United States General Accounting Office 

GAO the Budget, House of Representatives

Report to the Chairman, Committee on 

October 1996 CHILD SUPPORT


ENFORCEMENT


States’ Experience 

With Private Agencies’ 

Collection of Support 

Payments 

GAO/HEHS-97-11


United States


General Accounting Office
 GAO Washington, D.C. 20548


Health, Education, and 

Human Services Division 

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 

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. 

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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. 

Results in Brief	 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 

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). 

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. 

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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. 

Concerned about the cost of AFDC, the Congress established the CSE Background	 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 

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. 

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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. 

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. 

10As discussed later in this report, a new performance incentive system will be created under the 

Personal Responsibility and Work Opportunity Reconciliation Act of 1996. 

Page 4 GAO/HEHS-97-11 Privatized Child Support Collections 
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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. 

When states contract with private firms to provide child support collection Growing Caseloads services for portions of their caseloads, they often do so to help service

and Fiscal Constraints their growing caseloads. Some have found it difficult to hire additional 

Encourage States to	 staff in an environment of staff and budgetary constraints brought about 

by increased pressures to downsize government. Recent estimates of CSE Privatize Collections caseloads nationwide range from 300 cases to as many as 2,500 cases per 

Page 5 GAO/HEHS-97-11 Privatized Child Support Collections 
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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 

11Cases 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. 

Page 6 GAO/HEHS-97-11 Privatized Child Support Collections 
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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. 

State decisions about what types of cases to refer for privatized collection Type of Cases determine whether and the extent to which families and the federal and

Referred and AFDC state governments benefit from collection contracts. Collections on AFDC 

and CSE Funding cases benefit governments directly because they retain some of the 

support collected, while collections on non-AFDC cases benefit families Structures Determine directly because most collected support is distributed to them. Whether

Extent of Collections 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 

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. 

12When 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. 

Page 7 GAO/HEHS-97-11 Privatized Child Support Collections 
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Table 1: Financial Outcomes of 11 Child Support Collection Contracts, by Number and State 

Collections 

Fiscal year 

Retained by 

federal and 

state Distributed to 

Payment governments families 

termsa AFDC Non-AFDC AFDC Total 

Federal 

share of 

retained 

AFDC 

collectionsb 

(percent) 

Net CSE financial 

revenues (costs) Contract 

costs State Federal 

1-Idaho 

21 $250,913 c d $250,913 71 $52,692 $87,418 $110,803 

21 283,343 c d 283,343 70 59,502 100,927 122,914 

2-Kansas 

1994e 17 30,359 c d 30,359 60 19,488f 9,580 1,291 

17 51,789 c d 51,789 59 33,408f 16,607 1,774 

3-Maryland (covers only Prince Georges County and Baltimore City, Maryland) 

1995g 12.85 1,945,489 $3,928,277 397,762 6,271,528 50 654,307 1,052,559 238,622 

4-Michigan (covers only Bay County, Michigan) 

20 2,127,808 9,626,403 23,900 11,778,111 56 992,981 891,450 243,377 

20 2,145,932 10,149,685 21,525 12,317,142 57 384,078 1,098,500 663,354 

5-Michigan (covers only Midland County, Michigan) 

20 988,530 6,035,909 15,650 7,040,089 56 997,947 232,328 (241,745) 

20 1,059,471 6,555,550 14,650 7,629,671 57 920,781 294,311 (155,621) 

6-Missouri 

1995g 9.9 631,288 c 9,400 640,688 60 64,005 314,286 252,997 

7-Nevada


1995g 20 121,501 c d 121,501 50 50,000h 59,424 12,077


8-New Mexico


1995g, i 22 123,590 c d 123,590 73 25,954 40,105 57,531


9-New Mexico


1995g, i 21 241,679 c d 241,679 73 50,753 78,425 112,501


10-Texas


1994 13.24 3,133,976 1,153,247 d 4,287,223 64 569,244 1,333,330 1,231,402


1995 13.24 2,342,073 1,799,648 d 4,141,721 63 548,364 974,990 818,719


11-Virginia


1994 20 1,334,555 c d 1,334,555 50 254,013 753,071 327,471


1995 20 3,139,372 c d 3,139,372 50 494,113 1,806,666 838,592


(Table notes on next page) 

Page 8 GAO/HEHS-97-11 Privatized Child Support Collections 

1994 

1995 

1995 

1994 

1995 

1994 

1995 
B-272184 

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. 

aPayment terms are expressed as a percentage of contractor-generated collections. 

bEquivalent to the percentage of AFDC costs borne in each state by the federal government. 

cNo non-AFDC collections were made under these contracts. 

dNo current AFDC collections were made under these contracts. 

eIncludes 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. 

gThese contracts were not in effect in fiscal year 1994. 

hContract 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 As illustrated in figure 1, the net financial revenues or costs of the CSE 

Revenues or Costs program to the federal government are equal to its share of retained AFDC 

Affected by AFDC collections, minus performance incentives paid states, minus its share of 

CSE administrative costs. For state governments, the computation is the Cost-Sharing Ratios, State same except that performance incentives are added instead of subtracted. Collection Efficiency, and 

the CSE Administrative 

Cost-Sharing Ratio 

Page 9 GAO/HEHS-97-11 Privatized Child Support Collections 
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Figure 1: Equations for the Federal and 

State Governments’ Net CSE 

Revenues or Costs 

Net 

CSE Revenues 

or Costs 

Net 

CSE Revenues 

or Costs 

Share 

of Retained 

Collections 

Share 

of Retained 

Collections 

Performance 

Incentives 

Paid to States 

Performance 

Incentives 

From the 

Federal 

Government 

66% of 

Collection 

Contract Costs 

34% of 

Collection 

Contract Costs 

= 

= 

– 

+ 

– 

– 

Federal 

State 

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 

13Nationwide, current support payments passed through to families were about 18 percent of AFDC 

collections in 1994. 

14In 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. 

Page 10 GAO/HEHS-97-11 Privatized Child Support Collections 
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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 Equation variables Factors


CSE Revenues or Costs Retained collections - AFDC or non-AFDC collections 

- current or past-due support on AFDC cases 

- AFDC collections distributed to families 

- AFDC cost-sharing ratios 

Performance incentives - AFDC and non-AFDC collections 

- 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 

15In 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. 

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Contracts Illustrate How 

Various Factors Interact to 

Influence Net CSE 

Revenues or Costs 

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. 

16The 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. 

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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. 

Welfare Reform Will 

Impact Financial 

Outcomes of Collection 

Contracts for Families and 

Government 

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. 

17Currently, 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. 

Page 13 GAO/HEHS-97-11 Privatized Child Support Collections 
B-272184 

In commenting on a draft of this report, HHS said that it believes that our Agency Comments report should be a useful reference to states as they consider privatizing

and Our Evaluation child support functions. HHS also provided technical comments that we 

incorporated in the final report as appropriate. 

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


Page 14 GAO/HEHS-97-11 Privatized Child Support Collections 
Page 15 GAO/HEHS-97-11 Privatized Child Support Collections 
Contents


Letter 1


Appendix I 

Scope and 

Methodology 

Related GAO Products 

Tables Table 1: Financial Outcomes of 11 Child Support Collection 

Contracts, by Number and State 

Table 2: Factors That Determine the Federal and State 

Governments’ Net CSE Revenues or Costs 

Figure Figure 1: Equations for the Federal and State Governments’ Net 

CSE Revenues or Costs 

Abbreviations 

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


Page 16 GAO/HEHS-97-11 Privatized Child Support Collections 

18 

20 

8 

11 

10 
Page 17 GAO/HEHS-97-11 Privatized Child Support Collections 
Appendix I 


Scope and Methodology


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. 

Page 18 GAO/HEHS-97-11 Privatized Child Support Collections 
Appendix I 


Scope and Methodology


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. 

Page 19 GAO/HEHS-97-11 Privatized Child Support Collections 
Related GAO Products


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). 

(106612) Page 20 GAO/HEHS-97-11 Privatized Child Support Collections 
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