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. In the case of non-AFDC families, participation in the program is voluntary and most collections are distributed to custodial parents. 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. 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. 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. 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. 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. 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. 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. 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 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. 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. 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. 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, 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, 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. 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. 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. 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. 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. 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. 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. 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. 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). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists.

Summary: 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) states contract with private agencies to collect past-due or hard-to-collect child support payments because they are finding it increasingly difficult to service their growing child support enforcement caseloads with available staff and budget resources; (2) under the terms of most collection contracts, states pay contractors only if collections are made, and contractor payments are often a fixed percentage of collections; (3) the federal and state governments retain most of the child support payments collected for families receiving Aid to Families with Dependent Children (AFDC) benefits, while non-AFDC families receive most of the support payments collected; (4) the federal government's share of the child support collections depends on how much it contributes to the state's welfare program and how much it pays in performance incentives and child support enforcement administrative costs; and (5) a review of 11 contracts showed that the federal government's financial outcomes ranged from a net cost of about $242,000 to revenues of $1.2 million.