The TANF and CCDF programs are two of the nation’s key federal programs for assisting needy families with children and are an important component of states’ social services networks. These two programs each consist of more than 50 distinct state-level programs—one for each state, the District of Columbia, four territories, and numerous tribal entities. Annually, the federal government makes available to each state a portion of the (1) $16.5 billion TANF block grant that was established by PRWORA and (2) $4.8 billion from CCDF for child care subsidies and other related activities. Within HHS, the Administration for Children and Families (ACF) oversees states’ TANF and CCDF programs. Congress created TANF in 1996 to replace the decades-old Aid to Families With Dependent Children (AFDC) program that entitled eligible needy families to monthly cash assistance payments. PRWORA made sweeping changes to federal welfare policy, including ending individuals’ entitlement to aid, imposing time limits on the receipt of aid, and imposing work requirements on most adults receiving aid. This federal framework gives states the flexibility to design their own programs; define who will be eligible; establish what benefits and services will be available; and develop their own strategies for achieving program goals, including how to help recipients move into the workforce. PRWORA provides states substantial authority to use TANF funds in any way that is reasonably calculated to meet the goals of the program. As specified by PRWORA, TANF’s goals include ending the dependence of needy families on government benefits by promoting job preparation, work, and marriage; preventing and reducing the incidence of nonmarital pregnancies; and encouraging two-parent families. These broad goals represent a significantly broader scope than AFDC. PRWORA also expanded the scope of services that could potentially be contracted out, such as determining eligibility for TANF, which had traditionally been done by government employees. In addition to these programmatic changes, PRWORA dramatically changed the fiscal structure of the program and shifted significant fiscal responsibility for the program to states. Each year, the federal government makes a fixed amount of TANF funds available to each state, and a state may reserve some of these funds for use in the future. This represents a significant departure from past policy, under which the amount of federal funds received was linked to the size of each state’s welfare caseload. To receive their federal TANF funds, states must spend a specified amount of their own funds each year, referred to as state maintenance of effort. Along with granting states significant flexibility, PRWORA redefined HHS’s role in administration of the nation’s welfare system, limiting its regulatory and enforcement authority and reducing its staff level for administering TANF. Specifically, the law states: “No officer or employee of the Federal Government may regulate the conduct of States under this part or enforce any provision of this part, except to the extent expressly provided in this part.” The law also eliminated the quality control system that HHS used to measure payment accuracy of monthly welfare payments under AFDC. Under that system, states were required to statistically select a sample of cash assistance cases and determine the level of erroneous (improper) payments; if a state’s improper payment rate exceeded the targeted error rate, it faced a financial penalty. HHS states in the preamble to TANF regulations that PRWORA reflects the principle that the federal government should focus less attention on eligibility determinations and place more emphasis on program results. To that end, PRWORA gave HHS new responsibilities for tracking state performance, including a set of financial penalties for states that fail to comply with program requirements and a bonus program for states that perform well in meeting certain program goals. Several of these penalties reflect new expectations for states to assist recipients in making the transition to employment. For example, states face financial penalties if they do not place a minimum specified percentage of adult TANF recipients in work or work-related activities each year and if they provide federal TANF funds to families who have reached the TANF time limits on receipt of aid—60 months over a lifetime. The bonus program was to reward states for high performance toward achieving program goals, such as moving welfare recipients into jobs and reducing out-of-wedlock births. At the same time, Congress, through PRWORA, emphasized the importance of sound fiscal management for state TANF programs. One part of the new penalty system focused on penalties for states that use funds in violation of PRWORA, as identified through audits conducted under the Single Audit Act. In addition, the law stated that states are to include in the TANF plans that they file with HHS a certification that procedures are in place to combat fraud and abuse, although the law does not require the states to describe these procedures. Moreover, states are required to continue participating in the Income and Eligibility Verification System (IEVS) that provides information from various sources to help verify eligibility information. As state TANF programs have evolved since implementation, the nation’s welfare system now looks quite different than it did under AFDC, posing some challenges for defining and measuring improper payments. As our previous work has shown, welfare agencies now operate more like job centers, taking steps to move recipients into work and providing aid to help families avoid welfare. States now spend most TANF funds on a broad array of services for families rather than on monthly cash assistance, as shown in figure 1. These services include employment services, case management services, support services such as child care and transportation, and pregnancy prevention among others. In addition, states offer various services to other low-income families not receiving welfare, including child care and employment and training services. In addition to the broad range of services provided by TANF programs, more entities receive and administer TANF program funds than before, posing additional challenges for states in managing improper payments. In many states, county or local governments receive TANF funds and are the key TANF administrative agencies, sometimes establishing their own policies and programs. States may also distribute TANF funds to several different state agencies to provide services. States and localities also may contract with a multitude of nonprofit and for-profit organizations. In our 2002 report on TANF contracting, our survey to states identified more than 5,000 TANF contracts with nongovernmental organizations at the state level and at least 1,500 contracts at the local level. We also found that in 2001, about a quarter of states contracted out 20 percent or more of TANF funds expended for services in fiscal year 2000, ranging up to 74 percent. Figure 2 shows the broad range of services for which TANF payments are made and the entities involved in the TANF payment processes. PRWORA also combined several existing child care programs into one program designed to provide states with more flexible funding for subsidizing the child care needs of low-income families who are working or preparing for work. CCDF provides states funds to subsidize child care assistance for families with incomes up to 85 percent of state median income who are working or in education or training. Under CCDF rules, eligible participants are to be allowed parental choice of child care providers, including center-based, home-based, or relative care. In addition, families are required to contribute to the cost of care, in the form of a copayment, unless states exempt families below the poverty level from this requirement. CCDF rules also provide some guidance on establishing reimbursement rates for child care providers and requires that a specified portion of funds be set aside for activities designed to enhance child care quality. Within this framework, states establish their own income eligibility criteria and determine how the program will be administered. Like TANF, CCDF is administered through multiple agencies, including county and local governments and nonproft and for-profit organizations. This decentralized system can create challenges for determining what constitutes an improper payment. Figure 3 illustrates the steps often involved in making child care payments. In recent years, federal and state CCDF expenditures have increased more than 100 percent—from $4.0 billion in 1997 to $8.6 billion in 2002, the most recent year for which data are available. At the federal level, ACF’s Office of Family Assistance (OFA) is responsible for overseeing TANF, and the Child Care Bureau is responsible for overseeing CCDF. Staff in the 10 ACF regional offices and the Office of Financial Services also assist in overseeing aspects of state TANF and CCDF programs. Figure 4 shows ACF’s organizational structure. OFA is responsible for overseeing TANF and coordinating HHS efforts to assist states in managing improper payments in the TANF program. Specifically, the office is responsible for (1) developing and implementing strategies to assist grantees in implementing and designing programs to meet TANF purposes; (2) ensuring compliance with federal laws and regulations; (3) implementing national policy and developing regulations to implement new laws; (4) developing regulations to implement data collection requirements; (5) implementing and maintaining systems for the collection and analysis of data, including participation rate information, recipient characteristics, financial and administrative data, state expenditures on families, work activities of noncustodial parents, transitional services, and data used in the assessment of state performance; and (6) identifying best practices and sharing information through conferences, publications, and other means. The Child Care Bureau is responsible for overseeing CCDF programs and coordinating HHS efforts to assist states in managing improper payments in the CCDF program.