Child Support Enforcement: States' Experience with Private Agencies'
Collection of Support Payments (Letter Report, 10/23/96, GAO/HEHS-97-11).

Pursuant to a congressional request, GAO provided information on states'
use of private agencies for the collection of child support payments,
focusing on: (1) why states contract for these collection services; and
(2) the factors affecting the financial outcomes of collection contracts
for families and the federal and state governments.

GAO found that: (1) due to budgetary and resource constraints, states
contract with private agencies to collect past-due or hard-to-collect
child support payments; (2) the federal and state governments retain
most of the child support payments collected from noncustodial parents
whose families receive Aid to Families with Dependent Children (AFDC)
benefits; (3) non-AFDC families receive most of the support payments
collected by the government; (4) the federal government's net revenues
or costs depend on how much the government contributes to each state's
welfare program and how much is paid toward its share of child support
enforcement program administrative costs; (5) the federal government
provides performance incentives to states to improve their efficiency in
collecting AFDC and non-AFDC support payments; and (6) the types of
cases referred to private collection agencies influence the financial
outcome for both the federal and state governments.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-97-11
     TITLE:  Child Support Enforcement: States' Experience with Private
             Agencies' Collection of Support Payments
      DATE:  10/23/96
   SUBJECT:  Child support payments
             Government collections
             Federal/state relations
             Service contracts
             Debt collection
             Privatization
             Law enforcement
             Cost sharing (finance)
             Intergovernmental fiscal relations
             State-administered programs
IDENTIFIER:  AFDC
             Aid to Families with Dependent Children Program
             HHS Child Support Enforcement Program
             Idaho
             Kansas
             Maryland
             Michigan
             Missouri
             Nevada
             New Mexico
             Texas
             Virginia

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Cover
================================================================ COVER

Report to the Chairman, Committee on the Budget, House of
Representatives

October 1996

CHILD SUPPORT ENFORCEMENT -
STATES' EXPERIENCE WITH PRIVATE
AGENCIES' COLLECTION OF SUPPORT
PAYMENTS

GAO/HEHS-97-11

Privatized Child Support Collections

(106612)

Abbreviations
=============================================================== ABBREV

  AFDC - Aid to Families With Dependent Children
  CSE - Child Support Enforcement
  HHS - Department of Health and Human Services
  OCSE - Office of Child Support Enforcement
  TANF - Temporary Assistance to Needy Families

Letter
=============================================================== LETTER

B-272184

October 23, 1996

The Honorable John R.  Kasich
Chairman, Committee on the Budget
House of Representatives

Dear Mr.  Chairman:

Between 1980 and 1995, the national child support enforcement (CSE)
program's caseload more than tripled--from 5.4 million to 20.1
million cases.\1 In addition, the amount of uncollected support from
prior years increased from $8.8 billion in 1986 to $30.8 billion in
1994.  Federal responsibility for the CSE program lies with the
Department of Health and Human Services' (HHS) Office of Child
Support Enforcement (OCSE).  State child support enforcement agencies
have responsibility for administering the program at the state and
local levels.  This includes providing services to locate
noncustodial parents, establish paternity and support orders, and
collect support payments.

To service this large and growing caseload, some state CSE programs
are contracting with private organizations for child support
services, including the collection of support payments.  Collection
services are aimed at obtaining the financial child support legally
owed by noncustodial parents to their children.  Recent enactment of
welfare reform legislation--the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996--strengthens the CSE program
by providing additional tools to enhance the collection of child
support.  Among many provisions, the act requires the federal and
state governments to establish automated registries of child support
orders and a directory of new employees for quickly tracking and
locating parents owing support.

This report responds to your request for information on (1) the
reasons why states are contracting for CSE collection services and
(2) the factors affecting the financial outcomes of collection
contracts for families and the federal and state governments.  To
develop the information in this report, we (1) interviewed CSE
officials in nine states identified in our November 1995 report as
having collection contracts for which we were able to obtain cost and
collection data;\2 (2) analyzed cost and collections data for 11
collection contracts in these states in fiscal years 1994 and 1995;
and (3) analyzed state data, compiled by OCSE, on CSE caseloads and
support collections in fiscal years 1980 through 1995.  We did not
compare the contractors' performance with that of state collection
efforts because data were not available.  Appendix I contains more
detailed information on our scope and methodology.

--------------------
\1 The caseload figures presented include only those child support
cases enforced under Title IV-D of the Social Security Act--cases of
Aid to Families With Dependent Children recipients and individuals
who requested services.

\2 The nine states are Idaho, Kansas, Maryland, Michigan, Missouri,
Nevada, New Mexico, Texas, and Virginia.  See Child Support
Enforcement:  States and Localities Move to Privatized Services
(GAO/HEHS-96-43FS, Nov.  20, 1995).

   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

States are turning to private firms to collect child support payments
because they are finding it increasingly difficult to service their
growing CSE caseloads with available staff and budgetary resources.
Most commonly, states contract with the private sector for the
collection of past-due support,\3 especially that considered
hard-to-collect.  Privatizing collections has enabled states to
collect support that they would have been unable to collect without
hiring additional staff.  Under the terms of most collection
contracts, states pay contractors only if collections are made and
payments to contractors are often a fixed percentage of collections.
For example, in fiscal years 1994 and 1995, contractors in nine
states collected nearly $60 million and were paid about $6 million.

Whether or not these collections provide financial benefits for the
states and for the federal government depends on whether the families
receiving child support services had received welfare and on the
specific financial arrangements that exist between the federal
government and each state.  For families receiving Aid to Families
With Dependent Children (AFDC) benefits,\4 most of the child support
collected is retained by the government; in effect, the government is
reimbursed for AFDC payments made to families.  Families not on AFDC
get most of the support collected.  The split in collections between
the federal and state governments depends first of all on the federal
government's share of welfare payments within each state.  The more
the federal government pays in relation to the state, the more it
gets back from child support collections.  However, the net amount
actually returned to the federal government also is reduced by
performance incentives paid to the states and the share of CSE
program administrative costs paid by the federal government.  In the
11 contracts we reviewed, the federal government's financial outcomes
ranged from a net cost of about $242,000 to revenues of $1.2 million.

--------------------
\3 Any child support legally due but unpaid is considered past-due.
Of the nine states that we reviewed, some refer to contractors cases
that are 60 days or more past-due, while others refer cases that are
2 years or more past-due.

\4 AFDC provides benefits to economically needy families with
children who lack support from one or both of their parents because
of death, absence, incapacity, or unemployment.  AFDC is funded with
federal and state dollars.  In fiscal year 1995, the AFDC program
provided about $22 billion in cash benefits to nearly 14 million
adults and children.  As of July 1, 1997, the AFDC program will be
replaced by the Temporary Assistance for Needy Families (TANF)
program.

   BACKGROUND
------------------------------------------------------------ Letter :2

Concerned about the cost of AFDC, the Congress established the CSE
program in 1975 as Title IV-D of the Social Security Act to help
families obtain the financial support that noncustodial parents owe
their children and to help single-parent families achieve or maintain
economic self-sufficiency.  It was anticipated that government
welfare expenditures would be reduced by recouping AFDC benefits from
noncustodial parents' child support payments.  In addition, earlier
enforcement of child support obligations for families not receiving
AFDC would prevent such families from needing government support.

CSE services provided through the program include locating
noncustodial parents; establishing paternity and support orders;
updating support orders to be current with a noncustodial parent's
income; obtaining medical support, such as medical insurance, from
noncustodial parents; and collecting ongoing and past-due support
payments.  All AFDC recipients are required to participate in the CSE
program so that the federal and state governments may recover some
portion of the AFDC benefits paid to families.\5 In the case of
non-AFDC families, participation in the program is voluntary and most
collections are distributed to custodial parents.\6

The federal and state governments retain collections on AFDC cases as
recoupment of AFDC benefits paid to families.  More specifically, the
government retains all past-due support collected and all but $50 of
each month's current support collected on AFDC cases, up to the
amount of the family's monthly AFDC benefits.  If the current support
collected together with family income makes families ineligible for
AFDC, all current support is distributed to the family and the
monthly AFDC benefit is not paid.\7

The federal and state governments share retained collections on AFDC
cases by the same percentage as they funded AFDC benefits to families
in the state.\8 The percentage of AFDC benefit payments that is
funded by the federal government is inversely related to state per
capita income and varies from state to state, ranging from 50 percent
in states with high per capita incomes, such as California, to close
to 80 percent in a state with relatively low per capita income, such
as Mississippi.

Collections on non-AFDC cases, though generally not retained by the
federal and state governments, might indirectly benefit them.  The
receipt of these collections by non-AFDC families might preclude the
need for these families to seek AFDC benefits, thus enabling the
governments to avoid incurring the cost of paying AFDC benefits.

Under the CSE funding structure, the federal government reimburses
states for 66 percent of their CSE administrative costs for both AFDC
and non-AFDC services.\9

States are responsible for the remaining 34 percent.

The federal government also pays performance incentives to states on
the basis of their efficiency in collecting support on both AFDC and
non-AFDC cases.\10 These incentives are calculated separately for
AFDC and non-AFDC collections.  Collection efficiency is determined
by dividing AFDC and non-AFDC collections each by total
administrative costs.  Incentives are paid on the basis of the
resulting ratios and range from 6 percent of collections for ratios
less than 1.4 to 10 percent of collections for ratios of 2.8 or
higher.  In practice, all states earn at least 6 percent on AFDC and
non-AFDC collections.  The total amount of non-AFDC incentives paid,
however, is limited to 115 percent of the amount of incentives paid
for AFDC collections.  The incentive formula seeks to ensure that
states provide equitable treatment for both AFDC and non-AFDC
families.  All but two states had reached the 115-percent cap on
non-AFDC incentives in fiscal year 1994.

The federal and state governments' net financial revenues or costs
from the CSE program are determined by their respective share of (1)
AFDC collections retained, (2) CSE administrative costs incurred, and
(3) performance incentives paid or received for both AFDC and
non-AFDC collections.

Privatized child support contracts in the states cover one or more
services and, in general, either supplement state or local program
efforts or replace them with privatized offices.  As we reported in
our November 1995 report, one or more child support services had been
privatized statewide in 20 states and at the local office level in 18
states as of October 1995.  There were 21 contracts for full-service
child support operations, 41 contracts for collections and related
parent location services, 9 contracts for payment processing
services, and 8 contracts for location services only.  Most of these
services were being provided by four major contractors.

As evident from our November 1995 report, the most widely privatized
service was for the collection of support payments.  Services
provided under the 41 contracts for support payment collection are
typically those performed by debt-collection agencies.  These include
sending letters and making telephone calls to persons owing support,
often after searching various sources, such as credit bureaus,
utility companies, and telephone books, to locate parents and obtain
their current addresses and telephone numbers.

Under the terms of most collection contracts, contractors are paid
only if collections are made.  Payments to contractors are often
calculated as a percentage of collections--on both AFDC and non-AFDC
cases.  The payment rates identified for collection contracts in our
November 1995 report range from about 8 percent to 24 percent and
largely depend on factors such as contract case volume, case
collection difficulty, type of cases referred (AFDC or non-AFDC), and
the use of multiple or single contractors.  States are eligible for
federal reimbursement of 66 percent of the payments to contractors as
CSE administrative costs.

--------------------
\5 A parent who requests AFDC for his or her child is required as a
condition of eligibility to assign his or her rights to child support
to the government and to cooperate with the CSE program in
identifying and locating the noncustodial parent of the child.

\6 If there is unpaid support from prior periods during which the
family received AFDC benefits, the governments retain collections in
excess of the current monthly amounts due the non-AFDC family.

\7 If there is unpaid support from prior periods during which the
state provided AFDC benefits, the governments retain current payments
in excess of the monthly support due, up to the limit of assistance
paid to the family.

\8 As of October 1, 1996, under recently passed welfare reform
legislation, retained collections will be shared by the same
percentage as the federal and state governments were funding AFDC
benefits on September 30, 1996.

\9 The federal government also pays 90 percent of states' costs for
certain other services related to paternity establishment.  In
addition, states are reimbursed for 90 percent of their management
information systems' development costs incurred before fiscal year
1996 and 66 percent for such costs in fiscal year 1996 and
thereafter.

\10 As discussed later in this report, a new performance incentive
system will be created under the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996.

   GROWING CASELOADS AND FISCAL
   CONSTRAINTS ENCOURAGE STATES TO
   PRIVATIZE COLLECTIONS
------------------------------------------------------------ Letter :3

When states contract with private firms to provide child support
collection services for portions of their caseloads, they often do so
to help service their growing caseloads.  Some have found it
difficult to hire additional staff in an environment of staff and
budgetary constraints brought about by increased pressures to
downsize government.  Recent estimates of CSE caseloads nationwide
range from 300 cases to as many as 2,500 cases per worker.  In 1994,
states were able to collect only 55 percent of support due that year
and only 7 percent of support due from prior years.

State CSE officials said that contracting with the private sector
allows them to service portions of their caseloads without hiring
additional staff and to obtain support payments they have been unable
to collect.  For example, an official from Virginia told us that
past-due AFDC cases are sent to contractors because state staff
rarely have time to work them.  Also, an official from New Mexico
said that cases the state sends to contractors for collection
services are ones on which the state would not try to collect,
believing them difficult to collect and, therefore, not
cost-effective to pursue.

Another reason that state officials cited for privatizing was that
contracting collections allows their staff to concentrate on
paternity and order establishment, functions that the officials
believed state employees are more adept at handling than collections.
Similarly, some state officials believed that collection agencies
have greater expertise and proficiency at collections than state
employees.

States are predominantly privatizing collections of past-due support.
Of the 41 collection service contracts identified in our November
1995 report, 35 provided for collection of past-due support; 12 of
these focused strictly on collecting past-due support for AFDC cases,
while the remainder provided for collection of past-due support for
both AFDC and non-AFDC cases.  Of the remaining 6 contracts, 3
provided for collection of both current and past-due support for AFDC
and non-AFDC cases and 3 allowed individual caseworkers discretion to
decide what type of child support cases to send to collection
contractors.

All nine states we reviewed had criteria for selecting cases to refer
for private collection services that were intended to identify cases
on which support was hard-to-collect or uncollectible.  All the
criteria specified minimum periods of time for which collections had
not been made, minimum accumulated amounts of past-due support, or
both.\11 For example, in Missouri, the criteria specified that cases
with at least 6 months of support past-due that was in an amount in
excess of $500 and for which no payments had been made in a year
should be referred to the contractor.  In addition to the minimum
time and past-due support criteria, Kansas and Idaho referred only
closed AFDC cases--those involving custodial parents who were not
currently receiving AFDC, but in which the noncustodial parent owed
support to the state from prior periods when the state paid AFDC
benefits to the custodial parent.\12 An official from Kansas said
that closed AFDC cases referred for collection are ones the state had
tried unsuccessfully for several years to collect on and were not
currently receiving attention.

--------------------
\11 Cases that are not classified as hard-to-collect or uncollectible
could also meet the criteria if states had not worked on them or not
tried to collect support for a period of time.  We did not sample
referred cases to determine if the states had attempted collection
efforts.

\12 When they first began privatizing collections, Virginia and Texas
also referred only closed AFDC cases, but have since expanded to
referring all past-due support cases.

   TYPE OF CASES REFERRED AND AFDC
   AND CSE FUNDING STRUCTURES
   DETERMINE EXTENT OF COLLECTIONS
------------------------------------------------------------ Letter :4

State decisions about what types of cases to refer for privatized
collection determine whether and the extent to which families and the
federal and state governments benefit from collection contracts.
Collections on AFDC cases benefit governments directly because they
retain some of the support collected, while collections on non-AFDC
cases benefit families directly because most collected support is
distributed to them.  Whether the federal or state governments
experience net CSE revenues or costs from collection contracts is
principally affected by (1) AFDC cost-sharing ratios, (2) states'
efficiency in making collections that earn incentives under the CSE
program, and (3) the CSE administrative cost-sharing ratio.  We did
not assess whether the contracts were cost-effective compared to
increased state efforts to collect.

      GOVERNMENTS RETAIN
      COLLECTIONS ON AFDC CASES,
      WHILE FAMILIES RECEIVE
      COLLECTIONS ON NON-AFDC
      CASES
---------------------------------------------------------- Letter :4.1

The federal and state governments benefited from collections under
all 11 contracts that we analyzed because all the states involved
referred AFDC cases for collection, as shown in table 1.  On AFDC
cases, the federal and state governments retained all collections of
past-due support and all but $50 of current support collected up to
the amount of each families' monthly AFDC benefit.  Furthermore,
states earned performance incentives from the federal government on
both AFDC and non-AFDC collections.

Families also benefited from collections under five contracts that
collected on AFDC, non-AFDC, or both types of cases.  Contractors in
Maryland and Michigan collected support that was distributed to both
AFDC and non-AFDC families, while the contractor in Missouri
collected support distributed to only AFDC families and the
contractor in Texas to only non-AFDC families.

                                         Table 1

                          Financial Outcomes of 11 Child Support
                           Collection Contracts, by Number and
                                          State

                                                          Federal
                                                            share
                                                               of
                                                          retaine
                                                           d AFDC
                                                          collect
                                                           ions\b  Contra
Fiscal     Payment                Non-                    (percen      ct          Federa
year       terms\a      AFDC      AFDC    AFDC     Total       t)   costs   State       l
--------  --------  --------  --------  ------  --------  -------  ------  ------  ------
1-Idaho
-----------------------------------------------------------------------------------------
1994            21  $250,913       \\c     \\d  $250,913       71  $52,69  $87,41  $110,8
                                                                        2       8      03
1995            21   283,343       \\c     \\d   283,343       70  59,502  100,92  122,91
                                                                                7       4

2-Kansas
-----------------------------------------------------------------------------------------
1994\e          17    30,359       \\c     \\d    30,359       60  19,488   9,580   1,291
                                                                       \f
1995            17    51,789       \\c     \\d    51,789       59  33,408  16,607   1,774
                                                                      \f\

3-Maryland (covers only Prince Georges County and Baltimore City, Maryland)
-----------------------------------------------------------------------------------------
1995\g       12.85  1,945,48  $3,928,2  397,76  6,271,52       50  654,30  1,052,  238,62
                           9        77       2         8                7     559       2

4-Michigan (covers only Bay County, Michigan)
-----------------------------------------------------------------------------------------
1994            20  2,127,80  9,626,40  23,900  11,778,1       56  992,98  891,45  243,37
                           8         3                11                1       0       7
1995            20  2,145,93  10,149,6  21,525  12,317,1       57  384,07  1,098,  663,35
                           2        85                42                8     500       4

5-Michigan (covers only Midland County, Michigan)
-----------------------------------------------------------------------------------------
1994            20   988,530  6,035,90  15,650  7,040,08       56  997,94  232,32  (241,7
                                     9                 9                7       8     45)
1995            20  1,059,47  6,555,55  14,650  7,629,67       57  920,78  294,31  (155,6
                           1         0                 1                1       1     21)

6-Missouri
-----------------------------------------------------------------------------------------
1995\g         9.9   631,288        \c   9,400   640,688       60  64,005  314,28  252,99
                                                                                6       7

7-Nevada
-----------------------------------------------------------------------------------------
1995\g          20   121,501        \c     \\d   121,501       50  50,000  59,424  12,077
                                                                       \h

8-New Mexico
-----------------------------------------------------------------------------------------
1995\g,         22   123,590        \c     \\d   123,590       73  25,954  40,105  57,531
 i

9-New Mexico
-----------------------------------------------------------------------------------------
1995\g,         21   241,679       \\c      \d   241,679       73  50,753  78,425  112,50
 i                                                                                      1

10-Texas
-----------------------------------------------------------------------------------------
1994         13.24  3,133,97  1,153,24     \\d  4,287,22       64  569,24  1,333,  1,231,
                           6         7                 3                4     330     402
1995         13.24  2,342,07  1,799,64     \\d  4,141,72       63  548,36  974,99  818,71
                           3         8                 1                4       0       9

11-Virginia
-----------------------------------------------------------------------------------------
1994            20  1,334,55       \\c     \\d  1,334,55       50  254,01  753,07  327,47
                           5                           5                3       1       1
1995            20  3,139,37       \\c     \\d  3,139,37       50  494,11  1,806,  838,59
                           2                           2                3     666       2
-----------------------------------------------------------------------------------------
Notes:  Contract costs may be understated; thus, net CSE financial
revenues or costs also may be overstated or understated,
respectively.  In addition to amounts paid the contractor for
collections, Kansas and Nevada also reported other administrative
costs associated with the contract.  No other state reported such
costs.

Contract collections and costs were reported to us by the state and
local CSE offices; we calculated collections distributed to families
and retained by government, and state and federal net CSE revenues or
costs.  Because in most states past-due support on cases under
collection contracts was categorized as uncollectible or expected to
be, our net CSE revenue/cost calculations assume that collections
under these contracts were additional collections that would not have
been made but for the collection contract and contract costs were
additional costs invested in collection efforts on these cases.
States may have incurred other costs necessary to generate
collections on cases under private contract, such as costs for
paternity and order establishment, but these costs are not
determinable and are not included in our net CSE revenue/cost
calculations.

Contracts cover collections statewide unless otherwise indicated.

\a Payment terms are expressed as a percentage of
contractor-generated collections.

\b Equivalent to the percentage of AFDC costs borne in each state by
the federal government.

\c No non-AFDC collections were made under these contracts.

\d No current AFDC collections were made under these contracts.

\e Includes only 7 months of fiscal year 1994.

\f Contract costs include costs of administering the contract and
costs per case of operating the state's parent locator services in
addition to contractor payments of 17 percent of collections.

\g These contracts were not in effect in fiscal year 1994.

\h Contract costs include state computer programming expenses in
addition to contractor payments of 20 percent of collections.

\i These contracts had different contractors and covered different
geographic areas.

      GOVERNMENTS' NET CSE
      REVENUES OR COSTS AFFECTED
      BY AFDC COST-SHARING RATIOS,
      STATE COLLECTION EFFICIENCY,
      AND THE CSE ADMINISTRATIVE
      COST-SHARING RATIO
---------------------------------------------------------- Letter :4.2

As illustrated in figure 1, the net financial revenues or costs of
the CSE program to the federal government are equal to its share of
retained AFDC collections, minus performance incentives paid states,
minus its share of CSE administrative costs.  For state governments,
the computation is the same except that performance incentives are
added instead of subtracted.

   Figure 1:  Equations for the
   Federal and State Governments'
   Net CSE Revenues or Costs

   (See figure in printed
   edition.)

Note:  Collection contract costs include payments to contractors and
other associated administrative costs.

Retained collections are calculated by multiplying the federal or
state government's AFDC cost-sharing ratio by AFDC collections
reduced by the amounts passed through to families.  For example, if
AFDC collections were $100,000 and $18,000 was passed through to
families,\13 the remaining $82,000 in collections would be available
for sharing by the federal and state governments.  If the federal
government's AFDC cost share in the state was 60 percent, the federal
government's retained collections would equal 60 percent of $82,000,
or $49,200.  The state's share would be 40 percent of $82,000, or
$32,800.

The performance incentives are calculated by computing the state's
collection efficiency ratios for AFDC and non-AFDC collections to
determine the percentage of incentives earned, then multiplying the
earned percentages by the associated type of collections--most states
earn 6 percent incentives and have reached the 115-percent cap on
non-AFDC incentives.  For example, if AFDC collections were $100,000
as above, non-AFDC collections $400,000, and total administrative
expenses $125,000,\14 the collection efficiency ratio for AFDC
collections would equal 0.8 ($100,000 in collections divided by
$125,000 in administrative expenses).  Collection efficiency ratios
lower than 1.4 earn 6 percent AFDC incentives; therefore, AFDC
incentives in this example would equal 6 percent of $100,000, or
$6,000.  The non-AFDC collection efficiency ratio in this example
equals 3.2, $400,000 divided by $125,000.  This ratio would earn
incentives of 10 percent of collections.  However, since non-AFDC
incentives cannot exceed 115 percent of AFDC incentives, non-AFDC
incentives that can be received in this example would be limited to
115 percent times $6,000, or $6,900.  Thus, the federal government
would pay the states $12,900 in performance incentives on the
$500,000 in collections.

Contract costs are calculated by multiplying the contract percentage
rate to be paid the contractor for collections by total collections.
Continuing the above example, with total collections of $500,000 and
a payment rate of 25 percent, contract costs would equal $125,000.
The federal government would reimburse the states for 66 percent of
these costs, or $82,500.

Accordingly, in this example, the federal government would experience
net CSE costs of $46,200, after receiving $49,200 in retained AFDC
collections and paying $12,900 in performance incentives and $82,500
in contract costs.  The state on the other hand would experience net
CSE revenues of $3,200, after receiving $32,800 in retained AFDC
collections and $12,900 in performance incentives and paying $42,500
in costs.

Table 2 summarizes the several factors that affect the calculation of
the federal and state governments' respective shares of retained
collections, performance incentives, and contract costs.\15

                          Table 2

           Factors That Determine the Federal and
           State Governments' Net CSE Revenues or
                           Costs

Equation
variables         Factors
----------------  ----------------------------------------
Retained          -AFDC or non-AFDC collections
collections       -current or past-due support on AFDC
                  cases
                  -AFDC collections distributed to
                  families
                  -AFDC cost-sharing ratios

Performance       -AFDC and non-AFDC collections
incentives        -contract costs
                  -incentives earned (6 to 10 percent of
                  collections)
                  -115-percent cap on non-AFDC incentives

Contract costs    -total collections
                  -percent of collections to be paid
                  contractor
----------------------------------------------------------

--------------------
\13 Nationwide, current support payments passed through to families
were about 18 percent of AFDC collections in 1994.

\14 In the CSE program nationwide, total non-AFDC collections are
about three times AFDC collections and total administrative expenses
are approximately 25 percent of total collections.

\15 In our calculations of net CSE revenues or costs under the 11
contracts, all collections are assumed to be additional collections
that would not have been made but for the contract, and payments to
contractors are considered additional costs the states incurred to
generate collections.

      CONTRACTS ILLUSTRATE HOW
      VARIOUS FACTORS INTERACT TO
      INFLUENCE NET CSE REVENUES
      OR COSTS
---------------------------------------------------------- Letter :4.3

As shown in table 1, collections under 10 of the 11 contracts we
analyzed generated net CSE financial revenues for both the federal
and state governments.\16 The federal government's net revenues were
less than the states' under the seven contracts in Kansas, Maryland,
Michigan (number 4), Missouri, Nevada, Texas, and Virginia and
greater than the states' under the three contracts in Idaho and New
Mexico.  Under one contract in Michigan (number 5), the federal
government experienced net CSE costs, while the state experienced net
revenues.

The influence of case type on retained collections and of total
collections on contract costs can be seen in the outcomes under the
two contracts in Michigan.  As shown in table 1, under contract
number 5, the federal government experienced net CSE costs in part
because most of the collections were for non-AFDC support, none of
which was retained by the federal or state governments.  Furthermore,
the non-AFDC collections were about six times as great as AFDC
collections, contributing to higher contract costs but not retained
collections.  Consequently, under this contract, the federal
government's share of retained AFDC collections was not large enough
to offset its share of contract costs and performance incentives paid
to the state based on AFDC and non-AFDC collections.

In contrast, under contract number 4 in Michigan, even though
non-AFDC collections were greater than contract number 5, the federal
government experienced net CSE financial revenues.  This occurred
because AFDC collections were a larger share of total collections
than under the other contract.  In addition, contract costs as a
percentage of collections were lower on contract number 4--8 percent
and 3 percent compared with 14 percent and 12 percent of collections
on contract number 5.

The influence of whether collections are AFDC or non-AFDC is also
apparent in the outcomes of the contracts in Nevada and Kansas.
Although contract costs as a percentage of total collections in these
two states were relatively high--41 percent to 65 percent,
respectively--both the federal and state governments experienced net
revenues because all collections under the contracts were past-due
AFDC, which are fully retained by the governments.  Costs reported to
us for these two contracts included state costs for computer
programming and administering the contract in addition to the
percentage of collections paid the contractor.

Another factor influencing the financial outcomes of collection
contracts is the AFDC cost-sharing ratio, as illustrated by the
financial outcomes under the contracts in Idaho and New Mexico.
Under the three contracts in these states, the federal government's
net CSE revenues were greater than those of the states, largely
because the federal share of retained AFDC collections was relatively
high--ranging from 70 percent to 73 percent.

The influence of AFDC cost-sharing ratios on retained collections and
of AFDC or non-AFDC collections on contract costs also can be seen in
comparing the financial outcomes from the contracts in Maryland and
Texas for fiscal year 1995.  The federal government gained less net
revenue under the contract in Maryland than in Texas.  One reason for
this result is that the federal government's share of retained AFDC
collections was less in Maryland than in Texas--50 percent compared
with 64 percent.  In addition, contract costs were higher under the
contract in Maryland because total collections were greater and
non-AFDC collections (not retained) were greater than AFDC
collections (retained) by a ratio of about 3 to 2, thus contributing
to higher contract costs but not retained collections.

--------------------
\16 The fact that governments experienced net CSE revenues from
collections under most of the contracts we examined does not indicate
whether contractors' performance was more or less cost effective than
states'.  Data on the cost of states' provision of collection
services are not available for comparison with contractor
performance.

      WELFARE REFORM WILL IMPACT
      FINANCIAL OUTCOMES OF
      COLLECTION CONTRACTS FOR
      FAMILIES AND GOVERNMENT
---------------------------------------------------------- Letter :4.4

The financial outcomes of collection contracts for families and
government will be impacted by changes to be implemented under recent
welfare reform legislation--the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996.  For example, among several
such changes, after September 2000, for families that are no longer
receiving government assistance, collection of past-due support that
accrued before or after the family received such assistance generally
will be distributed first to the family.\17 Furthermore, the
pass-through to families of the first $50 of current support payments
collected will no longer be mandatory.  If states choose to continue
to pass-through the $50 and disregard it in determining the income of
families receiving assistance, the states must pay for the disregard
with state funds.

The legislation also affects the incentive payments that states
receive.  It directs the Secretary of HHS in consultation with the
states to develop a new performance incentive system to replace, in a
revenue neutral manner, the existing system.  The legislation
requires the Secretary to report on the new system to the Congress by
March 1, 1997, and makes the new system effective on October 1, 1999.

--------------------
\17 Currently, under the law regarding distribution of child support
payments, the government is generally reimbursed first for any
past-due support that is assigned to the state up to the limit of
assistance paid to the family, then families are reimbursed for any
past-due support owed them.

   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :5

In commenting on a draft of this report, HHS said that it believes
that our report should be a useful reference to states as they
consider privatizing child support functions.  HHS also provided
technical comments that we incorporated in the final report as
appropriate.

---------------------------------------------------------- Letter :5.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of the Senate Committee on Finance and the House
Subcommittee on Human Resources, Committee on Ways and Means; the
Secretary of HHS; and HHS' Assistant Secretary for Children and
Families.  We will also make copies available to others on request.

We will continue to keep you and your staff informed of our progress
in reviewing state CSE privatization initiatives.  If you or your
staff have any questions about this report, please contact David P.
Bixler, Assistant Director, at (202) 512-7201 or Catherine V.
Pardee, Senior Evaluator, at (202) 512-7237.

Sincerely yours,

Mark V.  Nadel
Associate Director, Income Security Issues

SCOPE AND METHODOLOGY
=========================================================== Appendix I

Using contract cost and collection data provided by state and local
CSE offices, we determined the financial outcomes for 11 collection
contracts by calculating (1) collections distributed to families and
retained by the federal and state governments and (2) net CSE
financial revenues or costs for the federal and state governments.
The net CSE financial revenues or costs to the governments equal the
federal or state governments' respective share of (1) retained
collections, (2) performance incentives paid by the federal
government and received by states, and (3) contract costs.  We did
not independently verify the contract cost and collection data
provided by states.

We sought data only on collection contracts listed in our November
1995 report in which payment terms were disclosed and stated as a
percentage of collections, the most common method of payment in
collection contracts.  Although we sought data on more than 11
contracts, cost and collection data available from some states were
insufficient to determine how support collected was distributed
between families and the federal and state governments.
Specifically, some states could not separately identify amounts of
collections on non-AFDC and AFDC cases and the total amount of
current AFDC support distributed to AFDC families on cases with
collections.  For these reasons, our data analysis and interviews
were limited to 11 contracts in nine states:  Idaho, Kansas,
Maryland, Michigan, Missouri, Nevada, New Mexico, Texas, and
Virginia.

Our calculation of net CSE financial revenues or costs constitutes a
comparison of additional collections with additional collection
costs.  Support collected under the 11 collection contracts was
classified by the state programs as uncollectible or expected to be
uncollectible, and we assumed that collections under the contracts
would not have been made by the states.  Payments to the contractors
represented additional costs that the states invested in collection
efforts on cases under the contract.  We did not attempt to determine
whether the states would have spent more or less to collect the
amounts using state employees or through other means.

With the exception of two states, the contract cost data that states
provided included only the payments to contractors based on a
percentage of collections.  Additional state costs associated with
the collection contracts, such as for contract negotiation and
administration, could not be determined and were not included in our
calculations.

In calculating the governments' respective share of retained
collections, we used the AFDC cost-sharing ratios for each state for
the same year as the collection contracts.  In calculating
performance incentives, we used statewide collection efficiency
ratios for the states for 1994 as reported in data compiled by OCSE.

We performed our work from November 1995 to August 1996 in accordance
with generally accepted government auditing standards.

RELATED GAO PRODUCTS
=========================================================== Appendix 0

Child Support Enforcement:  States and Localities Move to Privatized
Services (GAO/HEHS-96-43FS, Nov.  20, 1995).

Child Support Enforcement:  Opportunity to Reduce Federal and State
Costs (GAO/T-HEHS-95-181, June 13, 1995).

Child Support Enforcement:  Families Could Benefit From Stronger
Enforcement Program (GAO/HEHS-95-24, Dec.  27, 1994).

Child Support Enforcement:  Federal Efforts Have Not Kept Pace With
Expanding Program (GAO/T-HEHS-94-209, July 20, 1994).

Child Support Enforcement:  Credit Bureau Reporting Shows Promise
(GAO/HEHS-94-175, June 3, 1994).

Child Support Enforcement:  States Proceed With Immediate Wage
Withholding; More HHS Action Needed (GAO/HRD-93-99, June 15, 1993).

Child Support Assurance:  Effect of Applying State Guidelines to
Determine Fathers' Payments (GAO/HRD-93-26, Jan.  23, 1993).

Child Support Enforcement:  Timely Actions Needed to Correct System
Development Problems (GAO/IMTEC-92-46, Aug.  13, 1992).

Child Support Enforcement:  Opportunity to Defray Burgeoning Federal
and State Non-AFDC Costs (GAO/HRD-92-91, June 5, 1992).

Interstate Child Support:  Wage Withholding Not Fulfilling
Expectations (GAO/HRD-92-65BR, Feb.  25, 1992).

Interstate Child Support:  Mothers Report Less Support From
Out-of-State Fathers (GAO/HRD-92-39FS, Jan.  9, 1992).

Child Support Enforcement:  A Framework for Evaluating Costs,
Benefits, and Effects (GAO/PEMD-91-6, Mar.  5, 1991).

*** End of document. ***