[Federal Register: December 27, 2000 (Volume 65, Number 249)]
[Rules and <strong>Regulations</strong>]               
[Page 82177-82216]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27de00-21]                         


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Part V
Department of Health and Human Services
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Administration for Children and Families
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45 CFR Parts 302, 304, and 305



Child Support Enforcement Program; Final Rule


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Parts 302, 304 and 305

RIN 0970-AB85

 
Child Support Enforcement Program; Incentive Payments, Audit 
Penalties

AGENCY: Office of Child Support Enforcement (OCSE), HHS.

ACTION: Final rule.

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SUMMARY: This final rule implements the statutory requirement of the 
Social Security Act that requires the Secretary of Health and Human 
Services to establish the new performance-based incentive system. It 
also implements a performance-based penalty system and establishes 
standards for certain types of audits. Finally, this rule includes a 
requirement that States establish an administrative review process. The 
incentive system will be used to reward States for their performance in 
running a Child Support Enforcement (IV-D) Program. The penalty system 
will be used to penalize States that fail to perform at acceptable 
levels or fail to submit complete and reliable data.

EFFECTIVE DATE: The final rule is effective: December 27, 2000. Section 
304.12 is effective through September 30, 2001.

FOR FURTHER INFORMATION CONTACT: Joyce Pitts, OCSE Division of Policy 
and Planning, (202) 401-5374. Hearing impaired individuals may call the 
Federal Dual Party Relay Service at 800-877-8339 between 8:00 a.m. and 
7:00 p.m. eastern time.

SUPPLEMENTARY INFORMATION:

I. Statutory and Regulatory Authority

    These regulations implement sections 409(a)(8), 452(a)(4) and (g), 
and 458A of the Social Security Act (Act), as added by the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996, Pub. L. 
104-193, (PRWORA), by the Child Support Performance and Incentive Act 
of 1998, Pub. L. 105-200, and as amended by the Balanced Budget Act of 
1997, Pub. L. 105-33 and the Consolidated Appropriations Act of FY 
2000, Pub. L. 106-113.
    These regulations are also issued under the authority granted to 
the Secretary of Health and Human Services (the Secretary) by section 
1102 of the Act, 42 U.S.C. 1302. Section 1102 of the Act authorizes the 
Secretary to publish regulations that may be necessary for the 
efficient administration of the functions for which the Secretary is 
responsible under the Act.

II. Background

A. The National Strategic Plan

    The Government Performance and Results Act of 1993 required Federal 
programs to set goals and measure results by establishing strategic 
plans. OCSE and State partners developed a National Child Support 
Enforcement Strategic Plan by consensus with a vision, mission, goals 
and objectives. The plan includes three major goals for the child 
support program--that all children have paternity established, all 
children in the program have financial and medical support orders 
established, and all children in the program receive financial and 
medical support from both parents.
    After development of the National Child Support Enforcement 
Strategic Plan, States and OCSE worked together to develop specific 
performance indicators that could be used to measure the program's 
success in achieving the goals and objectives. It was this Strategic 
Plan and its performance measures that the States and OCSE used to 
recommend a performance-based incentive funding system to reward States 
for results. The Plan's array of performance measures was reviewed and 
the key indicators for the major activities of the child support 
enforcement program were selected. The Strategic Plan measures and the 
incentive measures for paternity establishment, support order 
establishment, collections on current support and cost-effectiveness 
are the same. The only deviation from the plan was the measure for 
collections on past-due support. State and Federal partners rejected 
the Strategic Plan measure that would provide an arrearage collection 
rate because there is a wide variation in how States' laws affect 
arrearages. State and Federal partners concluded that the only workable 
measure that would level the playing field among States in this 
important area was one based on the number of cases that were paying on 
arrears.
    After the incentive funding proposals were developed, State and 
Federal partners further collaborated to recommend a system of 
performance penalties for States. They returned to the Strategic Plan 
and the recommended incentive funding system that was being considered 
for legislation. The partners focused on those key measures of the 
program's performance which had been recommended for incentives and 
chose a subset of the incentive measures for application of financial 
penalties. These were the incentive measures which were given a greater 
weight in the computation of the incentive formula--paternity 
establishment, order establishment and the collection of current 
support.
    The Strategic Plan was also the basis for shaping a revision of the 
child support data reporting and collection systems and the role of the 
Federal audit process. This implements key structures that have been 
shaped and guided by the Strategic Plan and these structures will, in 
turn, help achieve outcomes that fulfill the goals and objectives of 
the Plan itself.

B. Issues and Activities Leading to the New Incentive Provisions

    Under section 458 of title IV-D of the Act, States are paid a 
minimum of six percent of their collections in TANF cases and six 
percent of their non-TANF collections as an incentive. Under this 
system, there is also the potential to earn up to 10 percent of 
collections based on the State's cost-effectiveness in running a child 
support program. However, the amount of non-TANF incentives is capped 
at 115 percent of the TANF incentive earned.
    This incentive system has been questioned for focusing on only one 
aspect of the IV-D program--Cost-effectiveness. In addition, since all 
States receive the minimum incentive amount of six percent of 
collections regardless of performance, this system was not regarded as 
having a real incentive effect.
    The Personal Responsibility and Work Opportunity Reconciliation Act 
of 1996 (PRWORA) required the Secretary, in consultation with State IV-
D Program Directors, to recommend to Congress a new incentive funding 
system for State IV-D programs based on program performance. The 
Incentive Funding Workgroup recommended a new incentive funding system 
based on the foundation of the National Strategic Plan.
    The Secretary fully endorsed the incentive formula recommendations 
and made recommendations to the Committee on Ways and Means of the 
House of Representatives and the Committee on Finance of the Senate. 
Most of the recommendations were included in Pub. L. 105-200, the Child 
Support Performance and Incentive Act of 1998. This rule implements 
that legislation. The legislative language is very explicit. Therefore, 
we are for the most part adopting the statutory language in this rule.

[[Page 82179]]

C. Audit and Penalties

    Prior to enactment of PRWORA, the Federal statute at former section 
452(a)(4) of the Act required periodic, comprehensive Federal audits of 
State IV-D programs to ensure substantial compliance with all Federal 
IV-D requirements. If the audit found that the State program was not in 
substantial compliance and if the deficiencies identified in an audit 
were not corrected, States faced a mandatory fiscal penalty of between 
1 and 5 percent of the Federal share of the State's title IV-A program 
funding under section 403(h) of the Act. Once an audit determined 
compliance with identified deficiencies, the penalty was lifted or 
ceased.
    Such a detailed, process-oriented audit was time-consuming and 
labor-intensive for both Federal auditors and the States. In addition, 
audit findings did not measure current State performance or current 
program requirements because of delays and the time it took to conduct 
audits. States contended that the audits focused too much on 
administrative procedures and processes rather than performance outcome 
and results.
    Section 452(a)(4) of the Act, as amended by PRWORA, changed the 
Federal audit process to focus on measuring performance and program 
results, instead of process. Subsequently, as part of technical 
amendments to PRWORA, the penalty provision under section 409(a)(8) of 
the Act was modified to conform to the new audit approach under the IV-
D program. The new approach to measuring program results changes the 
Federal audit focus to determining the reliability of program data used 
to measure performance and requires States to conduct self-reviews, 
similar to the former Federal process audits, to assess whether or not 
all required IV-D services are being provided. In addition, Federal 
auditors will conduct periodic financial and other audits, as 
necessary.
    The penalty system in this rule replaces the previous penalty under 
former section 403(h) of the Act that focused on substantial compliance 
with prescriptive Federal IV-D requirements. However, section 
452(a)(4)(C)(iii) provides for audits for such other purposes as the 
Secretary may find necessary and section 409(a)(8) provides for a 
penalty ``on the basis of the results of an audit. * * *''
    The assessment of data reliability by Federal auditors is a 
critical aspect of assuring that both incentives and penalties are 
based on accurate and reliable State-reported data. State-reported 
statistical and financial data taken from reporting forms, the OCSE-
157, the OCSE-34A, and the OCSE-396A, will be audited for completeness 
and reliability and will be used in determining State performance 
levels. State-reported data that is determined to be incomplete or 
unreliable may cause reductions in the State's funding under the IV-A 
(Temporary Assistance for Needy Families) program and will result in 
loss of Federal incentive payments under the IV-D program.
    While the specifics of performance measures for penalty purposes, 
with the exception of the Paternity Establishment Percentage (PEP) 
under section 452(g) of the Act, are left to the discretion of the 
Secretary, the approach to assessing penalties in this regulation takes 
into consideration the results of work done by State and Federal 
partners during the development of the National Strategic Plan and the 
proposal for incentive measures, as well as consultations with a wide 
variety of other interested parties.

III. Description of Regulatory Provisions--Incentives and 
Administrative Review

    This final rule does not have many changes from the notice of 
proposed rule making published in the Federal Register on October 8, 
1999 (64 FR 55073). However, we considered each comment and made some 
changes. The administrative complaint procedure was revised and 
clarified; a standard was added to the definition of data reliability; 
a deadline was established for having final incentive data to OCSE; and 
the incentive and reinvestment base-year calculation examples were 
removed.

Parts 302, 303 and 304--State Plan Requirements, Standards for 
Program Operations, and Federal Financial Participation

    The cross-references to existing regulations mentioned in this 
Description of Regulatory Provisions are as amended by the Interim 
Final Conforming Rule (64 FR 6237) published in the Federal Register 
February 9, 1999.

Sections302.55 and 304.12--Regulations for Existing Incentives Process.

    Currently, under section 454(22) of the Act and 45 CFR 302.55, the 
only restriction on the use of incentive funds awarded to the State is 
that States must share incentives earned with any political subdivision 
that shares in funding the administrative cost of the program. The 
requirement to share funds with political subdivisions is not being 
changed. Therefore, we are adding reference to the new part 305 in 
Sec. 302.55 by adding the words ``and part 305'' after ``Sec. 304.12''.
    Current 45 CFR 304.12(b)(1), as revised on February 9, 1999 at 64 
FR 6237, based on section 458 of the Act, computes incentive payments 
for States for a fiscal year as a percentage of the State's TANF 
collections, and a percentage of its non-TANF collections. The 
percentages are determined separately for TANF and non-TANF portions of 
the incentive. The percentages are based on the ratio of the State's 
TANF collections to the State's total administrative costs and the 
State's non-TANF collections to the State's total administrative costs. 
This is known as a State's cost-effectiveness ratio. The portion of the 
incentive payment paid to a State in recognition of its non-TANF 
collections is limited to 115 percent of the portion of the incentive 
payment paid in recognition of its TANF collections.
    HHS estimates the total incentive payment that each State will 
receive for the upcoming fiscal year. Each State includes one-quarter 
of the estimated total payment in its quarterly collection report that 
will reduce the amount that would otherwise be paid to the Federal 
government. Following the end of the fiscal year, HHS calculates the 
actual incentive payment the State should have received. If adjustments 
to the estimated amount are necessary, an additional positive or 
negative title IV-D grant award is issued.
    Under section 201(f) of the Child Support Performance and Incentive 
Act of 1998, effective October 1, 2001, current section 458 of the Act 
will be repealed and section 458A of the Act, will be redesignated as 
section 458. To implement this statutory provision, we added a new 
paragraph (d) to Sec. 304.12 under which Sec. 304.12 in its entirety 
becomes obsolete on October 1, 2001.
    A new paragraph (e) is also added to reflect the phase-in of the 
new incentive system as prescribed under section 201(b) of the Child 
Support Performance and Incentive Act. In fiscal year 2000, the amount 
of incentives paid under Sec. 304.12 will be reduced by one-third. In 
fiscal year 2001, the amount of incentives paid under Sec. 304.12 will 
be reduced by two-thirds.

Section 303.35--Administrative complaint procedure

    We have shifted to using an outcome-oriented approach to child 
support enforcement program accountability and responsibility. This 
approach, much of which was adopted under PRWORA,

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seeks to balance the Federal government's oversight responsibility with 
States' responsibilities for child support service delivery and fiscal 
accountability. One element of the approach, adopted partially in 
PRWORA and being implemented by these final regulations, is the focus 
on results-oriented performance measures for incentives and penalties 
purposes. A second aspect of the approach replaces statutory and 
regulatory Federal audit requirements with States' responsibility for 
ensuring that their programs meet IV-D requirements. The requirement 
for periodic State self-reviews, intended for management purposes to 
identify and resolve deficiencies in case processing, was also adopted 
under PRWORA as a State plan requirement at section 454(15)(A) of the 
Act. Procedures for State self-reviews are being implemented under a 
separate rulemaking.
    Although Federal funding of administrative review processes has 
long been considered an allowable expenditure under the IV-D program, 
we believe it to be a key element to any IV-D program. In the era of 
our focus on program results, we believe it appropriate to ensure that 
these administrative complaint processes are available to recipients of 
IV-D services. Using the authority under section 1102 of the Act to 
publish regulations that the Secretary deems necessary for the 
efficient administration of the IV-D program, we have added a section 
to part 303 requiring States to provide for an administrative review.
    Under Sec. 303.35, entitled Administrative Complaint Procedure, 
each State must have a procedure in place to allow individuals 
receiving IV-D services the opportunity to request a review of their 
cases when there is evidence that an action should have been taken on 
their cases. In addition, the State must have procedures in place, 
notify individuals of the procedures, and make them available to 
recipients of IV-D services to use when requesting a review, and use 
them for notifying recipients of the results of the review and any 
actions taken.
    This final rule revises Sec. 303.35 as it appeared in the notice of 
proposed rulemaking published in the Federal Register on October 8, 
1999 (64 FR 55073). These changes were made to balance our concern for 
efficient IV-D service provision with our commitment to allowing States 
discretion and flexibility in program design. We believe that 
recipients of IV-D services, through administrative complaint 
procedures, should be able to lodge complaints when they have evidence 
to support specific concerns in their cases. However, we have revised 
the regulatory language to address concerns that the proposed language 
was overly broad and open to multiple interpretations. In addition, we 
have included language to require States to notify individuals of the 
availability of administrative complaint procedures.

Part 305--Program Performance Measures, Standards, Financial 
Incentives, and Penalties

    We added a new part 305 to implement the new incentive system under 
section 458A of the Act and certain audit and penalty provisions found 
in sections 409(a)(8), 452(a)(4)(C) and 452(g) of the Act. Former part 
305 was revoked on February 9, 1999 at 64 FR 6237.

Section 305.0 Scope.

    Section 305.0, Scope, explains what part 305 covers, including the 
statutory basis for the incentive and penalty systems and a general 
description of the contents of part 305. Section 305.1 contains 
definitions and Sec. 305.2 contains performance measures. Sections 
305.31 through Sec. 305.36 of part 305 describe the incentive system. 
Sections 305.40 through Sec. 305.42 and Secs. 305.60 through 
Sec. 305.66 describe the grounds for penalties under section 409(a)(8) 
of the Act, the procedures for imposing penalties, the types of audits, 
and set forth the standards for substantial compliance audits and 
certain audit procedures.

Section 305.1 Definitions.

    Under Sec. 305.1, Definitions, the definitions found in Sec. 301.1 
of program regulations also apply to part 305. In addition, for 
purposes of part 305, Sec. 305.1 defines the following terms:
    Under paragraph (a), the term IV-D case means a parent (mother, 
father, or putative father) who is now or eventually may be obligated 
under law for the support of a child or children receiving services 
under the title IV-D program. A parent is a separate IV-D case for each 
family with a dependent child or children that the parent may be 
obligated to support. If both parents are absent and liable or 
potentially liable for support of a child or children receiving 
services under the IV-D program, each parent is considered a separate 
IV-D case. In counting cases for the purposes of this part, States may 
exclude cases closed under 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 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 is used in required Federal report forms and 
defines which cases may be excluded for purposes of calculating 
incentives, namely, IV-D cases meeting the conditions for case closure 
under 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 will be 
discounted. It is essential that we use consistent definitions for all 
data and therefore, the definitions in Sec. 305.1 apply equally for 
incentives and penalties purposes.
    Under paragraph (b), the term Current Assistance collections means 
collections received and distributed on behalf of individuals whose 
rights to support are required to be assigned to the State under title 
IV-A (TANF or Aid to Families with Dependent Children, AFDC), IV-E 
(Foster Care), or XIX (Medicaid) of the Act. In addition, a referral to 
the State's IV-D agency must have been made. Current Assistance 
collections do not include collections received and distributed under 
the Tribal TANF program because the statute includes only those 
collections where there is an assignment to the State. Tribal TANF 
recipients are not required by statute to assign their support rights. 
Thus, it is inappropriate to include collections relative to Tribal 
TANF programs in this definition.
    Under paragraph (c), the term Former Assistance collections means 
collections received and distributed on behalf of individuals whose 
rights to support were formerly required to be assigned to the State 
under either title IV-A, title IV-E, or title XIX of the Act.
    Under paragraph (d), the term Never Assistance/Other collections 
means all other collections received and distributed on behalf of 
individuals who are receiving child support enforcement services under 
title IV-D of the Act.
    The definitions of various categories of collections above reflect 
categories of collections described in section 458A(b)(5)(C) of the Act 
and used to calculate the State's collections base used for computing 
incentives. Current

[[Page 82181]]

Assistance and Former Assistance collections are multiplied by 2 and 
added to Never Assistance/Other collections to determine the State's 
collections base.
    Under paragraph (e), the term total IV-D dollars expended means 
total IV-D administrative expenditures claimed by a State in a 
specified fiscal year adjusted in accordance with Sec. 305.32. Section 
305.32, addressed later, includes specific expenditures that are 
excluded when calculating a State's total IV-D administrative 
expenditures for calculation of the cost-effectiveness performance 
measure.
    The term Consumer Price Index or CPI in paragraph (f) is taken from 
the definition in section 458A(b)(2)(B) of the Act, and means the last 
Consumer Price Index for all-urban consumers published by the 
Department of Labor. The CPI for a fiscal year is the average of the 
Consumer Price Index for the 12-month period ending on September 30 of 
the fiscal year.
    Under paragraph (g), the term State incentive payment share for a 
fiscal year means the incentive base amount for the State for the 
fiscal year divided by the sum of the incentive base amounts for all of 
the States for the fiscal year. This definition is found in section 
458A(b)(3) of the Act.
    Under paragraph (h), the term State incentive base amount for a 
fiscal year means the sum of the State's performance level percentages 
(determined in accordance with 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 paragraph (i), the term reliable data means the most recent 
data available which are found by the Secretary to be reliable for 
purposes of computing the paternity establishment percentage. This 
definition is based on section 452(g)(2)(C) of the Act and includes 
further elaboration of the circumstances under which the Secretary will 
consider data to be reliable. In the final rule, we have added that 
data for computing each of the measures must be found to be 
sufficiently complete and error free to be convincing for their purpose 
and context. For purposes of incentives and penalties, data must meet a 
95 percent standard of reliability beginning in fiscal year 2001. The 
95 percent rate was selected based on generally accepted accounting 
principles used by the auditing community and our experience from data 
reliability audits conducted to date on State systems. This standard is 
consistent with the recognition that ``data may contain errors as long 
as they are not of a magnitude that would cause a reasonable person, 
aware of the errors, to doubt a finding or conclusion made based on the 
data.'' Part of this definition is lifted verbatim from Chapter 1, 
Introduction of the U.S. General Accounting Office, Office of Policy 
Booklet (Standards) entitled, Assessing the Reliability of Computer-
Processed Data, dated September 1990. The official designation of this 
booklet is GAO/OP-8.1.3. The Government Auditing Standards--generally 
referred to as the ``Yellow Book''--provide the standards and 
requirements for financial and performance audits. A key standard 
covers the steps to be taken when relying on computer-based evidence. 
This booklet from the GAO, Office of Policy is intended to help 
auditors meet the Yellow Book standard for ensuring that computer-based 
data are reliable.
    Under paragraph (j), the term complete means all reporting elements 
from OCSE reporting forms that are necessary to compute a State's 
performance levels, incentive base amount, and maximum incentive base 
amount have been provided within the timeframes established in 
instructions to these reporting forms and Sec. 305.32(f).
    We believe the definitions in (i) and (j) are appropriate for 
purposes of Part 305 since State IV-D programs are required to have 
comprehensive statewide automated systems in place by October 1, 2000 
which, under section 454A(c) of the Act, must enable the Secretary to 
determine the incentive payments and penalty adjustments required by 
sections 452(g) and 458 of the Act. In addition, under section 
454(15)(A), States must have a process of extracting from the automated 
data processing system and transmitting to the Secretary, data and 
calculations concerning the levels of accomplishment and rates of 
improvement with respect to the applicable performance indicators for 
purposes of sections 452(g) and 458 of the Act. Finally, Federal 
auditors are required under section 452(a)(4)(C)(i) of the Act to 
conduct audits to assess the completeness, reliability, and security of 
the data, and the accuracy of the reporting systems used in calculating 
performance indicators. These provisions, taken together, require a 
clear, accepted and supportable definition of reliable data.

Section 305.2  Performance measures

    This section describes the performance measures that will be used 
in the incentive and penalty systems. Paragraph (a) of Sec. 305.2, 
Performance measures, indicates the child support incentive system will 
measure State performance levels in five areas: (1) Paternity 
establishment; (2) child support order establishment (cases with 
orders); (3) collections on current support; (4) collections on 
arrears; and (5) cost-effectiveness. It also requires that the penalty 
system measure State performance in three of these areas: (1) Paternity 
establishment; (2) child support order establishment; and (3) 
collections on current support.
    Paragraph (a)(1), Paternity Establishment Performance Level, 
reflects the explicit statutory language in section 458A(b)(6)(A)(i) of 
the Act, which gives States the choice of being evaluated on one of two 
measures--the IV-D or the statewide paternity establishment percentage 
(commonly known as the PEP), discussed in detail later. The statute and 
the paragraph provide that the count of children shall not include any 
child who is a dependent by reason of the death of a parent (unless 
paternity is established for that child). It also shall not include any 
child with respect to whom there is a finding of good cause for 
refusing to cooperate with the State agency in establishing paternity, 
or for whom the appropriate State agency determines it is against the 
best interest of the child to pursue paternity issues.
    The IV-D paternity establishment percentage and statewide paternity 
establishment percentage definitions that follow are contained in 
paragraphs (a)(1)(i) and (ii) and are set forth in sections 
452(g)(2)(A) and (B) of the Act:
    IV-D Paternity Establishment Percentage means the ratio that the 
total number of children in the IV-D caseload in the fiscal year (or, 
at the option of the State, as of the end of the fiscal year) who have 
been born out-of-wedlock and for whom paternity has been established or 
acknowledged, bears to the total number of children in the IV-D 
caseload as of the end of the preceding fiscal year who were born out-
of-wedlock. The equation to compute the measure is as follows 
(expressed as a percent):

[[Page 82182]]

[GRAPHIC] [TIFF OMITTED] TR27DE00.039

    Statewide Paternity Establishment Percentage is the ratio that the 
total number of minor children who have been born out-of-wedlock and 
for whom paternity has been established or acknowledged during the 
fiscal year, bears to the total number of children born out-of-wedlock 
during the preceding fiscal year. The equation to compute the measure 
is as follows (expressed as a percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.040

    The second performance measure contained in Sec. 305.2(a)(2), 
Support Order Performance Level, requires a determination of whether or 
not there is a support order for each case. The equation to compute the 
measure is as follows (expressed as a percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.041

    While the performance measure is defined in section 
458A(b)(6)(B)(i) of the Act, paragraph (a)(2) provides guidance as to 
which orders are counted for calculation of performance measures.
    The performance measure in paragraph (a)(3) is Current Collections 
Performance Level. It measures the amount of current support collected 
as compared to the total amount owed. Current support is money applied 
to current support obligations and does not include payment plans for 
payment towards arrears. Voluntary collections must be included in both 
the numerator and the denominator. This measure will be computed 
monthly and the total of all months reported at the end of the year. 
The equation to compute the measure will be as follows (expressed as a 
percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.042

    As with the other performance measures, this measure derives from 
section 458A(b)(6) of the Act. Finally, as provided under section 
458A(c) of the Act, support collected by one State at the request of 
another State will be treated as having been collected in full by both 
States.
    Section 458A(b)(6)(D)(i) of the Act sets forth the arrearage 
collection performance level included in Sec. 305.2(a)(4) Arrearage 
Collection Performance Level. This measure will include those cases 
where all of the past-due child support was disbursed to the family, or 
all of the past due child support was retained by the State because all 
the past due child support was assigned to the State. If some of the 
past due child support was assigned to the State and some was owed to 
the family, only those cases where some of the support actually was 
disbursed to the family will be included. The equation to compute the 
measure will be as follows (expressed as a percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.043

    This measure, unlike the current collections measure, counts cases 
with child support arrearage collections, rather than the percentage of 
arrearages collected.
    The final performance measure, reflecting section 458A(b)(6)(E)(i) 
of the Act, appears at paragraph (a)(5) Cost-Effectiveness Performance 
Level. This measure compares the total amount of IV-D collections for 
the fiscal year to the total amount of IV-D expenditures the fiscal 
year. The equation to compute this measure is as follows (expressed as 
a ratio):
[GRAPHIC] [TIFF OMITTED] TR27DE00.044


[[Page 82183]]


    This indicator provides a basic cost-benefit analysis of a child 
support enforcement program. As provided under section 458A(c) of the 
Act, collections by one State at the request of another State will be 
counted as having been collected in full by both States and any amounts 
expended by a State in carrying out a special project under section 
455(e) of the Act will be excluded. (Section 305.32 lists monies that 
are excluded when determining total dollars expended, such as fees 
collected from individuals, recovered costs and program income.)
    Under Sec. 305.2(b), as specified in section 458A(b)(5) of the Act 
for incentive purposes, the five performance measures will be weighted 
in the following manner. Each State will earn five scores based on 
performance on each of the five measures. The first three measures 
(paternity establishment, order establishment, and current collections) 
percentage scores earn a maximum of 100 percent of the collections base 
as defined in Sec. 305.31(d). The last two measures (collections on 
arrears and cost-effectiveness) earn a maximum of 75 percent of the 
collections base as defined in Sec. 305.31(d).
    The weighting provision was recommended by State and Federal 
partners and included in the Secretary's report to Congress as an 
essential aspect of the incentive system, placing extra emphasis on 
getting support to families each and every month.

Section 305.31  Amount of incentive payment.

    Under paragraph (a) of Sec. 305.31 (which addresses the contents of 
section 458A(b) of the Act), the incentive payment for a State for a 
fiscal year is equal to the incentive payment pool for the fiscal year, 
multiplied by the State incentive payment share for the fiscal year. As 
specified in section 458A(b)(2) of the Act, paragraph (b) defines the 
incentive payment pool as:
    (1) $422,000,000 for fiscal year 2000;
    (2) $429,000,000 for fiscal year 2001;
    (3) $450,000,000 for fiscal year 2002;
    (4) $461,000,000 for fiscal year 2003;
    (5) $454,000,000 for fiscal year 2004;
    (6) $446,000,000 for fiscal year 2005;
    (7) $458,000,000 for fiscal year 2006;
    (8) $471,000,000 for fiscal year 2007;
    (9) $483,000,000 for fiscal year 2008; and
    (10) For any succeeding fiscal year, the amount of the incentive 
payment pool for the fiscal year that precedes such succeeding fiscal 
year multiplied by the percentage (if any) by which the CPI for such 
preceding fiscal year exceeds the CPI for the second preceding fiscal 
year. In other words, for each fiscal year following fiscal year 2008, 
the incentive payment pool will be multiplied by the percentage 
increase in the CPI between the two preceding years. For example, for 
fiscal year 2009, if the CPI increases by 1 percent between fiscal 
years 2007 and 2008, then the incentive pool for fiscal year 2009 will 
be a 1 percent increase over the $483,000,000 incentive payment pool 
for fiscal year 2008, or $487,830,000.
    Paragraph (c) defines, in accordance with section 458A(b)(3) of the 
Act, the State incentive payment share for a fiscal year to be the 
incentive base amount for the State for the fiscal year divided by the 
sum of the incentive base amounts for all of the States for the fiscal 
year.
    Under paragraph (d), a State's maximum incentive base amount for a 
fiscal year is the combined sum of: the State's collections base for 
the fiscal year for each of the paternity establishment, support order, 
and current collections performance measures; and 75 percent of the 
State's collections base for the fiscal year for the arrearage payment 
and cost-effectiveness performance measures. This is specified in 
section 458A(b)(5) of the Act.
    Under paragraph (e), a State's maximum incentive base amount for a 
fiscal year is zero, unless a Federal audit performed under Sec. 305.60 
(described later in this preamble) determines that the data which the 
State submitted for the fiscal year and which will be used to determine 
the performance levels involved are complete and reliable. This 
provision is required by section 458A(b)(5)(B) of the Act. It is 
essential to ensure the integrity of the incentive system and the 
timeliness of the determinations. States are accountable for providing 
reliable data on a timely basis or they receive no incentives. This 
determination will be made using data submitted no later than the end 
of the first quarter of the next fiscal year (i.e. December 31). This 
deadline is needed so each State's data can be audited promptly during 
the first part of the following year to determine reliability and 
completeness. Allowing updates, corrections, and adjustments during 
that period would impede our ability to make final incentive 
determinations, and would result in continuing adjustment of the amount 
of the incentives payable to all States.
    Finally, under paragraph (f), a State's collections base for a 
fiscal year, as provided in section 458A(b)(5)(C) of the Act, is equal 
to: 2 times the sum of the total amount of support collected for 
Current Assistance cases plus two times the total amount of support 
collected in Former Assistance cases, plus the total amount of support 
collected in all other cases during the fiscal year, that is:

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

    This double-weighting of collections in Current Assistance and 
Former Assistance cases when calculating the collection base is another 
key component of the new incentives system. As with the emphasis placed 
on the current collections performance measure to ensure consistent and 
timely support to families, the calculation of the State's collection 
base also emphasizes the goal of helping families become and remain 
self-sufficient. Under the current incentive system, States lose 
incentives when families leave the State assistance rolls because 
collections in non-assistance cases are capped at 115 percent of 
collections in assistance cases. However, under section 458A of the Act 
and these regulations, collections in Former Assistance cases, as well 
as collections in Current Assistance cases will count double, while 
collections in all other cases (often seen as requiring less work by 
IV-D programs) will only be counted once. We note that Current 
Assistance cases do not include cases in which assistance is paid under 
a Tribal TANF program because the statutory language covers only cases 
where an assignment to the State is required by the Act. Tribal TANF 
cases have no such required assignment to the State. Tribal TANF cases 
will be included in Former Assistance cases to the extent that the 
individuals formerly were required to assign support rights to the 
State.

Section 305.32  Requirements applicable to calculations

    Section 305.32 establishes certain special provisions applicable to 
calculating the amount of incentives and penalties. Some are derived 
from current incentive rules and practice and some are based on 
explicit rules in section 458A of the Act. They are also applied to 
penalty calculations because we are using the same measures. Under this 
section the following conditions apply:
    Section 305.32(a) specifies that each measure will be based on data 
relating to the Federal fiscal year (FY). The Federal fiscal year runs 
from October 1st of one year through September 30th of the following 
year. This is consistent with current practice and reference to the 
fiscal year in section 458A of the Act.

[[Page 82184]]

    Section 302.32(b) specifies that only collections disbursed or 
retained, as applicable, and only those expenditures made by the State, 
in the fiscal year will be used to determine the incentive payment 
payable for that fiscal year. This is consistent with the way 
collections have always been counted on Federal reporting forms.
    Section 305.32(c) specifies that support collected by one State at 
the request of another State will be treated as having been collected 
in full by each State. Required by section 458A(c) of the Act, this 
maintains the same practice that exists under the current incentive 
system under section 458 of the Act for the new incentive system.
    Section 305.32(d) specifies that amounts expended by the State in 
carrying out a special project under section 455(e) of the Act will be 
excluded from the State's total IV-D dollars expended in computing 
incentive payments. This implements section 458A(c) of the Act, and 
also appears in section 458 of the Act.
    Section 305.32(e) specifies that fees paid by individuals, 
recovered costs, and program income, such as interest earned on 
collections, will be deducted from total IV-D dollars expended. This is 
consistent with 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.
    Section 305.32(f) specifies that States are required to submit data 
used to determine incentives following instructions and formats 
required by HHS and on Office of Management and Budget (OMB) approved 
reporting instruments, and sets December 31st of each calendar year as 
the final deadline for the submittal of State data for a fiscal year. 
It includes any necessary data from the previous fiscal year needed to 
calculate the paternity establishment percentage or any improvements 
over that fiscal year's performance necessary to earn incentives or 
avoid penalties for the current fiscal year. This is consistent with 
the requirement in 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. Data submitted 
as of December 31st will be used to determine the State's performance 
for the prior fiscal year and the amount of incentive payments due the 
States. We encourage States to have the capacity to make reports (e.g., 
year-to-date, previous quarter) available before the end of the 
reporting year so that we may conduct audits to determine data 
reliability and completeness earlier. By doing so, States will maximize 
their opportunity to correct any deficiencies before the end of the 
reporting year or, at least, by the end of the succeeding fiscal year 
which the statute allows for the State to take corrective action . A 
cut-off point is necessary for us to make the required performance 
determinations and calculations on a timely basis.

Section 305.33  Determination of applicable percentages based on 
performance levels.

    This section sets forth the explicit requirements in section 
458A(b)(6) of the Act for determining the applicable percentages used 
to calculate incentives based on a State's performance levels in the 
five performance measures.

Paternity Establishment Percentage

    Under paragraph (a), a State's paternity establishment performance 
level for a fiscal year will be, at the option of the State, the IV-D 
paternity establishment percentage or the Statewide paternity 
establishment percentage determined under Sec. 305.2 of this part. The 
applicable percentage for each level of a State's paternity 
establishment performance is set forth in table 1, except as provided 
in paragraph (b).
    Under paragraph (b), if the State's paternity establishment 
performance level for a fiscal year is less than 50 percent, but 
exceeds its paternity establishment performance level for the 
immediately preceding fiscal year by at least 10 percentage points, 
then the State's applicable percentage for the paternity establishment 
performance level is 50 percent.

Support Order

    Under paragraph (c), a State's support order performance level for 
a fiscal year is the percentage of the total number of IV-D cases where 
there is a support order determined under Sec. 305.2 and Sec. 305.32. 
The applicable percentage for each level of a State's support order 
performance can be found on table 1, except as provided in paragraph 
(d).
    Under paragraph (d), if the State's support order performance level 
for a fiscal year is less than 50 percent, but exceeds the State's 
support order performance level for the immediately preceding fiscal 
year by at least 5 percentage points, then the State's applicable 
percentage is 50 percent.

 Table 1.--Use this table to determine the maximum incentive levels for
   the paternity establishment and support order performance measures.
  If the Paternity Establishment or Support Order Performance Level Is:
------------------------------------------------------------------------
                                                                  The
                                                    But less  applicable
               At least:  (percent)                  than:    percentage
                                                   (percent)      is:
------------------------------------------------------------------------
80...............................................  .........         100
79...............................................         80          98
78...............................................         79          96
77...............................................         78          94
76...............................................         77          92
75...............................................         76          90
74...............................................         75          88
73...............................................         74          86
72...............................................         73          84
71...............................................         72          82
70...............................................         71          80
69...............................................         70          79
68...............................................         69          78
67...............................................         68          77
66...............................................         67          76
65...............................................         66          75
64...............................................         65          74
63...............................................         64          73
62...............................................         63          72
61...............................................         62          71
60...............................................         61          70
59...............................................         60          69
58...............................................         59          68
57...............................................         58          67
56...............................................         57          66
55...............................................         56          65
54...............................................         55          64
53...............................................         54          63
52...............................................         53          62
51...............................................         52          61
50...............................................         51          60
0................................................         50           0
------------------------------------------------------------------------

Current Support Collections

    Under paragraph (e), a State's current collections performance 
level for a fiscal year is equal to the total amount of current support 
collected during the fiscal year divided by the total amount of current 
support owed during the fiscal year in all IV-D cases, as determined 
under Secs. 305.2 and 305.32. The applicable percentage with respect to 
a State's current collections performance level can be found on table 
2, except as provided in paragraph (f).
    Under paragraph (f), if the State's current collections performance 
level for a fiscal year is less than 40 percent but exceeds the current 
collections performance level of the State for the immediately 
preceding fiscal year by at least 5 percentage points, then the State's 
applicable percentage is 50 percent.

Arrearage Collections

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

[[Page 82185]]

for a fiscal year is equal to the total number of eligible IV-D cases 
in which payments of past-due child support were received and disbursed 
during the fiscal year, divided by the total number of IV-D cases in 
which there was past-due child support owed, as determined under 
Secs. 305.2 and 305.32. The applicable percentage with respect to a 
State's arrearage collections performance level can be found on table 
2, except as provided in paragraph (h).
    Under paragraph (h), if the State's arrearage collections 
performance level for a fiscal year is less than 40 percent but exceeds 
the arrearage collections performance level for the immediately 
preceding fiscal year by at least 5 percentage points, then the State's 
applicable percentage is 50 percent.

      Table 2.--If the Current Collections or Arrearage Collections
                          Performance Level Is:
    (Use this table to determine the maximum incentive levels for the
    current and arrearage support collections performance measures.)
------------------------------------------------------------------------
                                                                  The
                                                    But less  applicable
               At least:  (percent)                  than:    percentage
                                                   (percent)      is
------------------------------------------------------------------------
80...............................................  .........         100
79...............................................         80          98
78...............................................         79          96
77...............................................         78          94
76...............................................         77          92
75...............................................         76          90
74...............................................         75          88
73...............................................         74          86
72...............................................         73          84
71...............................................         72          82
70...............................................         71          80
69...............................................         70          79
68...............................................         69          78
67...............................................         68          77
66...............................................         67          76
65...............................................         66          75
64...............................................         65          74
63...............................................         64          73
62...............................................         63          72
61...............................................         62          71
60...............................................         61          70
59...............................................         60          69
58...............................................         59          68
57...............................................         58          67
56...............................................         57          66
55...............................................         56          65
54...............................................         55          64
53...............................................         54          63
52...............................................         53          62
51...............................................         52          61
50...............................................         51          60
49...............................................         50          59
48...............................................         49          58
47...............................................         48          57
46...............................................         47          56
45...............................................         46          55
44...............................................         45          54
43...............................................         55          53
42...............................................         43          52
41...............................................         42          51
40...............................................         41          50
0................................................         40           0
------------------------------------------------------------------------

    Under paragraph (i), a State's cost-effectiveness performance level 
for a fiscal year is equal to the total amount of IV-D support 
collected and disbursed or retained, as applicable during the fiscal 
year, divided by the total amount expended during the fiscal year, as 
determined under Secs. 305.2 and 305.32. The applicable percentage with 
respect to a State's cost-effectiveness performance level can be found 
on table 3.

        Table 3.--If the Cost-Effectiveness Performance Level Is:
 (Use this table to determine the maximum incentive level for the cost-
                   effectiveness performance measure.)
------------------------------------------------------------------------
                                                                  The
                    At least:                       But less  applicable
                                                     than:     (percent)
------------------------------------------------------------------------
5.00.............................................  .........         100
4.50.............................................       4.99          90
4.00.............................................       4.50          80
3.50.............................................       4.00          70
3.00.............................................       3.50          60
2.50.............................................       3.00          50
2.00.............................................       2.50          40
0.00.............................................       2.00           0
------------------------------------------------------------------------

    Because of the complexity of the incentives formula set forth in 
section 458A of the Act and implemented by these regulations, we have 
included an example of how the system will work in a particular year 
for State A:
    Let's make the following assumptions regarding State A (See table 
A):
    <bullet> State A's paternity performance level is 54 percent, 
making its applicable percent 64 percent (see table 1)
    <bullet> State A's order establishment performance level is 79 
percent, making its applicable percent 98 percent (see table 1)
    <bullet> State A's current support collections performance level is 
41 percent, making its applicable percent 51 percent (see table 2)
    <bullet> State A's arrearage support collections performance level 
is 40 percent, making its applicable percent 50 percent (see table 2)
    <bullet> State A's cost-effectiveness ratio is 3.00, making its 
applicable percent 60 percent (see table 3)
    <bullet> 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)
    <bullet> 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
----------------------------------------------------------------------------------------------------------------
                                                               Applicable
                                                                percent                   State A's collection
              Measure                 State A's performance     based on      Weight      base  (assumed to be
                                              level           performance                    $50.0 million)
                                                                (percent)
----------------------------------------------------------------------------------------------------------------
Paternity establishment...........  54%.....................           64         1.00  $32.0 million.
Order establishment...............  79%.....................           98         1.00  $49.0 million.

[[Page 82186]]


Current collections...............  41%.....................           51         1.00  $25.5 million.
Arrearage collections.............  40%.....................           50         0.75  $18.8 million.
Cost-effectiveness................  $3.00...................           60         0.75  $22.5 million.
State A's maximum incentive base                                                        $147.8 million.
 amount.
----------------------------------------------------------------------------------------------------------------

    <bullet> We must now make some assumptions regarding the other 
States. Let's assume that there are only two other States in our 
country--and the maximum incentive base amount is $84 million for State 
B and $50 million for State C, making the total maximum incentive base 
amount $281.8 million for all three States (See table B).
    <bullet> We must now determine what State A's share of the $281.8 
million is. It is 52 percent ($147.8 divided by $281.8)

                                 Table B
------------------------------------------------------------------------
                                                               Incentive
                                            Maximum   State's   payment
                                           incentive   share   pool $422
                  State                       base       of     million
                                            amounts    $281.8     (in
                                                      million  millions)
------------------------------------------------------------------------
A........................................    $147.8      0.52    $219.4
B........................................      84.0      0.30     126.6
C........................................      50.0      0.18      76.0
------------------------------------------
  Totals.................................     281.8      1.00     422.0
------------------------------------------------------------------------

    <bullet> Let us assume the incentive payment pool for the FY is 
$422 million.
    <bullet> Since State A's share is 0.52, this State has earned 52 
percent of the $422 million incentive payment pool that Congress is 
allowing, or $219.4 ($422 mil. times 0.52) million incentive payment 
for this particular fiscal year.

Section 305.34  Payment of Incentives

    Section 458A(d) of the Act includes administrative provisions for 
estimating and paying incentives. Section 305.34 implements those 
provisions. Under paragraph (a), each State must claim/include one-
fourth of its estimated annual incentive payment on each of its four 
quarterly expenditure reports for a fiscal year. When combined with the 
other amounts reported on each of the State's four quarterly 
expenditure reports, the portion of the annual estimated incentive 
payment as reported each quarter will be included in the calculation of 
the next quarterly grant awarded to the State under title IV-D of the 
Act.
    Under paragraph (b), following the end of each fiscal year, HHS 
will calculate the State's annual incentive payment, using the actual 
collection and expenditure data and the performance data submitted by 
the State and other States for that fiscal year. To determine the final 
incentive amounts, OCSE will first audit State-reported data submitted 
by December 31, or if a data reliability audit has already been 
performed during that fiscal year, OCSE will confirm that no system's 
or other changes have occurred in the interim which may have affected 
the data reliability. A determination of reliability will be made. 
Because data reliability audits may have to be conducted for some 
States which did not take advantage of the opportunity for such audits 
to be conducted during the performance year, final calculation of the 
State's incentive award will be made in August using actual data and 
performance levels of the State and other States, factoring in any 
determinations of incomplete or unreliable data as provided in 
paragraph (c). Based on this calculation, a positive or negative grant 
will be awarded to each State under title IV-D of the Act to reconcile 
the actual annual incentive payment that for a fiscal year with the 
incentive payment estimated by the State during that year. We are 
encouraging states to be conservative in their estimates during the 
phase-in years for the new incentive system. This will decrease the 
likelihood that HHS will have to make large negative adjustments.
    Under paragraph (c), payment of incentives is contingent on a 
State's data being determined reliable data by Federal auditors, 
consistent with the requirement for complete and reliable data set 
forth in section 458A(b)(5)(B) of the Act.

Section 305.35  Reinvestment

    Section 458A(f) of the Act requires a State to use incentive 
payments to supplement and not supplant other funds used by the State 
in its IV-D program, or otherwise with approval of the Secretary. Under 
Sec. 305.35, which implements this requirement, paragraph (a) requires 
a State to expend the full amount of incentive payments received under 
the IV-D program to supplement, and not supplant other funds used by 
the States to carry out IV-D program activities; or funds for other 
activities approved by the Secretary which may contribute to improving 
the effectiveness or efficiency of the State's IV-D program, including 
cost-effective contracts with local agencies, whether or not the 
expenditures for the activity are eligible for reimbursement under 
title IV-D of the Act.
    Under paragraph (b), in those States in which incentive payments 
are passed through to political subdivisions or localities, in 
accordance with section 454(22) of the Act and Sec. 302.55, such 
payments must be used in accordance with this section.
    Under paragraph (c), State IV-D expenditures may not be reduced as 
a result of the receipt and reinvestment of incentive payments.
    In order to determine if incentive payments are used to supplement 
rather than supplant other amounts used by the State to fund the IV-D 
program, a base year level of program expenditures is necessary. 
Therefore, under paragraph (d), a base amount will be determined by 
subtracting the amount of actual incentives paid to the State which was 
reinvested in the IV-D program for fiscal year 1998 from the total 
amount expended by the State in the IV-D program during the same 
period. The rule also allows States, in the alternative, to use the 
average of the previous three fiscal years (1996, 1997, and 1998) as a 
base amount. This base amount of State spending will have to be 
maintained in future years. Incentive payments under this part are to 
be used in addition to, and not in lieu of, the base amount.
    We selected fiscal year 1998 rather than fiscal year 1999 because 
we believe that the total for fiscal year 1999 may not be available 
until some time in fiscal year 2000 and we want States to know what 
their base amount that must be

[[Page 82187]]

maintained is in advance of receiving any incentive payments under 
section 458A. Additionally, we allow the States the alternative of 
computing a 3-year average. We used this alternative because we believe 
it might more closely approximate the amount a State has been spending 
on its IV-D program and will not give undue weight to any extraordinary 
or non-recurring expenditures that the State may have made in fiscal 
year 1998.
    Based on comments from the proposed regulation, we eliminated the 
proposed examples under paragraph (e) and revised the language in 
paragraph (d) to clarify when incentive payments would be subtracted 
from FY 1998 expenditures. Most commenters found that the examples 
added an element of confusion to the base year calculation.
    Under paragraph (f), that has been redesignated as the new 
paragraph (e), requests for approval of expending incentives on 
activities not currently eligible for funding under the IV-D program, 
but which would benefit the IV-D program (e.g., work programs for 
noncustodial parents), must be submitted in accordance with 
instructions issued by the Commissioner of the Office of Child Support 
Enforcement. We will develop and disseminate by Action Transmittal 
instructions for States seeking approval to expend incentives on 
activities that would benefit the IV-D program.

Section 305.36  Incentive Phase-In

    Section 201(b) of the Child Support Performance and Incentive Act 
of 1998 establishes a transition period which phases in the new 
incentives system under section 458A of the Act. Under Sec. 305.36, the 
incentive system under part 305 will be phased-in over a three-year 
period during which both the current system and the new system will be 
used to determine the amount a State will receive. For fiscal year 
2000, a State will receive two-thirds of what it would have received 
under the incentive formula set forth in Sec. 304.12, and one-third of 
what it would have received under the formula set forth under part 305. 
In fiscal year 2001, a State would receive one-third of what it would 
have received under the incentive formula set forth under Sec. 304.12 
and two-thirds of what it would have received under the formula under 
part 305. In fiscal year 2002, the formula set forth under part 305 
will be fully implemented and will be used to determine all incentive 
amounts.

V. Description of Regulatory Provisions--Penalties and Audit

Former Audit and Penalty Process

    In implementing the former requirement at section 452(a)(4) of the 
Act, the former regulations at part 305 required HHS to conduct an 
audit at least once every three years, to evaluate the effectiveness of 
each State's program in carrying out the purposes of title IV-D of the 
Act and to determine that the program met the title IV-D requirements. 
These audits were the sole basis for imposing a penalty under former 
section 403(h) of the Act.
    The audits were a comprehensive review of all program requirements. 
A penalty was assessed in accordance with section 403(a) of the Act 
when the State failed the audit, but it was suspended during the period 
the State was under a corrective action plan. If the State passed the 
follow-up review, the penalty was not applied. In addition, HHS then 
conducted the comprehensive audit on an annual basis in the case of a 
State that was subject to a penalty. For a State operating under a 
corrective action plan, the review at the end of the corrective action 
period covered only the criteria specified in the notice of non-
compliance.
    Part 305 of the regulations was removed as part of an omnibus 
clean-up regulation designed to conform existing program regulations to 
mandatory changes made by PRWORA and subsequent laws. Since PRWORA and 
Pub. L. 105-200 significantly changed the audit and penalty provisions 
of the statute, we removed all of part 305. The clean-up regulation was 
published February 9, 1999 (64 FR 6237). We include this summary of the 
former Federal process, however, because under the revised audit and 
penalty provisions in sections 409(a)(8) and 452 (a)(4) and (g) of the 
Act, the Secretary is required to assess a penalty if a State IV-D 
program is determined not to be in substantial compliance with IV-D 
requirements. As explained in greater detail later in this preamble, 
the process for making such a determination is based largely on the 
former audit and penalty standards and procedures.

New Audit and Penalty Process

    Under section 409(a)(8) of the Act, if, based on the data submitted 
by the State for a review, the State program fails to achieve the 
paternity establishment or other performance standards set by the 
Secretary; or if an audit finds that the State data is incomplete or 
unreliable; or if the State failed to substantially comply with one or 
more IV-D requirements, and the State fails to correct the deficiencies 
in the succeeding fiscal year following the performance year, then the 
amounts otherwise payable to the State under title IV-A will be 
reduced. However under section 409(a)(8)(C) of the Act, a State will be 
determined to be in substantial compliance with IV-D requirements if 
the Secretary determines that the noncompliance is of a technical 
nature which does not adversely affect the performance of the State's 
IV-D program, or will be determined to have submitted accurate data 
where the incompleteness or unreliability of the data is of a technical 
nature which does not affect the determination of the State's 
performance on the performance standards.
    In these regulations, we have relied heavily on the well-
established, tested and experienced Federal audit process, which was 
used for penalties assessed under the former section 403(h) of the Act 
and former part 305, to establish the new audit regulations. In fact, 
much of our language governing the audit process is taken almost 
verbatim from former part 305, particularly in sections dealing with 
the audit process, State responsibilities, definition of substantial 
compliance, and notice and assessment of the penalty.

Section 305.40  Penalty Performance Measures and Levels

    Section 305.40 establishes the performance measures to be used to 
determine whether a State IV-D program is performing adequately to 
avoid a financial penalty under section 409(a)(8)(A)(i)(I) of the Act. 
As discussed earlier in this preamble, under paragraph (a), there are 
three performance measures for which States have to achieve certain 
levels of performance in order to avoid being penalized for poor 
performance. These measures are paternity establishment, support order 
establishment, and current collections as set forth in Sec. 305.2 of 
these regulations.
    The levels of performance that determine whether or not a State is 
subject to a penalty were established based on analysis of historical 
statistical and financial program data submitted by States. This 
program data was used to set the expected levels of performance and 
improvements, which are based on past State performance and reasonable 
expectations of improved performance. The expectations of performance 
in this rule were set taking into consideration State concerns, prior 
work done by State and Federal partners to develop the incentive 
system, and consultations with State partners about what

[[Page 82188]]

constituted reasonable performance levels supported by historical data.
    The measures and levels of performance are:
    (1) The paternity establishment percentage which is required under 
section 452(g) of the Act for penalty purposes. States have the option 
of using either the IV-D paternity establishment percentage or the 
statewide paternity establishment percentage defined in Sec. 305.2. 
Table 4 shows at which level of performance the State is subject to a 
penalty under the paternity establishment measure. For example, if 
State A earned a paternity establishment percent of 34 percent and only 
improved by 3 percentage points over the previous fiscal year, then 
State A is subject to a penalty of 1-2 percent of TANF funds, for the 
first finding.

                  Table 4.--Statutory Penalty Performance Standards for Paternity Establishment
 (Use this table to determine the level of performance for the paternity establishment measure that will incur a
                                                    penalty.)
----------------------------------------------------------------------------------------------------------------
                                              Increase required over      Penalty FOR FIRST FAILURE if increase
                   PEP                         previous year's PEP                       not met
----------------------------------------------------------------------------------------------------------------
90% or more.............................  None.........................  No penalty.
75% to 89%..............................  2%...........................  1-2% TANF funds.
50% to 74%..............................  3%...........................  1-2% TANF funds.
45% to 49%..............................  4%...........................  1-2% TANF funds.
40% to 44%..............................  5%...........................  1-2% TANF funds.
39% or less.............................  6%...........................  1-2% TANF funds.
----------------------------------------------------------------------------------------------------------------

    (2) The support order establishment performance measure to be used 
for penalty purposes is the measure defined in Sec. 305.2. For purposes 
of the penalty with respect to this measure, there is a threshold of 40 
percent, below which a State is penalized unless an increase of 5 
percent over the previous year is achieved--which will also qualify it 
for an incentive. Performance in the 40 percent to 49 percent range 
with no significant increase will not be penalized, but neither will it 
qualify for an incentive payment. Table 5 shows at which level of 
performance a State will incur a penalty under the order establishment 
measure.

                             Table 5.--Performance Standards for Order Establishment
   (Use this table to determine the level of performance for the order establishment measure that will incur a
                                                    penalty.)
----------------------------------------------------------------------------------------------------------------
         Performance level                Increase over previous year                 Incentive/Penalty
----------------------------------------------------------------------------------------------------------------
50% or more........................  no increase over previous year         Incentive/No Penalty.
                                      required.
40% to 49%.........................  w/ 5% increase over previous year....  Incentive/No Penalty.
                                     w/out 5% increase....................  No Incentive/No Penalty.
Less than 40%......................  w/ 5% increase over previous year....  Incentive/No Penalty.
                                     w/out 5% increase....................  No Incentive/Penalty equal to 1-2%
                                                                             of TANF funds for the first
                                                                             failure, 2-3% for second failure,
                                                                             and so forth, up to a maximum of 5%
                                                                             of TANF funds.
----------------------------------------------------------------------------------------------------------------

    (3) For the current collections performance measure, there is a 
threshold of 35 percent below which a State is penalized unless an 
increase of 5 percent over the previous year is achieved (that 
qualifies it for an incentive). Performance in the 35 percent to 40 
percent range with no significant increase will not be penalized, but 
neither will it qualify for an incentive payment. Table 6 shows at 
which level of performance the State will incur a penalty under the 
current collections measure.

                             Table 6.--Performance Standards for Current Collections
   (Use this table to determine the level of performance for the current collections measure that will incur a
                                                    penalty.)
----------------------------------------------------------------------------------------------------------------
         Performance level                Increase over previous year                 Incentive/Penalty
----------------------------------------------------------------------------------------------------------------
40% or more........................  no increase over previous year         Incentive/No Penalty.
                                      required.
35% to 40%.........................  w/5% increase over previous year.....  Incentive/No Penalty.
                                     w/out 5% increase....................  No Incentive/No Penalty.
Less than 35%......................  w/5% increase over previous year.....  Incentive/No Penalty.
                                     w/out 5% increase....................  No Incentive/Penalty equal to 1-2%
                                                                             of TANF funds for the first
                                                                             failure, 2-3% for second failure,
                                                                             and so forth, up to a maximum of 5%
                                                                             of TANF funds.
----------------------------------------------------------------------------------------------------------------

    Under paragraph (b), the provisions applicable to calculations 
listed under Sec. 305.32, apply to the calculation of performance 
levels for penalty purposes, e.g., counting only disbursed collections, 
and double-counting interstate collections.

Section 305.42  Penalty phase-in

    Section 305.42 sets a schedule for phasing in the new penalty 
provisions which relates to the incentive phase-in under Sec. 305.36. 
States will be subject to penalties for poor performance as of fiscal 
year 2001. States are subject to the performance penalties based on 
data reported for FY 2001. Data reported for

[[Page 82189]]

FY 2000 will be used as a base year to determine improvements in 
performance during FY 2001. There is an automatic statutory corrective 
action period of one fiscal year immediately succeeding the performance 
year before any penalty will be imposed. If at the end of the 
corrective action period the deficiency is not corrected, the penalty 
will be taken. For example, if the Secretary finds with respect to FY 
2001, that the State had either failed to achieve the level of 
performance required or that the State's FY 2001 data was unreliable or 
incomplete, then the State would be required to correct the deficiency 
and meet the performance measure during the succeeding year, i.e., FY 
2002. If the State has either unreliable or incomplete data or fails 
the performance measure for the corrective action year, FY 2002, a 
penalty will be assessed.
    Since States' performance will be measured on the basis of the 
States' own data, a State should be expected to continually monitor its 
progress toward meeting the performance standards during the course of 
the year. Similarly, States should continuously monitor their own data 
for completeness and reliability. OCSE will conduct a data reliability 
audit for a State during the year upon request by a State and will 
assess performance, based upon the data submitted by the State, as soon 
as it is reported at the end of the year. States are on notice, 
however, that any corrective action which may be necessary to correct 
either a data or a performance deficiency must be achieved before the 
end of the fiscal year immediately succeeding the performance year.

Section 305.60  Timing and scope of federal audits

    Based on explicit statutory requirements at sections 452(a)(4)(C) 
and 409(a)(8)(A)(i)(II) of the Act, under Sec. 305.60 OCSE will conduct 
audits, in accordance with the Government auditing standards of the 
Comptroller General of the United States--
    (1) At least once every three years (or more frequently if the 
State fails to meet performance standards and reliability of data 
requirements) to assess the completeness, authenticity, reliability, 
accuracy and security of data and the systems used to process the data 
in calculating performance indicators under part 305;
    (2) To determine the adequacy of financial management of the State 
IV-D program, including assessments of:
    (i) Whether funds to carry out the State program are being 
appropriately expended, and are properly and fully accounted for; and
    (ii) Whether collections and disbursements of support payments are 
carried out correctly and are fully accounted for; and
    (3) For such other purposes as the Secretary may find necessary, 
including audits to determine if the State is substantially complying 
with one or more of the requirements of the IV-D program (with the 
exception of the requirements of section 454(24) of the Act relating to 
statewide-automated systems of section 454(27)(A) or (B)(i) relating to 
the State Disbursement Units).
    If a data reliability audit has been performed during the prior 
year, OCSE will conduct a limited review to determine whether any 
systems or other changes have occurred which may have affected data 
reliability or completeness. A State may request a data reliability 
audit at any time during the year as such reviews do not necessarily 
require analysis of the full year's data.
    Substantial compliance audits are defined in Sec. 305.63 and are 
discussed later in this preamble. Under these rules the substantial 
compliance audits will be conducted at the discretion of the Secretary, 
and are triggered based on substantiated evidence of a failure by the 
State to meet IV-D program requirements. The evidence that might 
warrant such an audit to determine substantial compliance include:
    (i) The results of 2 or more sequential State self-reviews 
conducted under section 454(15)(A) of the Act which show evidence of 
sustained poor performance or indicate that the State has not corrected 
deficiencies identified in previous self-assessments and that these 
deficiencies are determined to seriously impact the performance of the 
State's program; or
    (ii) Evidence of a State program's systemic failure to provide 
adequate services under the program through a pattern of non-compliance 
over time.
    While we recognize the advantage and responsibility to maintain the 
authority to conduct audits similar to those which resulted in improved 
State performance in years past, we are committed to the philosophy 
which focuses on measuring program results, and allowing States the 
flexibility and responsibility to manage their own programs, while 
assuring that Federal requirements are met. We expect States to take 
the self-reviews to determine compliance with IV-D requirements 
seriously and to use those processes to continually critique and adjust 
their programs to ensure that children and families are adequately 
served. These Federal process audits authorized under section 
452(a)(4)(C) of the Act provide a fall back measure for the Secretary's 
use should systemic or serious problems with IV-D programs become 
apparent.
    The Child Support Performance and Incentive Act of 1998, Pub. L. 
105-200, established a specific financial penalty for a State's failure 
to meet statewide-automated systems requirements in section 454(24) of 
the Act. As a conforming amendment, section 409(a)(8) of the Act was 
amended to preclude a financial penalty under that section for failing 
to meet automated systems requirements under section 454(24) of the 
Act.
    Similarly, the Consolidated Appropriations Act for FY 2000, Pub. L. 
106-113, established an alternative penalty for States that fail to 
comply with the State Disbursement Unit (SDU) requirements under 
section 454(27)(A) and (B)(i) of the Act. As a conforming amendment, 
section 409(a)(8) of the Act was also amended to preclude a financial 
penalty under that section for failing to meet automated systems 
requirements under section 454(27)(A) or (B)(i).
    While compliance with particular systems requirements will be 
excluded from any Federal audit to determine substantial compliance 
with IV-D requirements, States must still have complete and reliable 
data and meet the individual IV-D program requirements being audited, 
as defined in 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.
    Under paragraph (b), as with past audits, during the course of the 
audit, OCSE will make a critical investigation of the State's IV-D 
program through inspection, inquiries, observation, and confirmation 
and use the audit standards promulgated by the Comptroller General of 
the United States in ``Government Auditing Standards.''

Section 305.61  Penalty for failure to meet IV-D requirements

    To implement the requirements of section 409(a)(8) of the Act, 
under paragraph (a) of Sec. 305.61, a State is subject to a financial 
penalty and the amounts otherwise payable to the State under title IV-A 
of the Act would be reduced:
    If, on the basis of:
    (i) Data submitted by the State or the results of an audit 
conducted under Sec. 305.60, the State's program failed to achieve the 
paternity establishment

[[Page 82190]]

percentages, as defined in section 452(g)(2) of the Act and 
Sec. 305.40, or to meet the support order and current collections 
performance measures set forth in Sec. 305.40; or
    (ii) The results of an audit under Sec. 305.60, the State did not 
submit complete and reliable data, as defined in Sec. 305.1; or
    (iii) The results of an audit under Sec. 305.60, the State failed 
to substantially comply with one or more of the requirements of the IV-
D program, as defined in Sec. 305.63;
    And, with respect to the corrective action year immediately 
following such failure, the State failed to take sufficient corrective 
action to achieve the appropriate performance levels or compliance or 
the data submitted by the State are still incomplete or unreliable.
    A penalty will be applied only if the State failed to correct any 
identified deficiencies by the end of this automatic corrective action 
year. For example, if a State fails the PEP in fiscal year 2001, it 
must have reliable data and meet the PEP in the succeeding fiscal 
corrective action year--meaning it must meet the PEP standard for 
fiscal year 2002 or face a penalty in fiscal year 2003.
    Under paragraph (b) of Sec. 305.61, the penalty reductions 
described under Sec. 305.61(c) (discussed below) will be made for 
quarters following the end of the automatic corrective action fiscal 
year following the fiscal year with respect to which the State 
submitted unreliable or incomplete data or failed the performance 
measure or was determined not to be in substantial compliance. The 
penalty will continue until the beginning of the first quarter 
following the end of the first quarter throughout which the State, as 
appropriate:
    (1) Has achieved the paternity establishment percentages, the order 
establishment or the current collections performance measures defined 
in Sec. 305.40; and
    (2) Has submitted data that is complete and reliable; or
    (3) Is in substantial compliance with the IV-D requirements audited 
for substantial compliance, as defined in Sec. 305.63.
    A State must have reliable and complete data and meet the 
performance standards in order to avoid imposition of a penalty 
following the end of the automatic corrective action year.
    It is important to note that the statute at section 409(a)(8)(A) of 
the Act and these regulations clearly require States to submit complete 
and reliable data for all of the performance measures under sections 
452(g) and 458 or incur financial penalties. However, unlike other 
penalty circumstances, penalties for incomplete or unreliable data will 
also result in a loss of incentives. When data is incomplete or 
unreliable, it will be impossible to accurately determine the State's 
level of performance to either pay incentives or to assess performance. 
In such cases, a State's data must be complete and reliable by the end 
of the succeeding fiscal year and must demonstrate that the submitted 
data meets the performance measures in order to avoid the imposition of 
a penalty. Correcting incomplete or unreliable data within the 
automatic one-year corrective action period is not enough; the data 
must also show that the State performed at a high enough level during 
the corrective action year to avoid a financial penalty. For example, 
say a State is determined to have unreliable current collection 
performance data for FY 2001 and the State corrects the unreliable data 
for FY2001 during FY 2002. The State must still have reliable FY2002 
data and meet the current collection performance standard for FY 2002 
or incur a penalty in FY2003.
    It should be noted, with reference to the example above, that the 
State may need to correct and resubmit its FY2001 data in order to 
demonstrate improvement which would qualify for incentives or to meet 
the penalty performance measure during FY2002. If the State will 
otherwise achieve the minimum performance level without showing an 
increase over the prior year, then correction of FY2001 data would be 
unnecessary.
    Paragraph (c) sets forth the penalty levels from section 
409(a)(8)(B) of the Act under which the payments for a fiscal year 
under title IV-A of the Act will be reduced by the following 
percentages:
    (1) One to two percent for the first finding;
    (2) Two to three percent for the second consecutive finding; and
    (3) Not less than three percent and not more than 5 percent for the 
third or a subsequent consecutive finding.
    These section 409(a)(8) penalties, which increase with each 
subsequent finding, are based upon penalties assessed under the former 
audit and penalty process in former section 403(h) of the Act. In 
actual practice, OCSE has used the lower amount for each situation.
    Because the penalty is taken as a percentage of the amount payable 
to the State under part A of title IV, certain provisions applicable to 
other TANF penalties also apply to this penalty. The provisions in 
section 409(d) of the Act which provide that the total penalties that 
may be taken may not exceed 25 percent of the TANF grant applies. In 
addition, section 410 of the Act provides for appeals when penalties 
are taken pursuant to section 409 of the Act.
    Finally, section 409(a)(12) of the Act which requires that a State 
spend additional funds to replace the reductions in funds resulting 
from the imposition of a penalty applies. The TANF regulations 
published April 12, 1999 at 64 FR 17720 and effective October 1, 1999, 
contain provisions in new 45 CFR part 262 which address and implement 
these statutory provisions. We incorporate those provisions by cross 
reference.

Section 305.62  Disregard of a failure which is of a technical nature.

    Section 409(a)(8)(C) of the Act, like the former section 403(h) of 
the Act, recognizes that certain noncompliance may be insufficient to 
significantly impact a State's performance or data reliability. Under 
Sec. 305.62, we implement this concept by providing 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 
measure percentages.

Section 305.63  Definition of substantial compliance with IV-D 
requirements.

    Because section 409(a)(8) of the Act requires the assessment of a 
penalty should a State be found, as a result of an audit, to have 
failed to substantially comply with one or more IV-D requirements which 
it fails to correct in the corrective action year, we must provide a 
definition of substantial compliance that will be used by the auditors 
to measure State compliance with IV-D requirements. Former Sec. 305.20 
established, for purposes of the former Federal audit and penalty 
process, the definition of an effective program in substantial 
compliance with the requirements of title IV-D of the Act. Therefore, 
under Sec. 305.63 we use the definition under former Sec. 305.20 as the 
basis for a determination that a State

[[Page 82191]]

failed to achieve substantial compliance with one or more IV-D 
requirements.
    However, there is one significant difference between the new and 
former audit and penalty process which deals with the required scope of 
the audit. Under the former statute and regulations, a penalty was 
based on a complete audit of a State's program for substantial 
compliance with all of the applicable IV-D requirements. Under section 
408(a)(9) of the Act and these regulations, a State may be audited on 
one, some, or all of the requirements and may be assessed a penalty, if 
it is found not to comply with one or more IV-D requirements. 
Assessment of a penalty could be based, therefore, on a targeted audit 
of specific IV-D requirements. Specifically, for the purposes of a 
determination under 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 is required 
to meet the specific IV-D State plan requirement or requirements that 
were audited. The IV-D requirements subject to audit are contained in 
part 302 of program regulations, and are measured as described in the 
following paragraphs.
    Under paragraph (a), the State must meet all the requirements under 
any of the following areas being audited:
    Statewide operations, 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 paragraph (b), the State is required to meet the requirements 
under the following areas in at least 90 percent of the cases reviewed 
for each criterion being audited, consistent with the requirements used 
under the former 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 paragraph (c), States will be held to the same test they have 
been held to under former audit and penalty requirements in place and 
used since the early to mid-1990s. Under the paragraph, the State is 
required to meet the following areas in at least 75 percent of the 
cases reviewed for each criterion being audited:
    (1) Collection and distribution of support payments, including: 
collection and distribution of support payments by the IV-D agency 
under 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 
income withholding under Sec. 303.100. In cases in which income 
withholding cannot be implemented or is not available and the non-
custodial parent has been located, States must use or attempt to use at 
least one enforcement technique available under State laws in addition 
to Federal and State tax refund offset, in accordance with State laws 
and procedures and applicable State guidelines developed under 
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 are using those standards because we 
still consider them to represent the critical aspects of IV-D program 
requirements and believe they are essential to any determination of 
substantial compliance with any of the requirements being audited for 
that purpose. The subparagraphs, as written, are broad and incorporate 
revised provisions of title IV-D of the Act, such as any changes in 
distribution, additional enforcement techniques, revised review and 
adjustment procedures and evolving medical support expectations that 
are indicated in the statute or regulations.
    The timeframe for disbursement of support collections by the State 
Disbursement Unit under section 454B of the Act is included because it 
is one of the essential case processing timeframes added by PRWORA. 
Other explicit requirements of PRWORA are included by reference to laws 
enacted under section 466 of the Act and still others, for example, the 
State Directory of New Hires and other new locate sources, will be 
evaluated as part of the State's automated system certification.
    As with the former audit process which recognized that citing 
States for each failure to meet a specific timeframe could remove a 
State's motivation to move forward in such a case, we propose to adopt 
the provisions from former 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 regulations and 
have incorporated it into paragraph (d).
    Finally, as under the former audit standards in Sec. 305.20, 
paragraph (e) requires a State to meet the

[[Page 82192]]

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) of the Act and 
the new audit responsibilities under section 452(a)(4) of the Act, the 
Federal audit and subsequent penalty can cover simply one, or a number 
of IV-D requirements. Using the definition of substantial compliance 
described above, Federal auditors, States and other interested parties 
will be aware of the expected level of State performance with respect 
to any particular requirement being audited.

Section 305.64  Audit procedures and State comments

    This section will adopt the same procedures as were in effect under 
former Sec. 305.12. Under paragraph (a), prior to the start of the 
actual audit, whether for data reliability and completeness or for 
substantial compliance, Federal auditors will hold an audit entrance 
conference with the State IV-D agency. At that conference, the auditors 
will explain how the audit will be performed and make any necessary 
arrangements.
    Under paragraph (b), at the conclusion of audit fieldwork, Federal 
auditors will afford the State IV-D agency an opportunity to have an 
audit exit conference at which time preliminary audit findings will be 
discussed and the State IV-D agency may present any additional matter 
it believes should be considered in the audit findings.
    Under paragraph (c), after the exit conference, Federal auditors 
will prepare and send to the State IV-D agency, a copy of an interim 
report on the results of the audit. Within a specified timeframe from 
the date the report was sent by certified mail, the State IV-D agency 
will be able to submit written comments on any part of the report that 
the State IV-D agency believes is in error. The auditors will note such 
comments and incorporate any response into the final audit report.

Section 305.65  State cooperation in audit

    Also consistent with historic State responsibilities with respect 
to Federal audits, we incorporated former Sec. 305.13 and require that 
each State make available to the Federal auditors such records or other 
supporting documentation (electronic and manual) as the audit staff may 
request, including records to support the data as submitted on the 
Federal statistical and financial reports that will be used to 
calculate the State's performance. On-line access to a State's system 
and data will expedite the process for both the Federal auditors and 
the States. We have included specific reference to the data States must 
submit because it is essential to the auditors' work. States will also 
be required to make available personnel associated with the State's IV-
D program to provide information that the audit staff may find 
necessary in order to conduct or complete the audit.
    We also require, under paragraph (b), that States provide evidence 
to OCSE that their data are complete and reliable. This ensures the 
responsibility for maintaining and providing reliable data is the 
State's responsibility.
    As was the case under former audit regulations at Sec. 305.13, we 
require in paragraph (c), that failure to comply with the requirements 
of this section with respect to audits conducted under Sec. 305.64 may 
necessitate a finding that the State has failed to comply with the 
particular criteria being audited. State cooperation with the audit is 
essential to assess performance. In addition, States are encouraged to 
provide Federal auditors with on-line access to their systems and data. 
On-line access to a State's system and data will expedite the process 
for both the Federal auditors and the States.

Section 305.66  Notice, corrective action year, and imposition of 
penalty for failure to meet requirements

    Section 305.66 addresses notice to the State of any deficiency or 
deficiencies identified. Similar to the notice aspects of the former 
audit process at former Sec. 305.99, paragraph (a) requires that, if 
the Secretary, on the basis of the results of an audit or review, finds 
a State to be subject to a penalty, OCSE will notify the State in 
writing of such finding.
    Under paragraph (b), the notice will:
    (1) Explain the deficiency or deficiencies which result in the 
State being subject to a penalty, indicate the amount of the potential 
penalty, and give reasons for the Secretary's finding; and
    (2) Specify that the penalty will be assessed if the State has 
failed to correct the deficiency or deficiencies cited in the notice 
during the succeeding fiscal year, referred to as the ``corrective 
action'' year. The corrective action year is the fiscal year 
immediately following the year with respect to which the deficiency 
occurred.
    The State should be continuously monitoring its own performance and 
taking action to improve performance which its own data shows may fail 
to achieve the performance measures. The State is also responsible for 
maintaining proper procedures and controls to ensure data reliability 
and completeness. OCSE is willing to conduct data reliability audits at 
any time during the compliance year, but the State should not wait or 
rely upon the Secretary's determination of a data or a performance 
deficiency in order to begin corrective action. Two consecutive years 
of failure (either poor data or poor performance) in the same 
performance measure criterion will trigger a penalty imposition.
    As discussed earlier in the preamble, the imposition of a penalty 
is subject to certain limitations, appeals and replacement of funds 
requirements specified in sections 409 and 410 of the Act. We 
incorporate those statutory requirements in paragraph (b)(2) by cross 
reference to the specific TANF regulatory provisions in 45 CFR part 262 
that implement those requirements.
    Under paragraph (c), the penalty will be assessed if the Secretary 
determines that the State has not corrected the deficiency or 
deficiencies cited in the notice by the end of the corrective action 
year. This determination will be made as soon as possible after the end 
of the corrective action year. The penalty will be assessed, however, 
commencing with the first quarter following the end of the corrective 
action year. The statute requires that the penalty must be imposed for 
a minimum period of one quarter, but may be suspended ``following the 
end of the first quarter throughout which the State program has 
achieved * * * (compliance).''
    We require, as supported by the language of section 409(a)(8) of 
the Act, under paragraph (d), that only one corrective action period be 
provided to a State in relation to a given deficiency when consecutive 
findings of noncompliance are made on that deficiency.
    Under paragraph (e), a consecutive finding occurs only when the 
State does not meet or achieve substantial compliance with the same 
criterion or with any one of the criteria cited in the notice. A new 
corrective action year will be triggered by a data deficiency or 
performance failure under a different criterion than was cited in the 
prior penalty notice.

VI. Response to Comments

    We received twenty-eight comments from representatives of State IV-
D agencies, national organizations, and advocacy groups on the proposed 
rule published October 8, 1999 in the Federal Register (64 FR 55074). A 
summary of the changes made in response to comments is followed by a

[[Page 82193]]

summary of the comments received and our responses follows:

Changes Made in Response to Comments

    OCSE carefully considered the comments received and made some 
changes to the final regulation in response. Section 303.35 dealing 
with the administrative complaint procedure was revised and clarified. 
Section 305.1(i) on the definition of data reliability was further 
clarified by including a 95 percent standard for data reliability to be 
effective for data reported for fiscal year 2001. Section 305.32(f) was 
revised to add a deadline of December 31 of each calendar year by which 
date complete and reliable data for the prior fiscal year necessary to 
compute the prior fiscal year's performance must be submitted to OCSE 
or the State will not receive incentives for that prior fiscal year. 
The example of the incentives calculation was removed from the 
regulation language. The two examples for determining a base year for 
the reinvestment requirement were removed.

Comments to Section 303.35 Administrative complaint procedure

    We received twenty-six comments on the administrative complaint 
procedure from State IV-D agencies, national organizations and advocacy 
groups. Of these comments, four expressed strong support for the 
proposed review procedure and twenty-two expressed opposition to the 
proposal. Most of those expressing support were advocacy groups. In 
expressing support for the proposed review process, four commenters 
stated that the process would appropriately hold IV-D agencies 
accountable in individual cases, would improve customer satisfaction, 
would increase efficiency and expedite resolution of individual 
problems, and could help States identify systemic problems. However, in 
order to strengthen the proposed review process, these commenters made 
several suggestions for additions to the regulation.
    The twenty-two commenters in opposition to the proposal were from 
State IV-D directors. Most of these requested that Sec. 303.35 be 
removed from the final regulations.
    We believe that an administrative complaint procedure is an 
essential component in the child support program. The rule does not 
dictate how States must implement the complaint procedure. We recognize 
that many States may already have these procedures in place. The rule 
sets minimal requirements and States are able to set their own 
procedures. We have revised the regulatory language to state that an 
administrative complaint procedure must be in place ``as defined by the 
State.'' We have addressed individual concerns in the following 
responses and have revised the regulatory language to address the 
objections. The comments and our responses are as follows:
    1. Comment: Three commenters suggested the addition of a specific 
deadline for State IV-D agencies in responding to client complaints and 
notifying the complainant of the review determination.
    Response: We have not adopted this suggestion to include in the 
regulation a specific time deadline for response and notification. The 
intent of this regulation is to ensure that all State IV-D programs 
have a review process in place, not to dictate specific requirements 
for States in implementing their complaint procedures.
    2. Comment: Three commenters recommended the addition of a 
requirement for State IV-D agencies to establish procedures for 
informing clients about the availability of the review process.
    Response: We have included this suggestion in the regulation, in 
order to ensure that recipients of IV-D services are informed of the 
State's review process. We would encourage all States to include this 
notification in the initial information provided to applicants and 
those referred for program services.
    3. Comment: Two commenters suggested we add an analysis of types 
and origins of complaints as a required element in the State's self-
assessment report to allow for the identification and correction of 
systemic problems.
    Response: We have chosen not to include analysis of complaints as 
required element in the State self-assessment report. However, we would 
encourage States to regularly examine the types of complaints they are 
receiving in order to identify and correct any chronic or systemic 
problems. This examination of complaints could be included in the 
optional program service enhancements section of the State self-
assessment, with a description of practices initiated by the State that 
are contributing to improved program performance and customer service. 
In order to assess the need for any future program improvements, we 
will monitor State implementation of the administrative complaint 
procedure and seek input from States and other stakeholders.
    4. Comment: One commenter recommended we require the reviews to be 
conducted by an independent decision-maker to enhance the credibility 
and fairness of the process. In so doing, this commenter cited the 
California statute that includes such a provision.
    Response: We have not adopted this recommendation as we are not 
convinced that an independent decision-maker is necessary to ensure 
fairness and we wish to provide the maximum flexibility to States in 
designing and implementing their administrative review procedures. 
States may utilize an independent reviewer to maximize fairness and due 
process for all parties involved.
    5. Comment: Eighteen commenters stated that the proposed regulation 
is unnecessary as most States already have complaint procedures in 
place. One commenter stated further that the regulation may create 
confusion regarding existing State procedures and whether they are/are 
not in compliance with the new regulation. One commenter stated that, 
due to existing State procedures, the regulation would provide no new 
protections for clients but would add administrative burdens to the 
State. Finally, one commenter stated that each State should be free to 
set its own complaint procedures.
    Response: We believe that an administrative complaint procedure is 
an essential component in the move to a program based on outcomes and 
performance-based incentives and penalties. Recipients of services, 
through administrative complaint processes, should be able to access 
the IV-D agency and lodge complaints when they have evidence to support 
specific concerns in their cases. It is not our intent to nor does the 
rule dictate how States must implement the complaint procedure or to 
require States to replace their existing procedures with a more formal 
process. We recognize that many States may already have these 
procedures in place and do not intend to place additional burdens on 
those States with these requirements. The rule sets minimal 
requirements and States are able to set their own procedures. We have 
revised the regulatory language to state that an administrative 
complaint procedure must be in place ``as defined by the State.''
    6. Comment: Sixteen commenters expressed concern that the proposed 
regulation would divert fiscal and personnel resources away from the 
primary IV-D mission. One commenter stated further that this diversion 
of resources could ultimately result in decreased agency efficiency and 
customer service. Ten commenters stated further that resources might be 
drained due to the potential for abuse of

[[Page 82194]]

the system by custodial parents who submit repeated complaints, 
requiring multiple reviews in each case. One commenter stated further 
that, as a result of this proposal, programs would have difficulty 
meeting major program goals, with the result of deficient performance 
in critical program areas. Finally, one commenter requested a more 
thorough analysis of the costs associated with this proposed 
regulation.
    Response: Since most States already have procedures in place, as 
asserted in comment #1, this regulation would not require additional 
resources for them--they may continue with their existing procedures. 
In establishing their procedures, States have the ability to establish 
parameters for appropriate complaints and to, therefore, avoid 
excessive or repeated reviews in a case. For States that do not 
currently have a complaint procedure in place, this regulation will 
require some additional resources. However, we feel strongly that 
customer service and a process for administrative reviews are critical 
program areas consistent and supportive of the program's mission. 
Further, we believe that the 66 percent Federal funding of State IV-D 
programs should allow for sufficient funding to address this 
requirement.
    7. Comment: Ten commenters stated that the language of the proposed 
Sec. 303.35 is vague and overly broad, allowing multiple 
interpretations and increasing the potential for abuse of the complaint 
system. Two commenters specifically cited the regulatory language 
``appropriate action'' and ``resolving'' as examples of this vague, 
broad language. Two commenters specifically requested that the second 
sentence in paragraph (a), which stated that the State ``must have a 
procedure for reviewing the individual's complaint and resolving it 
where appropriate action was not taken'', be deleted in order to 
eliminate the vague language of ``resolving'' and to require a simpler 
case review upon request.
    Response: To address these concerns, we revised the regulatory 
language to eliminate reference to resolving complaints but retain 
language to require States to take any appropriate action. The intent 
of this regulation is to allow customers a process for having their 
cases reviewed if an error has occurred and not to require formal 
administrative hearing processes or adjudication of complaints. We 
recognize that ``resolution'' of all complaints would be subject to 
interpretation. States determine appropriate action in IV-D cases and 
the complaint procedures is intended to remedy errors, not to allow 
individuals to dictate actions in a case.
    8. Comment: Nine commenters opposed this provision on the basis 
that it is beyond the scope and intent of the statute. One commenter, 
in referencing congressional intent, specifically cited provisions 
similar to this regulation that were in welfare reform bills that were 
rejected prior to the passage of PRWORA. One commenter states that the 
provision may also be unconstitutional.
    Response: Section 1102 of the Act provides the authority to publish 
regulations that the Secretary deems necessary for the efficient 
administration of the IV-D program. Using this authority, we remain 
committed to requiring the administrative complaint procedures as we 
believe they are a necessary component in the program shift under 
PRWORA to performance-based incentives and State self-reviews. PRWORA 
revised Federal audit requirements from a process-based system to a 
performance-based system. The administrative complaint procedure 
represents a key element to identify case management problems that 
would have been captured in the previous, process-based audit system. 
We have included the administrative complaint procedure in this final 
rule because these regulations implement this program shift toward a 
performance-based, rather than process-based system. In the absence of 
clear legislative statements to the contrary, we do not believe that 
the failure to enact these administrative complaint procedures in 
PRWORA was intended to preclude the Secretary from using her regulatory 
authority under section 1102 of the Act. In addition, we do not believe 
there is any basis upon which to conclude that this provision would be 
unconstitutional.
    9. Comment: Eight commenters referenced the Supreme Court decision 
in the Blessing v. Freestone case, stating that the proposed 
administrative complaint procedure would conflict with the Supreme 
Court decision in this case. Two additional commenters state that the 
proposed regulation would infer an ``individual right of action'', but 
do not specifically reference the Blessing v. Freestone case. Five 
additional commenters expressed a concern that this regulation would 
result in increased litigation against the State IV-D agency.
    Response: The United States Supreme Court, in the case of Blessing 
v. Freestone, 520 U.S. 329 (1997), ruled unanimously that title IV-D 
did not create an individually enforceable right to force States to 
``substantially comply'' with all of the requirements of the IV-D 
program. The administrative complaint procedure established under 
Sec. 303.35 does not conflict with the Court's decision in that case, 
nor does it establish or infer an ``individual right of action'' to 
pursue judicial remedies for failure to provide specific IV-D services. 
We believe that establishment of such administrative procedures will, 
in fact, result in a decreased risk of litigation against the State IV-
D agency based upon alleged failure of the State to provide specific 
services required under the statute and implementing regulations. Many 
of the requirements of title IV-D are concrete, mandatory, and binding 
upon the State and local agencies. For example, time limits which have 
been established for certain provision of services, distribution of 
support, and the like, could be construed as establishing enforceable 
rights. The establishment of an administrative complaint procedure, 
however, does nothing substantively to enhance or otherwise affect such 
rights as may already exist under title IV-D. The establishment of such 
procedures merely requires that the State have ``administrative'' pre-
judicial review procedures to determine, and possibly correct, failures 
to take particular actions which may have been required under existing 
IV-D rules.
    The State has broad discretion to determine what sort of an 
administrative complaint procedure it chooses to establish. We believe 
that most States, in fact, already have adequate procedures in place 
and that this new rule may impose virtually no additional requirement 
or burden on their program operations. In those States which have not 
established any mechanism for responding to complaints arising from 
parents' concern that certain mandatory actions have been delayed or 
were not taken at all, we believe that creating a forum to review such 
allegations will lead to increased customer satisfaction and should 
actually reduce the risk of judicial challenges to the State IV-D 
program.
    10. Comment: Six commenters expressed concern that this provision 
would remove State discretion in determining and using the most 
appropriate enforcement tools. Instead, the provision would allow the 
customers to dictate enforcement in their cases.
    Response: We disagree that this provision would allow customers to 
dictate enforcement or would remove appropriate State discretion. The 
rule does not mandate that the State take any particular action in 
response to a complaint. States will continue to have

[[Page 82195]]

responsibility for determining and using the appropriate actions and 
enforcement tools in a particular case in accordance with Federal 
regulations. This regulation is simply intended to allow recipients of 
IV-D services a mechanism for requesting a review of their cases when 
there is evidence that an action should have been taken by the IV-D 
agency. For example, a IV-D customer might request a review if he or 
she has provided information to the IV-D agency on the obligated 
parent's place of employment, but no action has been taken within 
federally required timeframes to institute wage withholding.
    11. Comment: Four commenters stated that OCSE has provided 
inadequate documentation to justify the need for regulation in this 
area. Three commenters proposed further that OCSE and the States work 
together on this proposal to assess the need for regulation. One of 
these commenters suggested that OCSE convene a national workgroup to 
assess the need for regulation and, if necessary, draft more explicit 
regulatory language. Finally, one commenter requested a more thorough 
analysis of the costs associated with this proposed regulation.
    Response: OCSE remains committed to partnership with States and 
consultation with our stakeholders. However, we are also committed to 
prioritizing customer service and feel that this regulation is 
necessary to ensure appropriate service for all IV-D customers. We will 
work with States to provide technical assistance and share best 
practices for implementing administrative complaint procedures. In this 
process, we will seek input from States and other stakeholders for 
further improvements.
    12. Comment: Four commenters questioned OCSE's decision to regulate 
in this area, citing the recent commitment of OCSE and HHS to avoid 
unnecessary regulations.
    Response: OCSE believes these requirements are necessary to ensure 
IV-D customers are given opportunities to raise concerns about their 
cases. We have drafted language that we believe imposes minimal 
requirements and allows maximum State flexibility in adopting and 
implementing administrative complaint procedures.
    13. Comment: Four commenters expressed concern regarding the 
language ``actions not taken,'' fearing a potential for litigation or 
abuse of the system. One commenter requested that, if the entire 
section 303.35 is not removed, that this ``action not taken'' language 
be removed from the final regulations.
    Response: We agree with the concern that the proposed regulatory 
language was subject to multiple interpretations. Thus, we have revised 
the language ``action taken, or not taken'' that appeared in the NPRM 
to provide that individuals may request a review when there is evidence 
that an action should have been taken in their particular cases. The 
language now reads: ``Each State must have an administrative complaint 
procedure, defined by the State, to allow individuals the opportunity 
to request an administrative review, and must take appropriate action 
if there is evidence that an error has occurred or an action should 
have been taken on a case.'' This final rule will ensure that all 
States have administrative complaint procedures in place and that 
recipients are notified of the availability of services and the outcome 
of the review, but will also allow States the flexibility to define 
their own administrative complaint procedures.
    14. Comment: Four commenters asserted that the administrative 
review requirement would eliminate the efficiency gained by automated 
systems by essentially returning case management to a case-by-case 
review.
    Response: While it is true that this regulation will require some 
case review, we disagree that it will eliminate the efficiency of the 
automated systems. The majority of cases will continue to be handled 
through automation. This regulation will require case review only in 
specific instances when the customer requests a review in accordance 
with State-established procedures. In these instances, we believe case 
review is appropriate in order to ensure the best possible case 
management and ensure maximum child support collections for children 
and families.
    15. Comment: Two commenters expressed concern that the complaint 
process implies a requirement for 100% caseload compliance, rather than 
``substantial'' compliance.
    Response: These requirements are not intended as an avenue for IV-D 
customers to lodge complaints without a basis of concern. If the State 
is taking appropriate actions, in accordance with Federal requirements 
and its own State procedures, there should be no basis for lodging a 
complaint. States are expected to comply with Federal requirements in 
all cases. However, they will only be penalized when they are not in 
substantial compliance.
    16. Comment: Two commenters expressed concern that the purpose of 
the proposed rule is to create a specific measure of State performance, 
but the proposed rule did not include any specifics regarding the 
method of measurement for State performance.
    Response: The intent of this regulation is to ensure that all State 
IV-D agencies have a complaint system in place. We believe that 
recipients of services should be able to access the IV-D agency and 
lodge complaints when they have specific concerns in their cases. 
However, the administrative complaint procedure is not intended to be 
used as a specific, quantitative measure of State performance. Nor does 
the complaint procedure convert the measure of substantial compliance 
test in State self-assessments to a 100 percent standard. Thus, we do 
not believe that including a specific method of measurement in the 
regulation is necessary. States may choose to address results of their 
procedures in their annual self-assessment reports.
    17. Comment: Two commenters expressed concern regarding the open-
ended nature of the proposal and requested the review process be 
limited to specific areas or issues. One of these commenters proposed 
that the review be limited to disputes surrounding the allocation and 
distribution of child support, and not applied to case management 
issues.
    Response: We encourage IV-D agencies to strive to achieve 
efficiency and quality customer service in all program areas. The 
administrative complaint procedure will allow IV-D programs to 
demonstrate this commitment to improving customer service, by providing 
recipients of services with a process to express their concerns. We 
believe that IV-D recipients of services should have the ability to 
request a review of any aspect of their case, including case management 
issues. Thus, we have not adopted this specific suggestion to limit the 
scope of the regulation to disputes involving allocation and 
distribution of collections, although that is an appropriate area for 
review, if warranted. However, we have revised the language to require 
procedures ``as defined by the State''. This change is intended to 
allow States flexibility and discretion in structuring their own 
administrative complaint procedures.
    18. Comment: Two commenters suggested that an additional paragraph 
should be added to Sec. 303.35 to explicitly spell out what the rule 
does and does not require. This suggestion was made due to concern that 
the regulatory language allows the potential for extreme 
interpretations, controversy and legal action. In addition, one 
commenter suggested that, if the final regulations do require 
administrative reviews of prior

[[Page 82196]]

IV-D activity, that a time limit be included so that reviews will only 
go back for a specific period of time. Finally, one commenter expressed 
concern that the proposal does not indicate the specific recordkeeping 
requirements that would be imposed on States with respect to the review 
process.
    Response: While we have not adopted these suggestions, they may be 
appropriate for State consideration in establishing procedures. As 
stated earlier, the intent of this regulation is to ensure that all 
State IV-D programs have some type of complaint process in place, not 
to dictate the specifics of the procedure. We believe it is preferable 
and supportable to allow States to establish their own procedures.
    19. Comment: One commenter questioned whether allowing the 
custodial parent to review actions taken on their case would be in 
conflict with safeguarding provisions, stating that the IV-D agency is 
not allowed to release their work product.
    Response: We do not believe that this provision would be in 
conflict with safeguarding provisions. The regulation does not allow a 
IV-D customer to review actions taken on his or her case. It requires 
the State to review the case at the request of the customer where there 
is evidence an action should have been taken and to notify the 
individual of the results of the review. This notification would not be 
a per se violation of the safeguarding requirements. Pursuant to 
section 454(26) of the Social Security Act, State IV-D programs are 
required ``to have in effect safeguards, applicable to all confidential 
information handled by the State agency, that are designed to protect 
the privacy rights of the parties''. States must design their 
administrative complaint procedures to ensure safeguarding requirements 
are met and that the information provided does not violate the privacy 
rights of one or both parties.
    20. Comment: One commenter questioned how the administrative 
complaint process would be applied in interstate cases.
    Response: Under current interstate case processing, applicants and 
recipients of IV-D services would express concerns to the IV-D agency 
in the State in which they applied or were referred for services. It 
would be the responsibility of that IV-D agency to determine whether 
the complaint involves its own actions or a responding State's actions 
in the case and to follow up by conducting its own review or contacting 
the other State's IV-D agency for an administrative review, as 
appropriate.
    21. Comment: One commenter indicated that the proposal is ill-timed 
as it coincides with the implementation of outcome measures, the 
incentive system and the expansion of penalty standards. The commenter 
suggested that this provision be delayed to allow OCSE to evaluate the 
impact of these other measures on program performance.
    Response: We believe that the administrative complaint procedure is 
a central component and an appropriate element of the move toward 
measuring program results and performance-based incentives. As such, we 
do not believe that it is appropriate to delay these requirements for 
the administrative complaint procedures beyond the implementation of 
the incentive system and other outcome measures.

Comments to Section 305.1  Definitions

    1. Comment: Two commenters recommended adding a sentence which 
further explains the meaning of ``lack of jurisdiction.'' The added 
text would include the following qualifying statement: ``Depending on 
applicable law concerning the subject matter jurisdiction in which the 
custodial parent or child resides, lack of jurisdiction cases may also 
include those cases in which the custodial parent or child resides in 
the civil jurisdictional boundaries of another country or federally 
recognized Indian Tribe.'' Another commenter stated the definition of 
lack of jurisdiction provided is not satisfactory and mentioned that 
subject matter jurisdiction issues begin with respect to the place of 
conception.
    Response: We believe the sentence in Sec. 305.1(a) is clear and 
adequate to explain the meaning of ``lack of jurisdiction'' for the 
purposes of Federal data reporting. Lack of jurisdiction refers to the 
practical effect of a State being unable to take action in a case due 
to lack of jurisdiction or other means to take establishment or 
collection action in the non-custodial parent's jurisdiction of 
residence. In cases where enforcement tools such as long arm 
jurisdiction can be used, there is no lack of jurisdiction.
    2. Comment: A few commenters compared the proposed regulation with 
Federal data reporting instructions and expressed confusion over the 
definition of ``collections received and distributed on behalf of title 
XIX (Medicaid) cases versus the proposed definition of title XIX 
cases.'' The commenters' understanding from Federal data reporting 
instructions is that ``Medicaid Only'' collections and cases should be 
reported either as current or former assistance.
    Response: The commenter's understanding is incorrect. Federal data 
reporting instructions for the OCSE-157 (AT-99-15) state that a 
``Medicaid Only case'' is ``a case where the child(ren) have been 
determined eligible for or are receiving Medicaid under title XIX of 
the Act, but who are not current or former recipients of aid under 
titles IV-A or IV-E of the Act. ``Medicaid Only'' cases are reported as 
never assistance cases.'' We remind States that ``Medicaid Only'' is 
defined and reported differently on the Federal financial reporting 
form, the OCSE-34A. The OCSE-34A will be the source for calculating a 
State's collections base for incentive purposes. ``Medicaid Only'' 
cases will be reported as current assistance cases on the OCSE-34A, 
unless the case was formerly on assistance and, therefore, will be 
reported as a former assistance case. States should refer to OCSE-34A 
instructions contained in Action Transmittal AT-00-02 and Dear 
Colleague letter DC-00-28. Under section 458A(b)(5)(C) of the Act, the 
``State Collections Base'' double counts those collections in which the 
``support obligation * * * is required to be assigned to the State 
pursuant to Title IV-A (TANF), Title IV-E (Foster Care) or Title XIX 
(Medicaid) * * *'' Incentive data taken from the OCSE-157 report uses 
total caseload and total collection numbers and are not broken into 
categories (i.e. current assistance, never assistance, and former 
assistance) for performance calculations. So, the fact that Medicaid 
only cases are reported differently on the OCSE-157 and OCSE-34A 
reports will not have an impact on incentives. However, since several 
commenters found this difference to be confusing, we will work with 
States to reconcile this difference in the future.
    3. Comment: Several commenters requested a specific definition of 
``reliable data'' in Sec. 305.1(i). A few commenters offered 
definitions of ``reliable data'' that referred to Comptroller General 
standards (U.S. General Accounting Office) or specific statistical 
analysis methodologies, such as Analysis of Variance (ANOVA). Two 
commenters recommended that monitoring compliance with case closure 
regulations should be part of the data reliability audits. Another 
commenter recommended that data reliability audits should measure 
compliance with Federal reporting instructions.

[[Page 82197]]

    Response: We have included a 95 percent standard for data 
reliability in response to comments to make the standard clearer than 
what was included in the proposed regulation. Our 95 percent standard 
is based on the unwritten, yet generally accepted 10 percent error rate 
used by the auditing community and based on our experience in FY 1999 
data reliability audits conducted of State IV-D program data to date. 
We believe the definition of ``reliable data'' in Sec. 305.1(i) as 
revised is adequate and preserves needed flexibility as State and 
Federal partners implement the new incentive, penalty, and audit 
system. Although no specific reference is made, General Accounting 
Office standards are included in the definition of ``reliable data.'' 
We rejected the commenter's suggestion to use the analytical technique 
known as ANOVA because it is not suited for the comparison of results 
obtained from one sample of reported data.
    While not included in the definition, case closure will be examined 
as part of the sample reviewed in the Data Reliability Audits. In 
addition, OCSE employs other methods to assure States are closing cases 
appropriately. Such methods may include reviewing reported data for 
large decreases in caseload from year to year and following up with a 
discretionary audit. State self-assessments are also an important 
management tool in assuring compliance with Federal requirements. Data 
Reliability Audits will measure the level of each State's compliance 
with Federal reporting instructions effectively providing a common 
standard by which all States will be compared. If a State does not 
comply with Federal reporting instructions, its data will not be 
determined to be complete and reliable.
    4. Comment: One commenter suggested that the determination of data 
reliability and payment of incentives should not occur until a level 
playing field is established with statewide certified automated systems 
in place in all States.
    Response: State and Federal partners began collaborating on 
standardized data definitions over five years ago. Consensus among 
partners was achieved on almost all details of the revised reporting 
system approximately two years ago through a State/Federal data 
definitions work group. The statute does not permit a delay in the 
assessment of data validity or in the implementation of the new 
incentive formula until automated systems are in place in all States. 
Data reliability can and will be assessed in States without certified 
statewide automated systems. Incentives can also be paid to States with 
complete and reliable data that may not have a certified automated 
system. However, more frequent audits may be necessary for those States 
without an automated system. An audit would be warranted once a 
previously non-fully automated State places all cases on its automated 
system or when a State passes its FY1999 audit at or below the 95 
percent level for any line item.
    5. Comment: One commenter suggested that ``parent'' in the context 
of a IV-D case could include a legal custodian or guardian who may be 
obligated to pay support for a child, not just a mother, father, or 
putative father as described in section 301.1(a) of the proposed rule.
    Response: While we agree that individuals other than parents may be 
obligated to pay support for a child in some cases and understand that 
several States have provisions that can hold step-parents liable for 
support, we have retained the term ``parent'' in Sec. 305.1(a) for 
consistency with the majority of IV-D cases and with the OCSE-157 
definition. States should, however, include IV-D cases where a legal 
custodian or guardian or step-parent becomes the obligor, and we will 
consider an expanded definition of the term in revisions to the OCSE-
157.
    6. Comment: Several commenters asked why Federal data reporting 
instructions for the OCSE-157 contained statements that were not 
included in the proposed rule. Others requested consistency with 
Federal reporting forms in a wide variety of definitions and 
instructions.
    Response: We do not believe it is appropriate to include the same 
level of detail in the instructions in the rules. Federal reporting 
instructions (AT 99-15) do not conflict with statements in regulations, 
but rather elaborate on those requirements with greater specificity and 
examples. States must refer to the detailed instructions that accompany 
the various reporting forms rather than using the regulations as a 
guide to completing Federal data reporting forms.
    7. Comment: One commenter suggested that there was not enough time 
for States to complete reprogramming of data reporting elements prior 
to Data Reliability Audits. The commenter requested that proposed 
definitions be deleted and instead a sentence could be added which 
refers to definitions contained in Federal reporting instructions. This 
way, any changes to the instructions are always covered by this section 
of the regulation.
    Response: We believe there has been enough time for States to 
complete any reprogramming that is necessary. State reprogramming of 
data reporting elements should have begun with the issuance of form 
OCSE-157 instructions, AT-98-20 dated July 10, 1998. Limited 
modifications were made through AT-99-15. States should not be using 
the proposed rule or this final regulation as a guide to data 
reporting. States that do not report in a timely manner face a 
determination of incomplete data.
    Almost all of these definitions are included in the statute and 
should not change frequently. It is appropriate to include definitions 
of key terms in regulations where they are subject to notice and 
comment rulemaking.
    8. Comment: Several commenters expressed confusion about the words 
``received and distributed'' in Sec. 305.1(b) which defines current 
assistance collections and made various suggestions to provide 
clarification.
    Response: This was intended to address collections made in one 
fiscal year but disbursed in the next fiscal year. For purposes of 
Federal data reporting, ``distributed'' means ``disbursed.'' A State's 
incentive collections base for a fiscal year will only include 
collections ``disbursed'' in the reporting fiscal year for individuals 
receiving IV-D services.
    9. Comment: One commenter recommended a phase-in of the data 
reliability requirement and consultation with States to determine an 
acceptable standard for fiscal year 2000.
    Response: The statute requires that data be determined to be 
complete and reliable in order for a State to be eligible to receive 
incentive payments under the new provisions in section 458A of the Act, 
beginning with FY 2000 data. The requirement for complete and reliable 
data is being phased-in with the performance-based incentive system, 
i.e. the data upon which one-third and two-thirds of incentive funds 
will be paid are subject to this requirement in fiscal years 2000 and 
2001, respectively. We have included a 95 percent standard for data 
reliability in these regulations beginning with respect to FY 2001 
data. This standard is based on generally accepted standards within the 
auditing community and based on our experience in data reliability 
audits conducted to date.
    10. Comment: One commenter suggested that the Secretary be given 
discretion to waive requirements in Secs. 305.0 through 305.66 for 
fiscal year 2000. The commenter's rationale included apparent conflicts 
between the proposed rules and current data

[[Page 82198]]

reporting instructions and the uncertainty of projecting State 
incentives.
    Response: There is no statutory authority for the Secretary to 
waive the many elements of the new incentive system implemented by the 
regulations. Moreover, the statute is clear enough to be implemented 
without final regulations. Federal data reporting instructions are not 
in conflict with the proposed rules, but rather contain more detail. 
States should follow reporting instructions when reporting information 
for incentive calculations. Again, the phase-in period will limit State 
and Federal partners' uncertainty with the new performance-based 
incentive system.
    11. Comment: One commenter asked for the specific lines from the 
OCSE-157 data report that match the elements needed to calculate the 
incentive collections base described in Sec. 305.1(b)-(d).
    Response: In the table below we have provided the specific line 
numbers from the reporting forms OCSE-157, OCSE-34A, and OCSE-396A 
which are used to calculate the five performance levels. This 
information will help States understand how OCSE will calculate State 
performance, highlight the importance of key data elements of State-
reported data, and assist States in making projections of their own 
performance.

[[Page 82199]]

[GRAPHIC] [TIFF OMITTED] TR27DE00.024

Comments to Section 305.2 Performance Measures

    1. Comment: One commenter recommended allowing States to exclude 
cases where it is impossible to establish paternity for children born 
out-of-wedlock in the preceding year. Examples of cases to exclude 
included: Mother's noncooperation, death of child or putative father 
before paternity establishment, custodial parent closes case before 
paternity establishment, and inconclusive genetic testing. A second 
commenter asked if situations where paternity is contested for a child 
born within marriage should be included. A third commenter asked if a 
child can be excluded if good cause was in effect at any time during 
the fiscal year or must it be in effect at the end of the fiscal year.
    Response: Some of the examples cited are very rare and are 
accounted for within the allowable tolerances in the performance 
standards. The performance standards for paternity establishment and 
other measures do not require 100% compliance in every case before an 
incentive can be earned or a penalty is avoided. State and Federal 
partners and Congress recognized that perfect performance was

[[Page 82200]]

not possible and decided to focus on effective or significantly 
improved performance.
    Moreover, section 452(g)(2) of the Act requires that States exclude 
children in cases involving good cause. This would apply to cases where 
a good cause finding was in effect at any time during the year. OCSE 
has issued more detailed reporting instructions which instruct States 
to exclude children where there is noncooperation due to good cause or 
death of a parent as provided for under section 452(g) of the Act.
    In addition, most State laws presume that a child born within a 
marriage is legitimate. These children could be determined to be born 
out-of-wedlock only if allowable under State law and then only if a 
court determined the presumed father could not have been the child's 
biological parent.
    2. Comment: A number of commenters wanted Federal data reporting 
instructions and the proposed rule to be consistent. One commenter 
believed that ``case count at a point in time'' was not as specific as 
the wording of the numerator and denominator used in the support order 
measure itself.
    Response: Federal reporting instructions are consistent with the 
measures as described in this regulation. However, regulations will not 
be as detailed as reporting instructions. The narrative description of 
the support order measure in the regulation is correct in identifying 
it as case count at a point-in-time (the end of this fiscal year). This 
measure counts cases with at least one support order.
    3. Comment: One commenter said that the statewide paternity 
establishment percentage should include only children born in the 
reporting State and involved in an interstate case as it is 
inconsistent to include a child born out-of-wedlock in another State.
    Response: Revised OCSE-157 reporting instructions issued in AT-99-
15 explain that with respect to the statewide paternity percentage, 
States should report children who were born out-of-wedlock in the State 
since States get their data from their vital statistics agencies. This 
is also consistent with the instructions for counting the number of 
children with paternity established or acknowledged for the statewide 
PEP. The instructions require States to only include those children 
born in the State with paternity established or acknowledged.
    4. Comment: One commenter said that ``modification'' must be 
defined in the explanation of the support order establishment measure. 
An example was cited from the commenter's State where a second case is 
created when a subsequent child is born to the same parents until the 
new order can be consolidated with the earlier order.
    Response: OCSE data reporting instructions (AT-99-15) explain that 
this measure is counting cases with orders, and modifications to an 
existing order should not be reported. However, if a second case is 
required to be established, it should be counted as a separate case 
until the two cases with orders are consolidated. When the 
consolidation occurs, the subsequent case should be subtracted from the 
count.
    5. Comment: One commenter observed that Sec. 305.2(a)(4) conflicts 
with AT-97-17 which requires States to first apply IRS Tax Offset 
collections to assigned arrears. The commenter believed that the 
performance criteria penalizes States that follow Federal distribution 
requirements. Another commenter believed that not counting Federal 
income tax refund offsets as an arrearage payment when no money goes to 
the family would lead to States directing efforts away from collecting 
arrears owed to the State. This would negatively impact the State's 
cost-effectiveness performance level.
    Response: Section 458A(b)(6)(D) of the Act includes a specific 
requirement with respect to former assistance cases in which some 
arrearages are owed to the State and some arrearages are owed to the 
family. In such cases, States may only count cases in which some 
arrearage payments are distributed to the family. Congress added this 
provision in response to concerns that States would be able to count 
former assistance cases as cases paying arrearages for incentive 
purposes when the only action taken by the State was to submit the 
arrearages owed to the State for Federal income tax refund offset. Thus 
States would have no incentive to collect support owed to former 
assistance families.
    In addition, we do not agree with the second commenter's statement 
that counting arrears payments this way would direct States away from 
collecting arrears. States have a strong inducement to collect arreas 
owned to the State in any circumstance because the State receives a 
direct financial benefit and because these collections help families 
stay off of TANF, thus increasing self-sufficiency.
    6. Comment: One commenter believed that States should not be held 
to performance criteria for areas that have not been worked out. The 
commenter cited aspects of interstate cases, such as administrative 
enforcement and the absence of final regulations implementing the 
Uniform Interstate Family Support Act.
    Response: Interstate cases are a significant part of the child 
support caseload and the statute does not exclude these cases from the 
incentive formula's performance measures. Statutory provisions 
specifically provide for double counting of collections where one State 
collects support for another State, whether it is a traditional 
interstate case or an administrative enforcement is employed. Section 
458A(c) of the Act requires support collected by one State at the 
request of another State to be treated as having been collected in full 
by each State.
    7. Comment: One commenter said that ``total IV-D dollars expended'' 
should be defined better in the explanation of the cost-effectiveness 
performance measure and added that State program structure should be 
taken into account.
    Response: ``Total IV-D dollars expended'' is a commonly used term 
in Federal financial reporting instructions. Instructions given to 
States for form OCSE-396A provide more detail on how this information 
should be reported by States. State and Federal partners that 
recommended the incentive formula to Congress believed all IV-D 
expenditures should be included in the cost-effectiveness performance 
measure. States do have the flexibility to structure their programs in 
many different ways. We encourage States to consider the impact of 
program structure, among many other factors, in assessing barriers to 
performance under the new incentive system.
    8. Comment: One commenter believed Sec. 305.2(a)(1), which 
describes the paternity establishment performance level, should read 
the count of children ``may'' (rather than shall) not include children 
in cases with a deceased parent or where good cause has been 
determined. The commenter stated that these cases are few and data 
reporting from automated systems is too costly and complicated.
    Response: Section 452(g)(2) of the Act provides that the total 
number of children shall not include any child who is dependent by 
reason of the death of a parent unless paternity is established for 
such child or any child with respect to whom an applicant or recipient 
is found to have good cause for refusing to cooperate. Accordingly, 
these children shall not be included in the count.
    9. Comment: One commenter recommended that special provision be 
made for States like California, New York, Florida, and Texas, who have 
a higher number of immigrants.

[[Page 82201]]

    Response: The statute governing incentives is very specific and 
does not allow for any such special provisions. We assume the commenter 
is referring to cases where one parent resides in a foreign country. 
While we agree that some cases involving immigrants may present greater 
challenges to child support enforcement programs, there are often 
mechanisms for working these cases such as agreements between the State 
and the foreign country. When there is no jurisdiction to work the case 
and no mechanism to facilitate government-to-government cooperation, 
these cases will not be included in the incentive calculation.
    It should also be noted that the Child Support Performance and 
Incentive Act of 1998 requires the Secretary to conduct a study ``* * * 
that identifies any demographic or economic variables that account for 
differences in the performance levels achieved by the States with 
respect to the performance measures...'' and make recommendations for 
changes ``* * * to the system as may be necessary to ensure that the 
relative performance of States is measured from a baseline that takes 
account of any such variables.'' This report due to the Congress 
October 1, 2000, will provide useful information to the States and 
Federal government on the affect such variables have on State 
performance.
    10. Comment: One commenter asked a question about counting 
voluntary collections in the current collections performance level. The 
commenter stated that there is no amount ``owed'' in a voluntary 
payment and therefore it cannot be included in the denominator.
    Response: Section 305.2 requires voluntary payments to be included 
in both the numerator and denominator of the current collections 
performance level. This is the only way the State can take credit for 
the voluntary payment as a ``collection.'' In these circumstances, we 
believe it is reasonable to consider the amount paid to be the amount 
``owed'' until a support order can be established.
    11. Comment: A few commenters recommended excluding ``minor'' from 
the numerator of the statewide paternity establishment percentage 
because a case may begin when the child is a minor and be resolved 
after the age of majority in the same fiscal year.
    Response: The numerator of the statewide paternity establishment 
percentage is taken directly from section 452(g) of the Act and, 
therefore, the word ``minor'' may not be excluded. Federal data 
reporting instructions (AT-99-15) state that emancipated children 
should not be included in the count of children and that States should 
only include those children who are under 18. However, instructions do 
allow States to count children who have reached their 18th birthday in 
the fiscal year being reported. This standardized definition of a minor 
child was added to address States' desire for a ``level playing field'' 
regarding the paternity establishment percentage--that no particular 
State have an unfair advantage regarding the PEP because of the way 
that State defines emancipation.
    12. Comment: One commenter suggested the inclusion of an additional 
optional performance measure for the current collections performance 
level. The measure would presumably compare the number of cases paying 
on current support to the number of cases with current support due.
    Response: There is no statutory authority for including a second 
optional measure for the current collections performance level for 
incentive payments. In addition, State and Federal partners did not 
recommend a case-based measure on current support because States treat 
these collections similarly, unlike arrearage collections which are 
dealt with in significantly different ways by individual States. 
However, nothing prevents a State from tracking performance in this way 
for its own program monitoring purposes. For penalty purposes, we 
believe States should be measured using the same measure that is used 
for incentive payments.

Comments to Sec. 305.31 Amount of incentive payment

    1. Comment: One commenter recommended rewording Sec. 305.31(e) for 
clarity to read: ``A State's maximum incentive base amount for a State 
for a fiscal year is zero if the fiscal year data submitted by the 
State to calculate a performance level fails to meet data reliability 
items as determined by a Federal audit performed under Sec. 305.60(1) 
of this part.''
    Response: Paragraph (e) tracks the from statutory language in 
section 458A(b)(5)(B) and we believe it is clear as written.
    2. Comment: Several commenters inquired about how HHS will handle 
downward adjustments in incentive payments for States that 
overestimated their quarterly claims or whose performance data was 
found to be incomplete or unreliable. Commenters asked if the funds 
would go to other States, a pool for future years, or are lost.
    Response: In the case of States that overestimated quarterly 
estimated claims for incentive payments, there will be a final 
adjustment of IV-D grant awards approximately nine months after the end 
of the fiscal year. Final adjustments can be either up or down 
depending upon the State's original estimated quarterly claims, 
calculation of the traditional cost-effectiveness incentive formula and 
the proportional distribution of incentive funds to all States based on 
performance. This mirrors the traditional process in which incentive 
payments have been made to States. During the phase-in period, this 
adjustment will be based upon calculation of the traditional cost-
effectiveness incentive and calculation of the new performance-based 
incentives. During fiscal year 2000, only one-third of the incentive 
pool or $139 million will be available for payment to the States based 
on the new incentive, while two thirds of a State's incentive will be 
earned based on the traditional incentive system. Funds from downward 
adjustments made under the new incentive provisions will go to other 
States. Funds from downward adjustments attributable to the existing 
incentive system will be returned to the U.S. Treasury. Because of the 
uncertainty involved with amounts that individual States will earn 
under the new incentive system, we encourage States to be conservative 
in their estimates of incentives for the phase-in years of the new 
system.
    In the case where a State is determined to have incomplete or 
unreliable data, and is thus ineligible for incentives under the new 
incentive system, those funds will be redistributed to other States 
based on their performance for the same fiscal year. We remind 
commenters that completeness and reliability of a State's performance 
data will be determined on a measure by measure basis. The 
determination is not ``all or nothing''--incentive funds are calculated 
based on the State's scores for each of the five performance measures. 
Accordingly, a State which has incomplete or unreliable data with 
respect to one (or more) performance measures may still qualify for 
incentive payments based on its performance levels for the remaining 
measures.
    3. Comment: Several commenters stated that the calculation of the 
incentive formula is too complicated, preventing States from estimating 
incentives and delaying payment of incentives until all States report 
data and final calculations are made. One commenter recommended a 
revised process that allows State and Federal governments to make 
reasonable decisions about the amount of incentive

[[Page 82202]]

payments. Another commenter said that requiring States to estimate 
their own incentives is contrary to legislation which requires the 
Secretary to estimate the amount of State incentives. A few commenters 
asked for a methodology or guidance to estimate incentives, while 
others recommended speedy estimates or taking into account the phase-in 
period.
    Response: The incentive calculation is explicitly required by 
statute and therefore, we are unable to modify it. We are aware that it 
presents challenges to State and Federal planning and implementation. 
There is a significant amount of uncertainty as we move from the 
traditional incentive system to one based on performance. As State and 
Federal partners gain more experience with data reporting and 
performance under the new system, the ability to predict performance 
should improve.
    We are committed to monitoring the implementation of the new 
incentive payment process and consulting with States. We will recommend 
improvements to Congress if elements of the formula prove to be 
unworkable or contrary to the intent of improving the program's 
performance.
    Federal staff have traditionally made estimated incentive payments 
based on State estimates of future incentive earnings. The program is 
forward funded with final adjustments to funding made later as actual 
data is reported. This process will not change. Federal staff will 
perform an analysis to determine if State estimates appear to be 
significantly higher or lower than likely actual incentives and 
recommend adjustments. We believe this comports with the statutory 
requirement that the Secretary make estimated payments based on the 
best information available. In addition, the phase-in period limits the 
amount of uncertainty with regard to estimating incentives for fiscal 
years 2000 and 2001.
    4. Comment: One commenter observed that States should be able to 
identify whether a case formerly received public assistance by use of 
an indicator present in State files and the Federal Case Registry. 
Computer matching of data files could be used to share this information 
with other States in interstate cases so that collections in former 
assistance cases can be given double credit in the calculation of the 
State incentive base.
    Response: The commenter correctly identifies that it will be to 
each State's advantage to identify which cases formerly received public 
assistance. We encourage States to share this information in interstate 
cases. We recognize that each State's ability to identify these cases 
will vary depending upon historical records and automation. While 
States may not have complete information on older cases, they will 
benefit from developing a procedure for recording former assistance 
status on cases in FY 2000 and beyond.
    The Federal Case Registry does not currently include a data element 
which would indicate whether a case formerly received assistance. In 
the future, such a data element could be considered for discussion by 
State and Federal partners.
    5. Comment: Several commenters expressed concern that required Data 
Reliability Audits would not be completed in order for FY 2000 
incentives to be calculated and paid.
    Response: Data Reliability Audits for FY 2000 incentives will not 
begin until FY 2000 data is available from States. OCSE is committed to 
providing adequate resources for Federal auditors to complete the 
necessary work to calculate each year's incentive payments. Data 
Reliability Audits rely on the submission of State-reported data and 
cooperation of the States. Because of the time it takes to conduct 
audits in every State, it is imperative that data be submitted on a 
timely basis. That is why we are imposing a deadline of December 31st 
for the reporting of final adjusted data for a fiscal year. Audits will 
be conducted based on the data submitted by States up until December 
31st. If these data are determined to be incomplete or unreliable, the 
State will be subject to a loss of incentive funds for the prior fiscal 
year. In addition, the results of the fiscal year 1999 audit will be 
important in determining the level of audit necessary for a State for 
fiscal year 2000. For those States meeting a high level of reliability 
in 1999, the audit will not have to be as exhaustive as it will for 
those States displaying a low level of reliability in 1999, or for 
those States that have made major changes in their systems or other 
data related processes. States may request a data reliability audit 
during FY 2000 if they have the ability to produce an ``ad hoc'' report 
using FY 2000 data which OCSE can review.
    6. Comment: One commenter wrote that using 1998 as a base year for 
program expenditures will unfairly penalize States that paid for 
automated systems during this timeframe.
    Response: That is why we have included an alternative base period 
that States may elect to use. States have the option of using the 
average amount for fiscal years 1996, 1997, and 1998 for determining a 
State's base year for reinvestment of incentives. Employing a three-
year average would decrease the effect of large non-recurring 
expenditures such as automated systems.
    7. Comment: One commenter asked how the statutorily-capped amounts 
of the incentive pool for FY 2000 through FY 2008 were determined. The 
same commenter inquired if two-thirds of the old incentive formula 
equals or exceeds the FY 2000 pool of $422 million for all States, will 
additional money be made available for States to earn the one-third new 
incentive?
    Response: The original statutory requirement for development of a 
new performance-based incentive formula required the new formula to be 
cost neutral, meaning not costing more than projections of incentives 
payments under the old formula. Congress enacted the capped incentive 
pool amounts contained in section 458A(b)(2) of the Act based on budget 
estimates for these years.
    During the phase-in period of FY 2000-2001, the old and new 
incentive formulas are in operation concurrently. Thus, for FY 2000 the 
old formula which is uncapped would be calculated as usual and two-
thirds of that amount would be actually paid to the States based on 
this formula. One-third, or $139 million, of the FY 2000 incentive pool 
of $422 million would be paid for States' performance on the new 
formula. Because the old formula is affected by declining TANF 
collections, which also caps incentives paid for non-TANF collections 
under the old incentive formula, and the two-thirds phase-in, we do not 
expect that States will earn more than $422 million.
    8. Comment: One commenter believed that Sec. 305.32(c) implied that 
both States may count an interstate administrative enforcement 
collection in its collections base in addition to traditional 
interstate collections.
    Response: Statutory provisions specifically allow for double 
counting of collections where one State collects support for another 
State, whether it is a traditional interstate case or administrative 
enforcement is employed. Section 458A(c) of the Act provides that 
support collected by one State at the request of another State shall be 
treated as having been collected in full by each State. Collections 
received via administrative enforcement in interstate cases can only be 
reported by both the responding and initiating States if they meet the 
requirement of section 458A(c). If, for example, State A uses 
administrative enforcement to collect support by itself, such as 
through interstate wage withholding where State A sends a wage 
withholding request directly to an employer in State B, only

[[Page 82203]]

State A would qualify for reporting the collection. Similarly, if State 
B provides information or other assistance (and not actual collection) 
to State A in response to a request, it would not be able to report the 
collection. We will use State-reported data to calculate all components 
of the incentive formula including the collections base.
    9. Comment: One commenter asked how the phase-in provisions would 
impact the payment of incentives under Secs. 305.31 and Sec. 305.34 and 
reinvestment of incentives under section Sec. 305.35.
    Response: During fiscal years 2000 and 2001, the old and new 
incentive formulas are in operation concurrently. Therefore, for fiscal 
year 2000, States will be able to earn two-thirds of what they earn 
under the traditional cost-effectiveness formula, which is uncapped. 
One-third of the $422 million fiscal year 2000 incentive pool or $139 
million will be available to all States to be shared under the 
performance-based incentive formula. For fiscal year 2001, States will 
be able to earn one-third of what they earn under the traditional cost-
effectiveness formula, which is uncapped. Two-thirds of the $429 
million fiscal year 2001 incentive pool or $286 million will be 
available to all States to be shared under the performance-based 
incentive formula.
    The incentive payment process required by Sec. 305.34 remains 
unchanged during the phase-in period except that we must factor in the 
performance of all States for the partial (1/3rd or 2/3rd) calculation 
of the performance-based incentive payment. Complete and reliable State 
data are required for payment of incentives on the performance-based 
formula.
    The reinvestment requirement described in Sec. 305.35 is applicable 
to one-third and two-thirds portions of the incentives a State may 
receive under the new formula for fiscal years 2000 and 2001 
respectively.
    10. Comment: One commenter pointed out an error in the example 
given at Table B to Paragraph (j).
    Response: The commenter was correct in that there was an error in 
the numbers for two of the fictional States. We corrected that error in 
the example which appears earlier in this preamble and are eliminating 
the example at Sec. 305.33 (j) from the final rule, since it was there 
for illustrative purposes only.

Comments to Section 305.35 Reinvestment

    1. Comment: Several commenters suggested that the requirement to 
reinvest incentive funds in the Title IV-D program be phased-in over 
the same three year period as the new incentive structure. One 
commenter stated that there is no need for Federal intrusion into this 
area. Another commenter suggested that the reinvestment requirement be 
tabled until the new incentive system is fully implemented and data can 
be validated. One commenter said the rule was unclear regarding the 
starting date of the reinvestment requirement.
    Response: Section 458A(f) of the Social Security Act provides for a 
phase-in of the requirement for States to reinvest incentive payments 
which matches the implementation of the new incentive payment system. 
Only incentive payments based on the new system must be reinvested. 
Accordingly, one-third of FY 2000 incentives, two-thirds of FY 2001 
incentives, and all of FY 2002 incentives and beyond must be reinvested 
in the IV-D program. There is no statutory authority to delay 
implementation of the reinvestment requirement.
    In the past, there were no requirements on use of incentive funds 
except that they be shared with political subdivisions that help 
operate the program. Over the years, the fact that IV-D incentive funds 
could be used to support State or local programs other than child 
support drew much attention. The reinvestment requirement had its roots 
in the consensus of the State and Federal workgroup on incentives. The 
Congress clearly expressed its belief that financial rewards earned by 
the IV-D program should be reinvested in the IV-D program by enacting a 
reinvestment requirement. The requirement to reinvest incentive funds 
should add critical resources to State efforts to improve the 
performance of child support enforcement programs.
    2. Comment: One commenter suggested a third alternative to 
calculating the base amount of a State's IV-D program investment: the 
denominator of the previous year's cost effectiveness ratio (total IV-D 
dollars expended) minus the previous year's incentives earned, only if 
the cost effectiveness ratio was at least $3.00 and at least two other 
performance measures remained constant or increased over the previous 
year.
    Response: We have not implemented the commenter's suggested 
alternative because this alternative method would reward States with 
average cost-effectiveness and static or increased performance on any 
two of the other four measures. Its effect would be to lower the base 
amount of State IV-D expenditures. This method would also be more 
complicated and might not be applicable to a few States because the 
proposed performance criteria would not be met. Our intention was to 
provide a simple method of calculation. We do not believe it is 
appropriate or consistent with the statutory intent to set criteria 
based on performance that would allow some States to employ a favorable 
base calculation method while others could not do so.
    3. Comment: One commenter suggested a fourth alternative to 
calculating the base amount of a State's IV-D program investment. A 
base cost per case formula was suggested to allow greater flexibility 
for all States in years of substantially declining or increasing 
caseloads. The formula was not described further.
    Response: We have not implemented the commenter's suggested 
alternative. Under this alternative, substantial increases or decreases 
in caseload from year to year would significantly affect a State's 
required investment. States could have difficulty ensuring that the 
appropriate amount was reinvested. The commenter's alternative method 
could also have required States to invest more than the value of their 
incentive payments. Finally, we are not convinced that a base cost per 
case is something that States should be encouraged to maintain.
    4. Comment: One commenter suggested clarifying whether the OCSE 
Commissioner can approve expenditures of incentives outside the IV-D 
program.
    Response: OCSE will issue instructions after the publication of the 
final regulation which provide the details of the spending approval 
process.
    5. Comment: Several commenters stated that the outside examples 
provided in Sec. 305.35(e) are unclear and should be deleted.
    Response: We agree that the examples caused some confusion and 
therefore have deleted the examples at Sec. 305.35(e) and redesignated 
Sec. 305.35(f) as Sec. 305.35(e). We have revised paragraph (d) to 
clarify when incentive amounts may be subtracted from FY 1998 
expenditures.
    6. Comment: A few commenters suggested that the base amount should 
exclude extraordinary or other one-time non-recurring (e.g., expenses 
incurred for federal automated system certification) because it would 
work against States' cost effectiveness.
    Response: The exclusion of long term investments was considered and 
rejected numerous times by State and Federal partners on a number of 
work groups. It is also not authorized by the statute. Therefore, we 
have not implemented this suggestion in the final

[[Page 82204]]

regulation. We appreciate the difficulty created by capital or 
nonrecurring expenditures like automated system investments. The rule 
provides for an alternative base year calculation that would use a 
three-year average calculation in order to avoid inflated spending in 
any one year for nonrecurring expenditures. We believe that the 
calculation of a State's base amount for reinvestment purposes should 
be consistent with the longstanding method of measuring State program's 
cost-effectiveness which uses total IV-D expenditures. Total costs are 
included in the denominator of the cost-effectiveness measure for 
incentive purposes. Certain costs in addition to systems costs, such as 
staff training and paternity establishment, may not have immediate 
payoff in terms of collections. States that wish to minimize the 
problem of nonrecurring expenditures in 1998 should elect to use the 
three-year average base amount calculation provided in the final rule.
    7. Comment: Two commenters believed the baseline of historic State 
expenditures should include all State expenditures, including incentive 
payments. The commenters also argued that the proposed rule ignored the 
reality that State money is fungible, or easily mixed with other funds.
    Response: The inclusion of State incentive payments as expenditures 
would require States that have historically used incentive funds to 
support the IV-D program to increase their spending by the amount of 
any new incentive funds that they received. The reinvestment 
requirement is not intended to force States to extraordinarily increase 
program funding. However, we recognize that once Federal funds are 
transmitted to a State, they become mixed with other funds and can not 
be identified as ``IV-D incentive funds.'' A State will be allowed to 
subtract the incentive funds received only to the extent that the State 
can document that they were re-invested in the IV-D program.
    8. Comment: One commenter asked when the instructions on what non-
IV-D activities would be acceptable for the use of incentive funds 
would be issued? The commenter also asked if such identified activities 
would be eligible for regular Federal financial participation at 66%.
    Response: After publication of the final regulations, OCSE will 
issue instructions on how States may request to spend incentive funds 
on activities not currently eligible for funding under the IV-D 
program, but which would benefit the IV-D program. However, while the 
statute allows incentives to be used for expenditures outside the IV-D 
program, these instructions will offer suggestions for acceptable uses 
of incentive funds that will not be all inclusive and will require 
documentation of proposed spending. There is no statutory authority to 
expand eligibility for Federal IV-D funding of ineligible activities.
    9. Comment: One commenter asked how will the Federal government 
know if individual counties have complied with the reinvestment 
requirement and who is responsible for ensuring compliance. Another 
commenter stated that the proposed rule did not address what will occur 
when a State is deemed to be supplanting State funds previously used to 
fund IV-D functions.
    Response: States are responsible for ensuring that all components 
of their IV-D programs comply with all Federal requirements, including 
local or county IV-D programs, vendors, or other entities that perform 
IV-D services under contract or cooperative agreement. Federal 
auditors' and central and regional office staff will have a role in 
monitoring State compliance with the reinvestment requirement. 
Potential Federal actions include financial audits which could result 
in disallowances of incentive amounts equal to the amount of funds 
supplanted.
    10. Comment: One commenter asked what happens if the State's level 
of performance and resulting incentives decline in future years after 
the base amount is determined?
    Response: If the amount of a State's incentives declines in future 
years, it would not affect its base amount. Whatever amount of 
incentives it received in future years would still have to be spent in 
addition to the base amount. If this scenario occurs, overall spending 
(base plus incentives) would necessarily decline if the State decided 
not to otherwise increase its spending on the program. We remind States 
that the base amount plus incentives only establishes a minimum level 
of spending and can always be augmented by State increases in spending 
on its IV-D program. Additional State spending may address performance 
problems which have resulted in declining incentive amounts. If a State 
earns less in incentives, fewer incentive dollars would have to be 
reinvested the following years.
    11. Comment: One commenter stated that the proposed rule would 
preclude a State from making cost reductions since the base amount 
would need to be spent each year. Another commenter expressed concern 
about the use of historical data to determine the base amount.
    Response: As noted in the proposed rule, we recognized that a fixed 
base year could potentially penalize States that reduce costs as a 
result of program improvement or cuts in government spending. On the 
other hand, we also recognized that a fixed base year would not reflect 
inflation or other increases in the cost of personnel or services. 
Thus, any negative effects would be lessened over time. We invited 
suggestions for alternative methods and did not receive any that we 
believed were better. The trend established by 25 years of the child 
support program indicates that most States have increased expenditures 
from year to year. The trend in increased spending has reflected the 
statutory expansion of the program and growth in the need for services. 
Historical data is the most recent available data upon which to 
calculate a base amount. We believe that the use of historical data was 
the best method available to us for setting this procedure.
    12. Comment: One commenter was concerned that the methods proposed 
to calculate the base amount will mandate that States will artificially 
inflate their expenditures in order to demonstrate that they satisfied 
the reinvestment requirement.
    Response: State reporting will be audited for reliability in 
addition to being monitored by Federal regional and central office 
staff. States that report and claim expenditures that are higher than 
actual expenditures will be subject to disallowances. Additionally, 
they will be subject to a loss of incentive payments and penalties for 
unreliable data, since program expenditures are used to compute 
incentive payments. Finally, artificial inflation of expenditures would 
be counterproductive in that would harm the State's cost-effectiveness 
performance level, thus lowering the amount of incentive funds to which 
the State would be entitled.

Comments to Sec. 305.40 Penalty performance measures and levels

    1. Comment: Several commenters stated that performance penalties 
for order establishment and current support collections should be 
eliminated from the proposed rule. The commenters identified that the 
Social Security Act only expressly requires a performance penalty for 
failure to meet the paternity establishment percentages. One of the 
commenters recommending elimination characterized the penalties as 
``discretionary.''
    Response: Section 409(a)(8) states that reductions of up to five 
percent would be taken against a State's TANF grant for

[[Page 82205]]

the failure to meet other performance standards as may be specified by 
the Secretary. After developing a national strategic plan, incentive 
measures, and a new data reporting system, partners met to consider 
development of a consistent penalty system. Careful consideration was 
given to the importance of applying penalties to the measures on order 
establishment and current support collections as indicated by the extra 
weight given these measures in calculating incentive payments. These 
measures show a State's success in getting critical regular support 
payments to families. Substantial consensus that these penalties should 
be adopted was achieved among all States, whether as a member of the 
work group that reported its recommendations to the OCSE Commissioner, 
or consulted through representatives.
    2. Comment: Several commenters stated that performance penalties 
for order establishment and current support collection should be 
delayed. Some of the reasons included current implementation of new 
data reliability audit process and the ability of all States and 
territories to report performance data completely, accurately and in 
accordance with due dates. Since the data reporting ability of States 
has not been audited, commenters argued, how can penalties be imposed?
    Response: Data reporting on the new form is improving, since 
technical assistance on the new form and the new audit process has been 
given to States. However, an automatic corrective action period of one 
year builds-in delay which allows States to identify and to correct 
either reporting or performance problems prior to being assessed a 
financial penalty. States should be diligent in continuously monitoring 
their own performance and data reliability.
    3. Comment: A few commenters suggested that the performance 
penalties should be delayed because it is a better management practice 
to allow the incentives to produce the desired results first and 
implement negative penalties later if poor performance continues.
    Response: State and Federal partners considered the implementation 
of performance penalties and arrived at a consensus decision to go 
forward with a performance penalty system required by statute. 
Performance penalties were recommended to be implemented in FY 2001. In 
addition, any performance penalty will be delayed an additional (FY 
2002) year for corrective action and should performance improve during 
that year sufficiently to avoid a penalty, no penalty will be assessed. 
Penalties can also be avoided at the lower levels if a significant 
level of improvement is achieved over the previous year. The statutory 
paternity penalty and requirement to ``meet other performance standards 
specified by the Secretary'' have been part of the Social Security Act 
since 1997. Since the performance measures are the same, further delay 
in implementing penalties while more experience with the incentives is 
gained would not be appropriate.
    4. Comment: One commenter stated that the incentive and penalty 
structure is flawed because a State could receive an incentive and a 
penalty ``on the same measure at the same time.''
    Response: This statement is potentially true for performance only 
in paternity establishment. An incentive could be earned for the high 
performance level while the State's lack of improvement at a 
significant level would cause a penalty to be incurred. Congress was 
aware of this possible interaction when the incentive structure was 
built upon the preexisting penalty structure. The corrective action 
period of a year not only delays the penalty for one year but also 
allows the State to avoid the penalty by improved performance. This 
incentive-penalty interaction is unique to the paternity establishment 
measure and does not occur with order establishment and current support 
collections. Under performance standards for order establishment and 
current support collections, high or significantly improved performance 
produces an incentive, poor performance triggers a penalty, and 
intermediate performance warrants neither an incentive nor a penalty.
    5. Comment: Several commenters expressed concern that a State could 
be penalized for interstate cases where the State relies on the actions 
of another State and recommended that States should have the option to 
exclude these cases.
    Response: There is no statutory basis to exclude these cases. 
Interstate cases represent approximately one-quarter to one-third of 
the national child support caseload. This would substantially decrease 
the number of cases for which a State was rewarded to achieve results. 
Removal from the incentives calculation might actually lead to 
encouraging neglect of these cases. Indeed, while interstate cases are 
among the most challenging cases to work, the Uniform Interstate Family 
Support Act (UIFSA) provides a workable mechanism for States to 
cooperate in establishing orders and enforcing cases. State and Federal 
partners continually strive to improve coordination among States on 
interstate caseloads through training, technical assistance, 
standardized procedures and dialogue. The statute and data reporting 
instructions only allow for the exclusion of cases where there is no 
jurisdiction (international cases and cases involving tribal 
sovereignty) and no mechanism such as cooperative agreements to work 
the case.
    6. Comment: One commenter stated that the penalty structure did not 
capture important elements of the child support enforcement program and 
would be better focused on different areas of performance from the 
incentive measures.
    Response: Both State and Federal partners and Congress have clearly 
expressed that the areas of paternity establishment, order 
establishment, current support collections are the most critical 
performance areas of the child support program. These performance 
measures have been enacted in law and are given greater weight in the 
incentive calculation. We believe these performance areas best express 
the results or outcomes desired by the program and the other program 
requirements while important, may often reflect measures of process. We 
also believe that incentive and penalty structures should be as 
consistent as possible. Having a few critial measures sanctioning poor 
performance allows States to focus resources, whereas scattering 
penalties among other additional performance areas may diminish the 
results of the program by spreading resources too thinly. This is also 
not the only means of assessing State performance. State self 
assessment, Federal regional office reviews and other Federal audits 
will contribute to determining whether States are operating programs 
that meet all IV-D requirements.
    7. Comment: One commenter suggested that assessing penalties 
against a State's title IV-A payments was unfair to the Temporary 
Assistance to Needy Families (TANF) program. This might lead to tension 
between the child support and temporary assistance programs and 
penalties taken against either program would reduce resources needed to 
achieve desired results.
    Response: Section 409(a)(8) of the Act clearly requires that 
penalties for lack of compliance, incomplete or unreliable data 
reporting or poor performance in the child support program are to be 
taken against the State's title IV-A payment. Congress has 
traditionally linked these two programs in many areas and has continued 
this statutory linkage with performance and other

[[Page 82206]]

penalties in the child support program. The consequences of a penalty 
reducing financial resources and affecting services of a program are 
real. This reality strengthens the deterrent effect on States to avoid 
the penalty initially and to improve performance the year following a 
penalty to avoid repetition of negative consequences.
    8. Comment: One commenter believed that the order establishment 
penalty structure is not equitable to States that perform below the 
fifty percent threshold needed for an incentive. State A improves its 
performance by five percentage points from one year to the next and 
receives an incentive. State B performs at higher level than State A, 
but below the fifty percent threshold and improves by three percentage 
points over the previous year, but is not eligible for an incentive. A 
similar example is provided using the current support collections 
performance levels.
    Response: Since the commenter's example actually refers to the 
bases for receiving or not receiving an incentive, we address our 
response accordingly. The performance levels for order establishment 
and current support collections were developed by State and Federal 
partners after reviewing historical performance data on the child 
support program. The group established levels that would reward a State 
for significant improvement from year to year in addition to rewarding 
high performance above a certain threshold. These performance levels 
received a nearly unanimous consensus from the States and Congress 
subsequently enacted these levels without change. The commenter's 
example is correct. States that achieve a significant improvement of 
five percentage points but perform at a lower level than other States 
with no significant improvement will receive a portion of the incentive 
payment for that measure. The structure is designed to reward 
significant improvement at lower levels of performance on order 
establishment and current support collections.
    9. Comment: One commenter identified that the proposed regulation 
Sec. 305.61(c) is ambiguous about when and how different levels of 
penalties will be imposed. The commenter suggested that language should 
be added that OCSE may impose the higher penalty in situations with 
multiple penalties, willful or egregious violations, and repeated 
penalties or violations. In addition, the commenter stated that 
penalties should be imposed for failing a financial management audit.
    Response: Section 305.61 states that the penalty percentage will 
increase from one to two percent for the first finding, two to three 
percent for the second finding, and three to five percent for a third 
or subsequent finding. We believe setting such criteria may confuse 
States about when a higher penalty might be imposed. The regulation 
clearly imposes higher penalties for repeated failures from year to 
year. We believe it is important to preserve discretion of the 
Secretary in taking penalties and do not want to restrict 
decisionmaking where each circumstance is considered individually. 
Section 409 of the Act also limits total penalties assessed by Child 
Support or TANF against the TANF grant to 25%. We are cognizant that 
multiple penalties and higher penalties raise awareness of the 
interaction with the TANF program.
    Section 409(a)(8) of the Act also imposes a penalty for failure to 
submit complete and reliable data. Collections and expenditure data 
will be reviewed by Federal auditors to determine its completeness and 
reliability. Section 409(a)(8) does not provide for a penalty for 
failing a financial management audit. However, financial management 
problems uncovered by Federal staff can result in the disallowance of 
claimed expenditures and reductions in grants to States.

Comments to Sec. 305.60 Types and scope of Federal audits

    1. Comment: Because of concern about the definition of reliable 
data, the Yellow Book standards should be included in the final rule, 
or at least referenced.
    Response: The final rule refers to standards of the Comptroller 
General and to the GAO Standards, as promulgated in ``Government 
Auditing Standards'' which is the ``Yellow Book''.
    2. Comment: States are currently given a very long time in which to 
correct data problems. Meanwhile, OCSE is using unreliable data to 
calculate incentives and penalties. Rather than performing a full 
audit, in FY 2000, OCSE should conduct a baseline data quality audit of 
all States and provide help to those with unreliable data.
    Response: The OCSE Division of Audit is conducting baseline audits 
of FY 1999 data and informing States of any deficiencies found during 
the audits. This process provides States the opportunity for 
implementing necessary corrective actions before reporting FY 2000 data 
and the initiation of payments under the new incentive system. OCSE is 
available to provide technical assistance to States.
    3. Comment: At minimum, Sec. 305.60(c)(2)(i) should indicate that 
OCSE will audit a program when two or more State self-assessments 
indicate poor performance. The regulation should also give OCSE the 
power to conduct an audit on the basis of one self-assessment if that 
self-assessment indicates serious deficiencies.
    Response: The wording of Sec. 305.60(c)(2)(i) and the statute allow 
the Secretary flexibility to determine when to carry out additional 
types of audits. We do not believe it would be helpful to mandate the 
timing of any audits and believe it is appropriate to make the 
determination based on all the circumstances involved.
    4. Comment: While the proposed regulations do not address the 
critical issue of proper distribution, it may be that OCSE intends 
disbursement to include distribution, but if it does, it should say so.
    Response: Distribution in accordance with the Federal statute and 
regulations is not a part of the new incentive and penalty system. 
However, proper distribution will still be reviewed under automated 
data processing system certification reviews for PRWORA and as part of 
substantial compliance audits. For purposes of reporting on OCSE forms, 
distribution means disbursement.
    5. Comment: A two-year timeframe for an audit based on self-
assessment results with the possibility of a penalty, is 
counterproductive. The commenter suggests a graduated approach that 
includes consultation, technical assistance, and an advisory audit with 
penalties only occurring after 4 or 5 years of insufficient compliance.
    Response: These regulations merely indicate that an audit could be 
initiated based on two or more poor self assessments. Substantial 
compliance audits are discretionary and will be used to monitor 
instances of severe deficiencies in State program case processing.
    6. Comment: The proposed rule allows States to receive incentives 
under certain circumstances based on an increase in performance from 
the previous year. The rules do not address the situation which may 
occur when the previous year's data was determined incomplete or 
unreliable. This should be clarified.
    Response: If a State fails to report complete and reliable data for 
any one of the incentive measures, the State will not receive an 
incentive for the performance measure for which the data are determined 
to be incomplete or unreliable. If the State is able to correct the 
problem and substitutes corrected data by the time data are required to 
be submitted for the next year's incentive payment determination, it 
will be able

[[Page 82207]]

to earn incentives for the next year on improvement measures based on 
the corrected data. If the data problem is not corrected, a State will 
not be able to earn incentives based on improved performance.
    7. Comment: It should be clear that States must pass the audit 
before any incentives are paid and that periodic audits begin only 
after the initial audit. The regulation should also clarify OCSE 
authority to conduct audits more frequently than every 3 years. It 
should include a catchall provision for audits whenever there is reason 
to question a State's data reliability. The broad scope of audits 
should be made clear, including that auditors are not limited to a 
review of material provided by the State.
    Response: We believe the statutory and regulatory language is clear 
on all of these points. Section 305.60(d) states that ``OCSE will 
conduct audits of the State's IV-D program through inspection, 
inquiries, observation, and confirmation  * * *'' as well as a review 
of State provided material. Before incentives may be paid for any 
fiscal year, the Secretary must determine, based on an audit, that the 
State's data are complete and reliable. Thus there is no need to add 
any language concerning audits of data reliability.
    Federal audits have proven to be a valuable tool to focus States on 
necessary improvements. The integrity of the new incentives and penalty 
process depends on reliable, complete data and on the Federal auditors' 
role in assessing whether States produce such data.
    8. Comment: An audit should review the use of funds to determine if 
incentive payments are being used to supplement rather than supplant 
other funds.
    Response: Administrative cost audits will be performed and will 
determine if program funds are expended in accordance with Federal 
regulations.
    9. Comment: Section 305.60(c)(2) should provide that ``OCSE may 
initiate audits to determine substantial compliance, or for such other 
purposes as OCSE may find necessary, whenever it has credible evidence 
of a failure to comply with one or more of the requirements of the IV-D 
program.''
    Response: We believe the wording of Sec. 305.60(c)(2) as currently 
drafted allows OCSE maximum flexibility to carry out our mandated and 
authorized duties.
    10. Comment: Does the term substantial compliance apply to each 
individual requirement identified? If so, does this mean that a State 
can be penalized based on an audit that just reviewed one specific area 
(e.g., case closure) that the State failed?
    Response: The term substantial compliance does apply to each 
individual requirement identified for audit. Yes, a State is subject to 
a penalty based on a failure to meet requirements in a specific area if 
corrective measures are not taken during the specified corrective 
action period.
    11. Comment: The regulation should provide that when a State fails 
data reliability requirements, it will be audited annually until it 
passes. Data reliability should be checked annually for States without 
a certified system or when there are changes to a system. An audit of 
data quality should include an audit for compliance with case closure 
regulations.
    Response: OCSE will continue its practice of performing annual 
audits of any State that it determines does not achieve substantial 
compliance with a program requirement or requirements or fails data 
reliability requirements until such time that the State able to achieve 
substantial compliance or the data reliability requirements are met. 
Also, a State may make significant changes to the system used to 
accumulate and report their performance indicator data. These changes 
will be reviewed by the auditors each year to the extent necessary to 
determine the completeness and reliability of the performance indicator 
data. While case closure is not one of the performance measures, it is 
evaluated during data reliability audits.
    12. Comment: The rule is unclear whether an error in a case applies 
to the ``life of the case'' or is restricted to a given fiscal year. We 
recommend that the error be restricted to a given fiscal year.
    Response: An error in a case is restricted to a given fiscal year.
    13. Comment: We are concerned about language in proposed 
Sec. 305.60 describing the types and scope of audits. For example, 
subsection (b)(2) states that audits would be conducted to determine, 
``whether collections and disbursements of support payments are carried 
out correctly and are fully accounted for.'' With the extremely 
complicated arrearage distribution rules that became law with PRWORA, 
we are concerned that a strict interpretation of this language could 
make States vulnerable to penalties. This language should be rewritten 
to recognize the complexity of the distribution system and reduce the 
vulnerability of States.
    Response: States are required to meet the distribution rules as 
enacted in PRWORA. OCSE auditors are knowledgeable of the extremely 
complicated statutory arrearage distribution rules and this is 
reflected in the audit instructions.
    14. Comment: Section 305.63 would allow penalties to be imposed on 
States based on targeted audits of specific IV-D requirements. We are 
concerned that targeted audits would not measure ``substantial 
compliance'' and would increase the financial exposure of States.
    Response: Targeted audits will measure substantial compliance with 
the area audited. A penalty could be imposed if a State is found not to 
be in substantial compliance with specific IV-D requirements. 
Maintaining the Secretary's authority to audit State programs to 
determine compliance with IV-D requirements is essential to carrying 
out her oversight responsibilities for the program.

Section 305.62 Disregard of a failure which is of a technical nature.

    Comment: A commenter expressed concern about the process under 
which OCSE will decide not to impose a penalty because of ``technical 
non-compliance''. Section 305.62 should provide a concrete definition 
of ``technical non-compliance.''
    Response: It is impossible to foresee all the circumstances under 
which a penalty might be imposed for technical non-compliance. Thus, it 
is not possible to provide a concrete definition. ``Technical non-
compliance'' is defined in a broad way allowing it to be applied to 
unknown situations that may occur. This definition is based on a 
historical application that has been used by OCSE to evaluate States' 
program performance.

VII. Regulatory Flexibility Analysis

    The Secretary certifies, under 5 U.S.C. 605(b), the Regulatory 
Flexibility Act (Pub. L. 96-354), that these regulations will not 
result in a significant impact on a substantial number of small 
entities. The primary impact is on State governments. State governments 
are not considered small entities under the Act.

VIII. Executive Order 12866

    Executive Order 12866 requires that regulations be reviewed to 
ensure that they are consistent with the priorities and principles set 
forth in the Executive Order. The Department has determined that this 
rule is consistent with these priorities and principles. This rule 
implements the statutory provisions by specifying the performance-based 
incentive and penalty systems.

[[Page 82208]]

IX. Unfunded Mandates Act

    Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded 
Mandates Act) requires that a covered agency prepare a budgetary impact 
statement before promulgating a rule that includes any Federal mandate 
that may result in the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year.
    If a covered agency must prepare a budgetary impact statement, 
section 205 further requires that it select the most cost-effective and 
least burdensome alternative that achieves the objectives of the rule 
and is consistent with the statutory requirements. In addition, section 
203 requires a plan for informing and advising any small government 
that may be significantly or uniquely impacted by the rule.
    We have determined that these rules will not result in the 
expenditure by State, local, and Tribal governments, in the aggregate, 
or by the private sector, of more than $100 million in any one year. 
Accordingly, we have not prepared a budgetary impact statement, 
specifically addressed the regulatory alternatives considered, or 
prepared a plan for informing and advising any significantly or 
uniquely impacted small government.

X. Paperwork Reduction Act

    Under the Paperwork Reduction Act of 1995, Public Law 104-13, all 
Departments are required to submit to the Office of Management and 
Budget (OMB) for review and approval any reporting or recordkeeping 
requirements inherent in a proposed or final rule. The reports 
necessary to implement this rule have received OMB approvals. They are 
the OCSE-157, OMB No. 0970-0177; the OCSE-34A, OMB No. 0970-0181; and 
the OCSE-396A, OMB No. 0970-0181. This rule requires no other reporting 
or recordkeeping requirements.

XI. Congressional Review

    This rule is not a major rule as defined in 5 U.S.C., Chapter 8.

XII. Assessment of Federal Regulations and Policies on Families

    Section 654 of the Treasury and General Government Appropriations 
Act of 1999 requires Federal agencies to determine whether a proposed 
policy or regulation may affect family well-being. If the agency's 
conclusion is affirmative, then the agency must prepare an impact 
assessment addressing seven criteria specified in the law. These 
regulations will not have an impact on family well-being as defined in 
the legislation. This regulation provides an alternative system to 
reward good performance and sanction poor performance and the new 
system, like its predecessor, will positively impact families needing 
support.

XIII. Executive Order 13132 Federalism Assessment

    Executive Order 13132 on Federalism applies to policies that have 
federalism implications, defined as ``regulations, legislative comments 
or proposed legislation, and other policy statements or actions that 
have substantial direct effects on the States, on the relationship 
between the national government and the States, or on the distributions 
of power and responsibilities among the various levels of government.'' 
This rule does not have federalism implications for State or local 
governments as defined in the executive order.

List of Subjects

45 CFR parts 302 and 303

    Child support, Grant programs/social programs, Reporting and 
recordkeeping requirements.

45 CFR part 304

    Child support, Grant programs/social programs, Penalties, Reporting 
and recordkeeping requirements, Unemployment compensation.

45 CFR part 305

    Child support, Grant programs/social programs, Accounting.

(Catalog of Federal Domestic Assistance Programs No. 93.563, Child 
Support Enforcement Program)
    Dated: August 17, 2000.
Olivia A. Golden,
Assistant Secretary for Children and Families.
    Dated: August 23, 2000.
Donna E. Shalala,
Secretary, Department of Health and Human Services.

    For the reasons discussed above, we amend title 45 CFR Chapter III 
of the Code of Federal Regulations as follows:

PART 302--STATE PLAN REQUIREMENTS

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

    Authority: 42 U.S.C. 651 through 658A, 660, 664, 666, 667, 1302, 
1396(a)(25), 1396B(d)(2), 1396b(o), 1396(p), 1396(k).


Sec. 302.55  [Amended]

    2. Section 302.55 is amended by adding the words ``and part 305'' 
after ``Sec. 304.12''.

PART 303--STANDARDS FOR PROGRAM OPERATIONS

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

    Authority: 42 U.S.C 651 through 658, 660, 663, 664, 667, 1302, 
1396a(a)(25), 1396b(d)(2), 1396b(o), 1396b(p), and 1396(k).

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


Sec. 303.35  Administrative complaint procedure.

    (a) Each State must have in place an administrative complaint 
procedure, defined by the State, in place to allow individuals the 
opportunity to request an administrative review, and take appropriate 
action when there is evidence that an error has occurred or an action 
should have been taken on their case. This includes both individuals in 
the State and individuals from other States.
    (b) A State need not establish a formal hearing process but must 
have clear procedures in place. The State must notify individuals of 
the procedures, make them available for recipients of IV-D services to 
use when requesting such a review, and use them for notifying 
recipients of the results of the review and any actions taken.

PART 304--FEDERAL FINANCIAL PARTICIPATION

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

    Authority: 42 U.S.C. 651 through 655, 657, 658, 1302, 
1396(a)(25), 1396b(d)(2), 1396b(o), 1396(p), and 1396(k).

    6. Section 304.12 is amended by adding new paragraphs (d) and (e) 
to read as follows:


Sec. 304.12  Incentive payments.

* * * * *
    (d) Effective date. This section is in effect only through 
September 30, 2001.
    (e) Phase in process. The amounts payable under this section will 
be reduced by one-third for fiscal year 2000 and two-thirds for fiscal 
year 2001.

PART 305--PROGRAM PERFORMANCE MEASURES, STANDARDS, FINANCIAL 
INCENTIVES, AND PENALTIES

    7. A new part 305 is added to read as follows:
Sec.
305.0  Scope.
305.1  Definitions.
305.2  Performance measures.
305.31   Amount of incentive payment.
305.32   Requirements applicable to calculations.
305.33   Determination of applicable percentages based on 
performance levels.

[[Page 82209]]

305.34   Payment of incentives.
305.35   Reinvestment.
305.36   Incentive phase-in.
305.40   Penalty performance measures and levels.
305.42   Penalty phase-in.
305.60   Types and scope of Federal audits.
305.61   Penalty for failure to meet IV-D requirements.
305.62   Disregard of a failure which is of a technical nature.
305.63   Standards for determining substantial compliance with IV-D 
requirements.
305.64   Audit procedures and State comments.
305.65   State cooperation in the audit.
305.66   Notice, corrective action year, and imposition of penalty.

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


Sec. 305.0  Scope.

    This part implements the incentive system requirements as described 
in section 458A (to be redesignated as section 458 effective October 1, 
2001) of the Act and the penalty provisions as required in sections 
409(a)(8) and 452(g) of the Act. This part also implements Federal 
audit requirements under sections 409(a)(8) and 452(a)(4) of the Act. 
Sections 305.0 through 305.2 contain general provisions applicable to 
this part. Sections 305.31 through 305.36 of this part describe the 
incentive system. Sections 305.40 through 305.42 and Secs. 305.60 
through 305.66 describe the penalty and audit processes.


Sec. 305.1  Definitions.

    The definitions found in Sec. 301.1 of this chapter are also 
applicable to this part. In addition, for purposes of this part:
    (a) The term IV-D case means a parent (mother, father, or putative 
father) who is now or eventually may be obligated under law for the 
support of a child or children receiving services under the title IV-D 
program. A parent is a separate IV-D case for each family with a 
dependent child or children that the parent may be obligated to 
support. If both parents are absent and liable or potentially liable 
for support of a child or children receiving services under the IV-D 
program, each parent is considered a separate IV-D case. In counting 
cases for the purposes of this part, States may exclude cases closed 
under 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.
    (b) The term Current Assistance collections means collections 
received and distributed on behalf of individuals whose rights to 
support are required to be assigned to the State under title IV-A of 
the Act, under title IV-E of the Act, or under title XIX of the Act. In 
addition, a referral to the State's IV-D agency must have been made.
    (c) The term Former Assistance collections means collections 
received and distributed on behalf of individuals whose rights to 
support were formerly required to be assigned to the State under title 
IV-A (TANF or Aid to Families with Dependent Children, AFDC), title IV-
E (Foster Care), or title XIX (Medicaid) of the Act.
    (d) The term Never Assistance/Other collections means all other 
collections received and distributed on behalf of individuals who are 
receiving child support enforcement services under title IV-D of the 
Act.
    (e) The term total IV-D dollars expended means total IV-D 
administrative expenditures claimed by a State in a specified fiscal 
year adjusted in accordance with Sec. 305.32 of this part.
    (f) The term Consumer Price Index or CPI means the last Consumer 
Price Index for all-urban consumers published by the Department of 
Labor. The CPI for a fiscal year is the average of the Consumer Price 
Index for the 12-month period ending on September 30 of the fiscal 
year.
    (g) The term State incentive payment share for a fiscal year means 
the incentive base amount for the State for the fiscal year divided by 
the sum of the incentive base amounts for all of the States for the 
fiscal year.
    (h) The term incentive base amount for a fiscal year means the sum 
of the State's performance level percentages (determined in accordance 
with Sec. 305.33) multiplied by the State's corresponding maximum 
incentive base on each of the following measures:
    (1) The paternity establishment performance level;
    (2) The support order performance level;
    (3) The current collections performance level;
    (4) The arrears collections performance level; and
    (5) the cost-effectiveness performance level.
    (i) The term reliable data, means the most recent data available 
which are found by the Secretary to be reliable and is a state that 
exists when data are sufficiently complete and error free to be 
convincing for their purpose and context. State data must meet a 95 
percent standard of reliability effective beginning in fiscal year 
2001. This is with the recognition that data may contain errors as long 
as they are not of a magnitude that would cause a reasonable person, 
aware of the errors, to doubt a finding or conclusion based on the 
data.
    (j) The term complete data means all reporting elements from OCSE 
reporting forms, necessary to compute a State's performance levels, 
incentive base amount, and maximum incentive base amount, have been 
provided within timeframes established in instructions to these forms 
and Sec. 305.32(f) of this part.


Sec. 305.2  Performance measures.

    (a) The child support incentive system measures State performance 
levels in five program areas:
    Paternity establishment; support order establishment; current 
collections; arrearage collections; and cost-effectiveness. The penalty 
system measures State performance in three of these areas: Paternity 
establishment; establishment of support orders; and current 
collections.
    (1) Paternity Establishment Performance Level. States have the 
choice of being evaluated on one of the following two measures for 
their paternity establishment percentage (commonly known as the PEP). 
The count of children shall not include any child who is a dependent by 
reason of the death of a parent (unless paternity is established for 
that child). It shall also not include any child whose parent is found 
to have good cause for refusing to cooperate with the State agency in 
establishing paternity, or for whom the State agency determines it is 
against the best interest of the child to pursue paternity issues.
    (i) IV-D Paternity Establishment Percentage means the ratio that 
the total number of children in the IV-D caseload in the fiscal year 
(or, at the option of the State, as of the end of the fiscal year) who 
have been born out-of-wedlock and for whom paternity has been 
established or acknowledged, bears to the total number of children in 
the IV-D caseload as of the end of the preceding fiscal year who were 
born out-of-wedlock. The equation to compute the measure is as follows 
(expressed as a percent):

[[Page 82210]]

[GRAPHIC] [TIFF OMITTED] TR27DE00.045

    (ii) Statewide Paternity Establishment Percentage means the ratio 
that the total number of minor children who have been born out-of-
wedlock and for whom paternity has been established or acknowledged 
during the fiscal year, bears to the total number of children born out-
of-wedlock during the preceding fiscal year. The equation to compute 
the measure is as follows (expressed as a percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.046

    (2) Support Order Establishment Performance Level. This measure 
requires a determination of whether or not there is a support order for 
each case. These support orders include all types of legally 
enforceable orders, such as court, default, and administrative. Since 
the measure is a case count at a point-in-time, modifications to an 
order do not affect the count. The equation to compute the measure is 
as follows (expressed as a percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.047

    (3) Current Collections Performance Level. Current support is money 
applied to current support obligations and does not include payment 
plans for payment towards arrears. If included, voluntary collections 
must be included in both the numerator and the denominator. This 
measure is computed monthly and the total of all months is reported at 
the end of the year. The equation to compute the measure is as follows 
(expressed as a percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.048

    (4) Arrearage Collection Performance Level. This measure includes 
those cases where all of the past-due support was disbursed to the 
family, or retained by the State because all the support was assigned 
to the State. If some of the past-due support was assigned to the State 
and some was to be disbursed to the family, only those cases where some 
of the support actually went to the family can be included. The 
equation to compute the measure is as follows (expressed as a percent):
[GRAPHIC] [TIFF OMITTED] TR27DE00.049

    (5) Cost-Effectiveness Performance Level. Interstate incoming and 
outgoing distributed collections will be included for both the 
initiating and the responding State in this measure. The equation to 
compute this measure is as follows (expressed as a ratio):
[GRAPHIC] [TIFF OMITTED] TR27DE00.050

    (b) For incentive purposes, the measures will be weighted in the 
following manner. Each State will earn five scores based on performance 
on each of the five measures. Each of the first three measures 
(paternity establishment, order establishment, and current collections) 
earn 100 percent of the collections base as defined in Sec. 305.31(e) 
of this part. The last two measures (collections on arrears and cost-
effectiveness) earn a maximum of 75 percent of the collections base as 
defined in Sec. 305.31(e) of this part.


Sec. 305.31  Amount of incentive payment.

    (a) The incentive payment for a State for a fiscal year is equal to 
the incentive payment pool for the fiscal year,

[[Page 82211]]

multiplied by the State incentive payment share for the fiscal year.
    (b) The incentive payment pool is:
    (1) $422,000,000 for fiscal year 2000;
    (2) $429,000,000 for fiscal year 2001;
    (3) $450,000,000 for fiscal year 2002;
    (4) $461,000,000 for fiscal year 2003;
    (5) $454,000,000 for fiscal year 2004;
    (6) $446,000,000 for fiscal year 2005;
    (7) $458,000,000 for fiscal year 2006;
    (8) $471,000,000 for fiscal year 2007;
    (9) $483,000,000 for fiscal year 2008; and
    (10) For any succeeding fiscal year, the amount of the incentive 
payment pool for the fiscal year that precedes such succeeding fiscal 
year multiplied by the percentage (if any) by which the CPI for such 
preceding fiscal year exceeds the CPI for the second preceding fiscal 
year. In other words, for each fiscal year following fiscal year 2008, 
the incentive payment pool will be multiplied by the percentage 
increase in the CPI between the two preceding years. For example, if 
the CPI increases by 1 percent between fiscal years 2007 and 2008, then 
the incentive pool for fiscal year 2009 would be a 1 percent increase 
over the $483,000,000 incentive payment pool for fiscal year 2008, or 
$487,830,000.
    (c) The State incentive payment share for a fiscal year is the 
incentive base amount for the State for the fiscal year divided by the 
sum of the incentive base amounts for all of the States for the fiscal 
year.
    (d) A State's maximum incentive base amount for a fiscal year is 
the State's collections base for the fiscal year for the paternity 
establishment, support order, and current collections performance 
measures and 75 percent of the State's collections base for the fiscal 
year for the arrearage collections and cost-effectiveness performance 
measures.
    (e) A State's maximum incentive base amount for a State for a 
fiscal year is zero, unless a Federal audit performed under Sec. 305.60 
of this part determines that the data submitted by the State for the 
fiscal year and used to determine the performance level involved are 
complete and reliable.
    (f) A State's collections base for a fiscal year is equal to: two 
times the sum of the total amount of support collected for Current 
Assistance cases plus two times the total amount of support collected 
in Former Assistance cases, plus the total amount of support collected 
in Never Assistance/other cases during the fiscal year, that is: 
2(Current Assistance collections + Former Assistance collections) + all 
other collections.


Sec. 305.32  Requirements applicable to calculations.

    In calculating the amount of incentive payments or penalties, the 
following conditions apply: ]
    (a) Each measure is based on data submitted for the Federal fiscal 
year. The Federal fiscal year runs from October 1st of one year through 
September 30th of the following year.
    (b) Only those Current Assistance, Former Assistance and Never 
Assistance/other collections disbursed and those expenditures claimed 
by the State in the fiscal year will be used to determine the incentive 
payment payable for that fiscal year;
    (c) Support collected by one State at the request of another State 
will be treated as having been collected in full by each State;
    (d) Amounts expended by the State in carrying out a special project 
under section 455(e) of the Act will be excluded from the State's total 
IV-D dollars expended in computing incentive payments;
    (e) Fees paid by individuals, recovered costs, and program income 
such as interest earned on collections will be deducted from total IV-D 
dollars expended; and
    (f) States must submit data used to determine incentives and 
penalties following instructions and formats as required by HHS on 
Office of Management and Budget (OMB) approved reporting instruments. 
Data necessary to calculate performance for incentives and penalties 
for a fiscal year must be submitted to the Office of Child Support 
Enforcement by December 31st, the end of the first quarter after the 
end of the fiscal year. Only data submitted as of December 31st will be 
used to determine the State's performance for the prior fiscal year and 
the amount of incentive payments due the States.


Sec. 305.33  Determination of applicable percentages based on 
performance levels.

    (a) A State's paternity establishment performance level for a 
fiscal year is, at the option of the State, the IV-D paternity 
establishment percentage or the Statewide paternity establishment 
percentage determined under Sec. 305.2 of this part. The applicable 
percentage for each level of a State's paternity establishment 
performance can be found in table 1 of this part, except as provided in 
paragraph (b) of this section.
    (b) If the State's paternity establishment performance level for a 
fiscal year is less than 50 percent, but exceeds its paternity 
establishment performance level for the immediately preceding fiscal 
year by at least 10 percentage points, then the State's applicable 
percentage for the paternity establishment performance level is 50 
percent.
    (c) A State's support order establishment performance level for a 
fiscal year is the percentage of the total number of cases where there 
is a support order determined under Secs. 305.2 and 305.32 of this 
part. The applicable percentage for each level of a State's support 
order establishment performance can be found on table 1 of this part, 
except as provided in paragraph (d) of this section.
    (d) If the State's support order establishment performance level 
for a fiscal year is less than 50 percent, but exceeds the State's 
support order establishment performance level for the immediately 
preceding fiscal year by at least 5 percentage points, then the State's 
applicable percentage is 50 percent.

 Table 1.--If the Paternity Establishment or Support Order Establishment
                          Performance Level Is:
  (Use this table to determine the applicable percentage levels for the
   paternity establishment and support order establishment performance
                               measures.)
------------------------------------------------------------------------
                             But less than:           The applicable
  At least:  (percent)          (percent)             percentage is:
------------------------------------------------------------------------
              80         ......................               100
              79                       80                      98
              78                       79                      96
              77                       78                      94
              76                       77                      92
              75                       76                      90
              74                       75                      88
              73                       74                      86
              72                       73                      84
              71                       72                      82
              70                       71                      80
              69                       70                      79
              68                       69                      78
              67                       68                      77
              66                       67                      76
              65                       66                      75
              64                       65                      74
              63                       64                      73
              62                       63                      72
              61                       62                      71
              60                       61                      70
              59                       60                      69
              58                       59                      68
              57                       58                      67
              56                       57                      66
              55                       56                      65
              54                       55                      64
              53                       54                      63
              52                       53                      62
              51                       52                      61
              50                       51                      60
               0                       50                       0
------------------------------------------------------------------------


[[Page 82212]]

    (e) A State's current collections performance level for a fiscal 
year is equal to the total amount of current support collected during 
the fiscal year divided by the total amount of current support owed 
during the fiscal year in all IV-D cases, determined under Secs. 305.2 
and 305.32 of this part. The applicable percentage with respect to a 
State's current collections performance level can be found on table 2, 
except as provided in paragraph (f) of this section.
    (f) If the State's current collections performance level for a 
fiscal year is less than 40 percent but exceeds the current collections 
performance level of the State for the immediately preceding fiscal 
year by at least 5 percentage points, then the State's applicable 
percentage is 50 percent. r
    (g) A State's arrearage collections performance level for a fiscal 
year is equal to the total number of IV-D cases in which payments of 
past-due child support were received and distributed during the fiscal 
year, divided by the total number of IV-D cases in which there was 
past-due child support owed, as determined under Secs. 305.2 and 305.32 
of this part. The applicable percentage with respect to a State's 
arrearage collections performance level can be found on table 2 except 
as provided in paragraph (h) of this section.
    (h) If the State's arrearage collections performance level for a 
fiscal year is less than 40 percent but exceeds the arrearage 
collections performance level for the immediately preceding fiscal year 
by at least 5 percentage points, then the State's applicable percentage 
is 50 percent.

      Table 2.--If the Current Collections or Arrearage Collections
                          Performance Level Is:
   (Use this table to determine the percentage levels for the current
      collections and arrearage collections performance measures.)
------------------------------------------------------------------------
                                                                  The
                                                    But less  applicable
                At least  (percent                   than:    percentage
                                                   (percent)      is:
                                                               (percent)
------------------------------------------------------------------------
80...............................................  .........         100
79...............................................         80          98
78...............................................         79          96
77...............................................         78          94
76...............................................         77          92
75...............................................         76          90
74...............................................         75          88
73...............................................         74          86
72...............................................         73          84
71...............................................         72          82
70...............................................         71          80
69...............................................         70          79
68...............................................         69          78
67...............................................         68          77
66...............................................         67          76
65...............................................         66          75
64...............................................         65          74
63...............................................         64          73
62...............................................         63          72
61...............................................         62          71
60...............................................         61          70
59...............................................         60          69
58...............................................         59          68
57...............................................         58          67
56...............................................         57          66
55...............................................         56          65
54...............................................         55          64
53...............................................         54          63
52...............................................         53          62
51...............................................         52          61
50...............................................         51          60
49...............................................         50          59
48...............................................         49          58
47...............................................         48          57
46...............................................         47          56
45...............................................         46          55
44...............................................         45          54
43...............................................         55          53
42...............................................         43          52
41...............................................         42          51
40...............................................         41          50
0................................................         40           0
------------------------------------------------------------------------

    (i) A State's cost-effectiveness performance level for a fiscal 
year is equal to the total amount of IV-D support collected and 
disbursed or retained, as applicable during the fiscal year, divided by 
the total amount expended during the fiscal year, as determined under 
Secs. 305.2 and 305.32 of this part. The applicable percentage with 
respect to a State's cost-effectiveness performance level can be found 
on table 3.

        Table 3.--If the Cost-Effectiveness Performance Level Is:
     (Use this table to determine the percentage level for the cost-
                   effectiveness performance measure.)
------------------------------------------------------------------------
                                                     But less   The app.
                     At least:                        than:       % is
------------------------------------------------------------------------
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
------------------------------------------------------------------------

Sec. 305.34  Payment of incentives.

    (a) Each State must report one-fourth of its estimated annual 
incentive payment on each of its four quarterly collections' reports 
for a fiscal year. When combined with the amounts claimed on each of 
the State's four quarterly expenditure reports, the portion of the 
annual estimated incentive payment as reported each quarter will be 
included in the calculation of the next quarterly grant awarded to the 
State under title IV-D of the Act.
    (b) Following the end of each fiscal year, HHS will calculate the 
State's annual incentive payment, using the actual collection and 
expenditure data and the performance data submitted by December 31st by 
the State and other States for that fiscal year. A positive or negative 
grant will 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.
    (c) Payment of incentives is contingent on a State's data being 
determined complete and reliable by Federal auditors.


Sec. 305.35  Reinvestment.

    (a) A State must expend the full amount of incentive payments 
received under this part to supplement, and not supplant, other funds 
used by the State 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 
this part.
    (b) In those States in which incentive payments are passed through 
to political subdivisions or localities, such payments must be used in 
accordance with this section.
    (c) State IV-D expenditures may not be reduced as a result of the 
receipt and reinvestment of incentive payments.

[[Page 82213]]

    (d) A base amount will be determined by subtracting the amount of 
incentive funds received and reinvested in the State IV-D program for 
fiscal year 1998 from the total amount expended by the State in the IV-
D program during the same period. Alternatively, States have an option 
of using the average amount of the previous three fiscal years (1996, 
1997, and 1998) as a base amount. This base amount of State spending 
must be maintained in future years. Incentive payments under this part 
must be used in addition to, and not in lieu of, the base amount.
    (e) Requests for approval of expending incentives on activities not 
currently eligible for funding under the IV-D program, but which would 
benefit the IV-D program, must be submitted in accordance with 
instructions issued by the Commissioner of the Office of Child Support 
Enforcement.


Sec. 305.36  Incentive phase-in.

    The incentive system under this part will be phased-in over a 
three-year period during which both the old system and the new system 
will be used to determine the amount a State will receive. For fiscal 
year 2000, a State will receive two-thirds of what it would have 
received under the incentive formula set forth in Sec. 304.12 of this 
chapter, and one-third of what it would receive under the formula set 
forth under this part. In fiscal year 2001, a State will receive one-
third of what it would have received under the incentive formula set 
forth under Sec. 304.12 of this chapter and two-thirds of what it would 
receive under the formula under this part. In fiscal year 2002, the 
formula set forth under this part will be fully implemented and would 
be used to determine all incentive amounts.


Sec. 305.40  Penalty performance measures and levels.

    (a) There are three performance measures for which States must 
achieve certain levels of performance in order to avoid being penalized 
for poor performance. These measures are the paternity establishment, 
support order establishment, and current collections measures set forth 
in Sec. 305.2 of this part. The levels the State must meet are:
    (1) The paternity establishment percentage which is required under 
section 452(g) of the Act for penalty purposes. States have the option 
of using either the IV-D paternity establishment percentage or the 
statewide paternity establishment percentage defined in Sec. 305.2 of 
this part. Table 4 shows the level of performance at which a State will 
be subject to a penalty under the paternity establishment measure.

     Table 4.--Statutory Penalty Performance Standards for Paternity
                              Establishment
 (Use this table to determine the level of performance for the paternity
            establishment measure that will incur a penalty.)
------------------------------------------------------------------------
                                Increase required     Penalty FOR FIRST
             PEP              over previous year's   FAILURE if increase
                                       PEP                 not met
------------------------------------------------------------------------
90% or more.................  None................  No Penalty.
75% to 89%..................  2%..................  1-2% TANF Funds.
50% to 74%..................  3%..................  1-2% TANF Funds.
45% to 49%..................  4%..................  1-2% TANF Funds.
40% to 44%..................  5%..................  1-2% TANF Funds.
39% or less.................  6%..................  1-2% TANF Funds.
------------------------------------------------------------------------

    (2) The support order establishment performance measure is set 
forth in Sec. 305.2 of this part. For purposes of the penalty with 
respect to this measure, there is a threshold of 40 percent, below 
which a State will be penalized unless an increase of 5 percent over 
the previous year is achieved--which will qualify it for an incentive. 
Performance in the 40 percent to 49 percent range with no significant 
increase will not be penalized but neither will it qualify for an 
incentive payment. Table 5 shows at which level of performance a State 
will incur a penalty under the child support order establishment 
measure.

         Table 5.--Performance Standards for Order Establishment
   (Use this table to determine the level of performance for the order
            establishment measure that will incur a penalty.)
------------------------------------------------------------------------
                                  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) The current collections performance measure is set forth in 
Sec. 305.2 of this part. There is a threshold of 35 percent below which 
a State will be penalized unless an increase of 5 percent over the 
previous year is achieved (that qualifies it for an incentive). 
Performance in the 35 percent to 40 percent range with no significant 
increase will not be penalized but neither will it qualify for an 
incentive payment. Table 6 shows at which level of performance the 
State will incur a penalty under the current collections measure.

[[Page 82214]]



         Table 6.--Performance Standards for Current Collections
  (Use this table to determine the level of performance for the current
             collections measure that will incur a penalty.)
------------------------------------------------------------------------
                                  Increase over
      Performance level           previous year       Incentive/Penalty
------------------------------------------------------------------------
40% or more.................  no increase over      Incentive.
                               previous year
                               required.
35% to 39%..................  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.
------------------------------------------------------------------------

    (b) The provisions listed under Sec. 305.32 of this part also apply 
to the penalty performance measures.


Sec. 305.42  Penalty phase-in.

    States are subject to the performance penalties described in 
Sec. 305.40 based on data reported for FY 2001. Data reported for FY 
2000 will be used as a base year to determine improvements in 
performance during FY 2001. There will be an automatic one-year 
corrective action period before any penalty is assessed. The penalties 
will be assessed and then suspended during the corrective action 
period.


Sec. 305.60  Types and scope of Federal audits.

    (a) OCSE will conduct audits, 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 this part;
    (b) Also, OCSE will conduct audits to determine the adequacy of 
financial management of the State IV-D program, including assessments 
of:
    (1) Whether funds to carry out the State program are being 
appropriately expended, and are properly and fully accounted for; and
    (2) Whether collections and disbursements of support payments are 
carried out correctly and are fully accounted for; and
    (c) OCSE will conduct audits for such other purposes as the 
Secretary may find necessary.
    (1) These audits include 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 and section 454(27)(A) 
and (B)(i) relating to the State Disbursement Unit) as defined in 
Sec. 305.63 of this part. Other audits will be conducted at the 
discretion of OCSE.
    (2) Audits to determine substantial compliance will be initiated 
based on substantiated evidence of a failure by the State to meet IV-D 
program requirements. Evidence, which could warrant an audit to 
determine substantial compliance, includes:
    (i) The results of two or more 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, or that those 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.
    (d) OCSE will conduct audits of the State's IV-D program through 
inspection, inquiries, observation, and confirmation and in accordance 
with standards promulgated by the Comptroller General of the United 
States in ``Government Auditing Standards.''


Sec. 305.61  Penalty for failure to meet IV-D requirements.

    (a) A State will be subject to a financial penalty and the amounts 
otherwise payable to the State under title IV-A of the Act will be 
reduced in accordance with Sec. 305.66:
    (1) If on the basis of:
    (i) Data submitted by the State or the results of an audit 
conducted under Sec. 305.60 of this part, the State's program failed to 
achieve the paternity establishment percentages, as defined in section 
452(g)(2) of the Act and Sec. 305.40 of this part, or to meet the 
support order establishment and current collections performance 
measures as set forth in Sec. 305.40 of this part; or
    (ii) The results of an audit under Sec. 305.60 of this part, the 
State did not submit complete and reliable data, as defined in 
Sec. 305.1 of the part; or
    (iii) The results of an audit under Sec. 305.60 of this part, the 
State failed to substantially comply with one or more of the 
requirements of the IV-D program, as defined in Sec. 305.63; and
    (2) With respect to the immediately succeeding 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 and unreliable.
    (b) The reductions under paragraph (c) of this section will be made 
for quarters following the end of the corrective action year and will 
continue until the end of the first quarter throughout which the State, 
as appropriate:
    (1) Has achieved the paternity establishment percentages, the order 
establishment or the current collections performance measures set forth 
in Sec. 305.40 of this part;
    (2) Is in substantial compliance with IV-D requirements as defined 
in Sec. 305.63 of this part; or
    (3) Has submitted data that are determined to be complete and 
reliable.
    (c) 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 under paragraph (a) of 
this section;
    (2) Two to three percent for the second consecutive finding; and
    (3) Not less than three percent and not more than 5 percent for the 
third or a subsequent consecutive finding.
    (d) The reduction will be made in accordance with the provisions of 
45 CFR 262.1(b)-(e) and 262.7.


Sec. 305.62  Disregard of a failure which is of a technical nature.

    A State subject to a penalty under Sec. 305.61(a)(1)(ii) or (iii) 
of this part may be determined, as appropriate, to have submitted 
adequate data or to have achieved substantial compliance with

[[Page 82215]]

one or more IV-D requirements, as defined in Sec. 305.63 of this part, 
if the Secretary determines that the incompleteness or unreliability of 
the data, or the noncompliance with one or more of the IV-D 
requirements, is 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  Standards for determining substantial compliance with IV-D 
requirements.

    For the purposes of a determination under Sec. 305.61(a)(1)(iii) of 
this part, in order to be found to be in substantial compliance with 
one or more of the IV-D requirements as a result of an audit conducted 
under Sec. 305.60 of this part, a State must meet the standards set 
forth below for each specific IV-D State plan requirement or 
requirements being audited and contained in parts 302 and 303 of this 
chapter, measured as follows:
    (a) The State must meet the requirements under the following areas:
    (1) Statewide operations, Sec. 302.10 of this chapter;
    (2) Reports and maintenance of records, Sec. 302.15(a) of this 
chapter;
    (3) Separation of cash handling and accounting functions, 
Sec. 302.20 of this chapter; and
    (4) Notice of collection of assigned support, Sec. 302.54 of this 
chapter.
    (b) The State must provide services required under the following 
areas in at least 90 percent of the cases reviewed:
    (1) Establishment of cases, Sec. 303.2(a) of this chapter; and
    (2) Case closure criteria, Sec. 303.11 of this chapter.
    (c) The State must provide services required under the following 
areas in at least 75 percent of the cases reviewed:
    (1) Collection and distribution of support payments, including: 
collection and distribution of support payments by the IV-D agency 
under Sec. 302.32(b) of this chapter; distribution of support 
collections under Sec. 302.51 of this chapter; and distribution of 
support collected in title IV-E foster care maintenance cases under 
Sec. 302.52 of this chapter;
    (2) Establishment of paternity and support orders, including: 
Establishment of a case under Sec. 303.2(b) of this chapter; services 
to individuals not receiving TANF or title IV-E foster care assistance, 
under Sec. 302.33(a)(1) through (4) of this chapter; provision of 
services in interstate IV-D cases under Sec. 303.7(a), (b) and (c)(1) 
through (6) and (c)(8) through (10) of this chapter; location of non-
custodial parents under Sec. 303.3 of this chapter; establishment of 
paternity under Sec. 303.5(a) and (f) of this chapter; guidelines for 
setting child support awards under Sec. 302.56 of this chapter; and 
establishment of support obligations under Sec. 303.4(d), (e) and (f) 
of this chapter;
    (3) Enforcement of support obligations, including, in all 
appropriate cases: establishment of a case under Sec. 303.2(b) of this 
chapter; services to individuals not receiving TANF or title IV-E 
foster care assistance, under Sec. 302.33(a)(1) through (4) of this 
chapter; provision of services in interstate IV-D cases under 
Sec. 303.7(a), (b) and (c)(1) through (6) and (c)(8) through (10) of 
this chapter; location of non-custodial parents under Sec. 303.3 of 
this chapter; enforcement of support obligations under Sec. 303.6 of 
this chapter and State laws enacted under section 466 of the Act, 
including submitting once a year all appropriate cases in accordance 
with Sec. 303.6(c)(3) of this chapter to State and Federal income tax 
refund offset; and wage withholding under Sec. 303.100 of this chapter. 
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) of this chapter; services 
to individuals not receiving TANF or title IV-E foster care assistance, 
under Sec. 302.33(a)(1) through (4) of this chapter; provision of 
services in interstate IV-D cases under Sec. 303.7(a), (b) and (c)(1) 
through (6) and (c)(8) through (10) of this chapter; location of non-
custodial parents under Sec. 303.3 of this chapter; guidelines for 
setting child support awards under Sec. 302.56 of this chapter; and 
review and adjustment of support obligations under Sec. 303.8 of this 
chapter; and
    (5) Medical support, including: establishment of a case under 
Sec. 303.2(b) of this chapter; services to individuals not receiving 
TANF or title IV-E foster care assistance, under Sec. 302.33(a)(1) 
through (4) of this chapter; provision of services in interstate IV-D 
cases under Sec. 303.7(a), (b) and (c)(1) through (6) and (c)(8) 
through (10) of this chapter; location of non-custodial parents under 
Sec. 303.3 of this chapter; securing medical support information under 
Sec. 303.30 of this chapter; and securing and enforcing medical support 
obligations under Sec. 303.31 of this chapter; and
    (6) Disbursement of support payments in accordance with the 
timeframes in section 454B of the Act and Sec. 302.32 of this chapter.
    (d) With respect to the 75 percent standard in paragraph (b) of 
this section:
    (1) Notwithstanding timeframes for establishment of cases in 
Sec. 303.2(b) of this chapter; provision of services in interstate IV-D 
cases under Sec. 303.7(a), (b) and (c)(4) through (6), (c)(8) and (9) 
of this chapter; location and support order establishment under 
Sec. 303.3(b)(3) and (5), and Sec. 303.4(d) of this chapter, if a 
support order needs to be established in a case and an order is 
established during the audit period in accordance with the State's 
guidelines for setting child support awards, the State will be 
considered to have taken appropriate action in that case for audit 
purposes.
    (2) Notwithstanding timeframes for establishment of cases in 
Sec. 303.2(b) of this chapter; provision of services in interstate IV-D 
cases under Sec. 303.7(a), (b) and (c)(4) through (6), and (c)(8) and 
(9) of this chapter; and location and review and adjustment of support 
orders contained in Sec. 303.3(b)(3) and (5), and Sec. 303.8 of this 
chapter, if a particular case has been reviewed and meets the 
conditions for adjustment under State laws and procedures and 
Sec. 303.8 of this chapter, and the order is adjusted, or a 
determination is made, as a result of a review, during the audit 
period, that an adjustment is not needed, in accordance with the 
State's guidelines for setting child support awards, the State will be 
considered to have taken appropriate action in that case for audit 
purposes.
    (3) Notwithstanding timeframes for establishment of cases in 
Sec. 303.2(b) of this chapter; provision of services in interstate IV-D 
cases under Sec. 303.7 (a), (b) and (c) (4) through (6), and (c)(8) and 
(9) of this chapter; and location and wage withholding in Sec. 303.3(b) 
(3) and (5), and Sec. 303.100 of this chapter, if wage withholding is 
appropriate in a particular case and wage withholding is implemented 
and wages are withheld during the audit period, the State will be 
considered to have taken appropriate action in that case for audit 
purposes.
    (4) Notwithstanding timeframes for establishment of cases in 
Sec. 303.2(b) of this chapter; provision of services in interstate IV-D 
cases under Sec. 303.7 (a), (b) and (c) (4) through (6), and (c)(8) and 
(9) of this chapter; and location and enforcement of support 
obligations in Sec. 303.3(b) (3) and (5), and Sec. 303.6 of this 
chapter, if wage withholding is not appropriate in a particular case, 
and the

[[Page 82216]]

State uses at least one enforcement technique available under State 
law, in addition to Federal and State income tax refund offset, which 
results in a collection received during the audit period, the State 
will be considered to have taken appropriate action in the case for 
audit purposes.
    (e) The State must meet the requirements for expedited processes 
under Sec. 303.101(b)(2)(i) and (iii), and (e) of this chapter.


Sec. 305.64  Audit procedures and State comments.

    (a) Prior to the start of the actual audit, Federal auditors will 
hold an audit entrance conference with the IV-D agency. At that 
conference, the auditors will explain how the audit will be performed 
and make any necessary arrangements.
    (b) At the conclusion of audit fieldwork, Federal auditors will 
afford the State IV-D agency an opportunity for an audit exit 
conference at which time preliminary audit findings will be discussed 
and the IV-D agency may present any additional matter it believes 
should be considered in the audit findings.
    (c) After the exit conference, Federal auditors will prepare and 
send to the IV-D agency a copy of their interim report on the results 
of the audit. Within a specified timeframe from the date the report was 
sent by certified mail, the IV-D agency may submit written comments on 
any part of the report which the IV-D agency believes is in error. The 
auditors will note such comments and incorporate any response into the 
final audit report.


Sec. 305.65  State cooperation in audit.

    (a) Each State shall make available to the Federal auditors such 
records or other supporting documentation (electronic and manual) as 
the audit staff may request, including records to support the data as 
submitted on the Federal statistical and financial reports that will be 
used to calculate the State's performance. The State shall also make 
available personnel associated with the State's IV-D program to provide 
information that the audit staff may find necessary in order to conduct 
or complete the audit.
    (b) States must provide evidence to Office that their data are 
complete and reliable as defined in Sec. 305.2 of this part.
    (c) Failure to comply with the requirements of this section with 
respect to audits conducted to determine compliance with IV-D 
requirements under Sec. 305.60 of this part, may necessitate a finding 
that the State has failed to comply with the particular criteria being 
audited.


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

    (a) If a State is found by the Secretary to be subject to a penalty 
as described in Sec. 305.61 of this part, the OCSE will notify the 
State in writing of such finding.
    (b) The notice will:
    (1) Explain the deficiency or deficiencies which result in the 
State being subject to a penalty, indicate the amount of the potential 
penalty, and give reasons for the finding; and
    (2) Specify that the penalty will be assessed in accordance with 
the provisions of 45 CFR 262.1(b) through (e) and 262.7 if the State is 
found to have failed to correct the deficiency or deficiencies cited in 
the notice during the automatic corrective action year (i.e., the 
succeeding fiscal year following the year with respect to which the 
deficiency occurred.)
    (c) The penalty under Sec. 305.61 of this part will be assessed if 
the Secretary determines that the State has not corrected the 
deficiency or deficiencies cited in the notice by the end of the 
corrective action year.
    (d) Only one corrective action period is provided to a State with 
respect to a given deficiency where consecutive findings of 
noncompliance are made with respect to that deficiency. In the case of 
a State against which the penalty is assessed and which failed to 
correct the deficiency or deficiencies cited in the notice by the end 
of the corrective action year, the penalty will be effective for any 
quarter after the end of the corrective action year and ends for the 
first full quarter throughout which the State IV-D program is 
determined to have corrected the deficiency or deficiencies cited in 
the notice.
    (e) A consecutive finding occurs only when the State does not meet 
the same criterion or criteria cited in the notice in paragraph (a) of 
this section.

[FR Doc. 00-32702 Filed 12-26-00; 8:45 am]
BILLING CODE 4184-01-P