Welfare reform legislation, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), eliminated the federal entitlement to cash assistance under the Aid to Families with Dependent Children (AFDC) program and replaced it with a program of block grants to states known as the Temporary Assistance for Needy Families (TANF) program. At the same time, Congress amended the Child Care and Development Block Grant Act of 1990, and required HHS to consolidate federal child care funds and administer them as a unified program. HHS named this program the Child Care and Development Fund. The intent of CCDF is to support state-administered child care programs for both families receiving public assistance and low-income working families not receiving public assistance. Since welfare reform, federal expenditures for CCDF have increased significantly from $2.1 billion in fiscal year 1996 to $5.3 billion in fiscal year 2000. In fiscal year 2002, about $4.8 billion was appropriated for CCDF. States also contributed to CCDF, and their funding for this program has nearly doubled from about $1.0 billion in fiscal year 1996 to $1.9 billion in fiscal year 2000. The average number of children who received subsidized child care each month also increased from about 1.2 million in fiscal year 1996 to 1.7 million in fiscal year 2000. States receive CCDF funds from potentially four funding streams. Each state’s annual federal allocation consists of separate discretionary, mandatory, and matching funds. A state does not have to obligate or spend any state funds to receive the discretionary and mandatory funds.However, to receive federal matching funds—and thus its full CCDF allocation—a state must maintain its program spending at a specified level, referred to as a state’s maintenance of effort, and spend additional state funds above that level. In addition to consolidating federal funds, PRWORA significantly changed federal child care policy by giving states maximum flexibility to design child care programs for low-income families. States have broad discretion to establish subsidy amounts, family co-payments, and eligibility limits. States set maximum reimbursement rates that consist of two parts—the state subsidy paid directly to a provider and the co-payment the family pays to a provider. These co-payments vary according to family income and size, and the amount of the state subsidy declines as the family co- payment rises. Co-payments can be waived for any eligible family whose income is at or below the federal poverty threshold, including those in the TANF program, and for children in protective services on a case-by-case basis. As of March 2001, 23 states waived co-payments for TANF families engaged in TANF or other work activities. According to federal law, states can set income eligibility limits up to 85 percent of the state median income (in 2000, this limit ranged from a low of $24,694 for West Virginia households to a high of $43,941 in Maryland), but most states set eligibility limits below that level. In the three states we visited, Oregon reported setting its income eligibility limit at 70 percent of the state median income, Maryland at 50 percent, and Illinois at 43 percent. States are not required to provide assistance to all families that fall within state-established eligibility guidelines, but they are required to give priority to children in very low-income families and to children with special needs. The program serves children up to age 13, but HHS allows states to provide child care services to children with special needs up to age 19. CCDF subsidies can be used to obtain child care from various types of providers such as child care centers and family homes. Child care centers, group homes, and family homes are most often regulated but some are legally exempt depending on the state. Table 1 provides descriptions of the types of child care providers generally used by subsidized families. States must provide subsidies through vouchers, but some states also made child care available from providers who have contracts with them.Two of the three states we visited made this option available to subsidized families. Illinois had contracts with some child care centers to serve children of subsidized families. As of June 2000, Illinois reported that contracted facilities served about 12 percent of the total number of children in the state’s subsidized child care program. Oregon contracted with child care providers primarily to serve children from targeted, at-risk families. Periodically, states adjust their reimbursement rates, co-payment levels, and income eligibility limits. These policy decisions can affect families’ access to child care providers. For example, if states set reimbursement rates too low, some providers might choose not to serve children of subsidized families. On the other hand, if states set reimbursement rates too high, some providers might replace children of nonsubsidized families with those of subsidized families. Co-payment levels are also important. For example, in Oregon, one study indicated that, in some cases, a family’s economic position worsened as a parent moved from a job paying $6 per hour to one paying $8 per hour because increases in the family’s earnings were more than offset by decreases in child care and other subsidies. HHS is charged with providing oversight, technical assistance and guidance to states, which have responsibility for administering CCDF programs. HHS requires states to submit biennial state CCDF plans that include, among other things, certification that within the past 2 years they performed a market rate survey. A market rate survey is a tool to be used by states to obtain information about providers, including the fees they charge, the type of child care they provide, the age groups of the children they serve, and where they are located. Although states are required to conduct market rate surveys every 2 years and consider the results, they are not compelled to use them in setting child care reimbursement rates. States are also required to certify that they met the equal access provision, a part of the federal law that requires states to set rates that are sufficient to provide access to child care services for eligible families that are comparable to those of families that do not receive subsidies. While HHS reviews and approves CCDF state plans, states have substantial discretion in determining the basis on which they will certify to HHS that they meet the equal access provision. HHS has authority to sanction states if they do not substantially comply with the law, but HHS officials told us that these sanctions have never been used. HHS provided guidance indicating that co-payment levels at no more than 10 percent of family income could be considered affordable and reimbursement rates set at least at the 75th percentile of providers’ fees can be presumed to provide equal access. In this case, the maximum rate paid by the state and the family would be equal to or greater than the fees charged by 75 percent of providers or for 75 percent of providers’ slots. However, states are free to set co-payments and reimbursement rates at other levels. States used the results of market rate surveys to help set child care reimbursement rates, but also reported considering other factors such as budgets in rate setting. Consistent with HHS guidance, 40 states reported that the survey results were an important consideration when setting reimbursement rates. However, 10 states did not use their most recent surveys in setting current reimbursement rates. States establish different rate schedules for geographical areas and different age groups of children. To establish their rates, states often set maximum reimbursement rates at a percentile of the distribution of providers’ fees. However, in setting their child care reimbursement rates, many states considered their budgets and other policy goals. Thirty-two states reported that their current budgets were of great importance when setting reimbursement rates. Other factors that states considered important in setting their rates included achieving policy goals such as expanding eligibility, improving child care quality, and increasing the supply of certain types of child care providers. Most states reported using their current market rate survey results to help set reimbursement rates; some states reported that they referred to less current survey information. Forty states reported that the results of their most recent market rate survey were very important in determining their current child care reimbursement rates. However, while 10 states reported that they had completed current market rate surveys as required by regulations, they used less current market rate survey results to set their rates. The market rate surveys they used were not completed within 2 years of their approved fiscal year 2001 CCDF plans. Of these, 3 states (Michigan, North Dakota, and West Virginia) considered 1999 market rate survey results, 5 states (Arizona, District of Columbia, Illinois, Iowa, and North Carolina) reported considering results from 1998 market rate surveys, 1 state (New Hampshire) considered results from 1994, and 1 state (Missouri) considered market rate survey results from 1991 and 1996. States reported that their market rate survey results primarily included data on providers’ fees from regulated child care center, family home, and group home providers. For example, 48 states surveyed regulated child care centers and 47 states surveyed regulated family home providers. In contrast, 24 states surveyed unregulated providers. Of these, 15 states reported that they obtained information about child care fees from relatives and/or other unregulated providers, such as religious-affiliated child care providers. (See fig. 2 for the types of providers that states indicated were included in their market rate surveys.) After an examination of those fees, state officials decided whether and how to divide the state into regions based on variations in providers’ fees. State officials may use a variety of methods for dividing the state into regions. As shown in figure 3, 18 states reported setting rates for multicounty regions, and 16 states set rates based on political boundaries, such as counties or municipalities. Illinois and Maryland, two of the states we visited, established reimbursement rate schedules that combined areas into multicounty regions. These regions generally consisted of counties that were not necessarily contiguous to one another but were designed to capture providers who charged similar fees.