Mr. Chairman and members of the Subcommittee, I appreciate the invitation to appear before you today on behalf of the National Women's Law Center to discuss the Child Support Enforcement Incentive Funding report submitted to you by the U.S. Department of Health and Human Services (HHS). The Center agrees with the recommendations in the HHS report, with some suggestions for improvement, and urges Congress to adopt HHS's proposed incentive system with the modifications suggested in this testimony.

The National Women's Law Center is a non-profit organization that has been working since 1972 to advance and protect women's legal rights. The Center focuses on major policy areas of importance to women and their families, including child support, employment, education, reproductive rights and health, child and adult dependent care, public assistance, tax reform and Social Security -- with special attention given to the concerns of low-income women.

The Center wishes to commend the Subcommittee for its strong leadership on child support issues. We are heartened by many of the improvements made in the federal-state Child Support Enforcement program in the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), enacted last summer. These provisions will, for the most part, strengthen the program contained in Title IV-D of the Social Security Act, often referred to as the IV-D program. 

As Congress recognized in enacting the PRWORA, however, improvements still need to be made in the way federal funding is provided to the states for their child support enforcement programs, specifically in the way in which federal "incentive payments" are made. In Section 341 of the PRWORA Congress therefore required that HHS, in consultation with state IV-D directors, develop a new performance-based incentive system that is cost-neutral, and report to Congress on the new system by March 1, 1997. In response to this mandate, an Incentive Funding Work Group (Work Group) comprised of 15 state or local IV-D directors and 11 HHS officials was formed in October, 1996, and a report on a proposed new incentive system was filed with the Secretary of HHS in late January, 1997. Sent to the Congress in March, 1997, this report is the focus of today's hearing.

There is broad consensus among federal policy makers, advocates and state child support officials that the current incentive
system is broken. Under the current system, in addition to federal reimbursement of part of administrative expenditures,(1)
states receive a minimum "incentive payment" of six percent of the amount of child support they collect, and can receive an
additional incentive payment of between 6.5 and 10 percent of the support they collect if their collection programs are
cost-effective -- that is, if the money invested in the program sufficiently exceeds the amount of support collected. 

1. The current base match rate (Federal Financial Participation or FFP) is 66 percent; that is, for every $1.00 the state spends
on the IV-D program, the federal government will reimburse it $ .66.

Under this incentive system, the initial six percent incentive payment bears no relation to state performance -- states that
perform badly, making no improvements in their system still receive this money. The additional percentage payment rewards
only state performance in collecting child support, ignoring performance in establishing paternity and establishing awards.
The cap on non-IV-A collections creates a situation in which states are not earning incentive payments on a portion of their
non-IV-A caseload -- leaving them with little incentive to work these very important cases. Adding to state disincentives is
the fact that some child support agencies never even see the incentive money they earn; under current law, states are free to
use their incentive dollars in any way they see fit -- reinvesting the money in the child support program, putting it into the
IV-A welfare program or simply putting the money in the general state treasury. While some states' incentive money is used to
better their child support program, that of other states may be used to pave state highways.

In response to these widely accepted problems, the Work Group recommended to HHS a revised incentive system, which
HHS endorsed fully in its report to Congress.(2) The HHS plan emphasizes performance in areas critical to the success of the
child support program and rewards states that make improvements in these areas.

2. The Work Group also recommended that the current FFP of 66 percent be maintained. HHS reserved judgement on this and
other funding issues raised by the Work Group, expressing a commitment to work with Congress on these issues. The Center
believes that a base match of at least 66 percent must be maintained. Without it, poor-performing states -- the ones that need
funding to improve but will not earn much in incentive payments -- will not have the necessary resources to improve their
programs.
 
 

Under the new system proposed by the Work Group in the HHS Report to Congress (hereinafter "HHS plan"), states would be provided incentive payments based on established state performance in five key areas. States would receive a maximum
incentive payment for each area in which they achieve an "upper" threshold and would receive a portion of that maximum
incentive payment for lower performance levels -- with performance defined specifically by HHS in each key area. The
maximum incentive payment would range from .75 to one percent of the collection base. The collection base would be roughly the total amount of child support collections, with more weight given to IV-A and former IV-A collections than to non-IV-A collections.

Performance Areas

Under the HHS plan, states would be provided incentive payments based on established state performance in five key areas:
establishment of paternities, establishment of child support orders, collections on current child support due, collections on past-due child support (arrears) and cost effectiveness (the money collected in child support measured against the money spent on the program). In each key area, HHS proposes the following measures of performance: 

 The paternity establishment rate would be either (at state option) 1) the ratio of the total number of children in the IV-D caseload (either in the fiscal year or at the end of the fiscal year) who were born out of wedlock and have paternity established 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; or 2) the total number of children born out of wedlock who have paternity established during the fiscal year to the total number of children born out of wedlock during the preceding fiscal year;

The support order establishment rate would be the ratio of the number of IV-D cases with support orders to the total number of IV-D cases;
    
The collection rate for current support would be the ratio of the total dollars collected for current support for IV-D cases to the total dollars owed for current support for IV-D cases;
    
The collection rate for arrears would be the ratio of the total number of IV-D cases in which arrears are collected to the total number of IV-D cases in which arrears are due; and

The equation for cost effectiveness divides total child support dollars collected by total IV-D dollars expended. 

Under the HHS plan, each key area has a upper and lower performance level and set benchmarks in between which establish
the level of incentive payments.

In the first performance area, paternity establishment, if a state has a paternity establishment rate under 50 percent, it must improve its rate over that of the previous year by 10 percent in order to earn 1/2 its maximum incentive payment for that area. If it has a rate of 50 percent it earns 60 percent of its maximum incentive payment. The performance level required and the corresponding percentage of the maximum incentive payment increase gradually until the top performance rate of 80 percent yields the total maximum incentive payment.

In the second performance area, establishment of child support orders, if a state has an order establishment rate under 50 percent, it must improve its rate by five percent in order to earn 1/2 its maximum incentive payment for that area. If it has a rate of 50 percent it earns 60 percent of its maximum incentive payment. The performance level required and the corresponding percentage of the maximum incentive payment increase gradually until the top performance rate of 80 percent yields the total maximum incentive payment.

In the third performance area, collections of current support, if a state has an order establishment rate under 40 percent, it must improve its rate by five percent or reach a rate of 40 percent in order to earn 1/2 its maximum incentive payment for that area. The performance level required and the corresponding percentage of the maximum incentive payment increase gradually until the top performance rate of 80 percent yields the total maximum incentive payment. 

In the fourth performance area, collections of past-due support, if a state has an order establishment rate under 40 percent, it must improve its rate by five percent or reach a rate of 40 percent in order to earn 1/2 its maximum incentive payment for that area. The performance level required and the corresponding percentage of the maximum incentive payment increase gradually until the top performance rate of 80 percent yields the total maximum incentive payment.

Finally, in the fifth performance area, cost effectiveness, if a state has a cost-effectiveness ratio of below 1.99, it does not receive any incentive payment. If it has a ratio of 2.00-2.49 it receives 40 percent of its maximum incentive payment, increasing gradually until the top ratio of 5.00 yields the total maximum incentive payment. 

Calculating the Incentive Payment

To calculate the incentive payment for each area, the HHS plan assigns a value to each performance measure. For the first three measures (paternity establishment, order establishment and collections of current support), a scoring at the upper threshold level earns the maximum incentive payment of one percent of the collection base (as defined below), while lower scores earn a percentage of the one percent.(3) For the last two measures (collections of arrears and cost-effectiveness), a scoring at the upper threshold level earns a maximum incentive payment of .75 percent of the collection base, with lower scores earning a percentage of the .75 percent.(4) Added together, the three measures of one percent and the two measures of .75 percent equal 4.5 percent of the collection base.

3. A state that had a collection base of $160 million, for example, would collect $1.6 million in incentive dollars if it
achieved the upper level in one of the first three categories, while it would collect $800,000 if it was below the lower level
but made the required improvements.

4. A state with a collection base of $160 million would collect $1.2 million in incentive payments (1 percent of .75 percent
of collections) if it achieved the upper level in one of the last two categories, and would earn $600,000 if its performance
was below the lower level but the state made the required improvements.

Reinvestment in the IV-D Program

Under the HHS plan, states would be required to reinvest their incentive payments in the IV-D program.

Implementation of the New Incentive System

Under the HHS plan, the new incentive system would be phased in over one year beginning in fiscal year 2000. In fiscal year 2000, a state would receive an incentive payment based on half of what it would have earned under the old incentive system and half of what it would earn under the new incentive system. In fiscal year 2001, the new incentive system would be fully phased in.
 

II. Analysis of HHS's Child Support Enforcement
Incentive Formula Funding Plan

Performance Areas

In selecting the five performance areas -- establishment of paternities, establishment of child support orders, collections of
current child support due, collections of past-due child support and cost effectiveness -- HHS has correctly identified the major areas that determine the success of the child support program. 

First, as Congress recognized in the 1993 and the 1996 child support reforms, paternity establishment is important for children born outside of marriage; the large number of children born out of wedlock who do not have paternity established has left many children without the legal ability to secure support from their fathers. 

Second, IV-D agencies must improve their records in obtaining child support orders -- the critical first step to collecting child support for families; in 1994, just over half the IV-D caseload had a child support order. 

Third, collecting current child support -- that is, ensuring that families receive child support in the month it is due -- is crucial if families are to count on regular, reliable support. 

Fourth, collecting arrears -- obtaining for a family back-due child support -- is important for many families, particularly those trying to leave and stay off welfare. 

Finally, cost-efficiency helps assure that states yield the greatest results from their investment in the system -- particularly as state governments trim budgets and demand more efficiency in government programs. Only when states significantly improve in these five key areas will child support programs be effective in serving custodial parents and their children.(5)

5. While these five categories are good measures of state performance, they are not all-inclusive. Indeed, there are
requirements in the law that states must meet and are important to families, but are not easily measured in a performance-based system. For example, states must provide timely service as required by the case processing standards, ensure that medical support orders are part of awards when appropriate and enforce such orders, and review and modify orders upon parents' request. States must comply with these, and other requirements of the IV-D law even if the requirements are not measured in a performance-based incentive system.

In fact, even with just five performance areas, states have an incentive to shift resources and obtain incentive payments in areas in which they are strongest. For example, a state that has a very low collection rate for back-due support could decide it is not worth the increased resources to improve in that area since doing so would take resources away from areas in which it could more readily secure an incentive payment. Audit and penalty provisions should be used to counteract any incentive to shift resources; if states not only lose incentive payments but face a penalty as well for poor performance in a certain area, states will be less likely to shift resources. Current law (enacted in 1993 and revised in the PRWORA) contains a provision for auditing and penalizing states that do not meet required performance measures in paternity establishment, and that provision has had some effect in moving states toward higher paternity establishment rates. 

The technical amendments to the PRWORA, now pending in Congress, would clarify that the Secretary has authority to establish other performance-based standards and to audit and penalize states that do not meet these standards. Congress should adopt these amendments, and HHS should be encouraged to establish other performance standards that help achieve the goals of its proposed incentive payment system.(6)

6. There is an anomaly in the HHS plan in the area of paternity establishment. Beginning at the 50 percent threshold, states
could receive both an incentive payment for paternity establishment and a penalty for failure to meet the paternity establishment percentage (PEP) of current law. The two provisions should be modified to work together rather than at cross-purposes.

First, the paternity establishment performance area does not adequately take into account that there will be certain children
born out of wedlock for whom paternity establishment is inappropriate -- in particular, those whose mothers are in the IV-A
system and have requested and been granted "good cause" not to cooperate with the state in establishing paternity.(7) 

7. Under the PRWORA, as a condition of IV-A assistance, custodial parents must cooperate with the IV-D agency in establishing paternity and in establishing and enforcing a support order unless they are found to have "good cause" not to cooperate. "Good cause" cases could include, for example, cases in which the mother's cooperation would put the mother and/or child in danger of harm by the noncustodial parent or cases in which the child is the product of incest or rape.
 

Second, in the performance area on collection of current support, under HHS's plan successful enforcement of current support is measured by comparing the amount of current child support dollars collected to the amount of current child support dollars due. This is a better system than comparing the number of cases in which current support is collected to the number of cases in which current support is due since the latter option would "over count" cases in which only very low partial payments are made. 

However, a dollars-based system gives states an incentive to emphasize collections in high-award cases and deemphasize those in low-award cases, although the latter cases often involve custodial parents who are the most dependent on monthly child support payments to meet their children's needs.(8) A better performance measure would be case-based, but only count cases in the numerator in which a certain percentage (say, 50 percent) of the current award due is collected in the month due.

8. For example, a state that is trying to enforce a $100 order and a $1,000 order would have a better collection rate based on dollars received to dollars owed if it collected the $1,000 but ignored the $100 order. If the state collected the $1,000 order but ignored the $100 order, it would have collected 91 percent of the dollars due; if the state collected the $100 order but ignored the $1,000 order, it would have collected just 9 percent of the dollars due.

Moreover, states do not always use the same definitions in their own systems from year to year, making it hard to measure their own performance over time. The PRWORA recognizes the importance of the states' use of uniform, reliable data in determining whether states have met the statute's audit requirements by requiring HHS to define, and the states to use, uniform terms, and by penalizing states that produce incomplete, unreliable and inconsistent data. A similar solution should be a part of the incentive system. 

Otherwise, at best, states could produce data for incentive payments that is unreliable; at worst, states could manipulate their data to achieve the desired results. Congress should mandate, therefore, that HHS define, and states use, uniform terms, and forbid states from securing incentive payments based on incomplete, unreliable or inconsistent data.

Upper and Lower Performance Rates

The HHS plan appropriately recognizes that states should receive higher payments for higher performance levels, but some payment even for less than adequate performance levels if they have sufficiently improved their performance over that of the prior year. 

First, it is important that at the lower levels states receive something for sufficient improvement, even if they have not achieved HHS's lower threshold. Otherwise states could decide that it is too hard and not monetarily worth allocating the resources to achieve the lower threshold level. For example, a state that only has established child support orders for 25 percent of its caseload could decide that it is not worth the effort and resources to secure orders for 50 percent of its caseload if that is what is necessary to secure any incentive payment. 

Second, it is important that states in the middle (between lower and upper thresholds) are rewarded for improvements, but are not required to improve as dramatically as states that are below the lower threshold in order to receive incentive payments. Especially as states reach the higher levels of performance, it becomes harder to make dramatic improvements; the easier-to-work cases have been taken care of and the harder-to-work cases -- particularly those in which there are factors outside the agency's control -- are left. 

Third, it is appropriate that as long as states continue to meet the upper threshold level they receive the maximum incentive payment.

Although the concept behind the HHS plan is sound, there are problems with the performance rate structure at the lower levels that need to be reformed.

First, the HHS plan unwisely permits states with performance levels below the lower threshold to secure a significant incentive payment (1/2 the maximum payment) even when they have not made serious improvements. While in the area of paternity establishment a state has to improve by 10 percent to receive an incentive payment, in three other areas (child support order establishment, current child support collections and arrears collections), a state only has to improve by five percent. 

Second, compounding this problem is that in two areas (current child support and arrears collections), there really is no lower performance threshold since states could earn the same amount (1/2 the maximum incentive payment) by having a 40 percent rate without making improvements as they would by having a lower rate and making improvements of five percent.

One solution would be to increase the required rate of improvement -- that is, in the areas of child support order establishment, current child support collections, and arrears collections, states would have to improve their performance by 10 percent in order to secure an incentive payment. However, rewarding small improvements is valuable in pushing a state along; if the improvements necessary are too large and states are struggling, they are not likely to make a full effort to improve but rather to simply write off that area for an incentive payment. 

The better solution, therefore, would be to use an improvement rate of five percent for all four areas (including paternity), but pay less incentive money -- 1/4 of the maximum incentive payment -- for achieving that level of improvement. A state would thus have to improve by 10 percent in all four areas in order to receive 1/2 of the maximum incentive payment. In addition, for current child support and arrears collections, 40 percent is too low a lower threshold to be considered adequate. Rather, these two areas should be treated like the first two areas; states should have to make improvements of at least five percent until they reach a 50 percent performance rate in order to earn an incentive payment. 

Finally, while rewarding states for improvements at the lower levels makes sense, there should be a bottom below which no incentive payment should be made. Just as in the cost-effectiveness area, states must realize that at some level (below 20 percent, perhaps) performance is so bad, even with five percent improvements, that incentive payments should be out of the question.

Calculating the Incentive Payment

The HHS plan appropriately proposes incentive payments to the states that reflect the value of the performance measures.

First, the plan gives the most weight to the areas in which it is most important that states improve -- paternity establishment,
establishment of support orders and enforcement of current support. 

Second, the plan gives states an incentive to emphasize IV-A and former IV-A collections by double-weighting this category in determining the collection base. At the same time, it encourages states to continue to secure non-IV-A collections by lifting the cap on this category. It is very important that states provide effective child support services to IV-A, former IV-A and non-IV-A families alike; as low-income families face time limits and reduced welfare benefits, child support will become the crucial safety net for many of these families.

Reinvestment in the IV-D Program

The HHS plan appropriately ensures that incentive payments be returned to the child support program rather than put into the
general state treasury. Child support programs can only improve if they have the resources to invest in efficient and reliable computer systems and staff.  Knowing they will directly reap the benefits of performance improvements may encourage IV-D agencies to improve their programs.

Implementation of the New Incentive System

The implementation schedule is designed to ease states into the new incentive program. It is meant to allow states to have as much possible notice to prepare and plan for the new system and work to boost their performance rates. In preparing for the new system, however, HHS must ensure that states do not close large numbers of cases improperly in an effort to clear their caseloads of hard-to-work cases -- cases which could bring down their performance rates once the new system is implemented. 

In the next few years, as states prepare for the new system, HHS should be required to provide states with guidance about case closing, including detailing which cases are appropriate and inappropriate to close.

III. Conclusion

HHS has proposed an incentive system designed to encourage states to improve their child support programs. While the premise of the incentive system and its overall structure is basically sound, some of its components should be reworked -- particularly those that reward states for very little effort. The HHS plan is a very good place to start in trying to overhaul the incentive funding system, and we recommend that it be used as the basis for Congress' upcoming work on crafting a new incentive program. We look forward to working with both Congress and the Administration in this very worthwhile effort.

The National Women's Law Center thanks Joan Entmacher of the Women's Legal Defense Fund and Vicki Turetsky of the Center for Law and Social Policy for their helpful comments in preparing this testimony.