Federal funds for subsidizing child care for low-income families, particularly those on welfare, are primarily provided to the states through two block grants—CCDF and TANF. Within certain guidelines established by the block grants, states have discretion in deciding how these funds will support child care, including who will be eligible, the payment mechanism to be used to pay providers, and the portion of TANF funds to be used for child care versus other eligible support services. The cost of child care can create a barrier to employment, especially for low-income families. To help these families meet their child care needs, PRWORA created CCDF by repealing three former child care programs and modifying a fourth one; it also included in CCDF the target populations of the programs it replaced. Between fiscal years 1997 and 2002, CCDF will provide states with a total of $20 billion in federal funds—ranging from $2.9 billion in fiscal year 1997 to $3.7 billion in fiscal year 2002—to subsidize child care for both welfare and nonwelfare families. 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 (MOE), and spend additional state funds above that level. Further, states may be spending more of their own funds on child care than the amount actually accounted for under CCDF’s MOE and match requirements. States must also spend at least 4 percent of their total CCDF expenditures for a given fiscal year on activities intended to improve the quality and availability of child care. These activities can include but are not limited to improving consumer education about child care, providing grants or loans to providers to assist them in meeting applicable child care standards, giving financial assistance to child care resource and referral agencies, improving monitoring and enforcement of child care standards, improving provider compensation, and providing training and technical assistance to providers. In addition to the 4 percent states must spend improving the quality and availability of child care, the Congress specifically earmarked money in CCDF’s discretionary fund in fiscal years 1998 and 1999 for certain activities and age groups: $19 million for school- age care and resource and referral services, and $223 million for quality- related activities. States may provide child care assistance to families whose income is as high as 85 percent of the SMI, thus including families at both the lowest and more moderate income levels. States may also establish a maximum income eligibility below this level. Looking across all states, 85 percent of SMI for a family of four in calendar year 1998—the most recent year for which data are available—ranged from a low of $36,753 per year to a high of $64,203 per year. In addition to establishing the maximum income level at which a family is eligible for a child care subsidy, the states also determine which groups of low-income families within that income eligibility limit will have priority over others in receiving subsidies, such as a family with a special needs child. Families who receive child care subsidies under CCDF must be offered the choice of using a voucher, which is a certificate assuring a provider that the state will pay a portion of the child care fee, or using a provider who has a contract with the state to provide care to subsidized families. Vouchers can be used to pay any type of provider, including those providers who may also have a contract with the state. Information about a state’s use of vouchers and contracts, the income level of families to whom the state will provide assistance, and its priorities for funding those families is contained in a state’s CCDF plan, which must be submitted and approved by HHS every 2 years. TANF, which is currently authorized through fiscal year 2002, ended the individual entitlement to welfare benefits afforded under the Aid to Families with Dependent Children (AFDC) established by the Social Security Act in 1935. In its place, PRWORA created TANF block grants, which provide an entitlement to eligible states of $16.5 billion annually. Federal funding under the TANF grant is fixed, and states are required to maintain a significant portion of their own historic financial commitment to their welfare programs, discussed earlier as a state’s MOE, as a condition of receiving their TANF grant. These two sources of funds—federal funds and state funds for MOE—represent the bulk of resources available to states as they design, finance, and implement their low-income assistance programs under TANF. TANF includes provisions to ensure that cash assistance to eligible families is temporary and that those receiving TANF assistance either work or prepare to work. To support state efforts in helping welfare families make this transition to work, PRWORA allowed states wide discretion over how to design their TANF programs. Instead of prescribing in detail how programs are to be structured, the new law authorizes states to use their block grants in any manner reasonably calculated to accomplish the purposes of TANF. For example, states are allowed to set their own criteria for defining who will be eligible and what assistance and services will be available. These services can include cash assistance, work-related activities such as job search assistance, substance abuse counseling, transportation assistance, and child care. In addition, states can choose to use their TANF money to help a broader population of low-income families through programs that, for example, provide refundable tax credits or job retention and advancement services. To ensure the temporary nature of TANF assistance and provide an impetus for moving recipients toward self- reliance, the law established a 5-year lifetime limit on assistance to families and required that states ensure that specified levels of recipients participate in work activities. States can incur financial penalties if these levels are not met. These levels started at 25 percent of a state’s welfare caseload for fiscal year 1997 and will increase to 50 percent in fiscal year 2002. In addition to giving states more flexibility to design their welfare programs, TANF also shifted much of the fiscal responsibility to the states. In doing so, the importance of state fiscal planning was underscored as states faced greater choices about how to allocate TANF dollars among the competing needs and priorities of various low-income programs that help families find and keep jobs and prevent them from returning to welfare. Under AFDC, the federal government and the states shared any increased welfare costs because welfare benefits were a matched, open-ended entitlement to the states. But under TANF, states receive a fixed amount of funds regardless of any changes in state spending or the number of people the program serves. Because of a combination of declining welfare caseloads, higher federal grant levels than would have been provided under AFDC, and MOE requirements that states maintain a specified level of welfare spending at 75 to 80 percent of their historical spending on welfare, states currently have more total budgetary resources available for their welfare programs than they would have had under AFDC. These additional resources presented states with numerous decisions to make about the families they would serve, the mix of support services they would offer and the extent to which these services would be funded, and the amount of TANF funds they would reserve for use in later years, particularly in the event of an economic downturn when welfare costs could rise. In addition, PRWORA allows states the flexibility to use TANF funds directly from the block grant to pay for child care or transfer it to other block grants. States may transfer up to 30 percent of their TANF funds to CCDF or 10 percent to the Social Services Block Grant (SSBG), which can also be used by states to fund child care and other social services, depending on their child care needs and priorities. Between fiscal years 1997 and 1999, states’ reported expenditures for child care from CCDF, TANF, and their own funds increased annually. For example, CCDF expenditures almost doubled in this time period—growing from $2.5 billion to $4.5 billion—while funds spent from the TANF block grant for child care grew from $14 million to almost $600 million in these 3 years. However, while states spent increased amounts from these sources and their own funds, they still had unspent TANF and CCDF balances at the end of fiscal year 1999. Nationwide, states spent increasingly larger amounts of their CCDF, TANF, and state money on child care between fiscal years 1997 and 1999—a total of more than $16 billion, as shown in table 1. CCDF expenditures made up almost two-thirds of the total amount spent on child care from these sources. These expenditures included funds that states transferred from TANF into CCDF, which more than tripled in 3 years—increasing from $483 million in fiscal year 1997 to around $1.7 billion in fiscal year 1999. (See app. I, tables 3 through 5, for more detailed information on TANF transfers for fiscal years 1997 through 1999 in current dollars.) The CCDF expenditure figures also include federal matching dollars for which states must spend a specified amount of state funds in order to receive their maximum CCDF matching allocation. Forty-seven states received the maximum fiscal year 1997 CCDF federal match while 49 received the maximum fiscal year 1998 match. By the end of fiscal year 1999, almost two-thirds of the states had already spent the required amount of state funds to receive their full fiscal year 1999 federal match even though they had until the end of fiscal year 2000 to do so. As with TANF transfers, states reported spending increasingly more federal TANF dollars on child care directly from the TANF block grant for fiscal years 1997 through 1999.