# Child Support Enforcement Program; Incentive Payments, Audit Penalties

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URL: https://www.frixlaw.com/law-library/documents/fr%3A99-25900

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** October 8, 1999
- **Citation:** 64 FR 55074

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-25900. Public record. Not legal advice.