The cost of child care often creates an employment barrier for low-income parents attempting to support their families through work. To help low-income families meet their child care needs, the Congress authorized four child care subsidy programs between 1988 and the passage of the new welfare reform legislation. Under three of these programs—AFDC/JOBS Child Care, Transitional Child Care, and At-Risk Child Care—states were entitled to receive federal matching funds based on their own expenditures. States could receive matching federal funds through an open-ended entitlement for AFDC/JOBS and Transitional Child Care expenditures but were limited in the amount of matching federal funds for expenditures on At-Risk Child Care. For the fourth program—the CCDBG—states received capped federal allocations without state spending requirements. Under the previous child care programs, federal and state program guidelines determined that AFDC clients were entitled to child care assistance if they met the necessary work, education, or training requirements or left AFDC because of employment, while non-AFDC clients received child care subsidies if funds were available. Funding from federal and state governments for these four child care programs totaled about $3.1 billion in fiscal year 1995, the most recent year for which data were available. Our previous work has suggested that child care subsidies can be an important factor in poor mothers’ decisions to find and keep jobs. Yet we found that the multiple and conflicting requirements of the four previous programs discouraged states from creating systems that gave continuous help with child care needs as families’ welfare status changed. In addition, in part because of state budget constraints, states often emphasized meeting the needs of welfare families, who were entitled to subsidies, rather than those of nonwelfare families who, although not entitled to aid, were often at risk of losing their jobs and going on welfare because of lack of assistance with child care costs. The new CCDF provides federal funds to states for child care subsidies for families who are working or preparing for work and who have incomes of up to 85 percent of a state’s median income, which is an increase from 75 percent under previous law. This consolidated program with one set of eligibility criteria primarily based on income affords greater opportunities for a state to operate an integrated child care system. Such a system, often called a seamless system, could enable all potentially eligible families—welfare clients whose welfare status may change over time as well as families who do not receive welfare benefits—to access program services under the same procedures, criteria, and requirements. Such programs could enhance parents’ abilities to achieve and maintain self-sufficiency and promote continuity of care for their children. The CCDF provided states with about $3 billion in federal funds in fiscal year 1997—$605.7 million more than was available in 1996 under previous law. In the future, the amount of federal CCDF funds available could rise from about $3.1 billion in fiscal year 1998 to about $3.7 billion in fiscal year 2002. Each state’s yearly federal allocation consists of separate discretionary, mandatory, and matching funds. A state does not have to obligate or spend any state funds to receive CCDF discretionary and mandatory funds. However, to receive matching funds—and, thus, its full CCDF allocation—a state must maintain its expenditure of state funds for child care programs at specified previous levels and spend additional state funds above those levels. As figure 1 shows, states are entitled to receive a total of about $2.2 billion in federal discretionary and mandatory funds without spending any of their own funds. An additional $723 million in federal matching funds is available for states that continue child care investments from their funds. If states obligated or spent the state funds necessary to receive their full allocation, the various CCDF funding streams would make a total of about $4.4 billion in federal and state funds available for state child care programs in fiscal year 1997. Federal Mandatory ($1,199.10) Federal Matching ($723.70) The CCDF provision that states may provide child care assistance to families whose income is as high as 85 percent of the state median income (SMI) allows states to assist families at both the lowest and more moderate income levels. Nationwide, for fiscal year 1997, 85 percent of SMI for a family of four ranged from a low of $31,033 in Arkansas (1.93 times the federal poverty level) to a high of $52,791 in Connecticut (3.29 times the federal poverty level). At the same time, the CCDF requires states to use at least 70 percent of their mandatory and matching funds to provide child care to welfare recipients, those in work activities and transitioning from welfare, and those at risk of going on welfare. It also requires that a substantial portion of discretionary funds and of the remaining 30 percent of mandatory and matching funds be used to assist nonwelfare, low-income working families. Other provisions of the new welfare law that require states to place increasing numbers of welfare families in work activities may provide incentives for states to focus child care resources on welfare families. Families now receive assistance through the new TANF block grants, which have a federally mandated 5-year lifetime limit on assistance and require that families be working if they have been receiving TANF benefits for 2 years or longer. In addition, states risk losing some of their TANF allocations unless they place specified percentages of welfare families in work activities. The new law also required that 25 percent of a state’s entire adult TANF caseload participate in work and work-related activities in fiscal year 1997, and the required rate increases by 5 percentage points annually to 50 percent in fiscal year 2002. Along with these requirements, the welfare law provides states the flexibility to transfer up to 30 percent of their TANF block grant allocations to the CCDF, or use TANF funds directly for child care programs. In addition, states may spend more state funds for child care than the amount required in order to draw down the federal funds. The new welfare reform law requires states to spend at least 4 percent of their CCDF expenditures on activities to improve the quality and availability of child care and to limit their administrative costs to 5 percent of their funds. All seven states we reviewed are expanding their child care subsidy programs to assist low-income families with their child care needs. Between fiscal years 1996 and 1997, each of the seven states increased its overall expenditures on child care subsidy programs, with most of them also increasing the number of children served under these programs. However, because of limited resources, only some of the seven states planned to serve all families meeting state eligibility requirements, while none of them planned to make child care subsidies available to all families meeting federal eligibility guidelines who might benefit from such assistance. To manage their finite child care resources, these seven states have limited access to their programs through various means, including family copayments or limited income eligibility criteria. In the near term, because of additional federal funds for child care and declining welfare caseloads, states expect to meet their welfare-related child care needs. However, they are uncertain about meeting future child care needs because of the unknown impact of increasing work participation requirements under welfare reform, the capping of federal funds, and unknown future levels of state funding. In response to welfare reform, the seven states are expanding their funding for child care programs. As table 1 shows, combined federal and state child care funding in the seven states will increase by about 24 percent, from about $1.1 billion in fiscal year 1996 to about $1.4 billion in fiscal year 1997. CCDF provisions allow states to operate their child care programs exclusively with federal funds, thereby reducing or eliminating the state funds used for child care and reducing their child care programs. Nevertheless, the seven states we reviewed intend to spend at least enough state funds to qualify for the maximum amount of federal CCDF funds available for child care. Similarly, a July 1997 survey of states by the American Public Welfare Association (APWA) indicated that 47 of the 48 states that responded were planning to spend sufficient state funds to draw down all available federal funds. Table 2 shows the amount of state funds that the seven states plan to use for child care in their states’ fiscal year 1997. States are expanding their child care programs through various combinations of federal and state funds. Texas and Louisiana will increase state funding for child care during federal fiscal year 1997 to obtain their full allocation of federal CCDF funds. California, Connecticut, and Oregon have also increased their state funding and will exceed the amount required to maximize their federal CCDF allocation. Nationwide data from the APWA survey show that 20 of 48 responding states have appropriated or plan to appropriate state funds beyond the levels necessary to obtain their full federal CCDF allocations. Some states are using the flexibility provided under welfare reform to fund child care programs. For those states that have experienced welfare caseload declines in recent years, more funds are available per family in fiscal year 1997 from TANF than were available from AFDC, Emergency Assistance, and JOBS before welfare reform because federal TANF allocations are based on previous federal expenditures in the state for these programs. While Wisconsin will expand its child care funding by 38 percent between state fiscal years 1996 and 1997, the increase will come from federal, not state, funding sources. Because of significant declines in TANF caseloads over the last few years, Wisconsin will use $13 million directly from its TANF block grant for child care. Similarly, Oregon, another state that has recently experienced substantial welfare caseload declines, plans to use $17.2 million directly from its TANF block grant for child care during state fiscal year 1997. Other states, including Texas, Connecticut, and California, also expect to use some TANF funds for child care programs in the future.