Child Support Enforcement Program; Incentive Payments, Audit Penalties

SUMMARY: This regulation proposes to implement 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 proposes a performance-based penalty system

and establishes standards for certain types of audits. Finally, OCSE is

proposing a requirement that States establish an administrative review

process. Beginning in fiscal year 2000, 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.

DATES: Consideration will be given to written comments received by

December 7, 1999.

ADDRESSES: Comments should be submitted in writing to the Office of

Child Support Enforcement, Administration for Children and Families,

370 L'Enfant Promenade, SW., 4th Floor, Washington, DC 20447,

Attention: Director of Policy and Planning Division, Mail Stop: OCSE/

DPP. Comments will be available for public inspection Monday through

Friday, 8:30 a.m. to 5:00 p.m. on the 4th floor of the Department's

offices at the above address. Comments may also be submitted by sending

electronic mail (e-mail) to [email protected], or by telefaxing to

202-401-3444. This is a not a toll-free number. Comments sent

electronically must be in ASCII format.

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 proposed 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, Public Law 104-193, (PRWORA), by the Child Support Performance

and Incentive Act of 1998, Public Law 105-200, and as amended by the

Welfare Reform Technical Amendments Act of 1997, Public Law 105-34.

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. Summary

These regulations cover four subjects: incentives to States;

penalties against State TANF grants; audits; and administrative

reviews. Each is briefly summarized below and is discussed in detail in

subsequent sections of the preamble.

The incentive payment provisions are set forth in section 458A of

the Act. Incentive payments would be made to States each fiscal year

based on their collections and their performance levels on five

statutory performance measures: paternity establishment; establishment

of support orders; collections for current support; case collections

for child support arrearages; and cost-effectiveness. The States would

be assigned a statutorily set percentage based on their performance

levels on each measure or their improved performance levels over the

preceding year. The precise amount a State would be entitled to receive

would be determined based on a number of different formulae set forth

in the statute. First, an incentive base amount would be calculated for

each State taking into account the State's collections base amount.

This latter amount would be computed based on the amounts collected by

the State with extra weight being given to cases that are or were

formerly assigned to the State. For certain performance measures, the

State would be credited with the full amount of the collections base

and for others, 75 percent of the collections base. These amounts would

then be multiplied by the percentages earned on each of the five

performance measures and all would be added together to compute the

State incentive base. Second, the incentive base amount would be used

to compute the State's share of the incentive pool appropriated each

year. A State's share of the pool would be the State's incentive base

amount divided by the sum of the incentive base amounts for all States

for that year multiplied by the amount appropriated for incentives for

the year. However, in order to receive incentive amounts each year, the

State's data must also be determined to be complete and reliable.

Incentive payments would be made quarterly based on estimates with

adjustments made following the end of the year based on actual data and

performance levels. These provisions would be used to determine one-

third of incentive payments made to States in fiscal year 2000, two-

thirds of the incentive payments made for fiscal year 2001, and all of

the incentive payments in subsequent years.

The penalty provisions are contained in section 409(a)(8) of the

Act. A reduction of up to five percent would be taken against a State's

family assistance grant for any of the following types of failures to

meet requirements of the child support enforcement program under title

IV-D of the Act: the failure to meet the paternity establishment

percentages; the failure to meet other performance standards specified

by the Secretary; the failure to submit complete and reliable data; and

the failure to substantially comply with one or more IV-D program

requirements. The Secretary proposes to adopt two additional

performance measures for penalty purposes, i.e. support order

establishment and collections for current support. These failures would

be determined either based on a review of data submitted by a State, or

as a result of a federal audit. After a failure has been identified, a

State would have an automatic one-year corrective action period to

remedy the failure or meet the performance standard or other

requirement. A reduction would be imposed for quarters following the

end of the corrective action year if the State fails to take sufficient

corrective action and would continue through the first quarter in which

the State is fully in compliance. The hearing and appeal provisions and

25 percent penalty ceiling applicable to other reductions in the

State's family assistance grant under section 409 of the Act would also

apply.

The audit provisions are set forth mainly in section 452(a)(4)(C)

of the Act, but are also further clarified in section 409(a)(8) of the

Act. OCSE would be required to conduct audits for the following

purposes: to assess the completeness, reliability, and security of the

data and the accuracy of the reporting systems used in calculating

incentive and penalty performance measures; to determine the adequacy

of financial management of the State IV-D

[[Page 55075]]

programs; to determine whether a State IV-D program is substantially

complying with IV-D program requirements; and such other purposes as

the Secretary finds necessary. The proposed regulations also establish

specific standards for audits to determine whether a State IV-D program

is in substantial compliance. Certain audits must be performed at least

once every three years or more frequently if the State fails to meet

standards.

The administrative review provisions are being proposed based on

the Secretary's rulemaking authority under section 1102 of the Act.

They would require a State to establish procedures to provide

recipients of IV-D program services the opportunity to request a review

of actions taken or not taken in their case. The State must establish

procedures for reviewing such requests, taking appropriate actions, if

necessary, and notifying the recipients of the results of the review

and any actions taken.

III. Background

A. The National Strategic Plan

OCSE and its State IV-D program partners saw an opportunity to

create a closer working relationship in the Government Performance and

Results Act of 1993. This Act required Federal programs to set goals

and measure results by establishing strategic plans. OCSE and State

partners embarked on an effort to develop a National Child Support

Enforcement Strategic Plan by consensus with a vision, mission, goals

and objectives. This was achieved in February, 1995. The plan can be

viewed on OCSE's website at http://www.acf.dhhs.gov/programs/cse/new/

spwith.htm.

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.

The plan has provided the foundation for both reshaping the State-

Federal relationship into a collaborative partnership and building a

results-oriented framework for the child support enforcement program.

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 array of performance measures

that the States and OCSE looked to in order to recommend a performance-

based incentive funding system to reward States for results. State and

Federal partners sought a formula that would spur States to achieve the

goals and objectives of the Strategic Plan. The array of performance

measures was reviewed and the key indicators for the major activities

of the child support enforcement program were selected. Essentially,

the performance measures selected for the new incentive system are a

subset of key measures for the program. The Strategic Plan measures and

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,

its full array of measures and the recommended incentive funding system

that was being considered for legislation. First the larger array of

measures from the Strategic Plan were considered for penalties but

rejected. Next, the partners focused on those key measures of the

program's performance which had been recommended for incentives. The

States and OCSE 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.

In addition to the use of the Strategic Plan for developing

performance measures for the child support enforcement program,

recommending a State incentive funding system, and a system of

performance penalties, it has also more recently shaped a revision of

the child support data reporting and collection systems and the role of

the Federal audit process. This proposed rule would implement 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. It does not reward

States for other important aspects of child support enforcement, such

as paternity and support order establishment. 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.

Over the past decade, a number of commissions and organizations

have recommended the adoption of a new performance-based incentive

system. In 1988, Congress authorized the creation of the U.S.

Commission on Interstate Child Support to make recommendations to

Congress on improving the child support program. That Commission's

report called for a study of the Federal funding formula and changes to

an incentive structure that is based on performance. In addition, other

national organizations, including the National Conference of State

Legislatures, the American Public Welfare Association (now the American

Public Human Services Association, APHSA), the National Governor's

Association, and several national advocacy organizations recommended

the adoption of a new performance-based incentive system.

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. Section

341(a) of PRWORA required that: (1) the Secretary of Health and Human

Services develop a new incentive funding system, in a revenue neutral

manner; (2) the new system provide additional payments to any State

based on that

[[Page 55076]]

State's performance; and (3) the Secretary report to Congress on the

new system.

The Incentive Funding Workgroup was formed in October 1996. This

group consisted of 15 State and local IV-D directors or their

representatives and 11 Federal staff representatives from HHS. Earlier

efforts of this State-Federal partnership produced the National

Strategic Plan for the IV-D program and a set of outcome measures to

indicate the program's success in achieving the goals and objectives of

the plan. Using the same collaboration and consensus-building approach,

State and Federal partners recommended a new incentive funding system

based on the foundation of the National Strategic Plan.

Over a period of three months, recommendations for the new

incentive funding system emerged. State partners consulted with State

IV-D programs not represented directly on the Workgroup. The final

recommendations represented a consensus among State and Federal

partners on the new incentive funding system. The Secretary fully

endorsed the incentive formula recommendations. The Secretary's report

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 Public Law 105-200,

the Child Support Performance and Incentive Act of 1998. This proposed

rule would implement that legislation. The legislative language is very

explicit. Therefore, we are for the most part, merely repeating the

language in these proposed rules. However, the proposed regulations add

details or guidance on how to treat certain cases or actions and

describe when it is permissible to exclude certain cases for purposes

of calculating State performance. We developed the specific exclusions

and definitions contained in the proposed regulations based on the work

done by the Incentive Funding Workgroup. Any non-statutory proposed

elements of this regulation are subject to public comment and may be

changed based on comments received.

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 audit system focused too much on

administrative procedures and processes rather than performance outcome

and results.

Notwithstanding these deficiencies, it is widely agreed that

efforts to pass the Federal audit were a significant driving force

behind States' improved program performance during the years that these

audit and penalty provisions were in place prior to enactment of

PRWORA. While two-thirds of the States failed the initial audit, three-

fourths of these same States came into compliance after a corrective-

action period and avoided the financial penalty.

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 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. States have the

opportunity to use these self-reviews (as the Office of Child Support

Enforcement is publishing under a separate proposed rule) to find and

correct deficiencies and avoid frequent Federal audits. Federal

auditors will assess States' data used to compute performance outcome

measures and determine if these data are complete and reliable. In

addition, Federal auditors will conduct periodic financial and other

audits, as necessary. The statute allows OCSE to make an annual

determination on the completeness and reliability of State data used to

compute performance measures. However, once a State's data has been

determined to be complete and reliable, we plan to only audit the data

every three years--unless there is a reason to believe it is needed

more often.

The penalty system in this proposed rule would replace the previous

penalty under former section 403(h) of the Act that focused on

substantial compliance with prescriptive Federal IV-D requirements.

However, sections 452(a)(4)(C) and 409(a)(8) continue to allow the

Secretary discretion to determine substantial noncompliance with IV-D

requirements and to assess a penalty under section 409(a)(8) of the

Act, based on discretionary audits of State IV-D programs.

Federal auditors will work with States to assess the reliability of

their data as well as to test State systems used to produce the data

and the tools used to make the reliability determinations. Federal

auditors' assessment of data reliability is a critical aspect of

assuring that both incentives and penalties are based on accurate and

reliable State-reported data. This is an important control, not only on

the expenditure of Federal funds, but because it underpins the fairness

of the incentive and penalty system and the resulting confidence that

States have in rewards dispensed and penalties assessed nationwide.

State-reported, statistical and financial data taken from the new

reporting forms, the OCSE-157, the OCSE-34A, and the OCSE-396A will be

used in determining State performance levels. The OCSE-157 statistical

report is, in part, the culmination of a Federal-State data improvement

initiative that began in early 1992. That initiative, referred to as

the Measuring Excellence Through Statistics (METS) initiative,

developed clear reporting instructions and State reporting of data

critical to measuring program results, which in turn will result in

improved State program statistical and financial data. State data as

reported on the OCSE-157, as well as on the expenditure reporting form

(the OCSE-396A) and the support collection reporting form (the OCSE-

34A), will be evaluated for completeness and reliability by Federal

auditors. State-reported data that is determined to be incomplete or

unreliable may cause reductions in the State's funding under the IV-A

program and loss of Federal incentive payments under the IV-D program.

The performance measures and standards proposed in this regulation

for penalty purposes reflect three objectives: (1) To insure

consistency and integration with the proposed incentive system; (2) to

neither reward nor penalize a State for certain levels of performance

with no significant increase over the previous year; and (3) to assess

a penalty for poor State

[[Page 55077]]

performance with no significant improvement over the previous year.

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 proposed 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, including the Congress, State

representatives, advocates, and national organizations.

D. Performance Measures

This section gives a description of each of the performance

measures to be used for incentive and penalty purposes.

The new child support incentive system, in section 458A of the Act,

as amended by the Child Support Performance and Incentive Act of 1998,

measures State IV-D program performance in five major areas: (1)

Paternity establishment; (2) cases with child support orders; (3)

collections on current support; (4) cases with collections on arrears;

and (5) cost-effectiveness.

The penalty system proposed in this regulation would measure State

IV-D program performance in three areas: (1) Paternity establishment,

(2) cases with child support orders, and (3) collections on current

support. The first is required by the statute pursuant to 409(a)(8)(i)

and the other two are measures being proposed by the Secretary.

1. Paternity Establishment

The measure for paternity establishment is that included by

Congress for purposes of paternity establishment penalties under

section 452(g) of the Act, as amended by PRWORA. It is also one of the

performance measures for incentives purposes under section

458A(b)(6)(A)(i) of the Act. States may use either one of the following

two measures set forth in 452(g)(2) of the Act:

(1) IV-D Paternity Establishment Percentage (PEP) is 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.

(2) Statewide Paternity Establishment Percentage (PEP) 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.

Under section 452(g)(2) of the Act, the count of children will not

include any child who is a dependent by reason of the death of a parent

(unless paternity is established for that child), nor any child whose

parent is found to have 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.

2. Cases With Child Support Orders

This measure is found in section 458A(b)(6)(B)(i) of the Act and

shows, for incentive purposes, the percentage of cases in the IV-D

caseload in which there is a support order. This proposed regulation

would apply the same measure for penalty purposes.

3. Collections on Current Support

The third measure is at section 458A(b)(6)(C)(i) of the Act for

purposes of incentives, and is proposed as the measure for penalty

purposes in this regulation. This measure focuses on the proportion of

current support owed that is collected in IV-D cases during the fiscal

year.

Another approach would be to look at cases with payments instead of

actual collections. We invite comment on the use of ``Cases with

Collections'' as an alternative to the ``Collections on Current

Support'' penalty measure.

4. Collections on Arrears

The fourth measure, found in section 458A(b)(6)(D) of the Act for

incentive purposes, measures the total number of cases under the IV-D

program in which payments of past-due child support were received in

the fiscal year and part or all of the payments were distributed to the

family to whom the past-due child support was owed (or, if all past-due

child support owed to the family was, at the time of receipt, subject

to an assignment to the State under title IV-A of the Act, part or all

of the payments were retained by the State) divided by the total number

of IV-D cases in which there is past-due child support.

This measure includes those cases where, during the fiscal year,

all of the past-due support collected was disbursed to the family, or

was retained by the State because all the support was assigned to the

State. If some of the past-due support owed in a IV-D case was assigned

to the State and some was owed to the family, only those cases where

some of the support actually went to the family can be included.

5. Cost-Effectiveness

The final measure for incentive purposes under section

458A(b)(6)(E)(i) of the Act, compares the total amount of support

collected by the State's IV-D program during the fiscal year to the

total amount expended during the fiscal year in the IV-D program.

E. Weighting the Measures

The statute requires some measures to get more weight than other

measures. For incentive purposes under section 458A of the Act, each

State would earn five scores based on performance on each of the five

measures. The statute specifies that more emphasis should be placed on

some of the measures, such as those that ensure timely and consistent

support for children. Therefore, in accordance with section

458A(b)(5)(A) of the Act, we propose to weight the first three measures

(paternity establishment, order establishment, and collections on

current support) slightly more heavily than the last two (collections

on arrears and cost effectiveness). The weighted scores are used to

determine a State's maximum base amount.

F. Exclusion of Other Measures From Penalty Measures

While the incentives measures, formula, and process is laid out or

cross referenced explicitly in section 458A of the Act, the penalty

provisions in sections 409(a)(8) of the Act allow the Secretary to set

the measures, performance standards (other than those for paternity

establishment), and process that will be used to determine if State

performance is sufficiently inadequate to warrant a financial penalty.

As noted earlier, we based these measures on the Strategic Plan.

Under this proposed regulation, penalties would be based on a State's

failure to meet minimum standards on paternity establishment, support

order establishment and collection on current support performance

measures, which are all in the strategic plan. The remaining measures--

collections on arrears and cost-effectiveness are not included in the

penalty system. We do not propose that these two measures be included

for the following reasons:

(1) The Child Support Performance and Incentive Act of 1998 changed

the recommended performance standard for

[[Page 55078]]

the number of cases paying arrears. The impact of this adjustment to

the proposed standard may have the effect of reducing the number of

cases for which past-due support is collected which may be counted for

incentives purposes. If some past due support was assigned to the State

and some due to the family, the case can only be included where some of

the support actually went to the family. We do not believe a State

should be measured, for penalty purposes, on collection of arrears

cases at this time. This is a new area of reporting for states and the

impact of the statutory adjustment to this standard is not clear.

(2) We also do not propose including the cost-effectiveness measure

for penalty purposes. Including it might have discouraged States from

investing in program improvements that might raise program costs and

might reduce cost-effectiveness or might not yield results immediately.

We believe that there are other, adequate mechanisms to address

concerns for cost-shifting or improper use of IV-D funds (such as

financial management and administrative cost audits). In addition,

State automated IV-D systems costs are expected to remain high over the

next few years due to continued development and modification of

statewide-automated systems to meet the requirements of PRWORA, thus

making such a measure less reflective of the actual cost-effectiveness

of the program.

For these reasons, we propose to begin the new penalty system with

just three penalty measures and intend to evaluate the possibility of

including other measures at a later time when more is known about the

impact of this penalty system. For example, we are in the process of

developing a recommendation to the Congress on a medical support

performance measure for incentive purposes, in accordance with section

201(d)(2) of the Child Support Performance and Incentive Act of 1998.

The Secretary's report is due to the Congress on October 1, 1999,

including recommendations for incorporation of a medical support

measure in a revenue neutral manner in the incentive payments system

established under section 458A of the Act. When changes are made to

incorporate such a measure in the statutory incentives system, it would

be appropriate to consider changes to the penalty measures presented in

these regulations.

G. Interaction Between Incentives and Penalties

We believe there are levels of State performance that merit an

incentive payment and there are levels that warrant a penalty. However,

there are also levels of State performance that neither merit an

incentive nor warrant a penalty.

There is an interaction between the incentive and penalty systems

proposed in this regulation. States with certain levels performance on

the three penalty measures would be able to avoid a penalty and qualify

for an incentive payment if a significant increase over the previous

year's performance is achieved in those measures (i.e., 10 percent on

the PEP, 5 percent on support orders and current support collections).

However, under this alternative improvement formula the incentive

payment would never be more than half of the maximum incentive

possible. As a result, those States with lower performance levels would

at least receive some incentive provided the program is improving

sufficiently and quickly. Penalties would be assessed against States

with very poor performance and decreasing, static, or minimal increases

in performance over the previous year.

While Congress was clear in setting a performance standard for the

paternity establishment percentage, the statute provided the Secretary

with discretion to set standards for performance in other areas. State

and Federal partners strongly considered the mandated paternity

establishment penalty model and determined that it would not work for

the other measures. Setting such a high standard for order

establishment and current support would be unrealistic and would cause

almost every State to be penalized.

The order establishment and current support performance standards

for determining at what level a penalty would be assessed against a

State were set applying historical program data. Using this

information, an analysis was done to determine the number of States

that might receive incentive funding, the number that might receive

neither incentive or penalty, and the number that would receive a

penalty. The partners agreed that the resulting system would provide a

graduated scale of punishment and rewards that would motivate States to

improve from year to year. Under the proposed levels, the majority of

States would not potentially be subject to penalties.

IV. Description of Regulatory Provisions--Incentives and

Administrative Review

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.

Sections 302.55 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

restriction to share funds with political subdivisions is not being

changed. Although Section 454(22) does not refer to Section 458A, the

restriction will be applicable when Section 458A is redesignated as

Section 458. Thus, we believe it was Congress' intent to have this

restriction apply continuously to the payment of incentives. Therefore,

we propose adding reference to the proposed new part 305 in Sec. 302.55

by adding the words ``and part 305'' after ``Sec. 304.12''.

Current 45 CFR 304.12(b)(1), as revised on 2/9/99 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 a fiscal year, HHS calculates the

actual

[[Page 55079]]

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 propose to add a new paragraph (d) to

Sec. 304.12 under which Sec. 304.12 would become obsolete on October 1,

2001.

A new paragraph (e) would be also added to reflect the phase-in of

the new incentive system. In fiscal year 2000, the amount of incentives

paid under Sec. 304.12 would be reduced by one-third. In fiscal year

2001, the amount of incentives paid under Sec. 304.12 would be reduced

by two-thirds.

Section 303.35--Administrative Review Process

We are proposing an outcome-oriented approach to child support

enforcement program accountability and responsibility. The proposed

approach seeks to balance the Federal government's oversight

responsibility with States' responsibilities for child support service

delivery and fiscal accountability. One element of the proposal being

implemented by these proposed regulations, is the focus on results-

oriented performance measures for incentives and penalties purposes. A

second aspect of the proposal replaces statutory and regulatory Federal

audit requirements with States' responsibility for ensuring that their

programs meet IV-D requirements. The requirement for these 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 review 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 propose to add a

section to part 303 requiring States to provide for an administrative

review.

Under proposed Sec. 303.35, entitled Administrative Review

Procedure, each State must have a procedure in place to allow

individuals receiving IV-D services the opportunity to request a review

of actions taken, or not taken when there is evidence that an action

should have been taken, on a particular case. In addition, the State

must have a procedure for reviewing the individual's complaint and

resolving it where appropriate action was not taken and for notifying

the individual of the results of the review and any actions taken.

Part 305--Program Performance Measures, Standards, Financial

Incentives, and Penalties

We propose adding 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 (g) of the

Act. Former Part 305 was revoked on 2/9/99 at 64 FR 6237.

Section 305.0 Scope

Proposed Sec. 305.0, Scope, explains what part 305 covers,

including the statutory basis for the incentive and penalty systems,

when the incentive and penalty systems, described above, are effective

and a general description of the contents of part 305. Proposed

Sec. 305.1 contains definitions and proposed Sec. 305.2 contains

performance measures. Proposed Secs. 305.31 through Sec. 305.36 of part

305 would describe the incentive system. Proposed Secs. 305.40 through

Sec. 305.42 and Secs. 305.60 through Sec. 305.66 would describe the

grounds for penalties under section 409(a)(8), 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 proposed Sec. 305.1, Definitions, the definitions found in

Sec. 301.1 of program regulations would also apply to part 305. In

addition, for purposes of part 305, Sec. 305.1 would define the

following terms:

The term IV-D case is 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. In

counting cases for the purposes of this part, States may exclude cases

closed under Sec. 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 proposed Sec. 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 was developed during the METS

initiative and 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 Sec. 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 would be discounted. It

is essential that we use consistent definitions for all data and we

propose, therefore, that the definitions in Sec. 305.1 apply equally

for incentives and penalties purposes.

Under proposed 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 of the Act, under title IV-A of the Act, under

title IV-E of the Act, or under title XIX of the Act. In addition, a

referral to the State's IV-D agency must have been made. Current

Assistance collections do not include assistance paid under Tribal TANF

because the statute includes only those collections where there is an

assignment to the State. Tribal TANF does not fall within that

category.

Under proposed 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 (TANF or Aid to Families

with Dependent Children, AFDC), title IV-E (Foster Care), or title XIX

(Medicaid) of the Act.

Under proposed 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 proposed above

reflect categories of collections described in section 458A(b)(5)(C) of

the Act and used to calculate the State collections

[[Page 55080]]

base used for computing incentives. Current Assistance and Former

Assistance are multiplied by 2 and added to Never Assistance/Other

collections to determine the State's collections base. The current

report that States use to report collection information to OCSE, the

OCSE-34A, did not originally address how title XIX, Medicaid,

collections should be reported. This was changed to be consistent with

the definitions stated above, when the report was last submitted for

clearance.

Under proposed paragraph (e), the term total IV-D administrative

costs means total IV-D administrative expenditures claimed by a State

in a specified fiscal year adjusted in accordance with Sec. 305.32 of

this part. Proposed Sec. 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 proposed 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 proposed 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 proposed 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 Sec. 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 proposed paragraph (i), the term reliable data includes the

most recent data available which are found by the Secretary to be

reliable for purposes of computing the paternity establishment

percentage. In addition, we have gone beyond the legislative definition

by adding 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. This definition is based on Sec. 452(g)(2)(C) of

the Act and includes further elaboration of the circumstances under

which the Secretary will consider data to be reliable. This 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 the 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 Office of Policy is intended to help auditors

meet the Yellow Book standard for ensuring that computer-based data are

reliable.

Under proposed paragraph (j), the term complete means all reporting

elements from OCSE OMB approved reporting forms that are necessary to

compute a State's performance levels, incentive base amount, and

maximum incentive base amount have been provided.

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 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.

Reliable data on all the key data elements is critical for

calculating accurate incentive payments. States must ensure that they

will be able to accurately report this data. Federal auditors will

determine the reliability of State data using commonly accepted

standards. We invite comment on the definition of reliable data set

forth at proposed section 305.1(i) and the methods for ensuring

reliable data is reported. Specifically, we request alternate

suggestions for methods or approaches which would address this issue

within the context of the statutory requirement and the procedures of

conducting the data reliability assessments.

Section 305.2 Performance Measures

This section describes the performance measures that will be used

in the incentive and penalty systems. Proposed paragraph (a) of

Sec. 305.2, Performance measures, indicates the child support incentive

system would 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 proposes 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.

Proposed 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 the following two measures, discussed in detail

later for their paternity establishment percentage (commonly known as

the PEP). The statute and the proposed 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 shall also 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

subparagraphs (a)(1)(i) and (ii) 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

[[Page 55081]]

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):

[GRAPHIC] [TIFF OMITTED] TP08OC99.000

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):

[GRAPHIC] [TIFF OMITTED] TP08OC99.001

The IV-D PEP is a measure of children in the caseload at a point-

in-time (i.e. the end of the fiscal year). The Statewide PEP is a

measure of what happened during the fiscal year. Both counts include

children in interstate cases.

As we propose the measure, paternities include those established

by: (1) Voluntary acknowledgments; and (2) all types of orders,

including court, administrative, and default. However, a paternity can

only be counted once--either when a voluntary acknowledgment is

completed or when an order determining paternity is established.

The second performance measure contained in proposed

Sec. 305.2(a)(2), Support Order Performance Level, requires a

determination of whether or not there is a support order for each case.

These support orders include all types of legally enforceable orders,

including court, default, and administrative. Since the measure is a

case count at a point-in-time, modifications to an order do not affect

the count. The equation to compute the measure is as follows (expressed

as a percent):

[GRAPHIC] [TIFF OMITTED] TP08OC99.002

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. This

is to ensure consistency across States and is consistent with reporting

instructions for States.

The proposed 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. If included, voluntary

collections must be included in both the numerator and the denominator.

This measure would be computed monthly and the total of all months

reported at the end of the year.

The equation to compute the measure would be as follows (expressed

as a percent):

[GRAPHIC] [TIFF OMITTED] TP08OC99.003

As with the other performance measures, this measure derives from

section 458A(b)(6) of the Act. This approach and definition ensures a

consistent interpretation across States and captures a true picture of

payments made, voluntarily or under order, which families receive each

month. Finally, as provided under section 458A(c), support collected by

one State at the request of another State would 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 proposed Sec. 305.2(a)(4)

Arrearage Collection Performance Level. This measure would 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 would be included. The equation to

compute the measure would be as follows (expressed as a percent):

[[Page 55082]]

[GRAPHIC] [TIFF OMITTED] TP08OC99.004

This measure, unlike the current collections measure, counts cases

with child support arrearage collections, rather than the percentage of

arrearages collected.

Because we recognize the confusion that may ensue from reporting,

as required by section 452(a)(10)(C)(vi) of the Act, widely disparate

levels of arrearage debts in States, any display of this data at the

Federal level will be accompanied with a clear explanation of why State

performance cannot be compared and circumstances that affect this

measure. This would include such things as: (1) The optional charging

and calculation of interest on arrearages, (2) cases entering the IV-D

caseload with existing large arrearages, and (3) old arrearages set

before Federal law mandated establishing support orders based on the

obligor's income rather than based on the amount of public assistance

paid to the obligor's family.

The final performance measure, reflecting section 458A(b)(6)(E)(i)

of the Act, appears at proposed 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):

[GRAPHIC] [TIFF OMITTED] TP08OC99.005

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.

Under proposed Sec. 305.2(b), as specified in section 458A(b)(5) of

the Act for incentive purposes, the 5 performance measures would 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) percent score earn 100 percent of the collections base as

defined in proposed Sec. 305.31(e). The last two measures (collections

on arrears and cost-effectiveness) earn a maximum of 0.75 percent of

the collection base as defined in proposed Sec. 305.31(e).

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, which would place extra

emphasis on getting support to families each and every month.

Section 305.31 Amount of Incentive Payment

Under proposed paragraph (a) of Sec. 305.31 (which addresses the

contents of section 458A(b) of the Act), the incentive payment for a

State for a fiscal year would be 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,

proposed paragraph (b) would define 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 would 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 would

be a 1 percent increase over the $483,000,000 incentive payment pool

for fiscal year 2008, or $487,830,000.

Proposed paragraph (c) defines, in accordance with section

458A(b)(3), 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 proposed paragraph (d), a State's maximum incentive base

amount for a fiscal year would be 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 proposed paragraph (e), a State's maximum incentive base

amount for a fiscal year would be zero, unless a Federal audit

performed under proposed Sec. 305.60 (described later in this preamble)

determined that the data which the State submitted for the fiscal year

and which would be used to determine the performance level 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 or they receive no

incentives. This would prevent a State from being able to submit

repeated adjusted data, should data used to compute incentives and

penalties be determined unreliable.

Finally, under proposed paragraph (f), a State's collections base

for a fiscal year, as provided in section 458A(b)(5)(C) of the Act,

would be 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

[[Page 55083]]

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 proposed 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 would 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

Proposed Sec. 305.32 would establish 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 would apply:

Paragraph 305.32(a) specifies that each measure would 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.

Paragraph 302.32(b) specifies that only collections disbursed or

retained, as applicable, and only those expenditures made by the State,

in the fiscal year would 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.

Paragraph 305.32(c) specifies that support collected by one State

at the request of another State would be treated as having been

collected in full by each State. Required by section 458A(c) of the

Act, this implements for the new incentive system the same practice

that exists under the current incentive system.

Paragraph 305.32(d) specifies that amounts expended by the State in

carrying out a special project under section 455(e) of the Act would be

excluded from the State's total IV-D administrative costs in computing

incentive payments. This implements section 458A(c) of the Act, and

also appears in section 458 of the Act.

Paragraph 305.32(e) specifies that fees paid by individuals,

recovered costs, and program income such as interest earned on

collections would be deducted from total IV-D administrative costs.

This is consistent with Sec. 304.12(b)(4)(iii) which is applicable to

the current incentive system under section 458 and the requirement

under Sec. 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.

Paragraph 305.32(f) specifies that States would be 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. This is consistent with the requirement

in Sec. 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.

Section 305.33 Determination of Applicable Percentages Based on

Performance Levels

This proposed 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 proposed paragraph (a), a State's paternity establishment

performance level for a fiscal year would be, at the option of the

State, the IV-D paternity establishment percentage or the Statewide

paternity establishment percentage determined under proposed Sec. 305.2

of this part. The applicable percentage for each level of a State's

paternity establishment performance would be set forth in table 1,

except as provided in paragraph (b).

Under proposed 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 would be 50 percent.

Support Order

Under proposed paragraph (c), a State's support order performance

level for a fiscal year would be the percentage of the total number of

IV-D cases where there is a support order determined under Sec. 305.2

and Sec. 305.32. The applicable percentage for each level of a State's

support order performance would be found on table 1, except as provided

in paragraph (d).

Under proposed paragraph (d), if the State's support order

performance level for 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 would be 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:

-----------------------------------------------------------------------------------------------------------------

The The

But less applicable But less applicable

At least: (percent) than: percentage At least: (percent) than: percentage

(percent) is: (percent) is:

----------------------------------------------------------------------------------------------------------------

80................................. ........... 100 64.................... 65 74

[[Page 55084]]

79................................. 80 98 63.................... 64 73

78................................. 79 96 62.................... 63 72

77................................. 78 94 61.................... 62 71

76................................. 77 92 60.................... 61 70

75................................. 76 90 59.................... 60 69

74................................. 75 88 58.................... 59 68

73................................. 74 86 57.................... 58 67

72................................. 73 84 56.................... 57 66

71................................. 72 82 55.................... 56 65

70................................. 71 80 54.................... 55 64

69................................. 70 79 53.................... 54 63

68................................. 69 78 52.................... 53 62

67................................. 68 77 51.................... 52 61

66................................. 67 76 50.................... 51 60

65................................. 66 75 0..................... 50 0

----------------------------------------------------------------------------------------------------------------

Current Support Collections

Under proposed paragraph (e), a State's current collections

performance level for a fiscal year would be 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 Sec. 305.32. The applicable percentage with

respect to a State's current collections performance level would be

found on table 2, except as provided in paragraph (f).

Under proposed 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 would be 50 percent.

Arrearage Collections

Under proposed paragraph (g), a State's arrearage collections

performance level for a fiscal year would be equal to the total number

of 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 Sec. 305.32 of this part. The applicable percentage

with respect to a State's arrearage collections performance level would

be found on table 2, except as provided in paragraph (h).

Under proposed 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 would be 50 percent.

Table 2

[Use this table to determine the maximum incentive levels for the current and arrearage support collections

performance measures]

----------------------------------------------------------------------------------------------------------------

If the current collections or arrearage collections performance level is:

-----------------------------------------------------------------------------------------------------------------

The The applica

But less applicable But less ble

At least: (percent) than: percentage At least: (percent) than: (percentage

(percent) is: (percent) is:

----------------------------------------------------------------------------------------------------------------

80................................. ........... 100 59.................... 60 69

79................................. 80 98 58.................... 59 68

78................................. 79 96 57.................... 58 67

77................................. 78 94 56.................... 57 66

76................................. 77 92 55.................... 56 65

75................................. 76 90 54.................... 55 64

74................................. 75 88 53.................... 54 63

73................................. 74 86 52.................... 53 62

72................................. 73 84 51.................... 52 61

71................................. 72 82 50.................... 51 60

70................................. 71 80 49.................... 50 59

69................................. 70 79 48.................... 49 58

68................................. 69 78 47.................... 48 57

67................................. 68 77 46.................... 47 56

66................................. 67 76 45.................... 46 55

65................................. 66 75 44.................... 45 54

64................................. 65 74 43.................... 55 53

63................................. 64 73 42.................... 43 52

62................................. 63 72 41.................... 42 51

[[Page 55085]]

61................................. 62 71 40.................... 41 50

60................................. 61 70 0..................... 40 0

----------------------------------------------------------------------------------------------------------------

Under proposed paragraph (i), a State's cost-effectiveness

performance level for a fiscal year would be 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 Sec. 305.32 of this part. The

applicable percentage with respect to a State's cost-effectiveness

performance level would be found on table 3.

Table 3

[Use this table to determine the maximum incentive level for the cost-

effectiveness performance measure.]

------------------------------------------------------------------------

If the cost-effectiveness performance level is:

-------------------------------------------------------------------------

The applicable

At least: But less than: percentage:

------------------------------------------------------------------------

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 proposed regulations,

we have included an example of how the system would work in a

particular year for State A under proposed paragraph (j):

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

----------------------------------------------------------------------------------------------------------------

State A's

collection

State A's Applicable base (in

Measure performance percent based Weight millions)

level on (assumed to be

(percent) performance $50.0

million)

----------------------------------------------------------------------------------------------------------------

Paternity Establishment......................... 54 64 1.00 $32.0

Order Establishment............................. 79 98 1.00 49.0

Current Collections............................. 41 51 1.00 25.5

Arrearage Collections........................... 40 50 0.75 18.8

Cost-Effectiveness.............................. (*) 60 0.75 22.5

---------------

State A's Maximum Incentive Base Amount... .............. .............. .............. 147.8

----------------------------------------------------------------------------------------------------------------

* $3.00

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 $82 million for State

B and $52 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)

[[Page 55086]]

Table B

----------------------------------------------------------------------------------------------------------------

Incentive

Maximum State's share payment pool

State incentive of $281.8 $422 million

base amounts million (in millions)

----------------------------------------------------------------------------------------------------------------

A............................................................... $147.8 0.52 $219.4

B............................................................... 82.0 0.34 143.5

C............................................................... 52.0 0.14 59.1

-----------------------------------------------

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. Proposed Sec. 305.34 implements those

provisions. Under proposed 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 incentive payment as

reported each quarter would be included as in the calculation of the

next quarterly grant awarded to the State under title IV-D of the Act.

We have not specified any procedures for determining how States

should calculate their estimated payments. We invite comment on whether

we should specify a methodology in the regulations or merely provide

guidance to States. We also invite comment on appropriate methods for

determining the amount of estimated payments to be paid. We believe it

is in the interest of States to avoid estimates that result in

significant additional payments to States or significant repayments

when final incentive amounts are determined.

Under proposed paragraph (b), following the end of each fiscal

year, HHS would 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. A

positive or negative grant would then be awarded to the State under

title IV-D of the Act to reconcile an actual annual incentive payment

that has been calculated to be greater or lesser, respectively, than

the annual incentive payment estimated prior to the beginning of the

fiscal year.

Under proposed paragraph (c), payment of incentives would be

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

proposed Sec. 305.35, which implements this requirement, proposed

paragraph (a) would require 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 proposed 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 Sec. 302.55, such

payments must be used in accordance with this section.

Under proposed 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 proposed paragraph (d), a base amount would be

determined by subtracting the amount of actual incentives paid to the

State invested 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 proposal would also allow 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 would have

to be maintained in future years. Incentive payments under this part

would 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 propose 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.

We also considered and rejected using a changing base year, i.e.

the year immediately preceding the year for which incentives are paid.

We believe that such an approach would penalize States for, or

discourage them from, making large one time expenditures for

improvements to their programs because they would have to maintain

their program expenditures at that artificially high level. However, we

recognize concerns that a fixed base year could possibly penalize

States that improve the cost-effectiveness of their program.

We invite comment on the method we have chosen and other

alternative ways of ensuring that incentive funds are used to

supplement and not supplant State expenditures.

Again, based on the complexity of the statute, we believe an

example would be helpful and have included one under proposed paragraph

(e). Therefore,

(1) State A expended $15 million in FY1998 to conduct IV-D

activities and used incentive payments received by the State as general

revenues to fund an

[[Page 55087]]

assortment of non-IV-D State and local programs or activities. If State

A receives incentives, it must continue to expend at least $15 million

of its money annually to conduct IV-D activities, not including

incentive money. In addition, State A must henceforth expend any

incentive payments received pursuant to section 458A of the Act and

this part for IV-D activities, or other activities approved by the

Secretary. These incentive payments will be expended in addition to,

and not in lieu of, the current $15 million expended;

(2) State B expended $20 million in FY1998 in its IV-D program and,

of the $20 million, $5 million represents incentive funds that the

State received and reinvested in its IV-D program. If State B receives

incentive payments, it must continue to spend at least $15 million in

State money (not including incentive money) annually. Incentive

payments received by the State must continue to be used in addition to,

and not in lieu of, this $15 million base amount.

Under proposed paragraph (f), 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 proposed

Sec. 305.36, the incentive system under part 305 would be phased-in

over a three-year period during which both the current system and the

new system would be used to determine the amount a State will receive.

For fiscal year 2000, a State would receive two-thirds of what it would

have received under the incentive formula set forth in Sec. 304.12, and

one-third of what it would 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

Sec. 304.12 and two-thirds of what it would received under the formula

under part 305. In fiscal year 2002, the formula set forth under part

305 would be fully implemented and would 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 which used the criteria

prescribed in the regulations, including requirements governing:

statewide operations; reports and maintenance of records; separation of

cash handling and accounting functions; notice of collection of

assigned support; case closure criteria; collection and distribution of

support payments; establishment of paternity; establishment, review and

adjustment of orders for maintenance and medical support using

mandatory guidelines and expedited processes; location of non-custodial

parents; enforcement of support obligations through State and Federal

income tax refund offset and income withholding; and case processing

timeframes. There were numerical standards that the State had to meet

for each category.

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 were removed as part of an omnibus

clean-up regulation designed to conform existing program regulations to

mandatory changes, made by PRWORA and subsequent enactments. Since

PRWORA and P.L. 105-200 significantly changed 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 proposed process for making such a determination

is based largely on the former audit and penalty standards and

procedures.

Proposed Regulations

Under section 409(a)(8) of the Act, if, based on the data submitted

by the State or 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 the State failed to substantially comply with one or

more IV-D requirements, and the State fails to correct the deficiencies

in the following year, then the amounts otherwise payable to the State

under title IV-A will be reduced.

However, 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 proposed 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 proposed 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

Proposed Sec. 305.40 would establish 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 proposed paragraph

(a), there would be three performance measures for which States would

have to achieve

[[Page 55088]]

certain levels of performance in order to avoid being penalized for

poor performance. These measures are paternity establishment, order

establishment, and collection of current support set forth in

Sec. 305.2 of these proposed regulations.

The proposed levels of performance that would determine whether or

not a State would be 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 proposed 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 proposed measures and levels of performance would be:

(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 proposed

Sec. 305.2. However, as stated on the OCSE-157 form that States will

use to report incentive information, ``the option can be changed at a

later date, however, for calculation purposes, like data must be

compared from year-to-year.'' Table 4 shows at which level of

performance the State would be 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 would be subject to

a penalty of 1-2 percent of TANF funds, for the first finding.

Table 4

[Use this table to determine the level of performance for the paternity

establishment measure that would incur a penalty]

------------------------------------------------------------------------

Statutory penalty performance standards for paternity establishment

-------------------------------------------------------------------------

Increase

required over Penalty FOR FIRST

PEP (percent) previous FAILURE if increase not

year's PEP met

(percent)

------------------------------------------------------------------------

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 order establishment performance measure to be used for

penalty purposes is the measure defined in proposed Sec. 305.2. For

purposes of the penalty with respect to this measure, there would be a

threshold of 40 percent, below which a State would be penalized unless

an increase of 5 percent over the previous year is achieved--which

would qualify it for an incentive. Performance in the 40 percent to 49

percent range with no significant increase would not be penalized, but

neither would it qualify for an incentive payment. Table 5 shows at

which level of performance a State would incur a penalty under the

order establishment measure.

Table 5

[Use this table to determine the level of performance for the order

establishment measure that would incur a penalty]

------------------------------------------------------------------------

Performance standards for order establishment

-------------------------------------------------------------------------

Increase over

Performance level previous year Incentive/penalty

------------------------------------------------------------------------

50% or more................. no increase over Incentive.

previous year

required.

40% to 49%.................. w/5% increase over Incentive.

previous year.

w/out 5% increase... No Incentive/No

Penalty.

Less than 40%............... w/5% increase over Incentive.

previous year.

w/out 5% increase... 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 would be

a threshold of 35 percent below which a State would be penalized unless

an increase of 5 percent over the previous year is achieved (that would

qualify it for an incentive). Performance in the 35 percent to 40

percent range with no significant increase would not be penalized but

neither would it qualify for an incentive payment. Table 6 shows at

which level of performance the State would incur a penalty under the

current collections measure.

[[Page 55089]]

Table 6

[Use this table to determine the level of performance for the current

collections measure that would incur a penalty]

------------------------------------------------------------------------

Performance standards for current collections

-------------------------------------------------------------------------

Increase over

Performance level previous year Incentive/penalty

------------------------------------------------------------------------

40% or more................. no increase over Incentive.

previous year

required.

35% to 40%.................. w/5% increase over Incentive.

previous year.

w/out 5% increase... No Incentive/No

Penalty.

Less than 35%............... w/5% increase over Incentive.

previous year.

w/out 5% increase... 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 proposed paragraph (b), the provisions applicable to

calculations listed under Sec. 305.32, would apply to the calculation

of performance levels for penalty purposes, for e.g., counting only

disbursed collections, and double-counting interstate collections.

Section 305.42 Penalty Phase-in

Proposed Sec. 305.42 sets a schedule for phasing in the new penalty

provisions which relates to the incentive phase-in under Sec. 305.36.

Penalties would be measured for the first full fiscal year beginning

after the publication of final rules. We expect this will be fiscal

year 2001. States would be subject to the performance penalties based

on data reported for FY 2001. Data reported for FY 2000 would be used

as a base year to determine improvements in performance during FY 2001.

There would be a statutory corrective action period of one year before

any penalty would be assessed. The penalties would be assessed and then

suspended during the corrective action period.

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 proposed Sec. 305.60, OCSE

would 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). Substantial compliance audits are defined

in Sec. 305.63 and are discussed later in this preamble.

Under the proposed rules the substantial compliance audits would be

conducted at the discretion of the Secretary, and would be triggered

based on substantiated evidence of a failure by the State to meet IV-D

program requirements. We propose that evidence that might warrant such

an audit to determine substantial compliance would 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

both the self-reviews to determine compliance with IV-D requirements

and the proposed requirements for administrative review procedures in

Sec. 303.35 seriously and to use those processes to continually

critique and adjust their programs to ensure that children and families

are adequately served. These discretionary Federal process audits

authorized under section 452(a)(4)(C) 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 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). While compliance

with particular system's requirements will be excluded from any Federal

audit to determine substantive compliance with IV-D requirements,

States must still meet the individual IV-D program requirements being

audited, as defined in proposed Sec. 305.63, in order to avoid a

financial penalty under Sec. 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

with them.

Under proposed paragraph (b), as with past audits, during the

course of the audit, OCSE would 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 proposed paragraph (a) of Sec. 305.61, a State would be subject

to a financial penalty and the amounts otherwise

[[Page 55090]]

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 proposed Sec. 305.60, the State's program failed to

achieve the paternity establishment percentages, as defined in section

452(g)(2) of the Act and proposed section Sec. 305.40, or to meet the

support order and current collections performance measures set forth in

proposed Sec. 305.40; or

(ii) The results of an audit under proposed Sec. 305.60, the State

did not submit complete and reliable data, as defined in proposed

Sec. 305.1; or

(iii) The results of an audit under proposed Sec. 305.60, the State

failed to substantially comply with 1 or more of the requirements of

the IV-D program, as defined in proposed Sec. 305.63;

And, with respect to the following fiscal year, 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 would be applied when a State was determined not to meet

a requirement, but the penalty would be suspended during the following

year and applied only if the State failed to correct any identified

deficiencies by the end of this corrective action year.

Under proposed paragraph (b) of Sec. 305.61, the penalty reductions

described under proposed Sec. 305.61(c) (discussed below) would be made

for quarters following the end of the fiscal year following the fiscal

year in which the determination under Sec. 305.61(a)(1) is made that

the State is subject to a penalty and would continue until the State,

as appropriate:

(1) Has achieved the paternity establishment percentages, the order

establishment or the current collections performance measures defined

in Sec. 305.40; or

(2) Is in substantial compliance with the IV-D requirements audited

for substantial compliance, as defined in Sec. 305.63; or

(3) Has submitted data that is complete and reliable.

It is important to note that the statute at section 409(a)(8)(A) of

the Act and these proposed regulations clearly require States to submit

complete and reliable data or face financial penalties. However, unlike

other penalty circumstances, penalties for incomplete or unreliable

data may also trigger potential penalties for failure to meet

performance standards. This is because when data is incomplete or

unreliable, it may be impossible to accurately determine the State's

level of performance on one or more of the performance measures. In

such cases, a State would have one year following a determination that

its data was incomplete or unreliable, to submit complete and reliable

data, and 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 one-year period would not be

enough; the data must also show that the State performed at a high

enough level to avoid a financial penalty.

Proposed paragraph (c) sets forth the penalty levels from section

408(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 such 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 identical to the level and source of 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. Thus, under past practice, while the penalty

imposed for the first failure would be 1 percent of a State's TANF

block grant, if a State fails to meet the appropriate standard on one

or all of the three performance measures two years in a row, the

penalty would be 2 percent of TANF funds. Three years of failure would

garner a 3 percent penalty against TANF funds and so forth, up to a

maximum of 5 percent of TANF funds. The maximum penalty that would be

imposed would be 5 percent regardless of the number of different

grounds for which a State would be subject to a penalty. However, OCSE

reserves the right to impose the higher range of the amount allowed

under the statute in the case of multiple penalty grounds or if the

State's failures are willful or egregious .

Because the penalty is taken against a State's TANF block grant,

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 would apply. 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, would apply. 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

proposed Sec. 305.62, we implement this concept by proposing that a

State subject to a penalty under Sec. 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 Sec. 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

measures percentages.

Sec. 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 subsequent year, we must provide a

definition of substantial compliance that will be used by the auditors

to measure State compliance with IV-D requirements. Fortunately, it is

not necessary to reinvent the wheel because of the existence of a

previously established and tested definition of substantial compliance

from former section Sec. 305.20. That section 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, we propose under Sec. 305.63 to use

the definition under former Sec. 305.20 as the basis for a

determination that a State failed to achieve substantial

[[Page 55091]]

compliance with one or more IV-D requirements.

However, there is one significant difference between the proposed

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 proposed 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 Sec. 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 Sec. 305.60, a

State would be required to meet the specific IV-D State plan

requirement or requirements that was audited. The IV-D requirements

subject to audit are contained in part 302 of this chapter, and are

measured as described in the following paragraphs.

Under proposed paragraph (a), the State would have to meet all the

requirements under any of the following areas being audited:

Statewide operations, Sec. 302.10;

Reports and maintenance of records, Sec. 302.15(a);

Separation of cash handling and accounting functions, Sec. 302.20;

and

Notice of collection of assigned support, Sec. 302.54.

These areas are identical to those in former Sec. 305.20, which

measured management and accountability of the program.

Under proposed paragraph (b), the State would be 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 requirement used under the former Sec. 305.20:

Establishment of cases, Sec. 303.2(a); and

Case closure criteria, Sec. 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 proposed paragraph (c), States would 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 proposed

paragraph, the State would be required to meet the following areas in

at least 75 percent of the cases reviewed for each area being audited:

(1) Collection and distribution of support payments, including:

collection and distribution of support payments by the IV-D agency

under Sec. 302.32(b); distribution of support collections under

Sec. 302.51; and distribution of support collected in title IV-E foster

care maintenance cases under Sec. 302.52;

(2) Establishment of paternity and support orders, including:

establishment of a case under Sec. 303.2(b); services to individuals

not receiving TANF or title IV-E foster care assistance, under

Sec. 302.33(a) (1) through (4); provision of services in interstate IV-

D cases under Sec. 303.7(a), (b) and (c)(1) through (6) and (8) through

(10); location of non-custodial parents under Sec. 303.3; establishment

of paternity under Sec. 303.5(a) and (f); guidelines for setting child

support awards under Sec. 302.56; and establishment of support

obligations under Sec. 303.4(d), (e) and (f);

(3) Enforcement of support obligations, including, in all

appropriate cases: establishment of a case under Sec. 303.2(b);

services to individuals not receiving TANF or title IV-E foster care

assistance, under Sec. 302.33(a) (1) through (4); provision of services

in interstate IV-D cases under Sec. 303.7(a), (b) and (c)(1) through

(6) and (8) through (10); location of non-custodial parents under

Sec. 303.3; enforcement of support obligations under Sec. 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

Sec. 303.6(c)(3) to State and Federal income tax refund offset; and

wage withholding under Sec. 303.100. In cases in which wage 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 law in addition to Federal

and State tax refund offset, in accordance with State laws and

procedures and applicable State guidelines developed under

Sec. 302.70(b) of this chapter;

(4) Review and adjustment of child support orders, including:

establishment of a case under Sec. 303.2(b); services to individuals

not receiving TANF or title IV-E foster care assistance, under

Sec. 302.33(a) (1) through (4); provision of services in interstate IV-

D cases under Sec. 303.7(a), (b) and (c)(1) through (6) and (8) through

(10); location of non-custodial parents under Sec. 303.3; guidelines

for setting child support awards under Sec. 302.56; and review and

adjustment of support obligations under Sec. 303.8;

(5) Medical support, including: establishment of a case under

Sec. 303.2(b); services to individuals not receiving TANF or title IV-E

foster care assistance, under Sec. 302.33(a) (1) through (4); provision

of services in interstate IV-D cases under Sec. 303.7(a), (b) and

(c)(1) through (6) and (8) through (10); location of non-custodial

parents under Sec. 303.3; securing medical support information under

Sec. 303.30; and securing and enforcing medical support obligations

under Sec. 303.31; and.

(6) Disbursement of support payments in accordance with the

timeframes in section 454B of the Act or the regulation at Sec. 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 Sec. 305.20. We have proposed to use 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 are intended to 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. We do not believe it is necessary to include an explicit

reference to each and every aspect of the program.

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.

It is not our intention to include every aspect of IV-D case

processing or every State responsibility under this definition of

substantial compliance. There are a number of means of carrying out

Federal oversight responsibilities and ensuring State accountability

and provision of services to those in need of them without including

every IV-D requirement under this definition. We intend to use the

Secretary's discretion to conduct process audits only in

[[Page 55092]]

egregious situations. Other processes, including penalties for failure

to meet performance standards, Federal audits to ensure appropriate

financial management of program funds and general Federal review and

oversight of State programs, together with State self-reviews and the

availability of administrative review procedures for recipients of IV-D

services, should work together to ensure successful IV-D programs.

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 Sec. 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 proposed

regulations and have incorporated it into proposed paragraph (d).

Finally, as under the former audit standards in Sec. 305.20,

proposed paragraph (e) would require a State to meet the requirements

for expedited processes under Sec. 303.101(b)(2) (i) and (iii), and

(e).

Under the new penalty standards in section 409(a)(8) 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 proposed

above, Federal auditors, States and other interested parties would 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 proposed section would adopt the same procedures as were in

effect under former Sec. 305.12. Under proposed paragraph (a), prior to

the start of the actual audit, Federal auditors would hold an audit

entrance conference with the State IV-D agency. At that conference, the

auditors would explain how the audit will be performed and make any

necessary arrangements.

Under proposed paragraph (b), at the conclusion of audit fieldwork,

Federal auditors would afford the State IV-D agency an opportunity to

have an audit exit conference at which time preliminary audit findings

would be discussed and the State IV-D agency may present any additional

matter it believes should be considered in the audit findings.

Under proposed paragraph (c), after the exit conference, Federal

auditors would prepare and send to the State IV-D agency, a copy of an

interim report on the results of the audit. Within 45 days from the

date the report was sent by certified mail, the State IV-D agency would

be able to submit written comments on any part of the report that the

State IV-D agency believes is in error. The auditors would 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 propose to incorporate former Sec. 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. We have included specific

reference to the data States must submit because it is essential to the

auditors' work. States would 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 propose to 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 Sec. 305.13, we

propose in paragraph (c), that failure to comply with the requirements

of this section with respect to audits conducted under proposed

Sec. 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.

Sec. 305.66 Notice, corrective action year, and imposition of penalty

for failure to meet requirements

Proposed Sec. 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 Sec. 305.99, the proposed paragraph

(a) would require 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

would notify the State in writing of such finding.

Under proposed paragraph (b), the notice would:

(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 would be assessed if the State fails

to correct the deficiency or deficiencies cited in the notice during

the subsequent fiscal year, referred to as the ``corrective action''

year.

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 proposed paragraph (c), the penalty would 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 would be made as of the first full three-month

period beginning after the end of corrective action year.

We propose, 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. In the case of a

State in which the penalty is accessed and which failed to correct the

deficiency or deficiencies cited in the notice by the end of the

corrective action year, the penalty would be applied for any quarter

that ends after the end of the corrective action year and until the

first quarter throughout which the State is determined to have

corrected the deficiency or deficiencies cited in the notice.

Under proposed paragraph (e), a consecutive finding would occur

only when the State does not meet or achieve substantial compliance

with the same criterion or criteria cited in the notice.

VI. Regulatory Flexibility Analysis

The Secretary certifies, under 5 U.S.C. 605(b), the Regulatory

Flexibility Act (Pub. L. 96-354), that these proposed regulations will

not result in a significant impact on a substantial number of small

entities. The primary impact is on State governments. State governments

are not considered small entities under the Act.

[[Page 55093]]

VII. Executive Order 12866

Executive Order 12866 requires that regulations be reviewed to

ensure that they are consistent with the priorities and principles set

forth in the Executive Order. The Department has determined that this

proposed rule is consistent with these priorities and principles. The

proposed rule implements the statutory provisions by specifying the

performance-based incentive and penalty systems.

VIII. Unfunded Mandates Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded

Mandates Act) requires that a covered agency prepare a budgetary impact

statement before promulgating a rule that includes any Federal mandate

that may result in the expenditure by State, local, and Tribal

governments, in the aggregate, or by the private sector, of $100

million or more in any one year.

If a covered agency must prepare a budgetary impact statement,

section 205 further requires that it select the most cost-effective and

least burdensome alternative that achieves the objectives of the rule

and is consistent with the statutory requirements. In addition, section

203 requires a plan for informing and advising any small government

that may be significantly or uniquely impacted by the proposed rule.

We have determined that the proposed rules will not result in the

expenditure by State, local, and Tribal governments, in the aggregate,

or by the private sector, of more than $100 million in any one year.

Accordingly, we have not prepared a budgetary impact statement,

specifically addressed the regulatory alternatives considered, or

prepared a plan for informing and advising any significantly or

uniquely impacted small government.

IX. Paperwork Reduction Act

Under the Paperwork Reduction Act of 1995, Public Law 104-13, all

Departments are required to submit to the Office of Management and

Budget (OMB) for review and approval any reporting or recordkeeping

requirements inherent in a proposed or final rule. The reports

necessary to implement this proposed rule have received OMB approvals.

They are the OCSE-157, OMB No. 0970-0177; the OCSE-34A, OMB No. 0970-

0181; and the OCSE-396A, OMB No. 0970-0181. This proposed rule requires

no other reporting or recordkeeping requirements.

X. Congressional Review

This proposed rule is not a major rule as defined in 5 U.S.C.,

Chapter 8.

XI. Assessment of Federal Regulations and Policies on Families

Section 654 of the Treasury and General Government Appropriations

Act of 1999 requires Federal agencies to determine whether a proposed

policy or regulation may affect family well-being. If the agency's

conclusion is affirmative, then the agency must prepare an impact

assessment addressing seven criteria specified in the law. These

proposed regulations will not have an impact on family well-being as

defined in the legislation.

List of Subjects

45 CFR Parts 302 and 303

Child support, Grant programs/social programs, Reporting and

recordkeeping requirements.

45 CFR Part 304

Child support, Grant programs/social programs, Penalties, Reporting

and recordkeeping requirements, Unemployment compensation.

45 CFR Part 305

Child support, Grant programs/social programs, Accounting.

(Catalog of Federal Domestic Assistance Programs No. 93.563, Child

Support Enforcement Program)

Dated: April 29, 1999.

Olivia A. Golden,

Assistant Secretary for Children and Families.

Approved: June 21, 1999.

Donna E. Shalala,

Secretary, Department of Health and Human Services.

For the reasons discussed above, we propose to amend title 45 CFR

Chapter III of the Code of Federal Regulations as follows:

PART 302--STATE PLAN REQUIREMENTS

1. The authority citation for part 302 is revised to read as

follows:

Authority: 42 U.S.C. 651 through 658A, 660, 664, 666, 667, 1302,

1396(a)(25), 1396B(d)(2), 1396b(o), 1396(p), 1396(k).

2. Section 302.55 is amended by adding the words ``and part 305''

after ``Sec. 304.12''.

PART 303--STANDARDS FOR PROGRAM OPERATIONS

3. The authority section for Part 303 continues to read as follows:

Authority: 42 U.S.C. 651 through 658, 660, 663, 664, 667, 1302,

1396a(a)(25), 1396b(d)(2), 1396b(o), 1396b(p), and 1396(k).

4. A new Sec. 303.35 is added to read as follows:

Sec. 303.35 Administrative complaint procedure.

(a) Each State must have an administrative complaint procedure in

place to allow individuals the opportunity to request a review of

actions taken, or not taken when there is evidence that an action

should have been taken, on a particular case. In addition, the State

must have a procedure for reviewing the individual's complaint and

resolving it where appropriate action was not taken.

(b) A State need not establish a formal hearing process but must

have clear procedures in place and available for recipients of IV-D

services to use when requesting such a review and for notifying them of

the results of the review and any actions taken.

PART 304--FEDERAL FINANCIAL PARTICIPATION

5. The authority citation for part 304 continues to read as

follows:

Authority: 42 U.S.C. 651 through 655, 657, 658, 1302,

1396(a)(25), 1396b(d)(2), 1396b(o), 1396(p), and 1396(k).

6. Section 304.12 is amended by adding new paragraphs (d) and (e)

to read as follows:

Sec. 304.12 Incentive payments.

* * * * *

(d) This section is in effect only through 9/30/01.

(e) The amounts payable under this section will be reduced by one-

third for fiscal year 2000 and two-thirds for fiscal year 2001.

7. A new part 305 is added to read as follows:

PART 305--PROGRAM PERFORMANCE MEASURES, STANDARDS, FINANCIAL

INCENTIVES, AND PENALTIES

Sec.

305.0 Scope.

305.1 Definitions.

305.2 Performance measures.

305.31 Amount of incentive payment.

305.32 Requirements applicable to calculations.

305.33 Determination of applicable percentages based on performance

levels.

305.34 Payment of incentives.

305.35 Reinvestment.

305.36 Incentive phase-in.

305.40 Penalty performance measures and levels.

305.42 Penalty phase-in.

305.60 Types and scope of Federal audits.

[[Page 55094]]

305.61 Penalty for failure to meet IV-D requirements.

305.62 Disregard of noncompliance which is of a technical nature.

305.63 Standards for determining substantial compliance with IV-D

requirements.

305.64 Audit procedures and State comments.

305.65 State cooperation in the audit.

305.66 Notice, corrective action year, and imposition of penalty.

42 U.S.C. 609(a)(8), 652(a)(4) and (g), 658A and 1302.

Sec. 305.0 Scope.

This part implements the incentive system requirements as described

in section 458A (to be redesignated as section 458 effective October 1,

2001) of the Act and the penalty provisions as required in sections

409(a)(8) and 452(g) of the Act. This part also implements Federal

audit requirements under sections 409(a)(8) and 452(a)(4) of the Act.

Sections 305.0 through 305.2 contain general provisions applicable to

this part. Sections 305.31 through 305.36 of this part describe the

incentive system. Sections 305.40 through 305.42 and Secs. 305.60

through 305.66 describe the penalty and audit processes.

Sec. 305.1 Definitions.

The definitions found in Sec. 301.1 of this chapter are also

applicable to this part. In addition, for purposes of this part:

(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. In counting cases for the purposes of this part, States may

exclude cases closed under Sec. 303.11 of this chapter 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.

(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 of

the Act, under title IV-E of the Act, or under title XIX of the Act. In

addition, a referral to the State's IV-D agency must have been made.

(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 title

IV-A (TANF or Aid to Families with Dependent Children, AFDC), title IV-

E (Foster Care), or title XIX (Medicaid) of the Act.

(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.

(e) The term total IV-D administrative costs means total IV-D

administrative expenditures claimed by a State in a specified fiscal

year adjusted in accordance with Sec. 305.32 of this part.

(f) The term Consumer Price Index or CPI 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.

(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.

(h) The term incentive base amount for a fiscal year means the sum

of the State's performance level percentages (determined in accordance

with Sec. 305.33 of this part) multiplied by the State's corresponding

maximum incentive base on 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 collections performance level; and

(5) The cost-effectiveness performance level.

(i) The term reliable data means the most recent data available

which are found by the Secretary to be reliable and is a state that

exists when data are sufficiently complete and error free to be

convincing for their purpose and context. This is 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 based on the data.

(j) The term complete data means all reporting elements from OCSE

OMB approved reporting forms, necessary to compute a State's

performance levels, incentive base amount, and maximum incentive base

amount, have been provided.

Sec. 305.2 Performance measures.

(a) The child support incentive system measures State performance

levels in five program areas: paternity establishment; support order

establishment; current collections; arrearage collections; and cost-

effectiveness. The penalty system measures State performance in three

of these areas: paternity establishment; establishment of support

orders; and current collections.

(1) Paternity establishment performance level. States have the

choice of being evaluated on one of the following two measures for

their paternity establishment percentage (commonly known as the PEP).

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 shall also not include any child whose parent is found

to have good cause for refusing to cooperate with the State agency in

establishing paternity, or for whom the State agency determines it is

against the best interest of the child to pursue paternity issues.

(i) 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):

[GRAPHIC] [TIFF OMITTED] TP08OC99.006

[[Page 55095]]

(ii) Statewide paternity establishment percentage means 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):

[GRAPHIC] [TIFF OMITTED] TP08OC99.007

(2) Support order establishment performance level. This measure

requires a determination of whether or not there is a support order for

each case. These support orders include all types of legally

enforceable orders, such as court, default, and administrative. Since

the measure is a case count at a point-in-time, modifications to an

order do not affect the count. The equation to compute the measure is

as follows (expressed as a percent):

[GRAPHIC] [TIFF OMITTED] TP08OC99.008

(3) Current collections performance level. Current support is money

applied to current support obligations and does not include payment

plans for payment towards arrears. If included, voluntary collections

must be included in both the numerator and the denominator. This

measure is computed monthly and the total of all months is reported at

the end of the year. The equation to compute the measure is as follows

(expressed as a percent):

[GRAPHIC] [TIFF OMITTED] TP08OC99.009

(4) Arrearage collection performance level. This measure includes

those cases where all of the past-due support was disbursed to the

family, or retained by the State because all the support was assigned

to the State. If some of the past-due support was assigned to the State

and some was to be disbursed to the family, only those cases where some

of the support actually went to the family can be included. The

equation to compute the measure is as follows (expressed as a percent):

[GRAPHIC] [TIFF OMITTED] TP08OC99.010

(5) Cost-effectiveness performance level. Interstate incoming and

outgoing distributed collections will be included for both the

initiating and the responding State in this measure. The equation to

compute this measure is as follows (expressed as a ratio):

[GRAPHIC] [TIFF OMITTED] TP08OC99.011

(b) For incentive purposes, the measures will be weighted in the

following manner. Each State will earn five scores based on performance

on each of the five measures. Each of the first three measures

(paternity establishment, order establishment, and current collections)

earn 100 percent of the collections base as defined in Sec. 305.31(e)

of this part. The last two measures (collections on arrears and cost-

effectiveness) earn a maximum of 0.75 percent of the collections base

as defined in Sec. 305.31(e) of this part.

Sec. 305.31 Amount of incentive payment.

(a) 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.

(b) The incentive payment pool is:

(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, if

the CPI increases by 1 percent between fiscal years 2007 and 2008, then

the incentive pool for fiscal year 2009 would be a 1 percent increase

over the $483,000,000 incentive payment pool for fiscal year 2008, or

$487,830,000.

(c) The State incentive payment share for a fiscal year is 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.

(d) A State's maximum incentive base amount for a fiscal year is

the State's collections base for the fiscal year for 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 collections and

[[Page 55096]]

cost-effectiveness performance measures.

(e) A State's maximum incentive base amount for a State for a

fiscal year is zero, unless a Federal audit performed under Sec. 305.60

of this part determines that the data which the State submitted for the

fiscal year and which are used to determine the performance level

involved are complete and reliable.

(f) A State's collections base for a fiscal year 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 Never Assistance/other cases during the fiscal year, that is:

2(Current Assistance collections + Former Assistance collections) + all

other collections.

Sec. 305.32 Requirements applicable to calculations.

In calculating the amount of incentive payments or penalties, the

following conditions apply:

(a) Each measure is based on data submitted for the Federal fiscal

year. The Federal fiscal year runs from October 1st of one year through

September 30th of the following year.

(b) Only those Current Assistance, Former Assistance and Never

Assistance/other collections disbursed and those expenditures claimed

by the State in the fiscal year will be used to determine the incentive

payment payable for that fiscal year;

(c) Support collected by one State at the request of another State

will be treated as having been collected in full by each State;

(d) 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 administrative costs in computing incentive payments;

(e) Fees paid by individuals, recovered costs, and program income

such as interest earned on collections will be deducted from total IV-D

administrative costs; and

(f) States must submit data used to determine incentives and

penalties following instructions and formats as required by HHS on

Office of Management and Budget (OMB) approved reporting instruments.

If not submitted within the timeframes specified in the instructions to

the OMB approved reporting instruments, we may consider the data to be

incomplete.

Sec. 305.33 Determination of applicable percentages based on

performance levels.

(a) A State's paternity establishment performance level for a

fiscal year is, at the option of the State, the IV-D paternity

establishment percentage or the Statewide paternity establishment

percentage determined under Sec. 305.2 of this part. The applicable

percentage for each level of a State's paternity establishment

performance can be found in table 1 of this part, except as provided in

paragraph (b) of this section.

(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.

(c) A State's support order establishment performance level for a

fiscal year is the percentage of the total number of cases where there

is a support order determined under Secs. 305.2 and 305.32 of this

part. The applicable percentage for each level of a State's support

order establishment performance can be found in table 1 of this part,

except as provided in paragraph (d) of this section.

(d) If the State's support order establishment performance level

for a fiscal year is less than 50 percent, but exceeds the State's

support order establishment 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 to Part 305

[Use this table to determine the applicable percentage levels for the paternity establishment and support order

establishment performance measures.]

----------------------------------------------------------------------------------------------------------------

If the paternity establishment or support order establishment performance level is:

-----------------------------------------------------------------------------------------------------------------

The The

But less applicable At least: But less applicable

At least: (percent) than: percentage (percent) than: percentage

(percent) is: (percent) is:

----------------------------------------------------------------------------------------------------------------

80............................................ ........... 100 64 65 74

79............................................ 80 98 63 64 73

78............................................ 79 96 62 63 72

77............................................ 78 94 61 62 71

76............................................ 77 92 60 61 70

75............................................ 76 90 59 60 69

74............................................ 75 88 58 59 68

73............................................ 74 86 57 58 67

72............................................ 73 84 56 57 66

71............................................ 72 82 55 56 65

70............................................ 71 80 54 55 64

69............................................ 70 79 53 54 63

68............................................ 69 78 52 53 62

67............................................ 68 77 51 52 61

66............................................ 67 76 50 51 60

65............................................ 66 75 0 50 0

----------------------------------------------------------------------------------------------------------------

(e) A State's current collections performance level for a fiscal

year would be 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, determined under

Sec. 305.32 of this part. The applicable percentage with respect to a

State's current collections performance level can be found in table 2

of this part, except as provided in paragraph (f) of this section.

(f) If the State's current collections performance level for a

fiscal year is less

[[Page 55097]]

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.

(g) A State's arrearage collections performance level for a fiscal

year is equal to the total number of IV-D cases in which payments of

past-due child support were received and distributed 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 Sec. 305.32 of this

part. The applicable percentage with respect to a State's arrearage

collections performance level can be found in table 2 of this part,

except as provided in paragraph (h) of this section.

(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 to Part 305

[Use this table to determine the percentage levels for the current collections and arrearage collections

performance measures]

----------------------------------------------------------------------------------------------------------------

If the Current Collections or Arrearage Collections Performance Level Is:

-----------------------------------------------------------------------------------------------------------------

At least: But less than: The applicable At least: But less than: The applicable

(percent) (percent) percentage is: (percent) (percent) percentage is:

----------------------------------------------------------------------------------------------------------------

80 ................. 100 59 60 69

79 80 98 58 59 68

78 79 96 57 58 67

77 78 94 56 57 66

76 77 92 55 56 65

75 76 90 54 55 64

74 75 88 53 54 63

73 74 86 52 53 62

72 73 84 51 52 61

71 72 82 50 51 60

70 71 80 49 50 59

69 70 79 48 49 58

68 69 78 47 48 57

67 68 77 46 47

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