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.