[Federal Register Volume 64, Number 69 (Monday, April 12, 1999)]
[Rules and Regulations]
[Pages 17720-17931]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8000]



[[Page 17719]]

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Part II





Department of Health and Human Services





_______________________________________________________________________



Administration for Children and Families



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45 CFR Part 260, et al.



Temporary Assistance for Needy Families Program (TANF); Final Rule

  Federal Register / Vol. 64, No. 69 / Monday, April 12, 1999 / Rules 
and Regulations  

[[Page 17720]]



DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Parts 260, 261, 262, 263, 264, and 265

RIN 0970-AB77


Temporary Assistance for Needy Families Program (TANF)

AGENCY: Administration for Children and Families, HHS.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Administration for Children and Families (ACF) issues 
regulations governing key provisions of the new welfare block grant 
program enacted in 1996--the Temporary Assistance for Needy Families, 
or TANF, program. It replaces the national welfare program known as Aid 
to Families with Dependent Children (AFDC) and the related programs 
known as the Job Opportunities and Basic Skills Training Program (JOBS) 
and the Emergency Assistance (EA) program.
    These rules reflect new Federal, State, and Tribal relationships in 
the administration of welfare programs; a new focus on moving 
recipients into work; and a new emphasis on program information, 
measurement, and performance. They also reflect the Administration's 
commitment to regulatory reform.

EFFECTIVE DATES: These regulations are effective October 1, 1999.

FOR FURTHER INFORMATION CONTACT: Mack Storrs, Director, Division of 
Self-Sufficiency Programs, Office of Family Assistance, Administration 
for Children and Families (ACF), at 202-401-9289, or Ann Burek, Family 
Assistance Program Specialist, at 202-401-4528.
    Deaf and hearing-impaired individuals may call the Federal Dual 
Party Relay Service at 1-800-877-8339 between 8 a.m. and 7 p.m. Eastern 
time.

SUPPLEMENTARY INFORMATION: On November 20, 1997, the Administration for 
Children and Families published a Notice of Proposed Rulemaking that 
covered key provisions of the new welfare block grant program, known as 
Temporary Assistance for Needy Families, or TANF. We provided an 
extended 90-day comment period, which ended on February 18, 1998. We 
offered commenters the opportunity to submit comments by mail or 
electronically via our Web site. A number of commenters took advantage 
of the electronic access, but a significant portion of the comments we 
received electronically duplicated comments we received in the mail.
    Eight major national organizations (three associations representing 
State groups, three advocacy groups, and two labor organizations) and 
one Congressman requested the opportunity to present their comments to 
us orally. We granted their requests, holding four meetings in 
Washington in June, July, and August 1998. The national organizations 
focused largely on those issues that they had identified as priority 
concerns in their written statements. In a few instances, they modified 
their suggestions, endorsed comments that had been offered by other 
commenters, or provided clarifying information. The Congressman 
expressed his interest in: (1) Providing States more flexibility in 
operating their programs; (2) collecting data that would be adequate 
for the effective enforcement and oversight of TANF; and (3) placing 
sufficient emphasis on ensuring that States met their maintenance-of-
effort (MOE) requirements and did not supplant existing State spending.
    The discussions did not introduce any new policy concerns or 
proposals. They are part of the public record, and individuals 
interested in reviewing notes on these meetings have the same access to 
that information as they do to other comments that were submitted in 
written form.
    Before discussing the comments in more detail, we want to point out 
that we changed the part and section references for this TANF rule. One 
commenter noted that our use of parts 270 through 275 for the TANF 
rules would likely cause confusion because the major Food Stamp rules 
used similar section numbers. In response to that comment, we have 
shifted all our part and section numbers down by ten; thus, for 
example, the provisions that appeared in part 270 of the NPRM appear in 
part 260 of this final rule.
    To help you make your way through these changes, we include both 
NPRM and final-rule section references in this preamble discussion.

Comment Overview

    After accounting for the duplications, we received nearly 270 
comments on the NPRM. The largest number of comments came from State 
welfare agencies and social services departments, followed by advocacy 
groups and other State-level organizations. We also heard from a 
significant number of Governors, national associations, local 
government offices, Federal legislators, community-based organizations, 
State legislators, and the general public. We received a lesser number 
of comments from other Federal agencies and members of the educational, 
business, child care, research, Tribal, and organized labor 
communities.
    The only policy area that generated a significant number of 
``single-issue'' comments was domestic violence. We received about 25 
comments from women's, legal, and other groups that focused exclusively 
on the domestic violence provisions in the NPRM. We also received a 
handful of comments, mostly from the general public, that focused 
exclusively on the role of education in promoting self-sufficiency.
    A substantial majority of the comments that addressed our 
regulatory framework were positive. Commenters generally seemed to 
agree that it was helpful for our rules to provide specific guidance on 
how we intended to implement the penalty process and make penalty 
determinations. In fact, based on the detailed questions and comments 
we received, one could conclude that some commenters were looking for 
an expansion on the amount of detail contained in the rule.
    On the positive side, in addition to support of particular 
policies, commenters indicated that the rules provided some helpful 
clarifications of the statute, expressed appreciation for our 
regulatory development process, noted ``positive steps'' we had taken, 
and noted numerous places where our proposed rules appropriately 
reflected the statute.
    In general, however, many commenters had mixed views on the policy 
proposals on the NPRM, supporting some, but opposing others. For 
example, with respect to the domestic violence policies, most 
commenters supported the general approach and commended our 
encouragement of State implementation of the Family Violence Option. 
However, most also expressed a number of concerns about specific 
provisions in the proposed rules.
    Likewise, many of the States, advocates, and national organizations 
supported the proposed rule in a number of areas (such as the 
flexibility afforded States to define work activities and the reduction 
in penalty liability for States that failed only the two-parent 
participation rate), but expressed objections to our approach on other 
major issues.
    The policy issues that generated the most consistent negative 
reactions were separate State programs, child-only cases, and 
continuation of waivers. Commenters expressed major concerns that: the 
proposed rules would stifle

[[Page 17721]]

innovation; they were overly prescriptive and burdensome; they 
undermined the partnership between State and Federal governments and 
contravened Congressional intent; we presumed State guilt without 
evidence; and these policies could ultimately harm recipients.
    We also received numerous negative comments from States and State 
representatives on the proposed data collection and reporting 
requirements. However, these same requirements generated a largely 
favorable reaction from other types of commenters.
    In the preamble to the proposed rule, we discussed our general 
approach on the major cross-cutting issues up front, prior to the 
section-by-section analysis. Many of the commenters organized their 
comments in the same way, addressing the issues thematically instead of 
following the specific structure of the rule. This preamble follows 
that same basic format, presenting a separate discussion of our 
policies on the major cross-cutting issues (separate State programs, 
child-only cases, waiver continuations, and domestic violence) before 
proceeding to the section-by-section analysis.
    We present most of the discussion of data collection and reporting 
issues in two places--the preamble for part 265 and the preamble 
discussion entitled the ``Paperwork Reduction Act'' in the ``Regulatory 
Impact Analyses'' section of the preamble.
    We believe that structuring the preamble this way enables us to 
provide a clearer framework for the specific regulatory provisions and 
to represent the commenters' concerns most accurately.
    For several reasons, we decided not to attempt precise numerical 
counts of the comments received. Based on the nature of the comments, 
we did not believe that the number of comments was a particularly 
meaningful statistic. First, because several of the comments had 
multiple signatories and some commenters provided general endorsements 
of the comments of other parties, we would have had to create somewhat 
arbitrary rules for developing counts. Also, commenters presented their 
views of the many overlapping and cross-cutting issues in many 
different ways; for example, some spoke generically about the major 
provisions of the rule, while others provided very specific suggestions 
about individual words and phrases. This diversity in the approach of 
commenters also hampered our ability to create meaningful counts. 
Nevertheless, we are confident that this preamble accurately conveys 
the scope and nature of the comments received.
    We appreciate the time and attention that commenters gave to 
reviewing the NPRM and preparing their comments. As a result of their 
efforts, we have been able to resolve certain technical problems, 
incorporate numerous regulatory clarifications, and consider some 
alternative regulatory approaches.

Table of Contents

I. Overview: The Personal Responsibility and Work Opportunity 
Reconciliation Act
II. Regulatory Framework
    A. Pre-NPRM Process
    B. Related Regulations under Development
    C. Statutory Context
    D. Regulatory Reform
    E. Scope of This Rulemaking
    F. Applicability of the Rules
III. Principles Governing Regulatory Development
    A. Restrictions on Our Regulatory Authority
    B. State Flexibility
    C. Accountability for Meeting Program Requirements and Goals
IV. Discussion of Cross-Cutting Issues
    A. Separate State Programs
    B. Waivers
    C. Child-only Cases
    D. Treatment of Domestic Violence Victims
    E. Recipient and Workplace Protections
    F. Comments Beyond the Scope of the Rulemaking
    G. Additional Cross-Cutting Issues
V. Part 260--General Temporary Assistance for Needy Families (TANF) 
Provisions
VI. Part 261--Ensuring that Recipients Work
VII. Part 262--Accountability Provisions--General
VIII. Part 263--Expenditures of State and Federal TANF Funds
IX. Part 264--Other Accountability Provisions
X. Part 265--Data Collection and Reporting Requirements
XI. Regulatory Impact Analyses
    A. Executive Order 12866
    B. Regulatory Flexibility Analysis
    C. Assessment of the Impact on Family Well-Being
    D. Paperwork Reduction Act
    E. Unfunded Mandates Reform Act of 1995

I. Overview: The Personal Responsibility and Work Opportunity 
Reconciliation Act

    On August 22, 1996, President Clinton signed ``The Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996''--or 
PRWORA--into law. This bipartisan welfare plan built upon previous 
Administration and State efforts to reform welfare. Even before PRWORA 
was enacted, many States were well on their way to changing their 
welfare programs into jobs programs. By granting Federal waivers, the 
Administration allowed 43 States--more than all previous 
Administrations combined--to require work, time-limit assistance, make 
work pay, improve child support enforcement, and encourage parental 
responsibility. The vast majority of States have chosen to continue or 
build upon these welfare demonstration projects.
    PRWORA is dramatically changing the nation's welfare system into 
one that requires work in exchange for time-limited assistance. The law 
contains strong work requirements, performance bonuses to reward States 
for moving welfare recipients into jobs and reducing out-of-wedlock 
births, State maintenance-of-effort requirements, comprehensive child 
support enforcement, and supports for moving families from welfare to 
work--including increased funding for child care. It provides 
opportunities for State and local governments, working in partnership 
with communities groups and other agencies, to serve families in new, 
more creative, and more effective ways.
    With the help of the strong economy, and new Federal and State 
policies, the percentage of welfare recipients working has tripled 
since 1992 and an estimated 1.5 million people who were on welfare in 
1997 were working in 1998. All States met the first overall work 
participation rates required under TANF, and welfare caseloads have 
fallen to the lowest levels in 30 years.
    The first title of this new law (Pub. L. 104-193) created a program 
called Temporary Assistance for Needy Families, or TANF, in recognition 
of its focus on moving recipients into work and time-limiting 
assistance. It repealed the existing welfare program known as Aid to 
Families with Dependent Children (AFDC), which provided cash assistance 
to needy families on an entitlement basis. It also repealed the related 
programs known as the Job Opportunities and Basic Skills Training 
program (JOBS) and Emergency Assistance (EA).
    The new TANF program went into effect on July 1, 1997, except in 
States that elected to submit a complete plan and implement the program 
at an earlier date.
    The new law reflects widespread, bipartisan agreement on a number 
of key principles:
     Welfare reform should help move people from welfare to 
work.
     Welfare should be a short-term, transitional experience, 
not a way of life.
     Parents should receive the child care and the health care 
they need to protect their children as they move from welfare to work.
     Child support programs should become tougher and more 
effective in securing support from absent parents.

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     Because many factors contribute to poverty and dependency, 
solutions to these problems should not be ``one size fits all.'' The 
system should allow States, Indian tribes, and localities to develop 
diverse and creative responses to their own problems.
     The Federal government should focus less attention on 
eligibility determinations and place more emphasis on program results.
     States should continue to make substantial investments of 
State funds in addressing the needs of low-income families.
    This landmark welfare reform legislation has dramatically affected 
not only needy families, but also intergovernmental relationships. It 
challenges Federal, State, Tribal and local agencies to foster positive 
changes in the culture of the welfare system and to take more 
responsibility for program results and outcomes. It also challenges 
them to develop strong interagency collaborations and improve their 
partnerships with legislators, advocates, businesses, labor, community 
groups, and other parties that share their interest in helping needy 
families successfully transition into the mainstream economy.
    The new law provides an unparalleled opportunity to achieve true 
welfare reform. It also presents very significant challenges for 
families and State and Tribal entities in light of the changing program 
structure, loss of Federal entitlements, creation of time-limited 
assistance, and new penalty and bonus provisions.
    Most of the resources in the AFDC program went to support mothers 
raising their children alone. In the early years, the expectation was 
that these mothers would stay home and care for their children; in 
fact, in a number of ways, program rules discouraged work. Over time, 
as social and economic conditions changed, and more women entered the 
work force, the expectations changed. In 1988, Congress enacted the new 
JOBS program to provide education, training and employment that would 
help needy families avoid long-term welfare dependence. By 1994, 20 
percent of the nonexempt adult AFDC recipients nationwide were 
participating in the JOBS program.
    In spite of these changes, national sentiment supported more 
drastic change. Policy-makers, agency officials, and the public 
expressed frustration about the slow progress being made in moving 
welfare recipients into work and the continuing decline in family 
stability. States lobbied for more flexibility to reform their 
programs. While the Clinton Administration had supported individual 
reform efforts in almost every State, approving 80 waivers in its first 
five years, the waiver process was not an ideal way to achieve systemic 
change. It required separate Federal approval of each individual reform 
plan, limited the types of reforms that could be implemented, and 
enabled reforms to take place only one State at a time. Governors 
joined Congress and the President in declaring that the welfare system 
was ``broken.''
    After more than two years of discussion and negotiation, PRWORA 
emerged as a bipartisan vehicle for comprehensive welfare reform. As 
President Clinton stated in his remarks as he signed the bill, ``. . . 
this legislation provides an historic opportunity to end welfare as we 
know it and transform our broken welfare system by promoting the 
fundamental values of work, responsibility, and family.''
    The law gives States, and federally recognized Indian tribes, the 
authority to use Federal welfare funds ``in any manner that is 
reasonably calculated to accomplish the purpose'' of the new program. 
It provides them broad flexibility to set eligibility rules and decide 
what benefits are most appropriate. It also enables States to implement 
their new programs without getting the ``approval'' of the Federal 
government. In short, it offers States and Tribes an opportunity to try 
new, far-reaching changes that can respond more effectively to the 
needs of families within their own unique environments.
    PRWORA redefines the Federal role in administration of the nation's 
welfare system. It limits Federal regulatory and enforcement authority, 
but gives the Federal government new responsibilities for tracking 
State performance. In a select number of areas, it calls for penalties 
when States fail to comply with program requirements, and it provides 
bonuses for States that perform well in meeting new program goals.
    Under the new statute, program funding and assistance for families 
both come with new expectations and responsibilities. Adults receiving 
assistance are expected to engage in work activities and develop the 
capability to support themselves before their time-limited assistance 
runs out. States and Tribes are expected to assist recipients making 
the transition to employment. They are also expected to meet work 
participation rates and other critical program requirements in order to 
maintain their Federal funding and avoid penalties.
    Some important indicators of the change in expectations are: time 
limits; higher participation rates; the elimination of numerous 
exemptions from participation requirements; and the statutory option 
for States to require individual responsibility plans. Taken together, 
these provisions signal an expectation that we must broaden 
participation beyond the ``job-ready.''
    In meeting these expectations, States need to examine their 
caseloads, identify the causes of long-term underemployment and 
dependency, and work with families, communities, businesses, and other 
social service agencies in resolving employment barriers. In some 
cases, States may need to provide intervention services for families in 
crisis or may need to adapt program models to accommodate individuals 
with disabilities or other special needs. TANF gives States the 
flexibility they need to respond to such individual family needs. 
However, in return, it expects States to move towards a strategy that 
provides appropriate services for all needy families.

II. Regulatory Framework

A. Pre-NPRM Process

    In the spirit of both regulatory reform and PRWORA, we implemented 
a broad and far-reaching consultation strategy prior to the drafting of 
the Notice of Proposed Rulemaking (NPRM). In Washington, we set up 
numerous meetings with outside parties to gain information on the major 
issues underlying the work, penalty, and data collection provisions of 
the new law. In our ten regional offices, we used a variety of 
mechanisms--including meetings, conference calls, and written 
solicitations--to garner views from ``beyond the Beltway.''
    The purpose of these discussions was to gain a variety of 
informational perspectives about the potential benefits and pitfalls of 
alternative regulatory approaches. We spoke with a number of different 
audiences, including: representatives of State, Tribal, and local 
governments; nonprofit and community organizations; business and labor 
groups; and experts from the academic, foundation, and advocacy 
communities. We solicited both written and oral comments, and we worked 
to ensure that information and concerns raised during this process were 
shared with both the staff working on individual regulatory issues and 
key policy-makers.
    These consultations were very useful in helping us identify key 
issues and evaluate policy options, and several commenters commended 
ACF on this process.

[[Page 17723]]

B. Related Regulations Under Development

    This rule addresses the work, accountability, and data collection 
and reporting provisions of the new TANF program. We have also issued 
NPRM's and program guidance on several related provisions of the new 
law including: high performance bonuses (TANF-ACF-PI-98-1 and TANF-ACF-
PI-98-05); illegitimacy reduction bonuses (63 FR 10263, March 2, 1998); 
and the Tribal TANF and Native Employment Works (i.e., ``NEW'') 
programs (63 FR 39365, July 22, 1998).
    With a couple of minor exceptions, this rule does not address the 
provisions of the Welfare-to-Work (WtW) program at section 403(a)(5) of 
the Act, as created by section 5001(a)(1) of Pub. L. 105-33. The 
Secretary of Labor issued interim rules on these provisions and the 
provisions at section 5001(c), regarding WtW grants for Tribes, on 
November 18, 1997. A copy of the interim rules and other information 
about this program are available on the Web at http://wtw.doleta.gov.
    The WtW provisions in this rule include the amendments to the TANF 
provisions at sections 5001(d) and 5001(g)(1) of Pub. L. 105-33. 
Section 5001(d) allows a State to provide WtW assistance to a family 
that has received 60 months of federally funded TANF assistance and 
specifies that ``noncash'' assistance under the WtW program is not 
treated as TANF ``assistance'' for purposes of the TANF time limit. 
Section 5001(g)(1) provides a new penalty that takes away WtW funds 
when a State fails to meet the basic MOE requirements.
    Also, this rule does not include the provision at section 
5001(g)(2), which requires repayment of WtW funds to the Secretary of 
Labor following a finding by the Secretary of Labor of misuse of funds. 
Since the Department of Labor is responsible for administering this 
penalty and receives any repaid funds, it would not be appropriate for 
us to issue rules on this provision.
    Under section 5001(e) of Pub. L. 105-33, we have responsibility for 
regulating the WtW data reporting requirements, under section 411(a) of 
the Act, as amended. On October 29, 1998, we issued an interim-final 
rule that addresses these requirements, following consultation with the 
Department of Labor, State agencies, Private Industry Councils, and 
other affected parties (63 FR 57919).
    As we pointed out in the NPRM preamble, there is an important 
relationship between this rulemaking and the rulemaking on Tribal 
programs. Under section 412 of the Social Security Act, federally 
recognized Tribes may elect to operate their own TANF programs, and 
Tribes that operated their own JOBS programs may continue to receive 
those funds to operate Tribal work programs. We published the NPRM for 
Tribal TANF programs on July 22, 1998 (see 63 FR 39365).
    Tribal decisions on whether to elect the TANF option will depend on 
a number of factors, including the nature of services and benefits that 
will be available to Tribal members under the State program. Thus, 
Tribes have a direct interest in the regulations governing State 
programs.
    Tribes also have an interest in these regulations because some of 
the rules we develop for State programs could eventually apply to the 
Tribal programs. In particular, we urge Tribes to note the data 
collection and reporting requirements at part 265. While the statute 
allows Tribes to negotiate certain program requirements, such as work 
participation rates and time limits, it subjects Tribal programs to the 
same data collection and reporting requirements as States.
    We would also like to direct the Tribes to the maintenance-of-
effort (MOE) policies discussed at Sec. 263.1. In that section, we 
provide that State contributions to a Tribal program could count toward 
a State's MOE. Tribes should be aware of the important implications of 
this provision for both the funding of Tribal programs and State-Tribal 
relations.
    In order for welfare reform to succeed in Indian country, it is 
important for State and Tribal governments to work together on a number 
of key issues, including data exchange and coordination of services. We 
remind States that Tribes have a right under law to operate their own 
programs. States should cooperate in providing the information 
necessary for Tribes to do so.
    Likewise, Tribes should cooperate with States in identifying Tribal 
members and tracking receipt of assistance.
    On December, 5, 1997, we issued a final rule to repeal the obsolete 
regulations for the EA, JOBS, and the IV-A child care programs and a 
few provisions covering administrative requirements of the AFDC program 
(see 62 FR 64301, December 5, 1997). This action resulted in the 
elimination of about 82 pages from the Code of Federal Regulations.
    We have yet to issue a more detailed conforming rule that deletes 
or replaces obsolete AFDC and title IV-A references throughout chapter 
II. This second rulemaking will take additional time because the AFDC 
provisions are intertwined with provisions for other programs that are 
not repealed. Also, it is not clear that we should repeal all the AFDC 
provisions because Medicaid, foster care, and other programs have 
linkages to the AFDC rules. Because of these complexities and the 
nonurgent nature of the conforming changes, this latter rule is not an 
immediate agency priority.
    PRWORA also changed other major programs administered by ACF, the 
Department, and other Federal agencies that may significantly affect a 
State's success in implementing welfare reform. For example, title VI 
of PRWORA repealed the child care programs that were previously 
authorized under title IV-A of the Social Security Act. In their place, 
it provided two new sources of child care funding (which we refer to 
collectively as the Child Care Development Fund). These funds go to the 
Lead Agency that administers the Child Care and Development Block Grant 
program. A major purpose of the increases in child care funding 
provided under PRWORA is to assist low-income families in their efforts 
to be self-sufficient. We issued final rules covering the Child Care 
and Development Fund on July 24, 1998 (see 63 FR 39935).
    We encourage you to look in the Federal Register for actions on 
these related rules, take the opportunity to comment, and work to 
understand the important relationships among these programs in 
developing a comprehensive strategy that can provide support to all 
families that are working to maintain their family structure and become 
self-sufficient.

C. Statutory Context

    These proposed rules reflect PRWORA, as enacted, and amended by 
Pub. L. 104-327, Pub. L. 105-33, Pub. L. 105-89, Pub. L. 105-178, and 
Pub. L. 105-200.
    As we indicated in the NPRM preamble, the changes made by Pub. L. 
104-327 are fairly limited in scope; we discuss them in the preamble on 
Contingency Fund MOE requirements at Secs. 264.71, 264.72, and 264.77.
    Pub. L. 105-33 (also known as The Balanced Budget Act of 1997) 
created the new Welfare-to Work (WtW) program, made a few substantive 
changes to the TANF program, and made numerous technical corrections to 
the TANF statute. We attempted to incorporate those amendments that 
were in our purview in the NPRM. However, commenters identified a 
couple of places where we did not fully

[[Page 17724]]

or correctly incorporate these amendments. We found a few more. We note 
these in the preamble discussion that follows and have made appropriate 
changes in the regulatory text.
    We want to note a couple of additional legislative developments 
since the drafting of the NPRM that might affect a State's liability 
for penalties and the use of Federal TANF funds. We have made a couple 
of conforming changes in the rules to reflect these developments.
    Under Pub. L. 105-89, known as the Adoption and Safe Families Act 
of 1997, Congress decreased the amount of money available to States 
through the ``Contingency Fund'' and increased the amount that States 
receiving contingency funds must remit, using a proportionate 
reduction. We discuss this provision in more detail in the preamble for 
subpart B of part 264, and we have changed the regulatory text to 
reflect this change.
    Under Pub. L. 105-178, known as The Transportation Equity Act for 
the 21st Century, Congress: (1) (Effective in fiscal year 2001) reduced 
the cap on the amount that a State could transfer to the Social 
Services Block Grant from 10 percent to 4.25 percent; (2) created the 
``Job Access'' competitive grant program to help communities develop 
transportation services that will help current and former welfare 
recipients and other low-income individuals access employment; and (3) 
specified that States could use their Federal TANF funds as part of the 
nongovernmental cost-sharing required under a Job Access program. None 
of these provisions directly affect the TANF rules, but they do change 
what would be an allowable use of Federal TANF funds. It is important 
that States understand these provisions if they wish to avoid a penalty 
for misuse of Federal TANF funds.
    Under section 403 of The Child Support Performance and Incentives 
Act of 1998, Pub. L. 105-200, Congress amended section 404 of the 
Social Security Act to address the use of Federal TANF funds within the 
Job Access and Reverse Commute program. It imposed: (1) restrictions on 
the use of Federal TANF funds for this purpose, including ``new 
spending'' and ``nonsupplantation'' requirements; (2) a requirement 
that the preponderance of funds go to TANF recipients, former TANF 
recipients, certain noncustodial parents, and low-income individuals at 
risk of qualifying for the TANF program; and (3) a requirement that the 
services provided support participation in TANF work activities. It 
also imposed a cap on the total amount of Federal TANF funds that a 
State could use for this purpose, computed as the difference between 30 
percent of the State Family Assistance Grant (SFAG) amount and the 
amount that a State was transferring that year to the Child Care and 
Development Block Grant or the Social Services Block Grant.
    Consistent with treatment of the other restrictions on the grant at 
section 404, we have not directly incorporated these restrictions into 
the TANF rule. However, we note that we would consider expenditures in 
violation of these new provisions a misuse of funds.
    We also point out that these provisions do not conflict with the 
restrictions at section 409(a)(7)(B)(iv) of the Act or Sec. 263.6(a) 
and (c) of these rules. The TANF rules deal with the converse 
situation--the circumstances under which other State expenditures do 
not qualify under TANF's basic maintenance-of-effort provisions. The 
new provisions address the circumstances under which Federal TANF funds 
may count as nongovernmental expenditures under a separate program. 
They do not give States the authority to use Job Access funds for basic 
MOE purposes.
    Further, the use of Federal TANF funds to support Job Access 
activities does not constitute a transfer of Federal TANF funds within 
the meaning of section 404(d)(1). Thus, they do not affect the 
``adjusted SFAG'' amount that we use in determining the administrative 
cost cap and penalty amounts.
    The Child Support Performance and Incentives Act also added a 
``rule of interpretation'' to section 404(k)(3) of the Social Security 
Act, which indicates that the provision of transportation benefits to 
an individual who is not otherwise receiving TANF assistance would not 
be considered assistance. We have made a conforming change to our 
definition of assistance at Sec. 260.31 to reflect this policy.

D. Regulatory Reform

    In its latest Document Drafting Handbooks, the Office of the 
Federal Register has supported the efforts of the National Partnership 
for Reinventing Government and encouraged Federal agencies to produce 
more reader-friendly regulations. In drafting the proposed and final 
rule, we paid close attention to this guidance and worked to produce a 
more readable rule. We also provided electronic access to the document 
and gave readers the option to submit their comments electronically. We 
received a number of positive comments about how the NPRM was written 
and the electronic access.
    Based in part on the positive reaction to the proposed rule, and in 
the spirit of facilitating understanding, we decided to retain much of 
the NPRM preamble discussion. We believe it will be useful for some 
readers in providing the overall context for the final regulations. 
However, where we are changing our policy in the final rule, or the 
context has changed since we issued the NPRM, we have made appropriate 
changes to the preamble. We also exercised some editorial discretion to 
make the discussion more succinct or clearer in places. Wherever we 
made significant changes in policy, the preamble notes and explains 
those changes.
    In the proposed rule, we decided to incorporate a few statutory 
provisions as a frame of reference even though we did not intend to 
regulate or enforce State behavior in those areas. We thought the 
inclusion of this additional preamble discussion and regulatory text 
would help establish the broader context for other parts of the 
rulemaking document. These additions were primarily explanatory in 
nature or restatements of the statutory requirements. We indicated that 
readers could probably identify these additional provisions based on 
the language used and the surrounding preamble discussion and noted 
that subparts A and G of part 271 (which addressed the work provisions 
other than participation rates and penalties) and Sec. 270.20 (which 
included the statutory goals of the program) as specific examples.
    Commenters identified an additional item that would be helpful to 
include as a frame of reference--the nondiscrimination provisions found 
at section 408(d) of the Act. We decided to accept the suggestion and 
include these provisions in the final rule since commenters had not 
generally objected to including such material in the regulatory text of 
the NPRM, the inclusion will have informational value, and the change 
does not materially alter the scope of the rule. (See the discussion on 
``Recipient and Workplace Protections'' for additional information.)
    Likewise, based on comments we received on the domestic violence 
provisions in the proposed rule, we incorporated the statutory 
provisions on the Family Violence Option at a new Sec. 260.52.
    In the spirit of providing access to information, we included draft 
data collection and reporting forms as appendices to the proposed rules 
even though we did not intend to publish the forms as part of the final 
rule. We thought that the inclusion of the draft

[[Page 17725]]

forms would expand public access to this information and make it easier 
to comment on our data collection and reporting plans.
    We believe that we succeeded in accomplishing these goals. 
Commenters responded in large numbers and specific detail to both the 
Paperwork Reduction Notice and the Proposed Rule. The changes to the 
final rule and to the companion appendices reflect our consolidated 
response to both sets of comments.

E. Scope of This Rulemaking

    The NPRM and final rule reflect our decision to incorporate the 
work, data collection, and penalty provisions in a single regulatory 
package. While this decision resulted in a large rule, we think it 
enabled us to develop a more coherent regulatory framework and provided 
readers an opportunity to look at, and comment on, the many 
interconnected pieces at one time.
    One downside of this decision was that the concentration of all 
these accountability provisions in one rule could have contributed to 
the perception among some commenters that the tone was punitive and the 
rule too penalty-focused. It is important to keep our broader 
regulatory and program agenda in mind as you assess the impact and 
meaning of this package. The total agenda includes rewards, as well as 
penalties, and tracks State performance along a variety of different 
measures, including job entries, success in the workplace, reductions 
in out-of-wedlock childbearing, and child poverty rates. It also 
includes annual reports to Congress on State program characteristics, 
recipient characteristics, and performance.
    Our agenda also includes extensive research, evaluation, and 
technical assistance efforts. Throughout this preamble, you will find 
examples of how our efforts in these areas respond, in a nonregulatory 
fashion, to commenter concerns. It would be impractical and 
inappropriate to use this rulemaking as the vehicle for informing the 
public about the full agenda, but the ``Promising Practices National 
Conferences'' held in September 1998 and in Fiscal Year 1999 provide a 
good example. These meetings, which have the financial support of the 
Department of Health and Human Services (including both the 
Administration for Children and Families and the Substance Abuse and 
Mental Health Services Administration) and the Department of Labor, 
will provide State and local staff and other practitioners with 
practical ideas on a range of topics, such as preparing for the 
difficult task of moving clients with multiple barriers into work, 
creating jobs in isolated and high-risk communities, increasing support 
from noncustodial parents, promoting collaboration and achieving 
seamless delivery of services, changing welfare offices to job centers, 
promoting success in the workplace, and maintaining the investments in 
needy families.

F. Applicability of the Rules

    As we indicated in policy guidance to the States and the NPRM, a 
State could operate its program under a reasonable interpretation of 
the statute prior to our issuance of final rules. Thus, in determining 
whether a State is subject to a penalty, we would not apply regulatory 
interpretations retroactively. We retained this basic policy, but 
modified it to clarify that the ``reasonable interpretation'' standard 
applies until the effective date of these final rules. You can find 
additional discussion of this policy at Sec. 260.40 of the preamble.

III. Principles Governing Regulatory Development

A. Restrictions on Our Regulatory Authority

    Under the new section 417 of the Act, the Federal government may 
not regulate State conduct or enforce any TANF provision except to the 
extent expressly provided by law. This limitation on Federal authority 
is consistent with the principle of State flexibility and the general 
State and congressional interest in shifting more responsibility for 
program policy and procedures to the States.
    We interpreted this provision to allow us to regulate in two 
different kinds of situations: (1) Where Congress has explicitly 
directed the Secretary to regulate (for example, under the caseload 
reduction provisions, described below); and (2) where Congress has 
charged the Department of Health and Human Services (HHS) with 
enforcing penalties, even if there is no explicit mention of 
regulation. In this latter case, we believe we have an obligation to 
States to set out, in regulations, the criteria we will use in carrying 
out our express authority to enforce certain TANF provisions by 
assessing penalties.
    In the preamble to the proposed rule, we indicated that we 
endeavored to regulate in a manner that did not impinge on a State's 
ability to design an effective and responsive program. A large number 
of commenters felt that our regulations would in fact have such a 
negative effect. In the subsequent discussion, you will note that we 
have revised provisions in key program areas that respond to these 
concerns.
    At the same time, however, we remain committed to ensuring that 
States remain accountable for meeting TANF requirements. Thus, we will 
continue to monitor program developments so that we can make 
appropriate adjustments if programs fail to remain focused on TANF's 
statutory objectives.

B. State Flexibility

    In the Conference Report to PRWORA, Congress stated that the best 
welfare solutions come from those closest to the problems, not from the 
Federal government. Thus, the legislation creates a broad block grant 
for each State to reform welfare in ways that work best. It 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 work force.
    Under the law and the proposed rules, we indicated that States 
could implement innovative and creative strategies for supporting the 
critical goals of work and responsibility. For example, they could 
choose to expend funds on refundable earned income tax credits or 
transportation assistance that would help low-wage workers keep their 
jobs. They could also extend employment services to noncustodial 
parents, by including them within the definition of ``eligible 
families.''
    To ensure that our rules supported the legislative goals of PRWORA, 
we indicated our commitment to gather information on how States were 
responding to the new opportunities available to them. We said that we 
reserved the right to revisit some issues, either through legislative 
or regulatory proposals, if we identified situations where State 
actions were not furthering the objectives of the Act.
    A large number of commenters felt we had unduly limited State 
flexibility to design their programs, particularly with respect to 
expending funds in separate State programs, providing assistance to 
child-only cases, and continuing waivers, but also in areas like the 
definition of administrative costs, restrictions on domestic violence 
waivers that affected reasonable cause, and the definition of 
assistance.
    We included some restrictions on State flexibility in the NPRM to 
protect against possible State policies that might undermine TANF goals 
or divert the Federal share of child support collections. However, in 
response to

[[Page 17726]]

these concerns and in recognition of the positive steps States have 
been taking to implement welfare reform, we have decided to remove some 
of the direct and perceived restrictions on State flexibility. We have 
also provided some important preamble language that helps clarify State 
flexibility to define needy families and spend both Federal TANF and 
State MOE funds in ways that support a wide range of families in 
diverse ways. We provide additional discussion of these changes and 
clarifications in subsequent sections of the preamble.

C. Accountability for Meeting Program Requirements and Goals

    In the NPRM we recognized that States have enormous flexibility to 
design their TANF programs in ways that strengthen families and promote 
work, responsibility, and self-sufficiency. At the same time, however, 
TANF reflects a bipartisan commitment to ensuring that State programs 
support the goals of welfare reform. To this end, the statutory 
provisions on data collection, bonuses, and penalties are crucial 
because they allow us to track what is happening to needy families and 
children under the new law, measure program outcomes, and promote key 
program objectives.
Work
    As we indicated in the NPRM, we believe the central goal of the new 
law is to move welfare recipients into work. The law reflects this 
important goal in a number of ways:
     Work receives prominent mention in the statutory goals at 
section 401 and the plan provisions in section 402;
     Section 407 establishes specific work participation rates 
each State must achieve;
     Section 409 provides significant financial penalties 
against any State that fails to achieve the required participation 
rates;
     Section 411 provides specific authority for the Secretary 
to establish data reporting requirements to capture necessary data on 
work participation rates; and
     Section 413 calls for ranking of States based on the 
effectiveness of their work programs.
    The proposed and final rules reflect a similar, special focus on 
promoting the work objectives of the Act and ensuring that States meet 
the statutory requirements at sections 407, 409, and 411 of the Act. 
You should look at the rules in part 261, and the related preamble 
discussion, for specific details.
    This Administration has repeatedly shown its commitment to 
promoting the work objectives of this new law. Before and since the 
legislation was passed, the President and the Administration have 
worked very hard to ensure that Congress passed strong work provisions 
and provided adequate child care funding and other program supports to 
help families making the transition from welfare to work.
    These include the new Welfare to Work program (WtW), the Welfare-
to-Work Tax Credit enacted in the Balanced Budget Act, Welfare-to-Work 
housing vouchers included in the Fiscal Year 1999 budget for the 
Department of Housing and Urban Development, and Job Access 
transportation grants.

    WtW provides grants to States, localities, Indian Tribes, and 
other grantees to help them move long-term welfare recipients and 
certain noncustodial parents into lasting, unsubsidized jobs.
    The Welfare to Work Tax Credit provides a credit equal to 35 
percent of the first $10,000 in wages in the first year of 
employment, and 50 percent of the first $10,000 in wages in the 
second year, to encourage the hiring and retention of long-term 
recipients. (It complements the Work Opportunity Tax Credit, which 
provides a credit of up to $2,400 for the first year of wages to 
employers who hire long-term welfare recipients.)
    Welfare-to-Work Housing vouchers will help current and former 
welfare recipients who need housing assistance to get or keep a job. 
Most of the housing vouchers (50,000 in FY 1999) will go to 
communities on a competitive grant basis.
    The Transportation Equity Act for the 21st Century (TEA-21) 
authorizes $750 million over five years for competitive grants to 
communities to develop innovative transportation activities to help 
welfare recipients and other low-income workers (i.e., those with 
income up to 150 percent of poverty) get to work. (You can find more 
information about the Administration's initiatives at http://
www.whitehouse/gov/wh/welfare.)

    The President has also challenged America's businesses, its large 
nonprofit sector, and the executive branch of the Federal government to 
help welfare recipients go to work and succeed in the workplace.
    In May 1997, the President helped to launch a new private-sector 
initiative to promote the hiring of welfare recipients by private-
sector employers. The Welfare-to-Work Partnership, which started with 
105 participating businesses, now includes over 10,000 businesses that 
have hired 410,000 welfare recipients. This partnership has produced a 
variety of materials to support businesses in these efforts, including 
the ``Blueprint for Business'' hiring manual and ``The Road to 
Retention,'' a report of companies that have achieved higher retention 
rates for former welfare recipients. You can find information about the 
Welfare to Work Partnership at http://www.welfaretowork.org.
    The Small Business Administration (SBA) is addressing the unique 
and vital role of small businesses, which account for over one-half of 
all private-sector employment. It is helping small businesses make 
connections to job training organizations and job-ready welfare 
recipients. It is also providing training and assistance to welfare 
recipients who wish to start their own businesses. Businesses can 
receive assistance through SBA's 1-800-U-ASK-SBA and through its 
network of centers, shops, and district offices. Information on SBA's 
Welfare to Work initiative (W2W) and other activities are available 
through the SBA home page at http://www.sba.gov.
    In addition, the Vice President has developed a coalition of 
national civic, service, and faith-based groups committed to helping 
former welfare recipients succeed in the workforce--by providing 
mentoring, job training, child care, and other supports.
    On March 8, 1997, the President directed all Federal agencies to 
submit plans describing the efforts they would make to respond to this 
challenge. Under the Vice President's leadership, Federal agencies 
committed to hiring at least 10,000 welfare recipients over the next 
four years. Agencies have already fulfilled this commitment--nearly two 
years ahead of schedule. (You can find additional information on this 
effort at http://www.welfaretowork.fed.gov.)
Meeting the Needs of Low-Income Families and Children
    In a number of different ways, the new law works to ensure that the 
needs of low-income children and families are met. First, it provides a 
guaranteed base level of Federal funding for the TANF programs. Then, 
in times of special financial need, it makes nearly $2 billion in 
additional funding available through a Contingency Fund and up to $1.7 
billion available for loans to States. It also authorizes several 
studies to monitor changes in the situations of needy children and 
families that occur after enactment. For example, it requires us to 
report on how certain children are affected by the provisions of the 
new law. It also requires us to track whether a State's child poverty 
rate increases as the result of the State's TANF program and requires 
States to initiate corrective actions when such increases occur.
    These regulations work to further the objectives of these statutory 
provisions.

[[Page 17727]]

Most importantly, they work to ensure that the use of Federal and State 
funds is consistent with the provisions and purposes of TANF, that 
States maintain their investments on needy families, that recipients 
and other workers have the protections available to them that are 
intended under Federal law, and that we collect data from States that 
are necessary to assess program performance.

IV. Discussion of Cross-Cutting Issues

Overview of Comments

    As we indicated earlier in the preamble, commenters expressed a 
number of major concerns with respect to our policies on separate State 
programs, child-only cases, and waiver continuations. In particular, 
they said: (1) In part because of the uncertainty they created, the 
proposed rules would stifle innovation and undermine the States' 
ability to meet the needs of their families; (2) the proposed rules 
were overly prescriptive and burdensome, too concerned about 
accountability and the taking of penalties, and not focused on 
outcomes; (3) they undermined the partnership between the State and 
Federal governments, fostered an adversarial relationship, violated the 
compact between the States and Washington in creating TANF, or 
contravened Congressional intent (if not the law) in regulating State 
behavior in these areas; (4) we presumed State guilt when there was no 
evidence that States were taking advantage of loopholes to evade the 
TANF provisions; and (5) our strict penalty policies, promotion of 
``work first'' strategies, and inattention to recipient protections 
could ultimately harm recipients (e.g., prevent them from attaining 
jobs that paid a living wage or accessing appropriate treatment).
    We disagree with commenters that claimed that we exceeded our 
regulatory and statutory authority in the NPRM. However, because of the 
evidence we have seen about States' commitment to develop programs that 
are consistent with the goals of TANF, these final rules reflect some 
significant changes in our policies on these three issues. You will 
find additional details in the following discussion.

A. Separate State Programs

Background
    Section 409(a)(7) of the Social Security Act permits States to 
assist eligible families by expending maintenance-of-effort funds (MOE) 
under ``all State programs.'' Thus, we recognize expenditures under the 
State's TANF program and/or separate State program(s). However, 
eligible families assisted through a separate State program are not 
generally subject to TANF requirements, including work participation 
requirements, child support collection requirements, the time limit on 
receipt of assistance, and data collection and reporting requirements. 
In other words, by definition, States operating separate programs avoid 
TANF requirements; they have more flexibility to use the funds 
available in these programs to help eligible families.
    In the NPRM preamble, in a section entitled ``Maintenance-of-Effort 
(MOE),'' we stated that one of the most important provisions in the new 
law designed to protect needy families and children is the basic 
maintenance-of-effort (basic MOE) requirement in the TANF statute. This 
provision requires States to maintain a certain level of spending on 
welfare, based on historic (i.e., fiscal year (FY) 1994) expenditure 
levels. Because this provision is critical to the successful 
implementation of the law, Congress gave us the authority to enforce 
State compliance in meeting this requirement, and it received 
significant attention in the proposed rule.
    We also directed readers to the data collection, work, and penalty 
provisions of the proposed rule, at parts 271-275, for provisions 
designed to: (1) ensure that States continue to make the required 
investments in meeting the needs of low-income children and families; 
(2) prevent States from either supplanting funds or using their MOE 
funds to meet extraneous program or fiscal needs; (3) give us adequate 
information to meet our statutory responsibility to determine what is 
happening in State programs; and (4) take a broad view of work effort, 
caseload reduction, and program performance.
    We recognized that States have more flexibility in spending their 
State MOE funds than their Federal TANF funds, especially when they 
expend their MOE funds in separate State programs. However, at the same 
time, we reiterated concerns that we had first expressed in our policy 
guidance of January 1997, TANF-ACF-PA-97-1, that States could design 
their programs to avoid the work requirements of the new law or to 
avoid returning a share of their child support collections to the 
Federal government. Therefore, we proposed four measures to mitigate 
these potential negative consequences.
    First, if we detected a significant pattern of diversion of 
families to a separate State program that achieves the effect of 
avoiding either the work participation rates or returning the Federal 
share of child support collections, we proposed to deny reasonable 
cause for certain penalties. For avoiding the work participation rates, 
reasonable cause relief would not be available with respect to 
penalties for failure to: meet minimum participation rates, implement 
time limits, maintain assistance to a custodial parent who cannot 
obtain child care for a child under age 6, and reduce assistance for 
recipients refusing without good cause to work. For diverting the 
Federal share of child support collections, reasonable cause would not 
be available with respect to the penalties for failure to: meet minimum 
participation rates, implement time limits, reduce assistance for 
recipients refusing without good cause to work, and cooperate with 
paternity establishment and child support enforcement requirements.
    Second, for the same two diversion situations and penalties that we 
just discussed, we proposed that a State would not be eligible for a 
penalty reduction on the basis of making substantial progress during 
corrective compliance unless it corrected the diversion.
    Third, we proposed to deny a State access to two possible 
reductions in the penalty for failing to meet work participation rates 
unless it ``demonstrates that it has not diverted cases to a separate 
State program for the purpose of avoiding the work participation 
requirements.''
    Finally, we proposed to require that a State collect case-record 
data on participants in separate State programs if it wished to receive 
a high performance bonus; qualify for work participation caseload 
reduction credit; or be considered for a reduction in the penalty for 
failing to meet the work participation requirements.
    In making these proposals, we noted that the Secretary has 
considerable discretion in determining whether to reduce penalties or 
grant a good cause exception. We argued that work was the most critical 
component in achieving the purposes of TANF and these limits on the 
relief on the work penalty were appropriate to prevent circumvention of 
this purpose.
    We went on to say that implementation of the child support 
provisions was the other key component to achieving self-sufficiency. 
We spoke about the major Federal role in child support enforcement 
(particularly with regard to the operation of the New Hire Directory 
and the Federal Parent Locator Service), the continuing Federal 
interest in the effectiveness of these programs, and the continued 
Federal financial

[[Page 17728]]

commitment, under TANF, for needy families whose children have been 
deprived of parental support and care.
    We expressed concern not just about the unintended, negative 
consequences of diverting cases to separate State programs for the 
Federal budget and the Federal government's ability to ensure an 
effective child support program, but also about reduced State 
accountability for ensuring that needy families take appropriate steps 
towards achieving self-sufficiency. We indicated that, in the interest 
of protecting the key goals of TANF, it was appropriate for the 
Secretary to use the discretion available to her to forgive penalties 
and set penalty amounts so as to ensure that States do not divert cases 
inappropriately.
    We announced plans to monitor States' actions to determine if they 
constituted a significant pattern of diversion. For example, if, based 
on an examination of statistical or other evidence, we came to the 
conclusion that a State was assigning people to a separate State 
program in order to divert the Federal share of child support 
collections, or in order to evade the work requirements, we would 
conclude that this is a significant pattern of diversion and would deny 
the State the specified types of penalty relief.
    We said a State would have opportunity to prove that this pattern 
was actually the result of State policies and objectives that were 
entirely unrelated to the goal of diversion, but we would make the 
final judgment as to what constitutes a significant pattern of 
diversion.
    We placed the specific regulatory provisions associated with these 
policies in Secs. 271.51(a), 271.52(b), 272.5(c) and (d), and 
272.6(i)(2) of the proposed rule.
    We also indicated our intent to propose that States seeking to 
receive high performance bonuses would be required to report on 
families served by separate State programs in the coming NPRM on high 
performance bonuses.
Comment Overview
    We received dozens of comments on these proposals related to 
implementation of separate State programs. The commenters universally 
opposed the proposals and presented a variety of objections. Most 
wanted the provisions deleted entirely, but some suggested specific 
changes that we could make to the regulatory provisions if we did not 
delete them.
    In summarizing these extensive comments, we first address those 
directed at deleting the provisions. Then we address the comments about 
possible refinements that we could make.
    Commenters objected to both the negative tone of these rules and 
their effect in undermining State and local flexibility to serve needy 
families, including those with multiple barriers to employment. They 
noted that several States have created or were considering separate 
State programs to serve their most vulnerable families, such as legal 
noncitizens with poor language and literacy skills; single parents 
taking care of a disabled child; citizens not disabled enough to 
qualify for SSI, but unable to work 20 to 30 hours a week; refugees; 
and victims of domestic violence. They expressed fears that the 
proposed rules, if not modified, could have a significant chilling 
effect on the development of innovative approaches to serve working 
families and the most vulnerable populations. That is, States would be 
conservative in extending assistance to hard-to-serve or working 
families out of fear of incurring more and larger penalties. In fact, 
some commenters argued that, since TANF was not an entitlement program, 
some States might choose not to give such individuals assistance due to 
concerns about the penalty consequences.
    Some argued that the proposals were contrary to the statute and 
Congressional intent. Their comments encompassed the following general 
points: (1) There is no statutory basis for the links between penalty 
relief and the operation of separate State programs. In deciding 
penalty relief, we should be looking only at the TANF program. (2) The 
statute clearly authorizes States to spend their basic MOE funds in 
separate State programs that are not subject to TANF requirements. Our 
proposals would punish States that elected to use this authority and 
preempt State and local authority over their own programs. (3) Our 
proposals would deny penalty relief where the statute requires such 
relief. (For example, the statute says that the Secretary ``shall'' 
reduce work participation penalties based on degree of noncompliance; 
thus, this reduction is not discretionary. The statute also provides 
that the Secretary could impose lesser penalties on a State that fails 
to correct a violation fully under corrective compliance.) 
Categorically denying penalty relief because of a State's legal and 
allowable actions on separate State programs is not appropriate.
    In lieu of the proposed policies, many commenters recommended that 
we monitor State actions to determine if a State is pursuing legitimate 
policy objectives or avoiding TANF-related requirements. They noted the 
lack of evidence so far that States were abusing the flexibility 
available under the law; their view was that States have been using 
separate programs for constructive and appropriate purposes. One noted, 
if a few States try to take advantage of the flexibility in the law, 
Congress and the Department can work together to figure out an 
effective way to stop them.
    Commenters also argued that the penalty consequences for operating 
separate State programs exceeded the magnitude of the purported 
offense. As a case example, a State could be operating a separate State 
program that represented only a small percent of its MOE expenditures, 
it barely missed its participation rate, and it had suffered a 
catastrophic natural disaster during the course of the year. The 
argument is that the State should get reasonable cause or penalty 
reduction because the State's failure could be attributed entirely to 
the natural disaster, the separate State program was an incidental 
matter, and, by any objective measure, the State's degree of 
noncompliance was minimal. Absolute loss of penalty relief in such a 
case would be arbitrary, at a minimum.
    A related comment was that we should limit denial of penalty relief 
to situations where there is a direct relationship between the penalty 
at issue and the conduct of the State. Commenters argued that we should 
not deny penalty relief on four penalties when the State actions at 
issue were probably only directly connected to one penalty.
    One suggestion for making the consequences more proportionate to 
the ``offense'' would be to not totally preclude eligibility for 
penalty relief, but to consider State policies on separate State 
programs as one of several factors affecting how difficult the penalty 
standard was for a State to achieve.
    Others noted that we had not used clear or consistent language when 
articulating how a separate State program might affect the availability 
of penalty relief. The lack of clarity would make it difficult for 
States to predict the effect of these provisions and could produce 
unfair, arbitrary, and inconsistent outcomes. It could also mean that 
we unduly deter States from assisting needy families.
    Commenters raised the following questions about the meaning of our 
proposals: (1) What is meant by ``purpose'' and ``effect''? (2) Are the 
terms meant to define different concepts? (3) Does ``purpose'' refer to 
``sole purpose'' or ``one of the purposes''? (4) How would we 
determine, or a State prove, whether a

[[Page 17729]]

separate State program has the specified ``purpose'' or ``effect''? (5) 
What is meant by a ``significant'' pattern of diversion? and (6) What 
criteria would we use to judge whether a State adequately demonstrated 
that it had not diverted cases to avoid penalties or divert child 
support? Relatedly, they objected to the fact that our proposed rules 
shifted the burden of proof about intent onto the States and to the 
difficulties attendant in proving a negative proposition.
    Among the suggestions offered for addressing these concerns were: 
(1) Clarify the circumstances when a State will not face loss of 
penalty relief (e.g., identify reasonable and legitimate policy bases 
for separate State programs, using examples); (2) allow an up-front 
assessment of the acceptability of separate State programs that States 
could rely upon in deciding what options to pursue under separate State 
programs; (3) create clear, objective criteria for determining when a 
separate State program would trigger adverse consequences; and (4) err 
on the side of flexibility if we cannot make highly accurate 
determinations that programs are deliberately designed to avoid Federal 
rules.
Overall Response
    When we were developing the proposed rules, obviously we were very 
concerned that States would use the flexibility available through 
separate State programs to avoid work participation requirements, 
divert the Federal share of child support collections, and otherwise 
undermine the goals or provisions of TANF. Within the authority that we 
have to make decisions on State penalties and bonuses, we proposed 
specific regulatory policies with respect to penalties, bonuses, and 
reporting in response to that concern.
    However, as we have seen these programs evolve, our concerns about 
possible abuses have diminished. As commenters pointed out, States are 
generally using separate State programs to serve a variety of policy 
purposes consistent with the goals and provisions of PRWORA. For 
example: (1) They are supporting work and self-support--through State 
earned income credits, transportation, child care, or other work-
related assistance; (2) they are helping families with special needs 
who are unable to engage in work activities for the requisite number of 
hours--e.g., families dealing with substance abuse, incapacity (or 
caring for a disabled child), literacy or ESL needs; (3) they are 
working to increase the economic viability of families--by providing 
financial aid for post-secondary education and support for other 
education or training activities, including activities for noncustodial 
parents; and (4) they are assisting individuals ineligible for the TANF 
program (e.g., using State funds to provide ``Food Stamp'' benefits for 
legal aliens who lost eligibility for assistance under PRWORA).
    In the few cases where separate State programs are serving families 
that we would normally expect to see in the TANF program, we often see 
the same or similar level of work activity required under TANF; e.g., 
Florida's two-parent program and Maine's Parents-as-Scholars program 
are part of separate State programs, but expect parents to participate 
at the TANF level of hours, or more.
    As commenters pointed out, if we developed policy to force States 
to provide services to families within the confines of the TANF 
statute, we would not necessarily achieve that end. An equally possible 
outcome could be that States would elect not to serve families, 
especially those hard-to-serve families that would be the most 
difficult to accommodate under the standard TANF rules.
    We considered ways to redraft the NPRM policy so that we would not 
have the ``chilling'' effect on State innovation that commenters 
feared. A variety of options were available to us, ranging from wording 
changes, to clarifications of key terms, to setting up a process for 
pre-clearance of State proposals, to reducing the potential negative 
consequences to States if we found inappropriate diversion.
    However, we were concerned that: (1) None of these options totally 
eliminated the potential ``chilling'' effects on State innovation; and 
(2) existing evidence did not indicate that there was a problem 
sufficient to justify such a strong policy response.
    Thus, the final rules eliminate the proposed link between a State's 
decisions on implementing a separate State program and its eligibility 
for penalty relief. In particular, we removed the provisions related to 
separate State programs that were in the proposed rules at 
Secs. 271.51(a), 271.52(b), 272.5 (c) and (d), and 272.6(i)(2).
    However, we remain concerned about the possibility that States 
could use separate State programs to avoid the TANF work requirements 
(particularly for two-parent families) and to divert the Federal share 
of child support collections. Thus, at Secs. 261.41(e) and 265.3(d)(1), 
we retained the NPRM provisions (which were at Secs. 271.41(e) and 
275.3(d)(1)) that, as a condition for receiving caseload reduction 
credits or a high performance bonus, States must report data on 
separate State programs and the recipients in them, through the SSP-MOE 
Data Report. However, we deleted the language that was in 
Sec. 275.3(d)(1)(iii) indicating that States needed to submit the SSP-
MOE Data Report if they wanted to be considered for a reduction in the 
penalty for failing to meet the work participation requirements. Also, 
as we discuss in the next section of the preamble, by changing the 
definition of assistance, we have limited the types of programs covered 
by this reporting. We have also reduced the types of data elements that 
must be reported.
    This data collection is part of a broad strategy to monitor the 
scope and nature of separate State programs. This strategy starts with 
four data sources: (1) The quarterly TANF Financial Report (Appendix 
D); (2) the MOE section of the annual report (at Sec. 265.9(c) and 
Appendix I); (3) the quarterly SSP-MOE Data Report; and (4) quarterly 
reports on child support collections. We would review data from these 
sources to identify States that might be using separate State programs 
either for the purpose of avoiding work or diverting the Federal share 
of child support collections. We would then make a preliminary 
assessment whether these States were operating separate State programs 
that were consistent with TANF goals. If we needed additional 
information for this assessment, we could supplement the official 
information with information gathered in single State audits or special 
studies (such as studies conducted by the Department's Office of the 
Inspector General).
    The data collection on separate State programs will help enable us 
to: (1) Monitor the nature of these programs; (2) determine the extent 
to which cases are being shifted to separate State programs; (3) 
determine whether such shifts are having an adverse effect on the two 
work participation rates or the Federal share of child support 
collections; (4) develop a sound policy response in the event of 
adverse effects; (5) better assess a State's claim for a caseload 
reduction credit or high performance bonus; and (6) decide if a State's 
policies with respect to separate State programs should affect its 
ranking under section 413(d) of the Act.
    In the proposed rule, we did not mention that the creation of 
separate State programs might affect the annual rankings of States 
based on the success of their work efforts. However, we have concluded 
that there could be circumstances under which we would

[[Page 17730]]

want to alter a State's ranking on this basis. For example, suppose the 
State with the highest percentage of placements in long-term jobs for 
its TANF cases achieved its placement rate and ranking by shifting all 
of its hard-to-serve cases from TANF to separate State programs. 
Obviously, this State would not merit a ranking as one of the five most 
successful States. We will consider if a State's separate State program 
had the effect of avoiding work requirements as one factor in 
determining the annual ranking of successful State programs.
    We will incorporate a full analysis of the information that we have 
gathered on what has been happening with separate State programs in our 
annual report to Congress. For example, we intend to address issues 
such as: (1) What is the basic nature of these programs; (2) have there 
been changes in their size or scope; (3) who do these programs serve; 
(4) how do they differ from TANF recipients; (5) what types of benefits 
do they provide; (6) to what extent do work participation rates apply; 
(7) what participation rates are being achieved; and (8) is there any 
evidence of the diversion of Federal child support collections. By 
looking at this range of issues, we will be better able to assess 
whether States have diverted individuals from TANF with the apparent 
purpose of avoiding TANF program requirements.
    In the High Performance Bonus guidance that we issued on March 17, 
1998 (TANF-ACF-PI-98-01), we noted that a State's success in meeting 
TANF performance goals could be affected by its decision to fund a 
separate State program with its maintenance-of-effort (MOE) dollars and 
that such actions might advantage one State over another. For example, 
if a State had a separate State program similar to TANF in which it put 
recipients who were more difficult to employ, its TANF performance 
results could be unfairly inflated. In such cases, we would need to 
consider including outcomes for the caseload in separate State programs 
in the performance measures. We said we would analyze separate State 
program data, as well as other information we receive on the 
characteristics of the caseload and the nature of benefits provided in 
separate State programs, in assessing how and whether to adjust a 
State's TANF performance data.
    On the issue of child support collections more specifically, while 
States have new flexibility in the way that they administer their TANF 
programs, they must continue to share a portion of child support 
collections with the Federal government. The need to share TANF-related 
collections could serve as a possible disincentive for States to pass 
through the full amount of child support to families and could create 
an incentive for States to serve needy families through separate State 
programs. State spending in these separate State programs continues to 
count under the basic MOE requirements, but States do not need to share 
the child support collected on behalf of families served by these 
programs.
    At this point, we have no evidence that States are diverting child 
support collections. For example, we are not seeing dramatic decreases 
in the Federal share of collections or changes in the average 
collection per case. In the meantime, the Administration is engaged in 
a dialogue with stakeholders on child support program financing issues 
to look at ways to address these and other related concerns. We will 
work with these stakeholders and with Congress to develop any necessary 
legislation.
    As a number of commenters suggested, under these final rules, we 
have adopted a strategy that includes gathering information, monitoring 
developments, and keeping our options open regarding future actions. 
Through our data collection, we will obtain substantial information on 
the characteristics of separate State programs, the families they 
serve, and the benefits they provide. This information will help us 
assess their potential impact on the achievement of TANF goals. We will 
consider proposing appropriate legislative or regulatory remedies, 
consistent with our legal authority, if we find that States are using 
the flexibility available under these rules to avoid work requirements, 
divert child support collections, or otherwise undermine the goals of 
TANF. However, we will not put any significant policy change into 
effect without appropriate prior consultation with States, Congress, 
and other interested parties.
Separate State Program Reporting
    Comment: Commenters also argued that the stringent reporting 
requirements and the potential loss of caseload reduction credits, 
eligibility for high performance bonuses, and certain penalty relief 
for States that failed to comply with the reporting requirements also 
discouraged States from implementing innovative separate State 
programs.
    Response: As we discuss in the preamble for Sec. 260.31, we have 
made significant changes to the proposed definition of assistance. 
These changes have a significant effect on the scope of the 
disaggregated and aggregate reporting for both TANF and separate State 
programs. Like the TANF Data Report, the SSP-MOE Data Report only 
captures information on families receiving ``assistance.'' Therefore, 
States do not have to provide detailed program and family 
characteristics data for families receiving other kinds of benefits and 
work supports. Thus, the data collection in the final rules responds to 
the commenters' concerns about the problems that would be inherent in 
requiring detailed reporting of case-record information from programs 
that bore little or no relationship, in substance or administration, to 
those providing traditional welfare benefits.
    However, information on separate State programs is still very 
important under the final rule. Thus, we still expect States to submit 
SSP-MOE Data Reports containing data on separate State programs that 
are similar to the TANF program data as a condition of receiving 
caseload reduction credits or high performance bonuses. Also, we have 
strengthened the information we will collect on SSP-MOE spending by 
expanding reporting under the TANF Financial Report and expanding 
information on all MOE programs in the annual report (as discussed in 
Sec. 265.9 and presented in Appendix I). Taken in combination, these 
data will help us ensure that each State has met its basic MOE 
requirement, properly evaluate State reports on caseload reduction 
credits, assess overall State performance, and report on program 
characteristics to the public, to the Department, and to Congress. We 
could also use the information to identify areas in which regulatory or 
legislative changes may be necessary.
    Under the final rule, we do not require that States submit the SSP-
MOE Data Report in order to qualify for penalty relief because the 
information in the report is not germane to the determination of its 
penalty amount.
    The information in the SSP-MOE Data Report is germane to 
determining if States have achieved creditable caseload reductions and 
to assessing a State's overall performance under TANF. Thus, as stated 
previously, the final rule does require that a State submit an SSP-MOE 
Data Report if it wants to receive either a High Performance Bonus or a 
caseload reduction credit (though with reduced data elements).
    Failure of a State to submit the MOE information required in either 
the TANF Financial Report or the annual report could affect a State's 
liability for a

[[Page 17731]]

reporting penalty or an MOE penalty, depending upon the nature of the 
failure.
    You should review the preamble discussion at Sec. 265.9 and 
Appendix I for information on annual aggregate reporting for MOE 
programs and the regulation at Sec. 265.3(b) and (d) and appendices E, 
F, and G for more detailed information on the data collection for 
separate State programs in the SSP-MOE Data Report.
    Finally, in the policy announcement and proposed rule, we advised 
States to think carefully about the risks to the long-term viability of 
their TANF programs if they relied too extensively on separate State 
programs to meet their MOE requirements. States cannot receive 
contingency funds unless their expenditures within the TANF program are 
at 100 percent of historic State expenditures. Thus, excessive State 
reliance on expenditures outside the TANF program to meet MOE 
requirements could make access to contingency funds difficult during 
economic downturns.
    This restriction on Contingency Fund MOE raised some concerns on 
the part of commenters. However, it represents a clear reading of the 
statutory language. Thus, we have made no change in this final rule.

B. Waivers

Background
    We have no direct interest in regulating section 415 of the Act; 
however, the continuation of waivers by a State might affect our 
application of certain of the penalty provisions within a State, 
specifically those regarding work and time-limit requirements. Thus, in 
order to administer the penalty provisions, we are providing notice 
concerning the rules that we will use in applying the penalties.
    To improve access to, and understanding of, the regulations on 
waivers, we have moved all the waiver provisions to a new subpart C of 
part 260 of the final regulation and consolidated our preamble 
discussion in this section of the preamble. First, we summarize the 
NPRM provisions that appeared in various places in the NPRM and provide 
an overall summary of the comments. Then we discuss each provision in 
the final regulation, section by section, as well as the related 
comments.
Summary of NPRM Waiver Provisions
    Under section 415, States that received approval for welfare reform 
waivers under section 1115 before enactment of PRWORA (August 22, 1996) 
have the option to operate their TANF programs under some or all of 
these waivers. For States electing this option, provisions of TANF that 
are inconsistent with the waivers do not take effect until applicable 
waivers expire.
    Section 415 also provides for delaying the effect of provisions of 
TANF related to waivers approved after enactment, but prior to July 1, 
1997. However, we do not address this specific provision in these rules 
because we approved no section 1115 waivers after enactment.
    The meaning of the term ``waiver'' is important because it governs 
the scope of section 415. The NPRM defined waiver as consisting of both 
the specific technical provisions in the approved waiver list and the 
AFDC and JOBS requirements under prior law that did not need to be 
waived, but were integral and necessary to achieve the policy objective 
of the waived provision. Thus, the proposed definition of waiver 
depended on determining a State's intent.
    The meaning of the term ``inconsistent'' is important because it 
governs the extent to which a State may delay the implementation of 
certain TANF requirements under section 415. The NPRM defined 
inconsistent to mean that complying with a TANF requirement would 
require a State to change a policy reflected in an approved waiver.
    The proposed rule applied these definitions to determine when a 
State's waivers were inconsistent with the TANF work and time-limited 
assistance requirements under sections 407 and 408(a)(7) of the Act, 
respectively. To the extent that we determined inconsistencies existed, 
we would have based the work participation rates and time-limit 
exceptions on the waiver provisions rather than the requirements of 
sections 407 and 408(a)(7).
    In particular, the NPRM allowed inconsistencies in two areas 
covered by section 407 (i.e., related to work). The first related to 
the types of activities that could count as work activities. Under the 
proposed definition, in addition to the expanded or revised activities 
specifically included in the technical waiver list (such as increased 
hours of job search), a waiver would have included the JOBS work 
activities that did not require waivers in order to be part of the 
State's program. The NPRM recognized that: (1) States had asked for 
waivers of the statutorily prescribed JOBS activities in order to 
provide what they considered to be the right mix of work activities; 
and (2) part of that mix included activities that did not require 
waivers under prior law. Thus, we would have considered such activities 
to be part of the waiver.
    The second work inconsistency recognized in the NPRM related to the 
hours of participation necessary for a recipient to be counted as 
engaged in work for the purpose of calculating the participation rates. 
To the extent that the mandated hours of work in the waiver reflected 
the individual circumstances of the participant, either due to criteria 
in the waiver itself or under an individual self-sufficiency plan, we 
would have recognized an inconsistency with the fixed hours required by 
section 407.
    The NPRM did not recognize, as inconsistent, waivers that served to 
increase the mandated hours of work for classes of recipients. The NPRM 
reasoned that there was no inconsistency in this case because TANF 
required those classes of recipients to participate for a greater 
number of hours than prior law required.
    Further, the NPRM did not recognize any inconsistencies for 
exemptions that the State had had for work participation under AFDC. 
Under the demonstrations, States had obtained waivers to change the 
exemptions of individuals from participation in JOBS. We had assumed 
that the purpose for changing the exemptions was to require more 
individuals to participate. Since we believed the State's purpose was 
increasing participation, we reasoned that maintaining the AFDC 
statutory exemptions was not necessary or integral to achieving the 
waiver's purpose. Therefore, the NPRM did not recognize the AFDC 
statutory exemptions as part of the waiver for determining 
inconsistency with TANF.
    In applying the definitions of ``waiver'' and ``inconsistent'' to 
time limits, the proposed rule recognized only those waivers that 
provided for terminating cash assistance because of the passage of 
time. We said that if a State would have to change its waiver policy on 
terminating assistance, due to the TANF time limit at section 
408(a)(7), it could apply its waiver time limit instead of the TANF 
time limit. In general, individuals subject to a State time limit would 
concurrently be subject to the TANF time limit. Those individuals who 
were exempt from the State waiver time limit would not be subject to 
the TANF time limit until the State's waiver expired. In addition, if 
the extensions of the receipt of assistance under the State waiver 
limit exceeded the 20-percent limit on extensions allowed under TANF, 
the State's extensions would govern.

[[Page 17732]]

    The NPRM did not recognize inconsistencies for States with waivers 
that: (1) had time limits that triggered work requirements, but did not 
result in the termination of assistance; or (2) had implemented 
comprehensive welfare reform initiatives under waivers that consciously 
chose not to include policies time-limiting assistance. Thus, in either 
of these situations, the State would have had to comply with the TANF 
time-limit requirements.
    The NPRM also recognized one other type of inconsistency. TANF 
cases that were part of a research group, whose treatment policies were 
being maintained for the purpose of continuing an impact evaluation, 
could continue to be fully subject to prior law policies, except as 
modified by waivers. Further, the NPRM allowed for exclusion of such 
cases from the numerator and denominator of the work participation 
rates. Maintaining different requirements for these groups was 
necessary to avoid compromising the evaluation. Information on the 
research group would be the primary basis for impact and cost-benefit 
analyses of the effects of demonstration provisions and would be 
essential to all major components of an evaluation.
    In the interest of balancing State flexibility with accountability 
and preserving the purposes of TANF (particularly those of encouraging 
work and focusing TANF on the provision of temporary support to 
families as they move to self-sufficiency), the NPRM also proposed 
certain other requirements. Specifically it: (1) Required Governors to 
certify waiver inconsistencies that a State believed apply in order to 
have the waiver rules apply in the penalty determinations; (2) denied 
certain forms of penalty relief to States continuing waivers that were 
inconsistent with TANF if States failed to meet work participation 
rates or time-limit requirements; and (3) proposed that we would 
publish information related to a State's success in meeting work 
participation rates and time-limit restrictions, as measured against 
both TANF and waiver requirements.
    Because States operating under alternative waiver requirements 
could have an advantage compared to other States, we proposed that 
States continuing inconsistent waivers would not be eligible for a 
reasonable cause exception from a related work participation or time-
limit penalty. Nor would they be eligible for a work participation rate 
penalty reduction based on severity of the failure or under our 
discretionary authority, as otherwise allowed in accordance with 
Sec. 271.51(b)(3) or (c) of the NPRM. Further, in developing a 
corrective compliance plan, the NPRM proposed that a State would have 
to consider modifying its alternative waiver requirements as part of 
that plan. If a State then continued its waivers and failed to correct 
the violation, the NPRM proposed that it would not be eligible for a 
reduced penalty for noncompliance regardless of whether the State made 
significant progress towards achieving compliance or if the State's 
failure to comply was attributable to natural disaster or regional 
recession.
Overview of Comments
    With few exceptions, the comments from States, organizations 
representing States, other organizations, and Congress relating to the 
proposed rules governing waiver inconsistencies strongly opposed our 
proposals.
    Specifically, most commenters argued that our application of the 
proposed rule violated the spirit of the law and Congressional intent 
to encourage waivers. To support this argument, they cited the language 
at section 415(c), which directs the Secretary to encourage States to 
continue operating their waivers. They argued that our narrow 
interpretation of waiver inconsistencies, along with our decision to 
deny penalty relief, would discourage continuation of waivers and 
violated the principle of State flexibility in PRWORA. They asserted 
that the proposed policies would force States to abandon their waiver 
programs.
    Finally, a number of commenters indicated that they found the 
definitions of ``waiver'' and ``inconsistent'' difficult to understand 
and apply to specific factual situations.
Overall Response
    In response to the many comments we received, the final rules take 
a different approach to the relationship between the continuation of 
AFDC waivers and the TANF requirements. While the definition of 
``inconsistent'' remains substantially the same, we have modified the 
definition of ``waiver'' to eliminate the proposed focus on intent. The 
new definition reflects the common use of the term, which refers to the 
policies that implement a particular area of reform in the 
demonstration. The revised definition allows the waiver to include a 
cluster of AFDC provisions with regard to work participation. Thus, it 
modifies how we would determine when work waivers are inconsistent.
    We also made one change in the application of the term 
``inconsistent'' to time limits; after further review, we believe that 
the NPRM did not adequately recognize a certain type of inconsistency.
    Generally, the revised definition of ``waiver'' continues to 
reflect the philosophy that a narrow, technical definition would be 
inappropriate. Rather, as reflected in common usage, the term should 
recognize that States rarely implemented the technical waivers of the 
former section 402 of the Act in isolation. Instead, technical waivers 
were generally part of a cluster of policies and requirements related 
to administering a component of a State's welfare program. For example, 
States implemented components related to time limits, family caps, work 
activities and requirements, treatment of teen parents, income and 
resource eligibility, and treatment of two-parent families. Although 
the substantive policies making up the components and the combination 
of components differed from demonstration to demonstration, these 
component areas were the core elements of the reform efforts in various 
State demonstrations and were commonly referred to as waivers.
    In the discussion that follows, the term ``waiver'' could have two 
distinct meanings; it could refer to either the technical waiver that 
was explicitly approved or the component of the demonstration. To avoid 
confusion, when we mean the technical use of the term (i.e., the waiver 
of an actual provision of former section 402 as reflected in the waiver 
list in the demonstration's terms and conditions), we will use the term 
``technical waiver.'' When we simply use the term ``waiver,'' we are 
using it (as defined in these regulations at Sec. 260.71) to mean the 
cluster of demonstration policies that the State implemented under its 
technical waiver. It is this broader definition that we will use to 
determine inconsistencies. The requirements and policies making up a 
waiver begin with one or more technical waivers, but could also include 
one or more related provisions of prior law.
    The NPRM recognized this concept of including prior law provisions 
as part of its definition of waiver, but it depended on the State's 
intent in seeking the technical waiver to determine which AFDC 
provisions should be included. Many commenters objected to this 
reliance on the State's intent to operationalize a broader waiver 
definition. The final rule contains a simpler and more objective 
definition based on the demonstration component of which the technical 
waiver is a part.
    Since our penalty authority that might be affected by waiver 
inconsistencies is related to work requirements at section 407 and time 
limits at section 408(a)(7),

[[Page 17733]]

we use those two sections to define the waiver components of work and 
time limits. We also limit our regulatory consideration of waivers to 
whether the waiver components that relate to work requirements and time 
limits are inconsistent with the respective provisions of the Act 
(i.e., section 407 for the work participation component and sanctions 
and section 408(a)(7) for the time-limit component). To the extent that 
a State's policies in the component area differ from the TANF policies, 
we will follow the waiver policies in making penalty determinations. 
You can find further discussion of the application of this definition 
in the section-by-section discussion that follows.
    Although some commenters objected to our attempt to balance State 
flexibility and accountability, accountability to the purposes of TANF 
remains important under the final rule. We believe our modified 
approach will ensure accountability while allowing waiver policies to 
continue. We recognize that States, whether continuing waivers or not, 
have generally made serious and concerted efforts to promote the TANF 
objectives as they have implemented their programs. Further, as more 
and more States reach or approach the end of their waivers, our 
concerns about delays in the implementation of the TANF provisions have 
diminished. By the effective date of these rules, waiver authority will 
have expired for 14 States, and it will expire for the remaining 32 
demonstration States within a few years. Moreover, for some of the 
remaining demonstration States, the limited scope of their waivers 
(e.g., limited to pilot sites or limited classes of recipients) means 
that the TANF provisions will be implemented broadly within the State, 
in spite of continuing waivers. Also, some of the remaining 
demonstration States have chosen to terminate waivers or to adopt 
modified policies that are more consistent with TANF than the original 
waivers.
Discussion of Specific Comments and Responses, by Section
(a) Section 260.70--What Is the Purpose of This Subpart?
    We added this section to the regulation to clarify that the 
Department's authority and interest in identifying waiver 
inconsistencies is limited to the determination of penalties in three 
areas: (1) Failing to meet the work participation requirement; (2) 
failing to impose sanctions on nonparticipants; and (3) failing to meet 
the time-limit requirement.
    Comment: A number of commenters asserted that we had totally 
exceeded our authority in regulating in this area. Some cited section 
417 and said its provisions prohibited us from defining waiver 
inconsistencies at all, leaving authority for reasonable interpretation 
to individual States. Also, some commenters believed we should give 
States full authority to determine the extent to which waiver 
inconsistencies apply.
    Response: We added this section to the final rule to clarify our 
interest in promulgating regulations on State waiver policies. In 
neither the NPRM nor the final rule have we shown any direct interest 
in regulating section 415, per se; however, continuation of waivers 
might affect the application of certain of the penalty provisions for a 
State, specifically those regarding work and time-limit requirements 
(under sections 407 and 408(a)(7) of the Act). Thus, we have the 
authority and responsibility to regulate in this area. In order to 
administer the penalty provisions on work and time limits fairly, we 
need to provide notice concerning the rules that we will use in 
applying these penalties. We limit our regulatory consideration of 
waivers to whether the waiver components relating to sections 407 and 
408(a)(7) are inconsistent with the respective provision. To the extent 
that a State's policies in the component area are inconsistent with 
TANF policies, we will follow the waiver policies in making penalty 
determinations.
    Comment: A few commenters specifically questioned the legitimacy of 
our stated objective for regulating in this area--to try to balance 
State flexibility to continue and test innovations begun under welfare 
reform waivers with accountability to the purposes of the TANF, 
particularly related to work and time-limit requirements. As some 
commenters noted, section 415 does not ``ask HHS to balance State 
policies against the virtue of the law.''
    Response: Section 415 contains ambiguity in using the terms 
``waiver'' and ``inconsistent'' without defining them. The Department's 
exercise of its work and time-limit penalty authority in a rational 
manner requires that we define those terms. As they are ambiguous on 
their face, we must look at Congressional intent. In this case, we find 
it necessary to try to balance the two potentially conflicting purposes 
of accountability and State flexibility to determine the meaning of the 
terms.
(b) Section 260.71--What Definitions Apply to This Subpart? 
(Sec. 270.30 of the NPRM)
    In the final rule, we retain the definition of ``inconsistent'' 
given in the NPRM. We define inconsistent to mean that complying with 
the TANF work participation rates or sanction requirements at section 
407 of the Act or the time-limit requirement at section 408(a)(7) of 
the Act would necessitate that a State change a policy reflected in an 
approved waiver.
    However, as previously discussed, we have revised and simplified 
the definition of waiver. In the final rule, we define a waiver as 
consisting of the work participation or time-limit component of the 
State's demonstration project under section 1115 of the Act. The 
component includes the revised AFDC requirements indicated in the 
State's technical waiver list, as approved by the Secretary under the 
authority of section 1115, and the associated AFDC provisions that did 
not need to be waived.
    Thus, the final rules for determining whether an inconsistency 
related to work exists depend on the existence of a technical waiver 
corresponding to any of the cluster of provisions included in section 
407. These provisions include: allowable work activities; mandated 
hours of, and exemptions from, work participation; and applicable 
sanctions for noncompliance with work requirements. Under the modified 
definition of waiver, if a State has any single technical waiver 
enumerated in its list of approved waivers that corresponds to any 
provision of section 407, it may incorporate prior AFDC (and the 
related JOBS) work participation rules that were part of the cluster of 
policies implemented under the waivers. Under the final rule, the 
inclusion of prior law as part of the waiver does not depend on the 
original purpose or objective of the State in seeking approval of the 
waiver.
    Finally, we have added definitions for ``control group'' and 
``experimental group'' that recognize the definitions included in the 
terms and conditions of the State's demonstration. The NPRM had special 
rules for research, control, and experimental groups in States that 
were continuing evaluations to avoid tainting the evaluations. However, 
it did not define any of those terms. The final rule retains the basic 
policies that were in the proposed rules, but refers only to 
``control'' and ``experimental'' groups. The revisions have the effect 
of making the policy clearer and addressing the concern of one 
commenter that the original terminology was not consistent

[[Page 17734]]

with its waiver approval and could undermine its ability to continue 
its evaluation.
    Comment: Commenters generally supported certain inherent concepts 
of the proposed definitions for ``waiver'' and ``inconsistent.'' In 
particular, they agreed that ``waiver'' should not include only the 
technical provisions listed in the documents approving the State's 
waivers, but should also encompass related and integral provisions of 
prior law. Similarly, they generally agreed that the term 
``inconsistent'' should apply where a State would need to change its 
waiver policies in order to comply with TANF.
    However, many commenters asserted that the proposed rules did not 
sufficiently recognize prior law as being integral to specific waivers. 
Thus, they argued the NPRM provisions would compel States to abandon 
policies they had implemented under waivers.
    Many also objected that we presupposed State objectives in 
obtaining work and time-limit waivers and thus arbitrarily narrowed the 
breadth of applicable inconsistencies. In particular, they disagreed 
with our characterizations of the purpose of the waivers that 
eliminated exemptions from JOBS participation requirements under AFDC 
law and that increased the number of hours of mandatory work 
participation for certain classes of recipients, believing they were 
too limited. (Under the proposed rules, we would have disallowed 
inconsistencies applicable to these types of waivers based on the 
rationale that TANF itself eliminated prior law work exemptions and 
expanded hours of required work participation for these affected 
classes of recipients, and thus TANF requirements were consistent with 
the purpose of State waivers.) In effect, the commenters argued that 
States increased their work requirements to establish the appropriate 
universe of recipients who should be required to work and the 
appropriate level of work participation. They noted that these stated 
purposes were analogous to the purpose we had already recognized in the 
NPRM for accepting AFDC work activities as part of the waiver, i.e., to 
find the appropriate mix of participation activities.
    A number of commenters further argued that section 415 did not 
confer on the Secretary the authority to judge a State's objectives.
    Response: The final rules reflect our continued belief that 
regulating on how a State's waiver policies would affect the 
application of certain penalty provisions is well within our statutory 
authority. However, we recognize that the NPRM's reliance on our 
ability to judge the State's purpose in seeking a specific technical 
waiver was problematic, given the limited documentation available on 
the specific purposes of particular waivers. Therefore, we have recast 
the definition in terms of an objective demonstration component. 
Components were commonly recognized as parts of the demonstration and 
are readily identifiable for penalty determination purpose; one merely 
has to associate a technical waiver relating to work requirements or 
time limits with the corresponding TANF provision that is subject to 
penalty. Thus, while maintaining the concept that ``waiver'' includes 
both the technical waiver and some portion of the former AFDC 
provisions, we have revised the definition to remove its reliance on 
the State's purpose.
    You can find a further discussion of the application of the new 
definition for work and time-limit policies at Secs. 260.73 and 260.74.
    Comment: Some of these commenters offered the perspective that a 
waiver should encompass the whole of prior AFDC law as part of the 
State's welfare reform strategy, not just specific individual waivers 
and limited related extensions of prior law.
    Response: We disagree with the commenters that Congress intended 
waivers to cover the whole of prior AFDC law. Section 415 allows States 
to continue ``one or more waivers to the extent they are 
inconsistent.'' The fact that it refers to one or more waivers and does 
not use the broader term, demonstration, in describing what is to be 
compared for inconsistency, indicates that Congress intended the 
determination of inconsistencies to be made on a more specific basis.
    Comment: A number of commenters recommended that we modify the 
definition of ``inconsistent'' to include any prior law policy in 
effect under its demonstration that, if continued, but not recognized 
as inconsistent, would give the State reason to believe that it was at 
risk of being subject to a TANF penalty.
    Response: We addressed this concern to some degree in the final 
rule by changing the definition of ``waiver.'' A State may continue 
prior law policy that is part of a demonstration component area (e.g., 
work requirements) for which the State has a waiver. Continuation of 
prior law policy that is not in a policy area that is subject to 
penalties under TANF (i.e., not related to sections 407 or 408(a)(7)) 
is outside the scope of this final rule and is left to State 
discretion.
    We declined to change the definition of ``inconsistent'' to mean a 
situation in which the State believes that continuing the policy would 
put it at risk of a penalty. Congress did not intend to eliminate 
penalties for States with waivers. Rather, it intended that we judge 
the conduct of such a State based on the requirements in the waiver, 
rather than in those in TANF, in determining whether a penalty is 
appropriate. If the State has waivers that are inconsistent with TANF, 
then the State may be subject to penalties if it fails to submit the 
required certification, fails to take the appropriate sanctions, fails 
to achieve the required participation rates under its own waiver 
policies, or otherwise violates its own waiver policies (e.g., exempts 
from time limits individuals subject to the State's demonstration time 
limit).
(c) Section 260.72--What Basic Requirements Must State Demonstration 
Components Meet for the Purpose of Determining If Inconsistencies Exist 
With Respect to Work Requirements or Time Limits? (Sec. 272.8 of the 
NPRM)
    In the final rules, we have eliminated those NPRM provisions that 
would have denied penalty relief to States that continued waivers that 
were inconsistent with TANF, but failed to meet work participation 
rates or time-limit requirements. Specifically, the NPRM had proposed 
that waiver States ought not be eligible for: (1) A reasonable cause 
exception from any of four related work participation or time-limit 
penalties; or (2) a reduction of work penalty amounts based on severity 
of the failure or under our discretionary authority, as otherwise 
allowed in accordance with Sec. 271.51(b)(3) or (c). We have also 
eliminated proposed rules that would have required a State, in 
developing a corrective compliance plan to address work or time-limit 
requirement failures, to consider modifying its alternative waiver 
requirements as part of its corrective compliance plan. Finally, we 
have decided not to deny a State that continues its waivers eligibility 
for a reduced penalty based on making significant progress towards 
achieving compliance with the work or time-limit requirements (as we 
had proposed and described in subparts B and C of part 271 and 
Secs. 274.1 and 274.2 of the NPRM).
    We had proposed imposing these rules on the basis that States 
operating under alternative waiver requirements were at an advantage 
compared to other States in being able to meet participation rates and 
comply with time-limit requirements. However, a

[[Page 17735]]

large number of commenters questioned whether the advantage that a 
waiver State had over other States in complying with specific TANF 
requirements was so great as to warrant such absolute restrictions; 
some noted the proposed rule was arbitrary in that we did not consider 
the degree of any advantage vis-a-vis other legitimate factors and 
situations that might result in noncompliance. Based on our assessment 
that our proposals might discourage States from continuing successful 
demonstration efforts, we have removed these restrictions on penalty 
relief.
    In the final rules, at Sec. 260.73(d), we retain the regulatory 
expectation to publish information about a State's success in meeting 
work participation rates, as measured against both TANF and waiver 
requirements. We do not expect to publish dual time-limit figures for 
States that have waivers of time limits that are inconsistent with the 
TANF requirements. Upon further review, for such States, we do not 
believe that it will be possible to compute the percentage of cases 
with an adult recipient that received more than 60 months of Federal 
TANF benefits under the standard TANF rules. Data reported in 
accordance with section 411(a) will not be sufficient to allow this 
calculation. We do not have the authority under section 411(a) to 
require waiver States to report the data that this calculation would 
require, and they are not germane to our penalty determinations. 
Therefore, we have deleted this specific regulatory expectation. 
However, we will be able to calculate dual work rates, and the final 
rules indicate our commitment to follow through on that proposal.
    The final rules also clarify other necessary conditions that apply 
if a State wants us to use its inconsistent waiver policies and 
requirements in the penalty determination process.
    First, the inconsistencies claimed must be within the scope of the 
approved waivers, both in terms of geographical coverage and coverage 
of the types of cases specified in the waiver approval package. For 
example, a State could not claim a statewide inconsistency if we 
approved its waiver policies for an eight-county pilot. Similarly, a 
State could not extend waivers to all adults when the approved waivers 
applied only to teen parents. Nor could waivers applicable only to two-
parent families apply to other types of cases. However, a State that is 
no longer maintaining control group cases for the purpose of completing 
an impact evaluation may choose to apply approved waiver policies to 
cases formerly assigned to a control group.
    Second, the State must have applied its waiver policies on a 
continuous basis from the date that it implemented its TANF program. 
Section 415(d) allows the State to ``continue'' one or more individual 
waivers (which, under the definitions enumerated in these final rules, 
means one or more individual demonstration components). Section 415(c) 
requires the Secretary to encourage States to ``continue'' their 
waivers. Implicit in both these provisions is that continuation of the 
waivers is necessary for a finding of inconsistency.
    This ``continuation'' requirement does not prevent a State from 
modifying policies begun under waivers. TANF clearly provides States 
with the authority to modify waiver policies inconsistent with prior 
law, but consistent with TANF (e.g., related to eligibility rules such 
as income and resource standards). These rules clarify that a State may 
modify waiver provisions that are inconsistent with TANF, provided 
that, in doing so, it makes its policies more consistent with TANF. For 
example, a State could choose to reduce the geographical scope of 
waivers, applying waivers approved for statewide implementation in only 
certain parts of the State, or a State could choose to eliminate some 
exemptions applicable to work participation or time-limited assistance, 
retaining other exemptions that are still inconsistent with TANF.
    We recognize that the issue of whether a State has continued 
waivers since the advent of TANF may be difficult to determine. 
Although ACF requested voluntary information on continuation, absent a 
final regulation, it never indicated a formal process or requirement 
for the States to submit such information about the continuation of the 
waiver policies. And, since States need not conduct evaluations as a 
condition of operating waivers, some States may have indicated that 
they were discontinuing their waivers, when in fact they intended only 
to notify us that they were discontinuing evaluations of the 
demonstration, not their waiver policies. Further, in the absence of 
final rules, some States may not have clearly understood how they 
should identify and report inconsistencies under their TANF plans. 
Also, although some may have indicated that they were continuing 
waivers with policies inconsistent with TANF, they may not have 
identified subsequent modifications in their operating policies.
    Under these final rules, to determine if a State has continued its 
work participation or time-limit waiver component and, therefore, may 
claim applicable inconsistencies, we will accept the certification of 
the Governor regarding the actual practice of the State. Many of the 
former waiver policies (for example, variations in the counting of 
income and resources for eligibility purposes) are unrelated to work 
and time limits and need not be addressed in the certification. A State 
need address only the inconsistencies related to work provisions in 
section 407 and time limits in section 408(a)(7), as explained further 
below.
    However, we wish to note that if a State has abandoned a policy 
provision that is inconsistent with TANF, the State has voided its 
waiver authority. Thus, it has lost its right to claim an inconsistency 
related to that provision. For example, a State that had technical 
waivers that allowed it to exempt all adult caretakers from work may 
have changed its policy to require participation of adult caretakers 
after it implemented TANF. While the State always had the flexibility 
subsequently to reinstate a policy exempting adult caretakers, we would 
not recognize this policy as an inconsistency in determining the work 
participation rates because the State had discontinued the prior 
technical waiver.
    We treat each technical waiver separately for continuation 
purposes. If a State discontinues one technical waiver, we will 
continue to recognize other continuing technical waivers related to 
work (for example, when a State discontinues an exemption waiver, but 
continues unlimited job search as a work activity). However, there is 
no authority in section 415 to restore discontinued policies; the 
statute allows for consideration only of continued inconsistent 
policies.
    Similarly, if a State had modified its implementation of the 
technical waiver to be more consistent with TANF, we would recognize 
only the modified policy as a continuation of the waiver.
    Third, the Governor must certify the waiver inconsistencies that 
the State is claiming, including an affirmation that the State has not 
expanded the scope of its policies and has continued the policies under 
section 415 in the interim period since implementing TANF, as discussed 
above. This requirement continues a provision of the proposed rules, 
but provides new detail about the expected content of the 
certification, particularly as it pertains to claiming specific 
inconsistencies related to work and time-limit requirements. See 
Secs. 260.73 and 260.74

[[Page 17736]]

for a more detailed discussion of work and time-limit inconsistencies.
    Finally, these final rules clarify that, despite broadening the 
scope of inconsistencies that a State may claim compared to the NPRM, 
inconsistencies with sections 407 or 408(a)(7) do not create 
inconsistencies with the penalty provisions at section 409. Thus, they 
do not have the general effect of delaying the application of the work 
participation rate or time-limit penalties at Secs. 261.50, 261.54, 
264.1, and 264.2 or the data collection requirements at part 265.
    We came to this decision because we never approved any waivers 
eliminating compliance with JOBS work participation rates (while they 
were operable) or voiding their applicability should they become 
operable. Our work component waivers only changed the substance of the 
work requirement. As for applicable data requirements, we never 
approved waivers that relieved States of data reporting requirements; 
thus, we approved no waivers that would be inconsistent with section 
411 of the Act. The work and time-limit components affected by sections 
407 and 408(a)(7) do not, of themselves, create inconsistencies because 
neither encompasses data collection requirements.
    Comment: One commenter noted that when the waiver expires for a 
State providing extensions of assistance in excess of the 60-month 
Federal time limit, a State would need to comply fully with the 20-
percent limit on extensions and that this could cause serious 
transition problems. The commenter recommended that we provide that 
``reasonable cause'' include a reasonable transition time in the case 
of a State that had been implementing an inconsistent policy under an 
approved waiver.
    Response: The ``waiver terms and conditions'' for demonstration 
projects affected by these regulations generally included a requirement 
that the State provide, and the Department approve, a plan to phase 
down and end the demonstration on the date the waiver approval expires. 
We did not authorize any waiver-related activities or costs to extend 
beyond the project period. Given that the project period for a waiver 
demonstration already includes a phase-down period, States should not 
require an additional transition period. In addition, we would remind 
States that they may fund cases above the 20-percent cap with State MOE 
dollars.
(d) Section 260.73--How Do Existing Welfare Reform Waivers Affect the 
Participation Rates and Work Rules? (Sec. 271.60 of the NPRM)
    If a State is implementing a work participation component under a 
waiver as defined in this subpart, the requirements of section 407 of 
the Act will not apply in determining whether a penalty should be 
imposed, to the extent that they are inconsistent with the State's 
waiver work demonstration component.
    To determine that the State's demonstration has a work component, 
the waiver list for the demonstration work participation component must 
include one or more specific provisions that directly correspond to 
provisions enumerated in section 407 (i.e., that cover allowable work 
activities, exemptions from participation, required hours of 
participation or sanctions for noncompliance with participation). In 
other words, the State's waiver list must include at least one 
technical waiver that changed the allowable JOBS activities, exemptions 
from JOBS participation, hours of required JOBS participation, or 
sanctions for noncompliance with JOBS participation.
    After the Governor has certified the inconsistencies with section 
407, we will calculate the State's work participation rates, if 
applicable, by: (1) Excluding cases exempted from participation under 
the demonstration and experimental and control group cases and not 
otherwise exempted; (2) defining work activities as defined in the 
demonstration in calculating the numerators of the rates; (3) including 
cases meeting the required number of hours of participation in work 
activities in accordance with waiver policy in calculating the 
numerators of the rates; and (4) excluding other cases exempt from 
participation under the waiver in calculating the denominators of the 
rates.
    We will also determine whether a State is taking appropriate 
sanctions when an individual refuses to work based on the State's 
certified waiver policies. These final rules explicitly recognize 
waiver inconsistencies related to sanctions for noncompliance with work 
requirements; the proposed rules were silent on this matter. They also 
recognize exemptions from work and changes to the required hours of 
work. Finally, they continue to recognize inconsistencies related to 
allowable work activities, as we proposed in the NPRM.
    It is important to stress that a State need not have a technical 
waiver in a particular part of the work component (e.g., work 
activities or exemptions) to claim that the related AFDC provisions for 
that part of the component are part of its waiver. Rather, the State 
needs one or more technical waivers related to a provision of section 
407 to claim applicable prior law in all areas that are part of section 
407.
    Thus, a State with a waiver work component may delay implementing 
TANF requirements for work participation for individuals exempt from 
JOBS if such exemptions have been part of the State's continuing 
demonstration policies. A State with a demonstration work component, 
but without a technical waiver modifying JOBS exemptions, may still 
include all prior law exemptions (or a modification of these exemptions 
that is more consistent with TANF), if such exemptions have been part 
of the State's continuing policies for work participation. For States 
with waivers that eliminated some (but not all) JOBS exemptions, the 
remaining exemptions would apply, if they have been part of the State's 
continuing demonstration policy. However, because all States will need 
to conform to all TANF rules once their waivers expire, we urge States 
to plan accordingly.
    Under these final rules, a State may claim inconsistencies 
applicable to hours of work if it has technical waivers related to 
section 407 and could, in an audit, provide written evidence (e.g., 
terms and conditions or policy manuals) to document that its waiver 
policies, as implemented, expressly provided for alternative rules with 
respect to the hours of work required of nonexempt individuals.
    The ability to provide such written evidence is necessary because 
prior law did not generally have requirements for the number of hours 
an individual must work to be considered participating. Rather, prior 
law had a calculation methodology that included any JOBS participants 
as long as including them did not reduce average hours below 20 hours 
per week. If no written policy was in effect, we would hold the State 
to the TANF hours-of-work requirements.
    Finally, a State may also choose to exempt, from the participation 
rate calculation, experimental and/or control group cases that are not 
otherwise exempt. It may remove experimental group cases as a class, 
control group cases as a class, or both experimental and control group 
cases on a class basis. However, it may not exclude such cases on an 
individual basis.
    Comment: All those commenting on the subject supported counting 
towards the work participation rate calculation those work activities 
allowed under

[[Page 17737]]

waiver authority without regard to TANF restrictions, as we proposed in 
the NPRM. However, many commenters asserted that the rules should not 
restrict inconsistencies related to prior law exemptions from work 
participation, where those policies were part of a State's welfare 
reform program. In support of their position, several organizations and 
States argued that, because section 415(a)(2)(B) specifies that waivers 
approved after enactment may not affect the applicability of section 
407 (concerning compliance with work participation rates), Congress 
fully intended the inverse to apply to waivers approved before 
enactment. Therefore, we should recognize all continued policies 
related to compliance with TANF work requirements as inconsistencies.
    Response: Our revised waiver definition would allow the States with 
waiver work components to include all prior law exemptions, and other 
AFDC (and JOBS) work policies, as part of the waiver, if such policies 
were part of the welfare reform demonstration that the State 
implemented under its technical waiver(s).
    Comment: A number of commenters asserted that hours of mandated 
work that were related to waivers and increased the JOBS requirements 
for a class of individuals should be claimable as an inconsistency.
    Response: These comments addressed a problem with the reference to 
a State's intent in our proposed definition of waiver (an issue that we 
addressed earlier). Since the final rules rely on the existence of 
waiver work components, rather than intent, they recognize increased 
hours as part of the waiver. If the amount of the required hours under 
the waiver is inconsistent with the required hours under section 407, 
the Governor can certify the inconsistency.
    Comment: Some commenters asserted that we could not even hold 
States operating under waivers to a work participation rate 
requirement--i.e., that we should delay the effect of section 407 in 
its entirety until State waiver authority expires.
    Response: Under section 1115, there were limits on what we approved 
as part of a demonstration project. The Secretary only had authority to 
waive provisions of the AFDC program that were included in former 
section 402. That section contained the provisions regarding the 
determination of eligibility, the amount of assistance, and required 
procedures for State administration of the plan. The Secretary could, 
and did, grant waivers concerning the content of the JOBS program (the 
AFDC work program), which was included at section 402(a)(19). However, 
the required work participation rate associated with JOBS was at the 
former section 403(l). Since the Secretary had no authority to waive 
this provision, we never approved any requests from States to waive it.
    Thus, no State has a waiver of participation rates that would 
conflict with the work participation rate penalty provision at the 
former section 409(a)(3). For a State to argue that the work penalty 
does not apply, it would have to show a technical waiver that is 
inconsistent with any application of the work penalty. However, waivers 
that create the content or substance of a State's demonstration work 
program are just that--definitions of the content of a work program. As 
such, they may be inconsistent with the content of the TANF work 
program at section 407 and may allow the State to substitute the 
substance of the work program in its demonstration for the program 
specified in section 407, to the extent that the State determines there 
is an inconsistency. However, there would be no inconsistency in 
applying the section 409(a)(3) work participation penalty as long as 
participation was determined under the State's demonstration work 
program.
    Since the final rule bases the penalty under section 409(a)(3) on 
what was required participation under the State's demonstration work 
program, there is no inconsistency. Delay of the work participation 
penalty itself in these circumstances would fall outside any reasonable 
definition of waiver or inconsistency.
(e) Section 260.74--How Do Existing Welfare Reform Waivers Affect the 
Application of the Federal Time-Limit Provisions? (Sec. 274.1(e) of the 
NPRM)
    If a State is implementing a time-limit component under a waiver, 
until the waiver expires, the provisions of section 408(a)(7) of the 
Act will not apply in determining whether to impose a penalty, to the 
extent that they are inconsistent with the waiver.
    To determine that the State's demonstration has a time-limit 
component, the waiver list for a demonstration time-limit component 
must include provisions that directly correspond to the time-limit 
policies enumerated in section 408(a)(7) (i.e., that address which 
individuals or families are subject to, or exempt from, terminations of 
assistance based solely on the passage of time, or who qualifies for 
extensions to the time limit).
    In general, the final rule requires a State with a waiver time-
limit component to count, toward the Federal five-year limit, all 
months for which the adult who is subject to the State time limit 
receives assistance with Federal TANF funds, just as it would if it did 
not have an approved waiver.
    The State need not count, toward the Federal five-year limit, any 
months for which an adult receives assistance with Federal TANF funds 
while the adult is exempt from the State's time limit under the State's 
approved waiver. Nor need the State count, toward the Federal five-year 
limit, months for which an adult subject to an adult-only State time 
limit under the State's waiver receives assistance with Federal TANF 
funds.
    The State may continue to provide assistance with Federal TANF 
funds for more than 60 months, without a numerical limit, to families 
provided extensions to the State time limit, under the provisions of 
the terms and conditions of the approved waiver.
    After the Governor certifies time-limit inconsistencies, we 
calculate the State's time-limit exceptions by: (1) Excluding, from the 
determination of the number of months of Federal assistance received by 
a family, any month in which the adult(s) (or children where a waiver 
only terminated assistance to adults) were exempt from State's time 
limit under the terms of the State's approved waiver; and (2) applying 
the State's waiver policies with respect to the availability of 
extensions to the time limit.
    The changes that we have made to the framework of how we define 
waiver inconsistencies have less effect on inconsistencies related to 
time-limiting assistance than to work. The main reason for this 
difference is that no prior law policies existed governing time-limited 
assistance. All time limits were the result of waivers. Thus, there are 
fewer issues about what a time-limit waiver includes. However, there 
are significant issues about what is allowable as an inconsistency; 
under these rules, the constraining factor is whether a State's 
demonstration project has a time-limit component related to the 
provisions in section 408(a)(7).
    Prior to the passage of PRWORA, a ``time limit'' could take any 
number of forms. However, under TANF, the penalty relates to the time 
limit in section 408(a)(7), which recognizes only time limits that 
terminate assistance with the passage of time (i.e., that terminate 
assistance to families with adults who received Federal TANF assistance 
for 60 months). Other parts of TANF address time limits in different 
contexts, such as those that trigger work requirements. However, these 
latter types of provisions are not subject to the penalty provision 
under section

[[Page 17738]]

408(a)(7), and we do not address them in this regulation.
    Therefore, as we proposed under the NPRM, we are allowing time-
limit inconsistencies only for those States with waiver policies that 
terminate assistance solely as the result of the duration of receipt. 
Under these rules, if a State has a technical waiver meeting this 
requisite, we compare its provisions with those at section 408(a)(7) to 
determine whether there are inconsistencies.
    As with work participation, States may also choose to exempt 
experimental and/or control group cases that are not otherwise exempt 
from time limits. However, a State may exclude such experimental and 
control group cases only on a group basis, not on an individual basis.
    Comment: Commenters generally agreed that inconsistencies should be 
recognized that allowed a State to: (1) exempt certain cases from 
having months counted toward the 60-month time limit; and (2) provide 
extensions to more than 20 percent of the caseload after reaching the 
limit.
    Response: We have retained these policies in the final rule.
    Comment: Some commenters argued that section 415 was designed to 
allow States to continue their welfare reform initiatives as a whole. 
On this basis, they maintained that any State that consciously chose 
not to include time-limited assistance provisions in the comprehensive 
welfare reform initiatives that it implemented under waivers should be 
able to claim a time-limit inconsistency.
    Response: Section 415 was not designed to carry over prior law in 
its entirety, nor to delay TANF requirements where waivers did not 
exist prior to implementation. Rather, it allows delay in implementing 
new TANF provisions ``to the extent such amendments are inconsistent 
with the waiver.'' Thus, we find no statutory basis for allowing 
inconsistencies to be claimed in this particular situation because no 
waiver exists.
    Comment: Some commenters argued that we should also allow time-
limit inconsistencies to apply where a State has implemented time 
limits that serve to trigger work requirements.
    Response: We do not recognize other waiver provisions, such as 
those where States used ``time limits'' to trigger work requirements, 
as inconsistent with time limits. The purpose of this section of the 
regulation is to determine the applicability of the time-limit penalty 
at section 409(a)(9). This penalty applies to any failure to meet the 
time-limit requirements at section 408(a)(7). Time limits triggering 
work requirements are found in sections 402 and 407, not section 
408(a)(7). Therefore, such policies do not fit within the definition of 
a waiver related to the time-limit component associated with 408(a)(7).
    Comment: One commenter recommended that, if we retained the 
proposed rules related to time-limit waiver inconsistencies, the 
preamble discussion should clarify that ``reduction waivers'' (adult-
only time limits) represent an inconsistency.
    Response: We have incorporated this change in the final rule. 
States with waivers terminating assistance for adults only may choose 
to delay counting months toward the Federal 60-month time limit for as 
long as they continue to apply adult-only policies under their State 
time limit. While the proposed rules had required that time against the 
Federal time clock be counted for any month in which an adult was 
subject to the State time limit (i.e., that the Federal and State 
clocks would run concurrently), this policy would have had an effect 
that was inconsistent with the waiver policy. Because time charged 
against an adult would have ultimately resulted in the termination of 
benefits to the whole family under TANF, the proposed policy would have 
resulted in time being counted against child recipients. While children 
are protected from termination of benefits while the waiver is 
operable, counting time against adults in the case would have, in 
effect, counted time against the family's (and children's) length of 
receipt of assistance. This result would have been contrary to the 
purpose of the adult-only time-limit waivers, which was to exempt 
children from any effect of the time limit. Thus, in submitting a 
Governor's certification of continuing waiver inconsistencies, the 
State may claim a time-limit inconsistency for its adult-only time 
limit.
    Comment: Another commenter said that we should allow all cases 
subject to a time limit adequate prior notice before a clock begins to 
count against them. Thus, States that have applied a reasonable 
statutory interpretation of section 415 to exempt cases from the 
Federal time limit should not have to count time retroactively against 
these cases (i.e., count time accrued prior to the effective date of 
the final rules).
    Response: As we have previously stated, these rules apply only 
prospectively; until they are effective, the State's reasonable 
interpretation of the statute applies. An individual who was considered 
exempt from the Federal time limit under the State's reasonable 
interpretation of its waiver would only have the Federal limit apply 
prospectively, beginning October of 1999. This policy will allow States 
time to provide the recipient with adequate notice.
(f) Section 260.75--If a State Is Claiming a Waiver Inconsistency for 
Work or Time Limits, What Must the Governor Certify? (Sec. 272.8(a) of 
the NPRM)
    If a State is claiming waiver inconsistencies, the Governor must 
certify that the State has continuously maintained applicable policies 
in operating its TANF program and that the inconsistencies claimed by 
the State do not expand the scope of the approved waivers. Further, the 
certification must identify the specific inconsistencies that the State 
chooses to continue with respect to work and time limits.
    If the waiver inconsistency claim includes work provisions, the 
certification must specify the standards that will apply in lieu of the 
provisions in section 407. Specifically, it must include, as 
applicable: (1) Descriptions of two-parent and other cases that are 
exempt from participation, if any, for the purpose of determining the 
denominators of the work participation rates; (2) the rules for 
determining whether nonexempt two-parent and other cases are ``engaged 
in work'' for the purpose of calculating the numerators of the work 
participation rates, including descriptions of the countable work 
activities and minimum required hours; and (3) the penalty against an 
individual or family when an individual refuses to work. Again, the 
certification may include a claim of inconsistency with respect to 
hours of required participation in work activities only if the State 
has written evidence that, when implemented, the waiver policies 
established specific requirements related to hours of work for 
nonexempt individuals.
    If the waiver inconsistency claim includes time-limit provisions, 
the Governor's certification must include the standards that will apply 
in lieu of the provisions at section 408(a)(7). It must specify the 
standards that will apply in determining: (1) Which families are not 
counted towards the Federal time limit; and (2) whether a family is 
eligible for an extension of its time limit on federally funded 
assistance.
    If the State is continuing policies for evaluation purposes, the 
certification must specify any special work or time-limit standards 
that apply to the experimental and control group cases. The State may 
choose to exclude cases assigned to the experimental and

[[Page 17739]]

control groups that are not otherwise exempt, for the purpose of 
calculating the work participation rates or determining State 
compliance related to limiting assistance to families including adults 
who have received 60 months of TANF assistance. Thus, the State may 
exclude all experimental and control group cases, not otherwise exempt. 
However, it may not exclude such cases on an individual, case-by-case 
basis.
    A State must provide the initial Governor's certification by 
October 1, 1999. It would be very helpful to receive the certification 
by July 1, 1999, in order to assess how inconsistencies will apply for 
data collection and reporting efforts before the effective date of the 
new requirements. We would like to resolve any issues about the 
treatment of waiver cases before the reporting requirements take 
effect, because it is much easier to code information correctly the 
first time than to modify the codes retroactively. In light of the 
number of States continuing waivers and some of the detailed, case-
specific questions that we anticipate might arise, we want to build in 
ample time to resolve all issues by October 1, 1999. It will certainly 
be in a State's interest if we can resolve all questions by the 
effective date of the new requirements.
    Also, we would point out that, until a State has submitted its 
Governor's certification, we will treat the State as a nonwaiver State 
in determining its compliance with work participation rate and time-
limit standards. Likewise, if we determine that a Governor's 
certification does not comply with the requirements of this subpart, we 
will advise the State of the inconsistency and give it an opportunity 
to revise the certification. We will accept alternative rules for 
determining penalties related to work participation rates and time-
limit exceptions only to the extent that they comply with the 
requirements of this part.
    If a State modifies its waiver policies, after it provides the 
certification, in a way that has a substantive effect on the 
calculation of its work participation rates, time-limit exceptions, or 
sanctions, it must submit an amended certification by the end of the 
fiscal quarter in which the modifications take effect.
    Comment: A few commenters questioned whether we had the authority 
specifically to require that Governors certify which waivers States 
were continuing. Some of these saw this requirement as an added burden 
that duplicated information already submitted in their State TANF plans 
or documented as part of their waiver approval.
    Response: We disagree that we have no authority to require the 
certification. As discussed, the Department has had no formal process 
for determining a State's decisions on the continuation of waivers. The 
information that has been provided has been sporadic and is not 
necessarily current or complete. Since we will be relying on the 
State's determination that it has continued an inconsistent waiver 
component in making penalty determinations, we must have accurate, up-
to-date information on the State's decision to continue its 
inconsistent work and time-limit components in order to make those 
penalty determinations correctly and on a timely basis. As such 
information is necessary to our implementation of the penalty 
provisions, we have authority under those provisions to collect it.
(g) Section 260.76--What Special Rules Apply to States That Are 
Continuing Evaluations of Their Waiver Demonstrations? (Sec. 271.60(c) 
and (d) and Sec. 274.1(e)(4) of the NPRM))
    If a State is continuing policies that employ an experimental 
design in order to complete an impact evaluation of a waiver 
demonstration, the experimental and control groups may be subject to 
prior law, except as modified by the waiver.
    We have added definitions for experimental and control groups at 
Sec. 260.71 (and cross-references at Sec. 260.30). These definitions 
reference the terms and conditions in the State's demonstration.
    Comment: One commenter suggested that we should allow any State in 
which more than half of its families are subject to waiver policies as 
part of a research group to apply the same waiver policies to the rest 
of the families in the State, as long as the State does not expand the 
geographical scope of the waiver authority. The same rule would apply 
to a county operating a waiver demonstration in a county-administered 
State. Another commenter indicated that States may be less likely to 
continue an evaluation if we do not allow a State to apply policies 
permitted for the research group to a broader set of families.
    Response: While we sympathize with the commenters' desire to reduce 
administrative complexity, we do not see why the complexity is any 
greater when a majority of the caseload is in the experimental and 
control groups than when a minority is. Furthermore, implementing this 
policy would introduce complexities of its own in terms of the 
measurement required to determine what rules apply in a given 
jurisdiction. Since both the number of families in the experimental and 
control groups currently on assistance and the total number of families 
currently on assistance vary from month to month, rules could vary 
month to month. In contrast, the experimental and control groups are 
well-defined; a family is either assigned to them or not. Therefore, 
under the final rule, determining when and to which families to apply 
the pre-TANF policies is relatively simple.

C. Child-Only Cases

Background
    The calculations for work participation rate and time-limit 
penalties center around the concept of ``family.'' Under the proposed 
rules, we indicated that a State could develop its own definition of 
``family,'' with the proviso that States could not create definitions 
that excluded adults from cases solely for the purpose of avoiding 
penalties. To monitor that restriction, we proposed that States report 
annually on the number of cases excluded from penalty calculations, and 
the reasons for each exclusion. We said we would add families back into 
the calculation if we found they were excluded for the purpose of 
avoiding penalties. You may find the specific proposals in 
Secs. 271.22(b)(2), 271.24(b)(2), and 274.1(a)(3) of the proposed rule.
    These provisions reflected our concern that States might convert 
cases to child-only cases to avoid the statutory work participation and 
time-limit requirements. In part, our concern was a reaction to public 
comments that States and advocates made shortly after PRWORA's 
enactment suggesting that States might take such actions. It also 
reflected our view that such conversions would seriously undermine 
critical provisions of welfare reform.
Overview of Comments
    Several commenters supported our decision to recognize that States 
had the primary authority to define ``family.'' However, a large number 
of commenters, from a diversity of groups, opposed or expressed 
concerns about our specific proposals in this area. The comments 
generally objected to our distrust of States and the pre-emption of 
State decisions to define families as they deemed appropriate.
    Several commenters challenged the statutory basis for our proposal. 
Some did not directly challenge our authority, but questioned the 
practicality of our proposed approach. Commenters pointed out 
inconsistencies in the language that we had used in different parts of 
the regulation and noted that

[[Page 17740]]

the determination of whether States created definitions for the sole 
purpose of avoiding penalties would involve subjective determinations 
of motive. To minimize these problems, they offered several suggestions 
about how we might clarify what types of cases might be subject to 
recalculation.
    Under one proposal, States would describe their child-only cases in 
the State plan or procedures. We could then discuss beforehand with 
States the appropriateness of these cases. Other commenters offered a 
related suggestion that we set up a process for States to get approval 
of reasons for conversions up-front, but did not identify a specific 
format for the State submissions.
    Another suggestion was that State definitions would automatically 
prevail, but that HHS would inform Congress if distortions of 
legislative intent seemed to result. In other words, in the absence of 
any documented abuses, we would simply gather information on what 
States are doing and permit States to use any definition of family that 
has a reasonable policy basis. Then, if we discover evidence that 
States were trying to subvert the TANF provisions, we could work with 
Congress in developing solutions.
    Some commenters noted that child-only cases existed under AFDC and 
enumerated examples of child-only cases that we should acknowledge as 
acceptable, including: cases in which the adults have no legal 
liability for the care of the children, cases with recipients of SSI or 
other disability payments, cases with adults not receiving assistance 
because they exhausted shorter State-imposed time limits, cases with 
noncitizen parents or adults ineligible for other reasons (e.g., SSI 
receipt or a drug felony conviction), cases that were previously 
converted under approved waiver policies, and cases with elderly 
caretakers.
    We also received suggestions that we should explicitly permit 
States to continue to provide assistance to children: (1) once the 
parent/relative loses eligibility due to the expiration of the five-
year time limit; (2) whose parent/relative was sanctioned for failure 
to participate in work or cooperate with child support enforcement 
requirements; and (3) whose parent or caretaker would be better served 
by some other State program, such as if she is disabled.
    In addition to specific objections or questions, many commenters 
expressed the overall concern that our proposal to control for 
inappropriate child-only cases may inhibit the State flexibility 
essential to TANF. State anxiety about Federal recalculation of penalty 
liability could create a ``chilling effect'' that caused States to 
limit child-only cases unnecessarily and inappropriately. In the words 
of one commenter, ``the uncertainty of knowing whether their policy 
basis will be considered legitimate and how work participation rates 
and time-limit compliance will be measured by HHS could simply lead 
States to avoid serving children as child-only cases even if the result 
is not to serve the children at all.''
    Commenters did not want to see assistance to valid child-only cases 
undermined by our rules. Of particular concern was the effect of our 
proposals on State efforts to keep children in the homes of relatives, 
in lieu of foster care placements.
    Others noted that, up to this point, we do not have evidence that 
States are converting cases to child-only cases for the purpose of 
avoiding TANF requirements; we have not observed significant changes in 
State policy or practice to create new child-only cases. Only if such 
changes actually occur should HHS develop corrective procedures.
Overall Response
    When we were developing the proposed rules, we were very concerned 
that States would use the flexibility available in defining families to 
avoid work participation requirements, time limits, and other TANF 
requirements. Within the authority that we have to collect 
participation rate information and make decisions on State penalties, 
we proposed specific regulatory policies with respect to penalties and 
reporting in response to that concern. However, as we have seen the 
TANF programs evolve, our concerns about possible abuses have 
diminished.
    While the number of child-only cases has been increasing over time, 
commenters correctly observed that the increases began well prior to 
TANF and that there is little indication so far that States are 
converting cases merely to avoid penalties. In fact, a couple of 
internal State analyses (i.e., in Florida and South Carolina) have 
found no evidence of conversion of cases to child-only cases from other 
statuses.
    Also, commenters correctly noted that there were numerous child-
only cases that were considered valid under prior law. Their existence 
under TANF therefore does not suggest that States are working to 
subvert TANF requirements in this manner. Over the past several years, 
there were a number of social and demographic changes underway that 
could have contributed to much of the growth in child-only cases. For 
example: (1) Because of the ``crack'' epidemic, some infants moved from 
the care of their mothers to the care of their grandmothers or other 
adult relatives (who may or may not have been needy); (2) in some 
places, immigration changes could have caused a growth in the number of 
eligible children with ineligible alien parents; and (3) in other 
places, States have made an effort to establish eligibility for SSI. 
(If parents became SSI-eligible, the children normally received 
assistance as child-only cases.)
    Recently, we have seen a reduction in the total number of child-
only cases. However, because the number of other types of cases has 
been declining faster, the proportion of child-only cases has not gone 
down. Thus, State success in moving more families to work may actually 
be causing an increase in the proportion of child-only cases.
    At the same time, we disagree with the suggestion that it would be 
appropriate to provide federally funded assistance to children in 
child-only cases when their parents reach the 60-month limit on Federal 
assistance. Such a result would be consistent with an adult-only time 
limit, but does not seem consistent with the intent of the specific 
provision in the law. For example, the provisions on transfers to the 
Social Services Block Grant program suggest that children in families 
whose adults reached their 60-month limit were not expected to continue 
receiving federally funded TANF assistance.
    While we disagree with the commenters' suggestion that we did not 
have legal authority to regulate in this area, we understand 
commenters' concern that the provisions in the proposed rules may do 
more harm than good. In the absence of clear evidence that States are 
converting cases to avoid the TANF rules, we have decided that the most 
appropriate response at this point is to give States leeway to define 
families in ways that they think are most appropriate while gathering 
better information on how child-only policies might be affecting the 
achievement of TANF goals.
    However, the possible conversion of cases to child-only status to 
avoid TANF requirements remains a major policy concern. For example, 
such conversions could effectively eliminate restrictions on the amount 
of time that any family could receive federally funded TANF assistance 
or could undermine the statutory provisions on the treatment of 
sanction cases in the participation rate calculations. We therefore 
intend to track it closely. To that end, we have added one data element 
to the disaggregated case-record reporting that will identify cases 
that have been

[[Page 17741]]

converted to child-only status since the past month. We will use the 
quarterly TANF Data Report to monitor trends both in the aggregate 
number and type of child-only cases and the number of conversions. By 
monitoring these trends, we should be able to identify changes in State 
practice or caseload characteristics that would merit further 
investigation. If we saw a significant number of conversions to child-
only status in a particular State (i.e., a number that was out of line 
with prior State numbers or the numbers for other States), we would 
look more closely at that State.
    We have a variety of investigative tools available to us, including 
detailed analysis of the case-record information reported to us, the 
Single State Audit, supplemental reviews, and targeted studies (like 
the current ASPE study mentioned below).
    We will incorporate a full analysis of the information we have 
gathered on what has been happening with child-only cases in our annual 
report to Congress.
    As a number of commenters suggested, under these final rules, we 
have adopted a strategy that includes gathering information, monitoring 
developments, and keeping our options open regarding future actions. 
Through our data collection, we will obtain substantial information on 
the characteristics of child-only cases, trends in their number and 
type, and conversions. This information will help us assess the 
possible effect of such cases on the achievement of TANF goals. We will 
consider proposing appropriate legislative or regulatory remedies if we 
find that States are using the flexibility available under these rules 
to define families to avoid work requirements or time limits or 
otherwise undermine the goals of TANF. However, we will not put any 
significant policy change into effect without appropriate prior 
consultation with States, Congress, and other interested parties.
Tracking of Child-Only Cases
    Comment: A significant number of commenters also objected to our 
proposals at Secs. 271.22(b)(2)(i), 271.24(b)(2)(i), 274.1(a)(3)(i), 
and 275.9(a)(1) that States annually report to us on their child-only 
cases and advise us of the specific nature of each of the cases. 
Commenters generally felt it was an unjustified additional burden for 
States. Some objected to the specific wording of the requirement 
because it suggested that we expected case-by-case reporting of such 
cases rather than aggregated reporting.
    Response: We have removed the requirement for annual reports on 
families excluded from work-rate and time-limit calculations and the 
reasons for their exclusion. The proposed language was not consistent 
in different parts of the NPRM package and caused some confusion.
    Monitoring trends in the number and type of such cases remains an 
important issue. However, we decided that a different type of data 
would be more helpful in helping us track conversions. Thus, we have 
added a new data element to the TANF Data Report that will identify the 
specific cases that have become child-only cases. These new data will 
supplement other data on child-only cases available through the TANF 
and MOE-SSP data reports and give us a solid basis of information for 
assessing national and State trends in the number and nature of child-
only cases. From other data elements in those reports, we will get 
disaggregated, case-level data on parents and other individuals who are 
in the household, but not in the family receiving assistance. We will 
get information on whether there are parents who are ineligible for 
receipt of Federal benefits, whether the cases are under sanction, and 
whether cases have no parent in the home. To provide still further 
supplemental information, the Office of the Assistant Secretary for 
Planning and Evaluation is undertaking a study in three States to 
explore the circumstances of child-only cases in more detail.
    Together, these information sources will provide valuable insight 
into the nature of child-only cases and the types of services and 
assistance States are providing them. We will be able to track any 
significant changes in the number and types of such cases and be in a 
better position to determine if we need to pursue further action. 
Depending on what specifically is happening, an appropriate response 
could be information-sharing, consultations, technical assistance, or 
regulatory or legislative proposals.
    To reflect our other decisions on child-only cases, we deleted the 
provisions at Secs. 271.22(b)(2), 271.24(b)(2), and 274.1(a)(3) of the 
proposed rule that prohibited conversion of child-only cases for the 
purpose of avoiding penalties, indicated that we would add cases back 
into the work participation rate and time-limit calculations if we 
found that they had, and required separate annual reporting on child-
only cases. We also deleted comparable annual reporting language at 
Sec. 275.9(a)(1). We believe that we will have sufficient information 
through the TANF Data Report to monitor child-only cases; we determined 
that the separate annual reporting requirements were redundant.

D. Treatment of Domestic Violence Victims

Background
    The Administration has shown a strong commitment to reducing 
domestic violence and helping victims of domestic violence access the 
safety and supportive services that they need to make transitions to 
self-sufficiency. In the proposed rule, we showed this commitment by 
promoting implementation of the Family Violence Option (FVO), a TANF 
State plan provision that provides a specific method for addressing the 
needs of domestic violence victims receiving welfare.
    Under section 402(a)(7) of the Act, States may elect the FVO. This 
State plan option provides for identification and screening of domestic 
violence victims, referral to services, and waivers of program 
requirements for good cause. In the NPRM, we proposed to grant 
``reasonable cause'' to States that either failed to meet the work 
participation rates or exceeded the limit on exceptions to the five-
year time limit because of program waivers granted under this 
provision. To be considered for this purpose, a ``good cause domestic 
violence waiver'' would need to incorporate three components: (1) 
Individualized responses and service strategies, consistent with the 
needs of individual victims; (2) waivers of program requirements that 
were temporary in nature (not to exceed 6 months); and (3) in lieu of 
program requirements, alternative services for victims, consistent with 
individualized safety and service plans.
    In addition, to be considered in determining reasonable cause for 
exceeding the time-limit exceptions, such waivers had to be in effect 
after an individual had received assistance for 60 months, and the 
individual needed to be temporarily unable to work.
    Our proposed rules attempted to remain true to the statutory 
provisions on work and time limits and to ensure that election of the 
FVO was an authentic choice for States. In deciding to address these 
waiver cases under ``reasonable cause'' rather than through direct 
changes in the penalty calculations, we tried to both reflect the 
statutory language and maintain the focus on moving families to self-
sufficiency. At the same time, we were giving States some protection 
from penalties when their failures to meet the

[[Page 17742]]

standard rates were attributable to the granting of good cause domestic 
violence waivers that were based on individual assessments, were 
temporary, and included individualized service and safety plans. We 
hoped our proposal would alleviate concern among States that attention 
to the needs of victims of domestic violence might place them at 
special risk of a financial penalty.
    We welcomed comments on whether our proposed approach and language 
achieved the balance we were seeking.
    Also, to ensure that these policies have the desired effect, we 
proposed to limit the availability of ``reasonable cause'' to States 
that have adopted the FVO. We indicated that we reserved the right to 
audit States claiming ``reasonable cause'' to ensure that good cause 
domestic violence waivers that States include in their ``reasonable 
cause'' documentation met the specified criteria. And we said we 
intended to monitor the number of good cause waivers granted by States 
and their effect on work and time limits. We wanted to ensure that 
States identify victims of domestic violence so that they may be 
appropriately served, rather than be exempted and denied services that 
could lead to independence. We also wanted to ensure that the provision 
of good cause waivers did not affect a State's overall effort in moving 
families towards self-sufficiency. Thus, we said we would be looking at 
information on program expenditures and participation levels to see if 
States granting good cause waivers were making commitments to assist 
all families in moving toward work.
    If we found that good cause waivers were not having the desired 
effects, we said we might propose regulatory or legislative remedies to 
address the problems that we identified.
    For additional discussion of our proposals, we referred readers to 
Secs. 270.30, 271.52 and 274.3 of the preamble and proposed rule.
    In the final rule, we have consolidated the provisions in a new 
subpart in order to make our policies more coherent. We have also made 
some changes to align the regulatory text more closely with the 
statutory language. For example, we modified the six-month time limit 
placed on good cause domestic violence waivers. Recognizing that the 
statute authorizes waivers for ``as long as necessary,'' we have 
incorporated similar language in the rule, but called for six-month 
redeterminations. We have also incorporated statutory language 
describing the Family Violence Option, including its reference to 
confidentiality.
Comments and Responses
(a) General Approach
    Most commenters generally approved of the way that the proposed 
rule attempted to protect victims of domestic violence. A significant 
number commended DHHS for recognizing the significance of domestic 
violence as a national problem and acknowledging the link between 
domestic violence and poverty. Many expressed the view that the 
approach we took was reasonable and provided States with the penalty 
protection that they needed. However, a few disagreed with the basic 
approach we took, and a substantial number of commenters raised 
concerns about specific aspects of the proposed rule.
    Response: Our rules do not limit a State's authority to grant 
``good cause'' waivers under the Family Violence Option, but they do 
limit the circumstances under which we will provide special penalty 
relief to States granting such waivers. In other words, if a State's 
waivers do not comply with the standards in these rules, the State does 
not get special consideration in our penalty determinations if it fails 
to meet the work participation requirements or exceeds the limit on 
Federal time-limit exceptions.
    To emphasize this distinction, in the final rules, we created a new 
term ``federally recognized good cause domestic violence waivers'' at 
Sec. 260.51. A ``good cause domestic violence waiver'' refers to any 
waiver granted by a State consistent with the FVO. A ``federally 
recognized good cause domestic violence waiver'' refers to a waiver 
that also meets the standards that we have established for special 
consideration in our penalty determinations.
    As we discuss in more detail below, we made some additional changes 
to the proposed rule in response to the comments that we received. We 
also moved the provisions on domestic violence (including the 
definition provisions that were in Sec. 270.30 of the proposed rule) to 
a new subpart B of part 260. In addition, we revised the language at 
Sec. 264.30(b). The revised language explicitly recognizes that 
individuals may receive waivers of child support cooperation 
requirements under the FVO and that our rules would treat such waivers 
like good cause exceptions granted under the child support statute (at 
section 454(29) of the Act).
    In summary, the final rule retains the same basic approach as the 
proposed rule--i.e., it gives States penalty relief if their failure to 
comply with the work participation rate or time-limit standards is 
attributable to the granting of good cause domestic violence waivers 
that meet certain Federal standards. It retains a requirement for 
service and safety plans, but makes important modifications related to 
policies on the duration of the waivers that we would recognize, 
confidentiality protections, work expectations, information that the 
State must provide with respect to its service strategies, and the 
standards for time-limit waivers. In addition, the preamble clarifies 
the flexibility available to States in delivering services to victims 
of domestic violence and the mechanisms in place for protecting victims 
from unfair penalties.
    Comment: A minority of the commenters argued that we should exclude 
individuals granted waivers of work requirements under the FVO from the 
calculation that determines a State's overall work participation rates 
for each month in the fiscal year.
    Response: We chose to address this as a State penalty-relief issue, 
in large part because we believe that keeping victims of domestic 
violence in the denominator of the work participation rates represents 
a better reading of the statute. Section 407 makes no reference to 
domestic violence cases or to a State's good cause waiver of work 
requirements under the Family Violence Option. In the statutory 
provisions on calculating work participation rates (at section 407(b)), 
there are only two explicit exemptions from the calculation: one for a 
single custodial parent of a child under 12 months old and the other 
for a recipient who is being sanctioned. There is no mention of the 
victims of domestic violence or cross-reference to the waivers granted 
under the FVO.
    We believe that victims of domestic violence and the objectives of 
the Act will best be served if we maintain the integrity of the work 
requirements and promote appropriate services to the victims of 
domestic violence. We do not want our rules to create incentives for 
States to waive work requirements routinely, especially in cases where 
a recipient can work; service providers who work closely with victims 
of domestic violence attest that work is often a key factor in helping 
victims escape their violent circumstances.
    We do realize that, in certain cases, working or taking steps 
toward independence may aggravate tensions with a batterer and place 
the victim in further danger. Under the final rule, States may provide 
temporary waivers of work requirements in such cases. Also, States may 
grant waivers to extend time limits to families that were not able to 
participate in work activities or to make due progress towards 
achieving

[[Page 17743]]

self-sufficiency within 60 months; we would give Federal recognition to 
waivers granted to extend time limits under such circumstances. We have 
revised the language on service plans to provide that work elements in 
a service plan should be consistent with the statutory expectations 
about ensuring safety and fairness. We have also modified the language 
on waivers to extend time limits (as discussed in a subsequent comment 
and response).
    We continue to believe that removing victims of domestic violence 
from the work participation rate calculation could result in 
inappropriate exemptions or deferrals of work requirements for victims 
of domestic violence. As an alternative, commenters suggested that we 
could protect against this result by requiring States to give waiver 
recipients access to appropriate education and training services. 
However, we do not believe such a requirement would suffice; States 
will have an inherent interest in focusing their resources on 
individuals who are part of the participation rate calculations and who 
could put them at penalty risk.
    Comment: Many commenters expressed general concerns about the 
proposed definition of the good cause domestic violence waiver. They 
argued that it should be more in line with the statutory language and 
less prescriptive.
    Response: We added the extra criteria related to Federal 
recognition of waivers (at Sec. 260.55) because we wanted to assure 
that victims of domestic violence would receive appropriate protections 
and services and the goals of TANF would be sustained. At the same 
time, as we have discussed, we have made a few modifications to the 
provisions that make the rules more consistent with the statute and 
responsive to the specific concerns that commenters raised.
    To ensure that our rules promote access to appropriate services, we 
have added reporting requirements at Secs. 260.54 and 265.9(b)(5) 
designed to ensure that States seeking Federal recognition of their 
good cause domestic violence waivers implement meaningful alternative 
service strategies for victims of domestic violence. The new reporting 
will tell us and other interested parties about the strategies and 
procedures States have put in place to ensure that these families 
receive appropriate supports. It will also give us information on the 
aggregate number of good cause domestic violence waivers granted by the 
State each year.
    Comment: One commenter expressed concerns about the administrative 
burden that States would face in filing a claim of reasonable cause.
    Response: We have not regulated specific requirements that States 
must meet in filing reasonable cause claims. While States must provide 
information sufficient to justify their claims, the burden associated 
with demonstrating reasonable cause should not be great. In fact, we 
would encourage States to present their reasonable cause arguments as 
succinctly as possible.
    State data reporting systems will contain information on the number 
of cases that received federally recognized good cause domestic 
violence waivers every month. States will be able to rely on that data 
in justifying their reasonable cause claims.
(b) Time Limits on Good Cause Waivers
    Comment: A significant number of commenters objected to the six-
month durational limit that we placed on good cause domestic violence 
waivers. They said that six months did not provide enough time and that 
the length of waivers should be determined on a case-by-case-basis. 
They also argued that our proposed rule could create an additional 
administrative burden on States for cases where a waiver needed to be 
renewed. They noted that the six-month limit is neither required by 
statute nor consistent with the statutory language that waivers 
continue ``as long as necessary.'' Finally, commenters noted that they 
found our policy authorizing extension or renewal of waivers only in 
the preamble language; at a minimum, they wanted this policy to be 
added to the regulatory text.
    Response: In the NPRM we said that we did not intend that all good 
cause waivers should last six months. Rather, the length of the waiver 
should reflect the State's individualized determination of what length 
of time a client needs. This was our way of giving States significant 
leeway in how they implemented their Family Violence Option programs. 
However, we agree with the commenters that our rules should be more 
consistent with the statute and have revised the final rule 
accordingly. At the same time, the rule continues to assure that these 
cases will receive periodic attention from service workers. More 
specifically, like the statute, it allows for the waiver to be granted 
for ``as long as necessary.'' However, at Sec. 260.55(b) and (c), it 
also requires that a reassessment will take place every 6 months to 
determine if the waiver is still necessary and if the service plan is 
still appropriate.
(c) Adoption of the Family Violence Option
    Comment: A small number of commenters expressed concern that, by 
providing special consideration only to States that have opted for the 
FVO, we could be penalizing States that did not choose the option.
    Response: As we stated in the proposed rule, we consciously tied 
penalty relief to State implementation of the FVO because we felt the 
FVO provided a constructive framework for identifying, screening, and 
serving victims of domestic violence. Also, because the FVO is a State 
plan provision, there are some statutory expectations on States that 
adopt it, the public will have access to information about it, and 
consultation with local governments and private sector organizations 
will take place.
    Comment: A couple of commenters said that we should mandate that 
any State seeking relief from penalties for not meeting work 
participation rates or for exceeding the cap on exemptions to the time-
limits must officially adopt and properly implement the FVO within 60 
days as part of the corrective plan.
    Response: States have the option of submitting corrective plans for 
our review, and this final rule provides wide latitude to States in 
developing the content of those plans. In that context, we do not 
believe it would be appropriate to be very prescriptive about what a 
State must include related to adoption of the FVO. Also, we want States 
to adopt the FVO based on broad policy and programmatic considerations, 
not because such a step would give them a quick way to avoid penalty 
liability.
    It is important that States understand that, to us, compliance 
means more than adoption of the Family Violence Option. In deciding 
whether a corrective compliance plan is acceptable, we will consider 
the strides that a State has already taken toward developing and 
implementing a broad strategy to serve victims of domestic violence and 
ensure their safety.
    Comment: A small number of commenters expressed concern that the 
regulations should require all States to demonstrate that the Family 
Violence Option is being implemented statewide.
    Response: We reviewed the TANF State plan provisions at section 402 
and found no specific requirement that the provisions there be 
implemented on a statewide basis. In fact, because the statutory 
language at section 402(a)(1)(A)(i) refers to TANF as a ``program, 
designed to serve all political subdivisions in the State (not 
necessarily in a uniform manner),'' it would be a reasonable 
interpretation of the statute to conclude that plan provisions need not 
be implemented statewide.

[[Page 17744]]

    If we were sure that a statewide requirement would produce the 
optimal policy results, we would have the authority to add such a 
requirement to our standards for waivers in determining penalty relief. 
However, we are not convinced that a statewideness requirement would 
result in better protections or more appropriate services for victims 
of domestic violence. For example, if a State could not enact statewide 
legislation for political reasons or could not implement a program in 
remote areas of the State for administrative reasons, a statewideness 
requirement might preclude any residents of the State from benefiting 
from the FVO.
    Thus, under the statute and this rule, there can be variations in 
the implementation of the FVO across a State. However, we hope that all 
States will work toward statewide implementation because we believe 
that recipients would generally be better served under a statewide 
program. Also, we point out that States can expect broader protection 
against penalties if they implement statewide.
    We would like to take this opportunity to clarify the meaning of 
the phrase ``optional certification'' in section 402(a)(7). Under this 
provision, election of the Family Violence Option is optional, i.e., 
States may use their own discretion in deciding if they will elect the 
option. However, for States that have adopted the option, the State 
plan certification is not optional. States adopting the option must 
submit the certification with their State plan or submit a State plan 
amendment and notify the Secretary of DHHS within 30 days.
(d) Scope of Penalty Relief Available
    Comment: A couple of commenters pointed out that our ``reasonable 
cause'' proposal gave States very limited penalty relief with respect 
to FVO waivers. If a State did not fully meet the work participation 
rates or time-limit cap when we removed waiver cases from the 
calculations, it could get no other consideration. For example, our 
proposed rules did not consider such waivers in deciding whether a 
State qualified for penalty reductions under Sec. 271.51 or in deciding 
the potential size of reductions under that provision.
    Response: In the revised language at Sec. 260.58(b), we indicate 
that we will consider good cause domestic violence waivers in deciding 
eligibility for, and the amount of, penalty reduction under 
Sec. 261.51. In Secs. 260.58(c) and 260.59(b), we indicate that we may 
take waivers into consideration in deciding if a State qualifies for 
penalty relief as the result of its performance under a corrective 
compliance plan.
    Also, while Secs. 260.58 and 260.59 set specific criteria for 
automatic reasonable cause determinations based on domestic violence 
waivers, under the revised language at Sec. 262.5(a), the Secretary has 
some discretion to grant reasonable cause in cases where a State could 
not attribute its failure entirely to one of the established 
``reasonable cause'' criteria. Thus, a State could request that we 
grant ``reasonable cause'' in cases where federally recognized good 
cause domestic violence waivers did not justify ``reasonable cause'' in 
and of themselves, but were one of several factors contributing to its 
failure.
    Taking waivers into consideration in deciding penalty reduction 
under Sec. 261.51 seemed to be a logical extension of our proposed 
``reasonable cause'' provision. Under the statute and rules, the 
penalty reduction under Sec. 261.51 is available based on the degree of 
noncompliance. If two States had the same participation rate, but one 
could attribute its failure in part to the granting of federally 
recognized good cause domestic violence waivers and the other could 
not, we think that the State granting waivers is complying to a greater 
degree and deserves a smaller penalty. The revised rules at 
Sec. 260.58(b) reflect this philosophy.
    The revised rules do not provide for automatic penalty relief for 
waivers granted during a corrective compliance period. As we have 
indicated in the response to another comment, we do not want States to 
look to the FVO as a quick fix for their penalty problems. Under these 
rules, at Secs. 260.58(c) and 260.59(b), we reserve discretion whether 
to give an individual State credit for good cause domestic violence 
waivers in determining whether it has achieved compliance during the 
corrective compliance period. In making this decision, we would expect 
to look at evidence provided by the State that it had adopted the FVO 
and had implemented a broad, thoughtful, and long-term strategy for 
identifying and serving victims of domestic violence.
(e) Service Plans and Work Requirements
    Comment: We received a number of comments on the requirement in the 
proposed rule that waivers be accompanied by service plans that ``lead 
to work.'' They argued that this language diverted the focus of the FVO 
away from the safety considerations emphasized in the statute and that 
the reference to work had no statutory basis.
    Response: As we indicated in the proposed rule, we believe that 
work is an important part of service plans because many victims of 
domestic violence need to make progress on that front in order to 
escape their abusive situations. In Sec. 270.30 of the proposed rule, 
we indicated that good cause domestic violence waivers must be designed 
to lead to work. However, we recognize that, in the short-term, safety 
issues and other demands on the family may preclude specific steps 
toward work. Thus, we have added new regulatory text at Sec. 260.55(c) 
to clarify that States have the ability to postpone work activities 
when safety or fairness issues would so indicate. For example, if a 
victim of domestic violence needs time to recover from injuries, secure 
safe and stable housing, and get her children resettled, or needs to 
stay at home or in a shelter to avoid danger, there may be a need to 
postpone work activities.
    We encourage States to incorporate work activities as a key 
component of the service plan for victims of domestic violence, to the 
extent possible. Also, we note that, with our removal of the 6-month 
limit on the duration of waivers, these final rules may make it more 
feasible to do so.
    Comment: Several commenters expressed concerns that the service 
plan requirements in the proposed rules would make victims of domestic 
violence more vulnerable to sanctions (i.e., penalty reductions) for 
not meeting welfare agency expectations. TANF caseworkers are trained 
to sanction participants who do not adhere to the caseworkers' 
instructions or who do not comply with eligibility conditions. 
Additionally, they stated that, in certain circumstances, an 
appropriate service plan for a victim may be to do nothing. Forcing 
victims to take specific steps within a fixed time frame may make their 
situation more precarious. They also argued that services provided by 
domestic violence counselors would be better for victims since these 
workers understand that developing a plan for the family's safety can 
be emotionally painful and may involve continuous reassessments.
    Response: The FVO provides for waiver of program requirements 
``where compliance with such requirements would make it more difficult 
for individuals receiving assistance * * * to escape domestic violence 
or unfairly penalize such individuals. * * *'' Thus, it would be 
inconsistent with the FVO for domestic violence victims to be more at 
risk of program sanctions than other individuals receiving assistance. 
In other words, States should be giving victims of domestic violence 
the same, or greater, access to ``good cause'' for failing to comply or 
cooperate with

[[Page 17745]]

work, personal responsibility, and child support requirements. They 
also should consider the needs of victims of domestic violence in 
deciding eligibility for State time-limit exemptions and exceptions.
    In general, we view service plans not as additional requirements 
for victims of domestic violence, but as alternatives to normal program 
requirements. In developing these plans, and determining if an 
individual has good cause for not complying with a plan, States should 
take the other demands on the family and the family's ability to 
respond into account. States should also recognize that a battered 
woman often does not have control over her own actions and respect a 
victim's judgment of whether she can safely take certain action steps 
(e.g., move out of her home).
    Comment: A significant number of commenters asked that we delete 
the requirement for a service plan because they felt it placed an 
additional burden on TANF caseworkers who may not be equipped to engage 
in this type of work and raised potential privacy issues. Commenters 
also wanted to see a requirement that States provide referrals to 
supportive services, as specified in the statute.
    Response: Implicit in these comments seems to be an assumption that 
TANF caseworkers would have full responsibility for developing and 
enforcing service plans. This is not our assumption, and it is not 
consistent with the evolving nature of the TANF program. The TANF 
statute does not have the same statutory or regulatory requirements for 
``single State agency'' administration that the AFDC program did. Thus, 
under TANF, other public and private agencies can make discretionary 
decisions on behalf of the TANF agency.
    In the context of the FVO, States have a lot of flexibility in 
deciding the appropriate roles for TANF staff and domestic violence 
service providers in administering these provisions. The statutory 
language in section 402 provides for State referral of domestic 
violence victims to counseling and supportive services. It makes no 
distinction as to who will provide these services. Thus, services may 
be provided within the TANF agency, with referrals to specially trained 
agency staff, or by referrals to an outside agency. There is also no 
specification as to when these referrals can occur; for example, they 
could occur before or after the service plan is in place.
    If there are concerns about the ability of TANF staff within a 
State to perform certain roles, e.g., because of resource constraints 
or expertise, the TANF agency can and should work with third parties on 
the development of service plans and the delivery of supportive 
services.
    Also, readers should note that we modified the regulatory text in 
Sec. 260.55 to include an expectation that assessments and service 
plans be developed by persons trained in domestic violence. This 
regulatory text does not prescribe any specific training curriculum, 
any specific staff credentials, or any specific administrative 
structure for delivering services. However, it does require that staff 
performing these functions have some training in domestic violence. The 
regulatory change reflects our view and the view of commenters about 
the critical importance of these activities. Staff need some level of 
special knowledge and expertise in order to make appropriate decisions 
in these highly sensitive case situations.
    At the Federal level we have been investing resources to improve 
the capacity of TANF staff to screen, identify, and serve victims of 
domestic violence. We supported a project in Anne Arundel County, 
Maryland, to pilot test such an effort. In 1997, ACF awarded a grant to 
train all of Anne Arundel County's Department of Social Services staff 
on domestic violence. This training has now been incorporated into the 
regular training for all new employees. This project is one of the 
first in the nation and has become a model for other States considering 
adopting a State domestic violence curriculum. In addition, we are 
developing resource materials that agencies can use as part of our
    Welfare and Domestic Violence Technical Assistance Initiative, 
under the National Resource Center on Domestic Violence. The first two 
``practice papers'' issued under this initiative address the subjects 
of ``Building Opportunities for Battered Women's Safety and Self-
Sufficiency'' and ``Family Violence Protocol Development.'' You may 
contact the National Resource Center at its toll-free number, 1-800-
537-2238.
    Comment: A couple of commenters felt that our rules should specify 
that service plans should also provide for referrals to appropriate 
alternative support, such as SSI and child support.
    Response: One of the expectations for all TANF recipients is to 
cooperate in establishing paternity and obtaining child support. Under 
both the Family Violence Option and the rules of the Child Support 
Enforcement program, the State may waive these requirements if the 
individual has ``good cause'' for not cooperating. Thus, we would 
expect child support referrals except in cases where it creates a risk 
to the family or is otherwise inappropriate.
    Our rules generally expect that service plans will help enable 
victims to attain the skills necessary to ``lead to work'' and to 
become self-sufficient because economic self-sufficiency is a major 
goal of the TANF program. However, our rules also envision that the 
plans will reflect individualized assessments of the needs and 
circumstances of victims and their families. The rules recognize that 
work requirements are not necessarily appropriate in some cases and 
that some women will need extra time on assistance because of their 
current or past circumstances.
    We would not prescribe the specific content of a State's 
assessments or the specific nature of its referrals. However, we would 
point out that, for a State's TANF program to achieve long-term 
success, families will need to receive appropriate supports and 
referrals. Also, based on State practice in recent years, it seems 
fairly clear to us that States understand the value of making 
appropriate referrals to SSI.
(f) Waivers of Time Limits
    Comment: Some commenters felt that our regulatory interpretation on 
time-limit waivers appeared to be contrary to the purpose of the 
welfare reform statute. A majority recommended that the final 
regulations should allow States to ``stop the clock'' for families and 
give them good cause domestic violence waivers at the time they are at 
risk of violence, not just at the time that they approach the 60-month 
time limit. A number of commenters had similar concerns about the 
proposed language that only recognized time-limit waivers for cases 
that were ``unable to work.''
    They felt that the proposed definition of good cause domestic 
violence waiver would not necessarily be consistent with an 
individual's circumstances. They argued that some domestic violence 
victims might need an extended period of time to set up a new 
household, help their children adjust to new surroundings, and receive 
counseling. If the trauma of the abusive relationship is substantial, a 
woman might not be psychologically ready to develop the employment 
skills that are required under TANF. In these types of cases, the clock 
should be stopped until the victim is healthy and feels safe enough to 
engage in work activities. Similarly, the clock should be stopped if 
States determine that abused women are not able to comply with the 
Federal work requirements. They also expressed concerns that our 
proposed policies

[[Page 17746]]

would treat victims inequitably, based on the particular timing of 
their domestic abuse situations.
    Response: Although we have not adopted the specific suggestion of 
commenters to recognize waivers that ``stop the clock'' and 
automatically exempt families from the time limit, we have revised the 
final rules to give Federal recognition to a much broader array of 
waivers to extend the time limits. Under the final rules, we will 
recognize such waivers, based on need, due to current or past domestic 
violence or the risk of further domestic violence. Thus, States will be 
able to provide victims with specific assurances that: (1) They can 
receive assistance for as long as necessary to overcome the effects of 
abuse; and (2) extensions will be available in the future based on 
their current inability to move forward. For example, States could look 
at whether victims were unable to pursue work or child support for any 
period of time while they were on assistance or whether a current or 
prior unstable housing situation creates a need for extended 
assistance. As a result, States could advise a victim that the family 
will receive an extension for as long as necessary if the family 
accrues 60 months of assistance.
    We encourage States to give victims the assurance they need that: 
(1) They will not be cut off assistance when they reach the Federal 
time-limit if they still need assistance; and (2) they will be able to 
return for assistance if the need recurs. Such assurances are important 
because they will alleviate pressure on victims to take steps that 
might jeopardize their personal or their family's safety. We intend to 
defer to State judgments on the need for such waivers and the length of 
time such waivers are needed. For example, if a State granted a waiver 
that extended a family's eligibility for assistance based on the length 
of time that the victim was unable to participate in work activities, 
we would recognize a State waiver that extended assistance for that 
period of time.
    The disaggregated data reporting will indicate those cases whose 
time limit has been extended based on a federally recognized domestic 
violence waiver, as reported by the State. (We will also get 
information on the aggregate number of waivers granted under the annual 
report.)
    As we have stated previously, we remain concerned that individuals 
granted waivers receive appropriate attention from TANF staff, access 
to services, and appropriate consideration of their safety issues. 
Therefore, we have added new annual reporting requirements at 
Sec. 265.9(b)(5) that should give us insight into actual State practice 
in these waiver cases and tell us how frequently such waivers are being 
granted. In addition, at Secs. 260.54, 260.58, and 260.59, we have 
specified that a State may receive special penalty consideration under 
these regulatory provisions if it submits this information. The primary 
purpose for creating criteria for Federal recognition of a State's good 
cause domestic violence waivers was to set in place a structure for 
ensuring that victims receive appropriate alternative services. In 
addition, the reporting will provide a public description of the basic 
strategies that the State has put in place.
    Comment: A few commenters expressed concern about the proposed 
language in Sec. 274.3 that appeared to require that the victim of 
domestic violence receive both a hardship exemption from the 60-month 
time limit and a separate good cause domestic violence waiver based on 
inability to work. The language in the NPRM stated that, in order to 
qualify for exclusion from the calculation of work participation rates, 
families must have good cause domestic violence waivers that were in 
effect after the family received a hardship exemption from the limit on 
receiving assistance for 60 or more months. They expressed concern that 
the effect of this requirement would be that a State wishing to use the 
FVO must include domestic violence as part of the hardship extension 
criteria. Commenters stated that this is not supported by law and could 
result in some States not being able to benefit from the penalty relief 
that we were trying to provide.
    Response: The language in the NPRM apparently did require that both 
a hardship exemption and a good cause domestic violence waiver be in 
effect. We agree with the commenters that waivers should not have to 
meet both requirements, and we have deleted the problematic language 
from the final rule.
(g) Confidentiality
    Comment: A large number of commenters expressed concerns about the 
lack of attention paid to confidentiality. Commenters argued that 
individual case files should not be kept. Such files could have a 
negative effect on victims, potentially discouraging them from seeking 
services and even endangering them, if special attention is not paid 
toward protecting the files. They asked us to clarify in both the 
preamble and final regulation that we would neither require nor expect 
States to include sensitive information in their files that could 
jeopardize a woman's safety or security. They recommended that States 
retain and report information in an aggregated form to protect the 
anonymity of victims and their children.
    Response: We have revised the regulation to incorporate the 
statutory language on confidentiality found in the FVO (see 
Sec. 260.52). We also encourage States to consider the special needs of 
victims of domestic violence and to consult with providers of domestic 
violence services as they develop procedures to ``restrict the use and 
disclosure of information'' on recipients, pursuant to section 
402(1)(A)(iv). The experience of domestic violence service providers 
should help shed light on questions such as what information is 
sensitive, what particular cautions should be taken with victims of 
domestic violence, and what practices work best in ensuring 
confidentiality.
    We recognize the importance of this issue. However, in order to 
administer these provisions and have effective and accountable 
programs, it will be necessary for States to maintain records that 
identify victims and recipients of good cause domestic violence 
waivers. Since it is vital to keep this information, States should 
consider whether their standard confidentiality safeguards are 
sufficient to protect victims or whether they should institute 
additional safeguards. For example, these could include establishing 
special safeguards for both computer and paper files, training TANF 
staff about the importance of confidentiality for domestic violence 
victims and specific procedures to be used in their workplace, using 
extreme caution when determining whether to release the whereabouts of 
victims to anyone, and handling disclosures of abuse with extreme 
sensitivity.
(h) Notice Requirements
    Comment: A small number of commenters asked to see language in both 
the preamble and the text of the regulation requiring that States 
provide TANF applicants written notice when a request for a good cause 
domestic violence waiver is denied.
    Response: Under section 402(a)(1)(B)(iii), in their TANF plans, 
States must set forth objective criteria for fair and equitable 
treatment and explain how they will provide opportunities for hearings 
for recipients who have been adversely affected. Although we are not 
regulating this provision, in light of the restrictions on our 
regulatory authority at section 417, we encourage States to send 
notices in these cases as a matter of fairness and

[[Page 17747]]

equity and to treat these waiver denials as adverse actions.

E. Recipient and Workplace Protections

Background
    A number of commenters expressed concerns that the NPRM focused too 
much on penalties and was unacceptably silent on protections for needy 
individuals and families, including the protections available through 
Federal nondiscrimination and employment laws.
    One concern of commenters was that the stringency of the proposed 
rules on issues like penalty relief, waivers, child-only cases, and 
separate State programs would make it less likely that hard-to-serve 
families would receive appropriate services and treatment. Throughout 
the final rule you will find responses to this latter concern.
    However, commenters also had some specific suggestions as to how we 
could incorporate specific protections available in the TANF law and 
other Federal laws into these rules. It is this latter set of comments 
that we address in this section.
    You will find discussion of some related comments and our response 
in the sections of the rules dealing with nondisplacement (at subpart G 
of part 261) and individual sanctions (at subpart A of part 261).
Comments and Responses
(a) Applicability of Other Federal Laws
    Comment: Several commenters noted that there was no reference in 
the TANF regulations to the applicability of Federal employment laws to 
TANF-funded positions, such as the Fair Labor Standards Act (FLSA), the 
Occupational Safety and Health Act (OSHA) and title VII of the Civil 
Rights Act. They noted that welfare recipients are not exempted from 
such laws; rather they are entitled to a safe, healthy employment 
environment, per OSHA, and to equal protection under all other statutes 
that apply to the workplace.
    We received a number of related comments about the lack of 
reference to Federal nondiscrimination laws, including the Americans 
with Disabilities Act, Equal Pay Act, and Age Discrimination in 
Employment Act.
    In both cases, commenters argued that we needed to take a more 
active role in the enforcement of these laws. There were a variety of 
suggestions about how we should do that.
    At one end of the spectrum, commenters want us to speak to the 
applicability of such statutes under the TANF program, reference 
guidance put out by the Department of Labor and EEOC, inform welfare 
systems about existing laws and enforcement procedures, and acknowledge 
the role of EEOC in addressing individual complaints.
    At the other end were comments saying that we should actively 
engage in litigation or promote actions through other agencies with 
enforcement authority upon evidence of systemic violations or a pattern 
of substantiated complaints. One commenter explicitly indicated that we 
could defer to agencies of proper jurisdiction for enforcement.
    Response: In the NPRM preamble, we had noted that our proposed 
rules did not cover the nondiscrimination provisions at section 408(d) 
of the Act. These provisions specify that any program or activity 
receiving Federal TANF funds is subject to: (1) the Age Discrimination 
Act of 1975; (2) section 504 of the Rehabilitation Act of 1973; (3) the 
Americans with Disabilities Act of 1990; and (4) title VI of the Civil 
Rights Act of 1964. We had decided not to include the provisions in the 
NPRM because ACF was not responsible for administering these provisions 
of law, and they were not TANF provisions.
    We suggested that individuals with questions about the requirements 
of the nondiscrimination laws, or concerns about compliance of 
individual TANF programs with them, should address their comments or 
concerns to the Director, Office of Civil Rights, Department of Health 
and Human Services, 200 Independence Ave, SW, Room 522A, Washington, DC 
20201.
    We recognize that this language and approach did not adequately 
represent this Administration's commitment to the enforcement of civil 
rights and labor laws. In that context, we have decided that we should 
focus more attention on these protections in the final rule. We can do 
that without violating section 417 (in letter or spirit) or interfering 
with the jurisdiction of other Federal agencies. In light of the 
concerns raised in these comments, we believed it would be helpful to 
include the nondiscrimination provisions referenced at section 404(d) 
of the Act in the regulation. They appear at Sec. 260.35(a).
    In Sec. 260.35(b), you will find new regulatory language designed 
to further clarify the protections applicable to TANF programs and 
activities. In this new clarifying language, we make the point that 
section 417 of the Act does not limit the effect of other Federal laws, 
including those that provide workplace and nondiscrimination 
protections. We also indicate that Federal employment laws and 
nondiscrimination laws apply to TANF beneficiaries in the same manner 
as they apply to other workers.
    Based on comments we received in this subject area and on some of 
the fiscal issues being raised, we were concerned that some States were 
reading the limitations in section 417 more broadly, in effect to free 
States from all provisions of Federal law, except those in the new 
title IV-A. In fact, section 417 only limits regulation and enforcement 
of the TANF provisions. It does not affect the applicability of other 
Federal laws or the authority of other Federal agencies to enforce laws 
over which they have jurisdiction.
    In addition to adding this new regulatory text at Sec. 260.35, we 
added a new reporting requirement at Sec. 265.9(b)(7). Under this 
provision each State must include a description of the grievance 
procedures that are in place in the State to resolve complaints that it 
receives about displacement.
    Each State must create nondisplacement procedures under section 
407(f) of the Act. This provision and the related provision at section 
403(a)(5)(J) of the Act (which applies to the WtW program) reflects 
long-standing concern among unions, labor groups, and others about the 
possibility that placement of welfare recipients at work sites could 
displace other workers from their jobs.
    States also are concerned about displacement because of its 
potential negative effect on their labor force and the long-term 
success of their TANF programs. At the same time, States are facing 
economic and programmatic pressures to move applicants and recipients 
into the workforce. For example, they want to avoid work participation 
rate and time-limit penalties, and they want to increase their job 
placements in order to qualify for a High Performance Bonus. In light 
of these countervailing pressures, we believe that it is important that 
we monitor State activity in this area. Thus, we are asking for 
information on the procedures available in the States to protect 
against displacement. We will incorporate a summary of this information 
on nondisplacement procedures as part of the characteristics of State 
programs that we feature in the annual report to Congress (pursuant to 
section 411(b)(3)). We can also make the descriptions publicly 
available to interested parties within the State.
    To the extent that a State includes such a description in its State 
TANF plan, it could merely cross-reference the plan material in the 
annual report. It

[[Page 17748]]

would not need to resubmit the information.
    In addition to these specific regulatory changes, we encourage 
States to exercise due care as they promote work and implement new job 
development, placement, and referral activities. They should not use 
TANF programs in any way that would cause displacement or compel people 
to endure discriminatory work places, unsafe work environments, or 
unfair work conditions in order to obtain assistance.
    There is a potential that States without adequate nondisplacement 
procedures may have an unfair advantage in obtaining job placements. 
Therefore, as we work on developing proposed rules for the High 
Performance Bonus, we will consider State grievance procedures or the 
record of a State with respect to displacement complaints as potential 
factors in determining eligibility for, or the size of, a High 
Performance Bonus. We look forward to receiving public comments on this 
issue and other issues when we publish the High Performance Bonus NPRM 
shortly.
    Finally, we wanted to use this opportunity to provide additional 
information to State agencies, employers, and the public about the 
workplace and nondiscrimination protections that do apply in TANF. We 
will not attempt to provide detailed information on how various other 
Federal laws would apply to the TANF program or to TANF recipients. 
Rather, our goal is to give enough background information so that 
readers will understand the basic context and know where to go for 
further information.
    As commenters pointed out, the four Federal laws that are cited in 
section 408(d) of the Act are not the only Federal nondiscrimination 
and employment laws that are applicable to, and relevant for, the TANF 
program. Other laws that may come into play include the Fair Labor 
Standards Act (which covers issues like minimum wage and hours of 
work), the Family and Medical Leave Act, the Occupational Safety and 
Health Act, title IX of the Education Amendments of 1972, title VII of 
the Civil Rights Act of 1964 (title VII), and the Equal Pay Act. A 
variety of Federal agencies are responsible for enforcing these laws, 
and the enforcement tools available differ by program.
    The Department is developing guidance that will provide an overview 
of the applicable civil rights laws and the enforcement mechanisms for 
each. We advise you to consult this guidance for information on which 
Federal agencies have jurisdiction over which types of complaints; for 
example, as one commenter pointed out, the Department's Office of Civil 
Rights may be the appropriate reference for certain issues, but the 
EEOC generally handles individual complaints of employment 
discrimination. We will provide access to the guidance through the Web, 
when it is available.
    The U.S. Department of Labor (DOL), and the Equal Employment 
Opportunity Commission (EEOC) have also issued guidance on the 
applicability of Federal discrimination and employment laws to welfare 
recipients. In part, this guidance indicates that welfare recipients 
participating in certain types of activities may be ``employees'' and 
thus covered by the FLSA, OSHA, and title VII. You may access these two 
documents through links on our Web site. The DOL guidance is entitled 
``How Workplace Laws Apply to Welfare Recipients (May 1997),'' and the 
EEOC guidance is entitled ``Enforcement Guidance: Application of EEOC 
Laws to Contingent Workers Placed by Temporary Employment Agencies and 
Other Staffing Firms (Dec. 3, 1997).''
    Likewise, the Internal Revenue Service (IRS) has issued guidance on 
the ``Treatment of Certain Payments Received as Temporary Assistance 
for Needy Families (TANF).'' IRS Notice 99-3, dated December 17, 1998, 
addresses the treatment of TANF payments under certain income and 
employment tax provisions. For example, it notes that, under the 
Internal Revenue Code, earned income for Earned Income Credit (EIC) 
purposes does not include amounts received for service in community 
service and work experience activities, to the extent that TANF 
subsidizes those amounts. It also specifies the conditions under which 
TANF payments would not be includible in an individual's gross wages, 
would not be earned income for EIC purposes, and would not be wages for 
employment tax purposes.
(b) Effect on Recipient Sanctions and State Penalties
    Comment: We received a couple of comments saying that our 
regulations should provide that a person whose failure to comply with 
work participation requirements is caused by a violation of employment 
standards (e.g., a woman who leaves her job due to unremedied sexual 
harassment) may not suffer reduction or elimination of assistance, 
under section 407(e). Likewise, a few commenters suggested that we 
provide that State definitions of good cause (e.g., for failure to 
participate in work or meet responsibilities under an Individual 
Responsibility Plan) include workplace rights and/or discrimination 
situations.
    Response: We have not directly required States to provide a good 
cause exception from the sanction provisions, as some of these comments 
suggest, because it is not clear that we have the authority to do so. 
Section 417 generally limits our regulatory authority, and the language 
at the end of section 407(e) indicates that State sanction decisions 
are ``subject to such good cause and other exceptions as the State may 
establish.'' Thus, we believe that we should defer to State decisions 
on the specific definition of ``good cause.''
    At the same time, we do not want to see TANF programs fostering 
work or participation that is in violation of Federal law. If we learn 
that violations are occurring, we will pursue additional enforcement, 
administrative, regulatory, or legislative remedies, as appropriate.
    Comment: A commenter also suggested that we deny reasonable cause 
and penalty relief if a State does not have an adequate process in 
place for recipients to raise good cause.
    Response: We have not made any changes to our regulation in 
response to this comment. Section 402(a)(1)(B)(iii) requires that the 
State plan must explain how the State ``will provide opportunities for 
recipients who have been adversely affected to be heard in a State 
administrative or appeal process.'' Also, as we previously mentioned, 
section 407(e) indicates that States have discretion in establishing 
rules on good cause exceptions to sanctions. In light of these 
provisions, section 417, our lack of plan approval authority, and the 
general expectation under the TANF statute and rules that States will 
have discretion in deciding how services are delivered, we do not think 
it be appropriate to regulate a State's good cause process in this 
manner.
    Comment: A couple of commenters said that we should not penalize 
States for failing to meet work requirements when their failure could 
be attributed to compliance with certain laws, such as employment 
discrimination. A related set of comments was that we should consider 
State efforts to comply with employment laws in determining whether a 
State gets reasonable cause or penalty reduction. For example, one said 
we should require States to develop ``an effective enforcement plan for 
the employment rights of recipients in work programs'' that include 
monitoring of laws as a prerequisite for getting a reduced penalty 
under Sec. 261.51(a). One commenter said we should deny reasonable 
cause and penalty reductions if the State has no system in place for

[[Page 17749]]

monitoring and enforcing of compliance.
    Response: We have not included any changes in our regulation in 
response to these comments. First, it was not clear to us that we 
should reward States for complying with other Federal laws. We thought 
it would be better to start with the presumptions that: (1) All States 
would comply with applicable Federal laws; and (2) we should rely on 
the procedures available under those other laws as the appropriate 
mechanisms for promoting compliance. We also had concerns about how we 
could incorporate such factors into our penalty determination 
decisions. We would not want to be making independent judgments about 
the level of State compliance with laws for which other agencies had 
jurisdiction. Further, it would be difficult for us to get timely, 
complete, and definitive compliance information from other agencies. 
Looking beyond Federal law to State and local laws would exacerbate 
these difficulties. Furthermore, we would have little assurance that 
official actions on official complaints accurately represented the 
overall level of compliance within the State, and we would have 
difficulty developing objective standards that would help convert 
evidence on violations--or State efforts to comply or enforce 
compliance--into objective, quantifiable standards.
(c) Procedural Requirements
    Comment: A few commenters suggested that we require States to 
inform recipients of their rights and/or procedures for addressing 
violations. One commenter said we should require that staff be informed 
as well. One commenter also said we should require posting of 
appropriate nondiscrimination notices following the model under title 
VII of the Civil Rights Act.
    Response: We recognize the value of providing full information to 
recipients, staff, and employees on these matters. However, we do not 
believe that imposing these requirements would be consistent with 
section 417 of the Act or the basic principle of State flexibility of 
the TANF legislation. Through the efforts by our Office of Civil Rights 
and other Federal agencies, we are making information on protections 
more widely available to the public, but in a framework more consistent 
with the TANF legislation.
    You can find additional discussion about workplace protections in 
the preamble for part 261.

F. Comments Beyond the Scope of the Rulemaking

General
    A few comments we received were outside the scope of this 
rulemaking. However, we wanted to take the opportunity to speak briefly 
to them in this preamble because they raise important TANF issues that 
merit discussion.
Special Issues
(a) Work Standards
    Comment: We received some comments expressing concerns about the 
statutory provisions--most notably about the work participation rate 
requirements. Readers noted two specific concerns--their failure to 
recognize certain kinds of educational activities as participation and 
the inordinately high standards applicable to two-parent families.
    Response: While certain policy decisions in this regulation respond 
to these concerns, to the extent that they represent statutory, and not 
regulatory, issues, they are beyond the scope of this rule. You may 
find additional discussion of this issue and our response in the 
preamble and rules for part 261.
(b) Drug Testing
    Comment: One organization expressed its opposition to urine drug 
testing, provided a number of suggestions about guidelines we could 
issue to protect clients against unfair sanctions, asked that we 
promulgate guidance to States on how to conduct testing in a way that 
ensures the due process rights of clients, and suggested that treatment 
for addiction would be a more cost-effective approach than sanctions, 
in the long run, for States. It also asked that we remind States that 
the law allows sanctions only against the person who tests positive, 
not other family members.
    Response: We are working with the Substance Abuse and Mental Health 
Services Administration (SAMHSA) on developing guidance and technical 
assistance materials that will help States deal effectively and 
appropriately with needy families that have substance abuse problems. 
In fact, we have developed an action plan of activities that we could 
undertake jointly with SAMHSA. Under that plan, we are co-sponsoring 
some sessions on substance abuse and welfare reform as part of our FY 
1999 ``Promising Practices'' Conferences.
    Regarding the commenter's last point, we assume the commenter is 
referring to section 902 of PRWORA, which says that the Federal 
government would not prohibit States from sanctioning welfare 
recipients who test positive for use of controlled substances. Clearly, 
this language envisions that sanctions in such cases would not extend 
beyond the individual to other family members.
    Technically, we could claim the authority to regulate this 
provision because the limits to our regulatory authority at section 417 
cover only those provisions in part IV-A of the Act. (Part IV-A of the 
Act incorporates section 103(a) of PRWORA, but not section 902 or the 
other sections.) However, requiring States to continue TANF benefits to 
other family members would contravene the intent of section 401(b) of 
the Act, which eliminates the entitlement to assistance under TANF, and 
the spirit of the TANF statute, in giving States discretion in deciding 
which families should receive benefits. Thus, while we might advise 
against sanctioning other family members, we decided not to regulate 
State decisions in this area.
(c) State Plan Requirements
    Comment: One commenter asked that our regulations include specific 
requirements about State plan descriptions, due process, and 
notifications to recipients.
    Response: In general, these are areas where we do not have clear, 
direct regulatory authority. However, there are places in the final 
rule where we have made changes that address this concern. One is in 
the section dealing with MOE expenditures. Because MOE expenditures 
must be made on behalf of ``eligible families,'' in order for us to 
determine if State MOE expenditures are ``qualified expenditures,'' 
State plans must contain information on how the State defines ``needy 
families.'' The revised rule at Sec. 263.2(b) contains a reference to 
this State plan requirement. Also, in the sections of the rule and 
preamble that deal with appropriate implementation of the work sanction 
provisions (Secs. 261.54 through 261.57), we draw a connection between 
the adequacy of a State's notification and hearings processes and its 
eligibility for penalty relief. We believe these provisions are clearly 
within our regulatory authority, because of their connection to penalty 
enforcement, even though we do not have general regulatory or 
enforcement authority in these areas.
    However, we would point out to States that the absence of 
regulation does not eliminate the requirements as the statute does 
address State responsibilities in these areas. Under section 
402(a)(1)(B), the State plan must

[[Page 17750]]

set forth objective criteria for the delivery of benefits and the 
determination of eligibility and for fair and objective treatment. It 
must also explain how the State will provide opportunities for 
recipients who have been adversely affected to be heard in a State 
administrative or appeal process. Section 402(b) requires that States 
must notify the Secretary of plan amendments within 30 days, and 
section 402(c) requires that States make summaries of the plan and plan 
amendments available. Section 407(e) provides that State penalties 
against individuals (i.e., sanctions) are subject to such good cause 
and other exceptions as the State establishes, and it prohibits 
penalties against single custodial parents with children under age 6 
who refuse to work and have a demonstrated inability to obtain needed 
child care.
(d) Tribal Issues
    Comment: We also received a couple of comments concerned about the 
Tribal regulations and the consultation process used in that 
rulemaking.
    Response: We have referred those comments to the Division of Tribal 
Services in the Office of Community Services for further consideration. 
At the same time, we would like to address a couple of concerns raised 
by the comments.
    Comment: One commenter asked that we require States to coordinate 
with Tribes as part of the planning process. Another noted that the 
proposed rule did not provide specific mechanisms for building State-
Tribal relationships. The commenter indicated that history of State-
Tribal relationships over the past 200 years was primarily negative and 
suggested we add specific financial penalties or sanctions to foster 
cooperation.
    Response: We believe it would be contrary to the spirit of this 
legislation and the restrictions placed on our regulatory authority by 
section 417 to require States or Tribes to take specific actions in 
this area. However, as indicated by our subsequent comments on State-
Tribal coordination, for welfare reform to succeed in Indian country, 
States and Tribes need to work together in addressing administrative, 
economic, and service delivery issues. Thus, we have spent some time 
trying to identify ways to make coordination between States and Tribes 
easier and more beneficial, and we have included a few provisions in 
this rule designed to foster better coordination. More specifically, 
this rule: (1) allows State contributions to Tribal TANF programs to 
count towards the State MOE; (2) exempts individuals covered by Tribal 
TANF reporting from the State case-record reporting sample; and (3) 
gives States an option whether to include individuals in Tribal 
programs in the State work participation rate calculations. Also, we 
continue to look for opportunities outside of this rule--such as in our 
technical assistance and outreach initiatives--to enhance coordination 
of State and Tribal programs.
    Comment: One commenter spoke about the concerns of Tribes and 
Tribal organizations in meeting the proposed TANF data collection and 
reporting requirements, in light of the limited resources available to 
Tribes. The commenter said that these requirements might prevent Tribes 
from implementing their own TANF programs and place those who do 
participate at risk of sanction. Because Tribes lack the same 
infrastructure as States, we should provide them administrative 
resources.
    Response: Because the statute imposes the same reporting 
requirements on Tribes as States and specifies many of the data 
elements that must be reported, we have limited ability to reduce the 
reporting burden for Tribes. However, we have made a few adjustments, 
as we discuss in part 265. Also, we would point out that: (1) there are 
some reports that Tribes do not have to submit, including the MOE-SSP 
data report, which is inapplicable to Tribal programs; (2) Tribes are 
not subject to a penalty if they fail to submit complete, accurate, and 
timely reports; (3) in these rules, we try to facilitate State support 
of Tribal programs in the form of MOE expenditures, systems support, 
and infrastructure; and (4) we will be providing technical assistance 
to Tribal programs to help address their infrastructure needs.

G. Additional Cross-Cutting Issues

Pregnancy Prevention
    Comment: One commenter asked that we address pregnancy prevention 
in the rules.
    Response: This issue did not get much direct attention in the NPRM 
because of the scope of the regulatory package and our limited 
regulatory authority. However, it is clear from the statement of 
findings in section 101 of PRWORA, the stated TANF goals at 
Sec. 260.20, the preamble discussions on allowable uses of Federal and 
MOE funds, and activities underway outside the scope of these rules 
that: (1) the TANF legislation recognizes out-of-wedlock pregnancy 
prevention as a critical component of welfare reform; and (2) subject 
to some general restrictions, States may spend Federal TANF and State 
MOE funds on pregnancy prevention efforts.
    Because of the significance of this issue, in the final rule, we 
have added a limited amount of new reporting to capture information on 
State activities related to out-of-wedlock pregnancies. First, at 
Sec. 265.9(b)(8), as part of their annual report, we are asking States 
to include a description of the out-of-wedlock pregnancy prevention 
activities they provide under their TANF program. Second, in the TANF 
Financial Report, we are asking States annually to provide a break-out 
of their expenditures on these activities--to the extent that such 
expenditures are not reflected in other reporting categories. (We have 
added similar requirements for reporting on activities related to the 
formation and maintenance of two-parent families.)
    The TANF bonus provisions, which are the subject of separate 
rulemakings, also address this concern. First, there is a bonus under 
section 403(a)(2) for States that achieve the greatest reductions in 
their rates of out-of-wedlock childbearing (without increasing their 
abortion rates). We will also be considering inclusion of pregnancy 
prevention measures as we develop proposed rules for the High 
Performance Bonus, awarded under section 403(a)(4).
    We would also point out that, under section 413(e) of the Act, we 
must rank States based on their rates of out-of-wedlock births for 
families receiving TANF assistance and conduct annual reviews of those 
States with the highest and lowest rankings. The TANF Data Report 
contains data collection related to this provision.
Program Coordination
    Comment: One commenter complained that the lack of coordination 
between the U.S. Department of Agriculture and the Department of Health 
and Human Services shackled State efforts to meet Federal agency goals.
    Response: We have worked diligently over many years to deal with 
some of the program inconsistency issues that have created 
administrative problems for States. We will continue our interagency 
efforts to coordinate program policies and minimize inconsistencies 
through active dialogue with the Department of Agriculture.
Rural and Transportation Issues
    Comment: One commenter offered several suggestions in response to 
concerns about the effects of TANF in rural areas, including: (1) a 
rural set-aside of TANF evaluation funds to

[[Page 17751]]

determine whether there were inequities for rural areas; and (2) the 
use of existing rural networks to provide information on the effects of 
welfare reform in rural areas and lessons learned.
    The commenter also suggested that we set guidelines for State 
implementation in rural areas.
    The commenter's final suggestion was that we come up with a method 
to encourage innovative programs in rural areas as an alternative to 
State waivers or exemptions of rural residents.
    Response: We referred the first two comments to the Director of the 
Office of Planning, Research and Evaluation for further consideration. 
At the same time, we would point out that a critical part of our 
overall research strategy is to ensure that our studies cover a broad 
diversity of geographic and demographic situations so that we can get a 
fuller understanding of the effects of our programs. In that context, 
in July of 1998, we announced that we would be awarding grants to State 
agencies to stimulate research of emerging approaches for welfare 
reform programs and policies in rural America. In the first phase of 
this project, we have awarded planning grants to increase knowledge 
about current rural strategies, develop new strategies that can be 
tested, and design evaluations for assessing these strategies. 
Contingent upon the availability of funds, we would then enter a second 
phase to fund implementation and evaluation activities.
    With regard to rural implementation, we believe that setting 
guidelines would violate the principle of State flexibility in TANF and 
the restrictions on our regulatory authority at section 417. However, 
we will give consideration to rural concerns as we continue to develop 
our research and evaluation, technical assistance, and outreach 
agendas.
    One of our goals in developing our technical assistance and 
outreach strategies is to foster efforts that help programs reach all 
families, including those in isolated communities. An area where we 
have made significant early progress is in the area of connecting needy 
individuals to work through more innovative uses of transportation 
resources and networks. We have been working with the Departments of 
Labor and Transportation to identify how new and existing resources can 
be used to address the transportation needs of low-income families and 
to highlight innovative approaches that have been developed at the 
community level. We expect these activities to develop further in 
response to the new Job Access program authorized under the 
Transportation Equity Act. You can find additional information on these 
transportation initiatives, including guidance on how TANF and other 
funds can support these activities and descriptions of program models, 
through the ACF Web site.
    Comment: We received a related comment from a national public 
transportation group, which urged that TANF plans be developed at the 
local level with local public transit systems and metropolitan 
transportation planning organizations.
    Response: We recognize the value of these local collaborations and 
are working on a variety of fronts to foster them. However, we have not 
included anything in our rule to require them because such a 
requirement would be beyond the scope of this rule and inconsistent 
with the limits of our regulatory authority at section 417.
Introduction to Section-by-Section Discussion
    Following is a discussion of the regulatory provisions we have 
included in this package. The discussion follows the order of the 
regulatory text, addressing each part and section in turn.

V. Part 260--General Temporary Assistance for Needy Families (TANF) 
Provisions (Part 270 of the NPRM)

Subpart A--What Provisions Generally Apply to the TANF Program?

    This subpart of the rules helps set the framework for the rest of 
the rule. For the convenience of the reader, it reiterates the goals 
stated in the new section 401. It also includes a set of definitions 
that are applicable to this part.
    We received no comments on this section and have made no changes in 
the final rule.

Section 260.10--What Does This Part Cover? (Sec. 270.10 of the NPRM)

    This section of the rules indicates that part 260 includes 
provisions that are applicable across all the TANF regulations in this 
rulemaking.
    We received no comments on this section and have made no changes in 
the final rule.

Section 260.20--What Is the Purpose of the TANF Program? (Sec. 270.20 
of the NPRM)

    This section of the rules repeats the statutory goals of the TANF 
program. In brief, they include reducing dependency and out-of-wedlock 
pregnancies; developing employment opportunities and more effective 
work programs; and promoting family stability.
    While we did not elaborate on the statutory language in the 
proposed rule, in the preamble we pointed out that, in a number of 
ways, the new law speaks to the need to protect needy and vulnerable 
children. We advised States to keep this implicit goal in mind as they 
implement their new programs.
    Comment: A couple of commenters argued that we should do more in 
our rules to promote job preparation and/or marriage. One expressed 
explicit concern about the negative effect of the two-parent work 
participation rate on State support for two-parent families.
    Response: This section of the regulation directly incorporates the 
statutory language and reflects the premise that States need and merit 
flexibility in deciding how to meet these goals. However, we have 
incorporated policies in other sections of the regulation to support 
State efforts in these areas. For example, our policy to let States 
define work activities will enable States to better support job 
preparation. Likewise, we have limited disincentives for States to 
serve two-parent families in TANF under our policy to limit the 
potential penalty States face when they fail only the two-parent 
participation rate (i.e., by basing the penalty on the proportion of 
the total caseload that two-parent cases represent). Also, we revised 
the calculation of caseload reduction credits in a couple of ways that 
address the commenters' latter concern. First, we allow the State an 
option of applying a credit based either on the two-parent caseload or 
on the overall caseload. Secondly, we provide for offsets in cases 
where the State has made eligibility changes that have the effect of 
increasing the caseload.
    We have also made changes to help focus more attention on State 
efforts to promote the formation and maintenance of two-parent 
families. In recognition of the significance of this issue, we have 
added a limited amount of new reporting to capture information on State 
activities in this area. First, at Sec. 265.9(b)(8), as part of their 
annual report, we are asking States to include a description of their 
activities to promote two-parent families. Second, in the TANF 
Financial Report, we are asking States annually to provide a break-out 
of their expenditures on these activities--to the extent that such 
expenditures are not reflected in other reporting categories. (We have 
added similar requirements for reporting on activities related to the 
prevention of out-of-wedlock pregnancies.)

[[Page 17752]]

    In a related effort, the formula that we created to award high 
performances, under separate guidance, encourages State efforts to 
prepare recipients for work, by setting aside a substantial share of 
the monies for States whose recipients succeed in the workplace (i.e., 
retain jobs and show earnings gains).

Section 260.30--What Definitions Apply Under the TANF Regulations? 
(Sec. 270.30 of the NPRM)

General Explanation
(a) Scope
    This section of the rule includes definitions of the terms used in 
parts 260 through 265. It also includes references to definitions that 
pertain only to individual parts or provisions. You can find the 
definition of terms that are specific only to individual parts or 
provisions in the appropriate individual parts of the final rules.
    In drafting this section, we defined only a limited number of terms 
used in the statute and regulations. We understood that excessive 
definition of terms could unduly and unintentionally limit State 
flexibility in designing programs that best serve their needs. 
Commenters were generally supportive of this approach, but had specific 
concerns about specific terms, that we address below.
(b) General Terms to Note
    In the proposed rule, we pointed out our use of the term ``we'' 
throughout the regulatory text and preamble--to mean the Secretary of 
the Department of Health and Human Services or any of the following 
individuals or agencies acting on her behalf: the Assistant Secretary 
for Children and Families, the Regional Administrators for Children and 
Families, the Department of Health and Human Services, and the 
Administration for Children and Families.
    We also cited the terms ``family'' and ``head-of-household'' as 
examples of terms that we did not define. We said that States were thus 
free to define what types of families would be eligible for TANF 
assistance. (However, we also advised readers to look at several 
sections of the proposed rule because, while not defining the term 
``family,'' they addressed key requirements on the State that related 
to the State's definition. These sections included: work participation 
rates (Secs. 271.22 and 271.24 of the NPRM), MOE requirements (subpart 
A of part 273), time limits (Sec. 274.1), and data collection 
definitions (Sec. 275.2). We received a number of comments on the 
proposed policies in these related areas, including the proposed 
provisions on child-only cases. Thus, you will find related discussion 
in those other sections of the preamble.)
    In the final rule, we have added a definition of noncustodial 
parent. It clarifies that, under TANF, this term is not used in the 
narrow legal context to refer to parents lacking legal custody, but to 
parents who do not live in the same household as the minor child. It 
also does not refer to parents who live outside the State and are 
beyond the reach of the State's TANF program. We felt it was necessary 
to include a basic definition because we received so many questions 
about how the TANF rules on expenditures, data collection, work 
requirements, and time limits applied to this group of individuals. You 
will find additional discussion of noncustodial parent issues 
throughout the preamble that follows.
    We decided not to define the individual work activities that count 
for the purpose of calculating a State's participation rates. We 
directed readers to the preamble discussion for Sec. 273.13 and subpart 
C of part 271 in the NPRM, respectively, for additional discussion. 
While commenters generally supported our decision not to define work 
activities, we received a few comments in this area. We discuss these 
comments in the preamble to subpart C of part 261. (NOTE:
    The reference to Sec. 273.13 in the NPRM preamble was incorrect, 
and we deleted it.)
    For reference purposes, we noted the use of the term ``Act'' to 
refer to the Social Security Act, as amended by the new welfare law, 
and ``PRWORA'' for the new law itself. Any section reference is a 
reference to a Social Security Act section, unless otherwise specified.
    This part incorporates the major definitions from the PRWORA 
statute, including: ``adult,'' ``minor child,'' ``eligible State,'' 
``Indian, Indian Tribe and Tribal organization,'' ``State,'' and 
``Territories.'' (Readers should note that the term ``State'' includes 
the ``Territories,'' unless specifically noted.) We include these 
definitions largely for the readers' convenience.
    This part also incorporates some clarifying definitions, commonly 
used acronyms (such as ACF, AFDC, EA, IEVS, JOBS, MOE, PRWORA, TANF, 
and WtW), and commonly used terms and phrases (such as the Act and the 
Secretary). While the meaning of many of these terms is generally 
understood, we included them to ensure a common understanding and 
enable some reductions in regulatory text.
(c) Significant Fiscal Terms
    This part also incorporates a number of definitions that have 
substantial policy significance, which we included for clarification 
purposes. For example, it incorporates terms that distinguish among 
several types of expenditures. These distinctions are critical because 
the applicability of the TANF requirements vary depending on the source 
of funds for the expenditures. In particular, it distinguishes between 
expenditures from the Federal TANF grant and from the State funds 
expended to meet MOE requirements (either within the TANF program or in 
separate State programs), as follows:
    Federal expenditures. This is short-hand for the State expenditure 
of Federal TANF funds.
    Qualified State Expenditures. This term refers to expenditures that 
count for basic MOE purposes (at section 409(a)(7)). (By regulation, 
many, but not all, of the requirements that apply for countable basic 
MOE expenditures also apply for Contingency Fund MOE purposes.)
    Basic MOE. This term refers to the expenditure of State funds that 
a State must make in order to meet the basic MOE requirement for the 
TANF program and avoid the penalty specified at section 409(a)(7). (In 
the NPRM, we used the term ``TANF MOE,'' but we changed the term in 
response to comments and concerns about confusing readers.)
    Contingency Fund MOE. This term refers to expenditures of State 
funds that a State must make in order to meet the Contingency Fund MOE 
requirements under sections 403(b) and 409(a)(10). States must meet 
this MOE level in order to retain contingency funds made available to 
them for the fiscal year. Note that this term is more limited in scope 
than the term ``basic MOE.'' See discussion at subpart B of part 264 
for additional details.
    State MOE expenditures. This term refers generically to any 
expenditures of State funds that may count for basic MOE or Contingency 
Fund purposes. It includes both State TANF expenditures and 
expenditures under separate State programs, where allowable.
    State TANF expenditures. This term encompasses the expenditure of 
State funds within the State's TANF program. It identifies the only 
expenditures that can be counted toward the Contingency Fund MOE. It 
includes both commingled and segregated State TANF expenditures.
    Commingled State TANF expenditures. This term identifies the 
expenditure of State funds, within the

[[Page 17753]]

TANF program, that are commingled with Federal TANF funds. Such 
expenditures may count toward both the State's basic MOE and 
Contingency Fund MOE. To the extent that expended State funds are 
commingled with Federal TANF funds, they are subject to the Federal 
rules.
    Segregated State TANF expenditures. This term identifies State 
funds expended within the TANF program that are not commingled with 
Federal TANF funds. Such expenditures count for both basic MOE and 
Contingency Fund MOE purposes. They are not subject to many of the TANF 
requirements that apply only to Federal TANF funds (including time 
limits).
    Separate State program (SSP). This term identifies programs 
operated outside of TANF in which the expenditure of State funds counts 
toward the basic MOE requirement, but not for Contingency Fund MOE. 
Expenditure of State funds must be made within the TANF program in 
order to count as MOE for Contingency Fund purposes.
    It also incorporates terms to distinguish among different 
categories and amounts of TANF grant funds. These distinctions are 
important because they affect the size of grant adjustments and total 
funding available to the State. In some cases, different spending rules 
apply to different categories of funds.
    State Family Assistance Grant (or SFAG). This term refers to the 
annual allocation of Federal TANF funds to a State under the formula at 
section 403(a)(1).
    Adjusted State Family Assistance Grant, or ``Adjusted SFAG.'' In 
the NPRM, we indicated this term refers to the grant awarded to a State 
through the formula and annual allocation at section 403(a)(1), minus 
any reductions due to the implementation of a Tribal TANF program to 
serve Indians residing in the State. In the final rule, we modified the 
definition to also exclude any funds transferred from TANF pursuant to 
section 404(d) of the Act. We explain this change in the Comment/
Response section below. The distinction between ``Adjusted SFAG'' and 
``SFAG'' is significant in determining spending limitations and the 
amount of penalties that might be assessed against a State under parts 
261-265.
    Federal TANF funds. This term includes not just amounts made 
available to a State through the SFAG, but also other amounts available 
under section 403, including bonuses, supplemental grants, and 
contingency funds. In expending Federal TANF funds, States are subject 
to more restrictions than they are in expending State MOE monies, as 
discussed under subpart B of part 263. (The NPRM used this term and the 
terms ``Federal funds'' and ``TANF funds'' interchangeably.)
(d) Cross-References
    In Sec. 260.30, you will find cross-references for the definitions 
of ``assistance'' and ``WtW cash assistance.'' In the NPRM, the 
definition of ``assistance'' appeared at Sec. 270.30. In the final 
rule, we decided to move it to its own separate section. You will find 
it in Sec. 260.31. The discussion of the comments on our proposed 
definition appears in the corresponding preamble section. ``WtW cash 
assistance'' was not defined in the NPRM; in the final rule, it appears 
in Sec. 260.32.
    In the NPRM, we included definitions for the terms ``Family 
Violence Option (FVO),'' ``good cause domestic violence waiver,'' and 
``victim of domestic violence'' in section Sec. 270.30 and explained 
them in this section of the preamble.
    In the final rule, Sec. 260.30 only contains cross-references for 
the definitions of the domestic violence terms. As we discussed earlier 
in the final rule, we have moved the domestic violence provisions to a 
new subpart B of part 260. The definitions appear at Sec. 260.51. For 
the discussion of these provisions, you should go to the earlier 
preamble section entitled ``Treatment of Domestic Violence Victims.''
    Likewise, in the final rule, we have moved the waiver definitions 
(including the definitions of ``waiver'' and ``inconsistent'') to a new 
subpart C of part 260. For the discussion of the waiver definitions and 
waiver policies, you should go to the earlier preamble section entitled 
``Waivers.''
    We received a few comments on the definition of child care terms 
that are relevant to the issue of whether single parents with children 
under age 6 may be sanctioned for failing to meet work requirements. 
For a discussion of those comments, you should go to Secs. 261.56 and 
261.57.
    Finally, we would like you to note that we added a reference to 
Sec. 263.0(b), which contains a definition of ``administrative costs.'' 
We decided not to define ``information technology and computerization 
costs needed for tracking or monitoring required by or under title IV-A 
of the Act.'' However, we do provide some regulatory language to 
explain the scope of the exclusion at Secs. 263.2(a)(5) and 263.13(b). 
You will find a discussion of this language in the preamble for 
Sec. 263.0. (These terms are important because States are subject to 
15-percent caps on the amount of Federal TANF and State MOE funds that 
they may spend on administrative activities, exclusive of such 
computer-related costs.)
Additional Definitional Issues in Sec. 260.30
(a) Fiscal Terms
    Comment: A few commenters pointed out that the proposed rule had an 
apparent inconsistency in that the base for determining the 
administrative cost cap and the base for determining penalty amounts 
were different in States that chose to transfer funds to CCDBG (the 
Discretionary Fund of the CCDF).
    Response: Not all commenters presented this as a definition 
comment, but we think the appropriate place to address it is by 
revising the definition of the ``adjusted SFAG.'' The revised 
definition excludes amounts transferred to SSBG and the Discretionary 
Fund of the CCDF. This change has the effect of removing the 
transferred amounts from the base for both the administrative cost cap 
and the penalty calculations. We believe the exclusion is most 
consistent with the statutory provision at 404(d), which provides that 
transferred amounts are subject of the rules of the program to which 
they are transferred. You can find additional discussion of this issue 
in the preamble for Sec. 263.0.
    Comment: One commenter indicated that we had too many financial and 
program terms in the list of definitions and asked that we delete some. 
Of particular concern were: (1) the distinction between SFAG and TANF 
funds; and (2) State MOE expenditures versus State TANF expenditures, 
TANF funds and TANF MOE. The commenter recommended that a different 
term be used for either TANF MOE or State MOE expenditure.
    Response: First, while ``SFAG'' and ``TANF funds'' are similar 
terms, they are not identical. It is important to make and understand 
the distinction. ``SFAG'' refers only to the basic Federal TANF block 
grant, the amount given to the State based on prior AFDC, JOBS, and EA 
payments. ``Federal TANF funds'' refers to Federal funds awarded to the 
State under section 403 of the Act, except for WtW funds. It thus 
includes any supplemental grants, bonuses, contingency funds. The 
``SFAG'' amount (adjusted) is the base amount for determining any 
penalties assessed on the State. Most of the provisions on use of funds 
apply to all ``Federal TANF funds,'' and thus extend to the funding 
provided under section 403, not just the basic TANF block grant amount.
    We have modified the definition of Federal TANF funds slightly to 
clarify

[[Page 17754]]

that the term does not include WtW funds provided under section 
403(a)(5). By statute (section 403(a)(5)(C)(v)), the restrictions on 
the use of TANF funds do not generally apply to WtW funds and the 
Secretary of Labor is responsible for administering the WtW grants. The 
exceptions are the TANF provisions on use of funds for administrative 
costs, Individual Development Accounts, and Employment Placement 
Programs. The Department of Labor has addressed the restriction on 
administrative costs for WtW funds separately in its WtW rules, we have 
made a conforming change to our IDA rules (at Sec. 263.21), and we have 
not addressed use of WtW funds for Employment Placement Programs 
because the TANF rules do not directly address this issue. While the 
proposed rule contained three definitions related to maintenance-of-
effort--Contingency Fund MOE, MOE, and TANF MOE, we believe it is best 
to keep three terms. Since the statute applies some different rules for 
the basic MOE requirement and Contingency Fund MOE, the rules need to 
include at least two terms. We included the third term--MOE--because 
there are many places where the same rules apply to both types of State 
expenditures, and it is more efficient to use the one short acronym 
than two longer terms.
    As we noted earlier, we did decide to change the term ``TANF MOE'' 
to ``basic MOE.'' We recognized that the term ``TANF MOE'' could cause 
confusion because States could expend funds outside the TANF program in 
meeting the basic MOE requirement; the term ``TANF MOE'' suggested that 
we were looking only at MOE expenditures under the TANF program.
    The proposed rule also contained three terms for Federal TANF 
funds--TANF funds, Federal funds, and Federal TANF funds. In this case, 
the three terms were duplicative. We chose to eliminate the first two 
from the list of terms at Sec. 260.30 and keep the definition for 
Federal TANF funds. We have made changes throughout the preamble and 
regulatory text to reflect this decision.
    Comment: One commenter noted that our definition for ``Contingency 
Fund MOE'' contained an incorrect reference to child care expenditures.
    Response: The commenter correctly noted that our proposed 
definition did not conform to the amendments in the Balanced Budget 
Act. We have revised the definition in the rules to remove the 
reference to child care expenditures. We also made conforming changes 
to the preamble discussion.
(b) Miscellaneous Issues
    Comment: One commenter indicated that we needed a definition of 
Governor and that we should include the Mayor of the District of 
Columbia in that definition.
    Response: We have added a standard definition that includes the 
Mayor of the District of Columbia and the chief executive officer of 
the eligible Territories as well.
    Comment: One commenter wanted us to establish a Federal definition 
for ``violating a condition of their parole or probation,'' like the 
one used in New York State. The commenter's suggestion would have the 
effect of limiting the scope of the ``fugitive felon'' provision at 
section 408(a)(9) by providing for uniform standards that exclude 
certain ``technical violations.''
    Response: For several reasons (including the limits to our 
regulatory authority under section 417 and existing variations in State 
law), we believe that this definition is an appropriate area to leave 
to State discretion. Therefore, we have not included a Federal 
definition.
Miscellaneous Technical Changes To Note
    Finally, we made a few minor changes based on our own internal 
reviews. First, we noted that the proposed definition of ``eligible 
State'' did not reflect the amendment made by the Balanced Budget Act. 
Under PRWORA, as enacted, an ``eligible State'' was one that had 
submitted a complete plan in the two-year period immediately preceding 
the fiscal year. Under the change, ``an eligible State'' is one that 
submitted a complete plan in the ``27-month period ending with the 
close of the first quarter of the fiscal year.'' The final rule 
incorporates this revised language.
    According to the Committee Report (H.R. Rep. No. 78, Part 1, 105th 
Cong., 1st sess., p. 38), the purpose of the amendment was to give 
States an additional quarter to submit their plans. However, the 
meaning of the new statutory language is a little more complicated. If 
you would like additional information, you may refer to guidance that 
we sent out on May 15, 1998 (OFA-TANF-PA-98-3). A copy of this document 
is available through the OFA Web page (at http://www.acf.dhhs.gov/ofa).
    Secondly, we have added some cross-references to terms defined in 
other parts of the TANF rules, including ``Individual Development 
Accounts'' and ``administrative costs.''
    Thirdly, as we have previously discussed, we created a new subpart 
A in part 260 for the definitions and other general provisions that 
were in part 270 of the NPRM, and we moved the definition of terms 
related to domestic violence and welfare reform waivers to new subparts 
of part 260. We believe this new structure will make our policies in 
these latter areas clearer and more coherent.
    Finally, we added definitions for ``Social Services Block Grant,'' 
``SSBG,'' ``State agency,'' ``CCDBG,'' and the ``Discretionary Fund of 
the Child Care and Development Fund'' because these terms were helpful 
in describing other provisions of these rules. These definitions are 
straightforward references, based on existing statutory and regulatory 
language.

Sec. 260.31  What Does the Term Assistance Mean? (New Section)

    This is a new section in the final rule. The proposed rule 
contained the definition of assistance in Sec. 270.30, with the other 
TANF definitions. However, because of the length and significance of 
this term, we decided to give it its own section.
(a) Background
    In the NPRM we advised readers to note the definition of 
``assistance'' proposed in this section. We indicated that PRWORA uses 
the terms ``assistance'' and ``families receiving assistance'' in many 
critical places, including: (1) most of the prohibitions and 
requirements at section 408, which limit the provision of assistance; 
(2) the numerator and denominator of the work participation rates in 
section 407(b); and (3) the data collection requirements of section 
411(a). Largely through reference, the term also affects the scope of 
the penalty provisions in section 409. Thus, the definition of 
``assistance'' is very important. At the same time, because TANF 
replaces AFDC, EA and JOBS, and provides much greater flexibility than 
these programs, what constitutes assistance is less clear than it was 
in the past.
    Because TANF is a block grant, and it incorporates three different 
programs, a State may provide some forms of support under TANF that 
would not commonly be considered public assistance. Some of this 
support might resemble the types of short-term, crisis-oriented support 
that was previously provided under the EA program. Other forms might be 
more directly related to the work objectives of the Act and not have a 
direct monetary value to the family. We proposed to exclude some of 
these forms of support from the definition of assistance.

[[Page 17755]]

    The general legislative history for this title indicated that 
Congress meant for this term to encompass more than cash assistance, 
but did not provide much specific guidance (H.R. Rep. No. 725, 104th 
Cong., 2d sess.). Likewise, our pre-NPRM consultations did not provide 
clear guidance or direction.
    In our January 1997 guidance (TANF-ACF-PA-97-1), we expressed the 
view that the definition of assistance should encompass most forms of 
support. However, we recognized two basic forms of support that would 
not be considered welfare and proposed to exclude them from the 
definition of assistance. In brief, the two exclusions were: (1) 
services that had no direct monetary value and did not involve explicit 
or implicit income support; and (2) one-time, short-term assistance.
    In the proposed rule, we clarified that child care, work subsidies, 
and allowances that cover living expenses for individuals in education 
or training were included within the definition of assistance. For this 
purpose, child care included payments or vouchers for direct child care 
services, as well as the value of direct child care services provided 
under contract or a similar arrangement. It did not include child care 
services such as information and referral or counseling, or child care 
provided on a short-term, ad hoc basis. Work subsidies included 
payments to employers to help cover the costs of employment.
    We also proposed to define one-time, short-term assistance as 
assistance that is paid no more than once in any twelve-month period, 
is paid within a 30-day period, and covers needs that do not extend 
beyond a 90-day period. In response to the policy announcement, we had 
received a number of questions about what the term ``one-time, short-
term'' meant. Based on our experience with the EA program, we realized 
that a wide range of interpretations was possible, and we were 
concerned that States might try to define as ``short-term'' or ``one-
time'' many situations where assistance was of a significant and 
ongoing nature. Thus, we proposed to limit what was excluded as one-
time, short-term assistance to items that were paid no more than one 
time a year over no more than a 30-day period for needs that did not 
extend beyond 90 days. We expressed the hope that our proposal would 
give States the flexibility to meet short-term and emergency needs 
(such as an automobile repair), without invoking too many 
administrative requirements and undermining the objectives of the Act. 
We welcomed comments on whether the proposed policy achieved this end.
    In drafting the NPRM, we had considered allowing States to include 
additional kinds of benefits and services as assistance, at their 
option. However, we were concerned that varying State definitions would 
create additional comparability problems with respect to data 
collection and penalty determinations. Also, we were concerned that an 
expanded definition might have undesirable program effects (e.g., in 
extending child support assignment to cases where it would not be 
appropriate). Thus, we did not give States the option to expand the 
definition.
    For those concerned about the inclusion of child care in the 
definition of assistance, we pointed out that the child care 
expenditures made under the Child Care and Development Fund (CCDF) are 
not subject to TANF requirements, and States have the authority to 
transfer up to 30 percent of their TANF grant to the Discretionary Fund 
of the CCDF program.
    We also proposed to collect data on how much of the program 
expenditures were being spent on different kinds of ``assistance'' and 
``nonassistance.'' We referred readers to the discussion of the TANF 
Financial Report at part 275 of the NPRM for additional details.
    We said that, if the data show that large portions of the program 
resources are being spent on aid that fell outside the definition of 
assistance, we would have concerns that the flexibility in our 
definition of assistance is undermining the goals of the legislation. 
We would then look more closely at the aid being provided outside the 
definition and try to assess whether work requirements, time limits, 
case-record data and child support assignment would be appropriate for 
those cases. If necessary, we would consider a change to the definition 
of assistance or other remedies.
    Since we issued the NPRM, Congress enacted the Child Support 
Performance and Incentives Act of 1998. As we discussed earlier in the 
preamble, section 403 of that legislation included several provisions 
on the use of Federal TANF funds to help pay for transportation 
benefits for welfare recipients under the Job Access program. In a new 
section 404(k)(3) of the Social Security Act, there is a ``rule of 
interpretation'' indicating that the provision of transportation 
benefits to an individual who is not otherwise receiving TANF 
assistance, pursuant to these provisions, would not be considered 
assistance. We have added a new exclusion to the definition of 
assistance to reflect this provision. (Also, as we discuss later, the 
final rule incorporates other changes that exclude transportation 
benefits for employed families from the definition of assistance.)
(b) Overview of Comments
    We received a number of comments supportive of the definition in 
our January 1997 guidance and the definition in the NPRM (which was 
derived from this guidance).
    At the same time, a wide range of commenters--including States, 
advocates, and union groups--wanted to see changes to one or both of 
our proposed exclusions. A significant number of commenters indicated 
that this was one of the most important issues in the NPRM for them. 
All these commenters wanted to narrow the scope of benefits that would 
be considered within the definition of assistance; many expressed a 
particular concern about the treatment of supports for working families 
under the definition. Some wanted modest changes to the proposed 
definition, while a significant number sought significant additional 
exclusions, such as: (1) child care, transportation, and other work 
supports; and (2) work-based assistance, such as wage subsidies.
    Moreover, subsequent discussions and materials that we have 
received suggest increasing concern about the proposed definition over 
time, as individuals have had more time to ponder its implications, 
States have further explored supports needed by families as they 
transition from welfare to work, and commenters have shared their 
concerns with other parties.
    As the result of these comments, we have made some significant 
modifications to the definition of assistance. The modifications 
address the concerns of commenters both about the treatment of work 
supports and the exclusion for one-time, short-term assistance. We 
found substantial merit in the arguments made by commenters in both 
areas. Also, as States proceed with their implementation of TANF, they 
continue to explore and develop new, innovative ways to support low-
income working families and to address the goals of the TANF program. 
As a result, their programs are beginning to look less like traditional 
welfare. TANF program requirements were created with a particular 
program model in mind. Applying the TANF requirements much more broadly 
makes limited policy sense.
    Under the narrower definition of assistance in the final rule, 
States will have more flexibility in how they serve families--
particularly working families--with their Federal TANF and

[[Page 17756]]

State MOE funds. They will also experience a significant reduction in 
the administrative burden associated with serving working families, 
providing refundable earned income tax credits, and administering 
Individual Development Accounts (because they will not have to provide 
disaggregated data in such circumstances).
    With the change in the definition of assistance under the final 
rule, we will not be collecting disaggregated data on work supports and 
other types of benefits and services that are not assistance. To 
compensate for this loss, we have significantly revised the TANF 
Financial Report by adding a number of new reporting categories. We 
have also provided for new information on diversion programs to be 
included in the annual report.
    At the same time, we remain concerned about the potential impact of 
this definition on the achievement of TANF goals. While we believe the 
revised definition in the final rule is sound, it is difficult to 
envision all of the consequences. Thus, we will monitor State programs 
and expenditures and periodically assess whether our definition 
continues to support the goals of the program. If aspects of the 
definition become problematic, we will pursue appropriate changes.
    A detailed discussion of the comments and our policy decisions 
follows.
(c) The Appropriateness of a Federal Definition
    Comment: A couple of commenters said we should let States create 
their own definitions of assistance.
    Response: We do not believe this is a viable option. The definition 
is too central to all the accountability provisions in the statute. If 
we did not define this term, States might define assistance so narrowly 
as to undermine the key TANF provisions on child support, work 
requirements, and time limits. Also, wide variations in State 
definitions would exacerbate issues about the consistency of data 
collection, program information, work participation rates, time limits, 
and other penalty provisions.
    Readers should understand that the definition of assistance does 
not substantially impede the flexibility each State has to set 
eligibility rules or to expend funds on a broad range of benefits, 
services, and supports for needy families in the State. The major 
effect of the definition is to determine the applicability of key TANF 
requirements to the benefits that a State does elect to provide. It 
does not circumscribe the types of allowable benefits; these may be 
inside or outside the definition of assistance.
    We had indicated in the proposed rule that the definition did not 
apply to the MOE provisions at subpart A of part 273. We have included 
similar language in the final rule at Sec. 260.31(c)(1). (We also made 
a conforming change in that paragraph that references Contingency Fund 
MOE as part of this exception). In addition, at Sec. 260.31(c)(2), we 
have added language clarifying that the definition of assistance does 
not limit the types of benefits and services that States provide to 
individuals and families under the first statutory goal of TANF. This 
first statutory goal authorizes the provision of assistance, but does 
not mention other forms of benefits or services. However, in other 
places, the statute specifically authorizes expenditures of State and 
Federal funds that are ``in any manner reasonably calculated to 
accomplish the purpose'' of the program. Thus, the statute indicates 
that the word ``assistance'' needs to be interpreted more broadly in 
the context of this first TANF goal. (The new regulatory text refers 
only to the first goal of TANF; the other TANF goals do not use the 
term ``assistance'' and thus did not require clarification.)
    Comment: Although one commenter said the proposed rule 
``effectively incorporates'' the policy from the guidance (with 
clarification and elaboration), a number of respondents commented that 
the proposed definition represented a retreat from the definition 
provided in the guidance.
    Response: We agree that the changes we proposed in the NPRM related 
to the exclusion for ``one-time, short-term assistance'' had the effect 
of narrowing what could have been excluded under our policy 
announcement. As discussed in the next comment, we have decided to ease 
the proposed restrictions on one-time, short-term assistance.
    We do not believe that our proposed definition otherwise deviated 
from the definition in the guidance. It is our view that benefits such 
as child care and transportation subsidies, while not directly 
mentioned, were part of the definition of assistance in the January 
1997 policy announcement (TANF-ACF-PA-97-1), as they involved subsidies 
or other forms of income support. Our intent in inserting the 
references to child care and transportation in the NPRM was to provide 
a clearer and more complete definition, not to make a substantive 
change.

(Nevertheless, as we discuss in the next section, on ``Work Supports,'' 
the final rule excludes such supports for working families from the 
definition of assistance.)
    Comment: Several commenters suggested that we should exclude 
assistance that was not cash assistance or financial assistance from 
our definition.
    Response: As we discuss in the following comments, the legislative 
history does not support this approach. Rather, for both TANF and WtW, 
it suggests that Congress envisioned inclusion of at least some noncash 
benefits as assistance. Otherwise, it would have been superfluous to 
specifically exclude noncash WtW assistance from the time-limit 
requirement. In addition, wholesale exclusion of noncash benefits from 
the definition would create some peculiar incentives for States and 
could substantially distort their decisions about how to provide 
benefits.
(d) Work Supports
    Comment: A significant number of commenters called for additional 
exclusions from the definition of assistance. While there was a fair 
amount of diversity in the specific suggestions, a significant number 
of commenters sought exclusions of: (1) assistance that is not like 
traditional welfare, but directed at achieving the work objectives of 
the Act (e.g., child care, transportation, and other work supports); 
and/or (2) work-based assistance, provided as either work subsidies to 
employers (especially payments to employers to cover the costs of 
supervision and training) or as compensation for work. Many commenters 
expressed specific concerns about the appropriateness of child support 
assignment and time limits in these cases. A number objected to our 
standard of ``direct monetary value.''
    Some commenters spoke broadly about excluding work subsidies, 
assistance directed at achieving the work objectives of the Act, or 
work supports. Others focused on specific items such as child care, 
transportation, and earned income tax credits. A few commenters 
suggested that we borrow language from the caseload reduction 
provisions of the proposed rule and exclude ``cases receiving only 
State earned income tax credits, transportation subsidies or benefits 
for working families that are not directed at their basic needs.''
    We received more comments in support of excluding child care than 
for other types of supportive services. Commenters expressed strong 
objections to the inclusion of child care, in large part due to 
concerns about the time-

[[Page 17757]]

limit implications. They also expressed disagreement with our 
proposition that States could transfer funds to the Child Care and 
Development Block Grant in order to avoid time limits for child care 
benefits; they argued that there were legislative and administrative 
barriers associated with these transfers. Some commenters argued that 
child care and transportation are not like cash. Since they are not 
fungible (i.e., available to meet a family's basic needs), they should 
be excluded from the definition of assistance on that basis. Other 
commenters said that it was unclear that Congress intended to extend 
child support assignment to additional forms of aid, such as child care 
and JOBS-related benefits; at a minimum, they requested that we clarify 
that States can take an assignment of less than the amount of 
assistance.
    In addition to some of the prior arguments, the principal arguments 
that commenters presented for the exclusion of work subsidies (or 
payments to employers to cover the costs of employment and training) 
were: (1) such benefits primarily benefit employers, not recipients, 
and thus do not have direct monetary value to the family; (2) they 
should be viewed as the equivalent of tax credits or like other 
expenditures on training; (3) employees may use up their time limit by 
going through a series of subsidized jobs from which employers benefit, 
but that give employees no prospect of long-term employment; and (4) 
their inclusion will create administrative problems and make it 
difficult to jointly fund work subsidy programs.
    Commenters also presented arguments for excluding assistance for 
which recipients worked. They argued that this assistance represented 
compensation for work, rather than assistance. Since recipients 
``earned'' this assistance, commenters felt that it was inappropriate 
for the months to accrue against the time limit on assistance and for 
child support assignment to apply.
    Response: We agree that there are good arguments for narrowing the 
definition of assistance to exclude work supports such as child care 
and transportation. While neither the statute nor the legislative 
history directly suggests that a significant subset of benefits should 
be excluded from the definition, there is also little direct evidence 
that Congress intended for time limits and data collection to apply to 
an array of new benefits (such as IDAs and new work supports) or to 
working families that have not traditionally been part of the welfare 
system. Rather, in reforming the welfare program, it seems Congress was 
trying to end dependence on welfare as a way of life for families and 
to facilitate the ability of families to work and become self-
sufficient. Two of the main effects of defining a TANF benefit as 
assistance are to require that a family work so that it can become 
self-sufficient and to time limit that assistance. However, a work 
requirement is unnecessary if the adult is already working and the 
benefit that the family receives is a work support. Further, the need 
to time-limit work supports is mitigated since the family is already 
moving toward self-sufficiency; working families should eventually 
become independent.
    One statutory provision that raised questions about Congressional 
intent was section 404(k)(3). This provision, which was part of the 
Child Support Performance and Incentives Act of 1998, provided a ``rule 
of interpretation'' that specified that transportation benefits 
provided under Job Access to an individual who was not otherwise 
receiving assistance under TANF would not be considered assistance. It 
suggests that Congress envisioned transportation to otherwise be 
included within the TANF definition of assistance. However, another, 
equally viable, interpretation of this Congressional action exists. The 
child support legislation was enacted while our interim guidance was in 
effect. Thus, Congress could have been providing a clarification of 
what was excluded from assistance in that context. In fact, the 
legislative history did not express any opinions about the interim 
definition in the policy guidance that we had issued (TANF-ACF-PA-97-
1).
    You will note that we have incorporated an exclusion that reflects 
this specific statutory provision. We recognize that it is largely 
duplicative of the general exclusion for work-related supportive 
services, including transportation, in Sec. 260.31(b)(3). However, it 
is possible that some Job Access transportation benefits are not 
covered by the general provisions, and we wanted to ensure that the 
statutory exclusion received full weight. Under Sec. 260.31(b)(7), 
therefore, we provide a categorical exclusion for transportation 
benefits received under Job Access by individuals who are not otherwise 
receiving TANF assistance.
    The definition in these rules is generally consistent with 
commenter suggestions, but more specific in some areas. It provides 
that supports for working families (such as child care and 
transportation) would be excluded. This exclusion covers supportive 
services needed to cover employment-related needs and time spent by an 
employed individual in education and training needed for job retention 
and career advancement. (As discussed below, the education and training 
is also excluded.)
    Except as provided in paragraphs (b), the exclusion does not cover 
supportive services related to participation in education, training, 
job search and related employment activities for nonworking families. 
Supportive services provided in this situation look more like 
traditional welfare than work supports. Also, the same rationale for 
excluding these individuals from the TANF program requirements, 
including work participation and time limits, does not exist for these 
families as exists for families that are already working.
    The education and training activities themselves are generally 
excluded under paragraph (b)(6). The one exception would be if 
education or training benefits included allowances or stipends designed 
to provide income support; these particular types of education and 
training benefits would be considered assistance. Also, we would remind 
readers that under sections 401 and 407 of the Act education and 
training services should be directed at preparing individuals for work 
and moving them to self-sufficiency; they should not be of a general 
nature.
    Our definition also specifies the types of items that would be 
considered as part of basic needs. The listed items (food, clothing, 
shelter, utilities, household goods, personal care items, and general 
incidental expenses) reflect those items that were represented in the 
majority of the State needs standards under prior law. The term 
``incidental expenses'' covers items States included as part of basic 
needs such as telephones; small allowances for child care or 
transportation needs associated with keeping appointments, going to the 
store, or fulfilling other basic responsibilities; basic supplies for 
the medical cabinet; insurance premiums; and miscellaneous fees and 
expenses, to the extent consistent with State practice.
    The definition excludes contributions to, and distributions from 
Individual Development Accounts (IDAs). Although the TANF statute 
includes IDA provisions, commenters did not specifically raise 
questions about the treatment of IDA benefits under the definition of 
assistance. However, interest has grown since the passage of the Assets 
for Independence Act (under title IV of Pub. L. 105-285). Since then, 
we have received numerous questions from interested parties, including 
State agencies and potential grantees, about how IDA benefits would be 
treated

[[Page 17758]]

under the TANF rules. We have several reasons for the specific 
exclusion in the final rule. First, many of the assets in IDA accounts 
represent deposits from the earnings of low-income families and the 
interest on those deposits. Thus, many of the assets do not represent 
assistance from TANF or any other governmental source. Second, when 
contributions are made into an IDA account from the TANF agency or 
other third parties, they only represent potential assistance at that 
point. The individuals whose funds are in the account are potential 
beneficiaries, but have very limited access to the funds in that 
account. The funds are not available to meet their basic needs. 
Furthermore, distributions from IDA accounts would normally be excluded 
under other provisions of our definition (e.g., as emergency benefits, 
for education, and as nonrecurrent, short-term benefits). Because the 
residual cases might be insignificant in terms of the amount of 
assistance involved and the tracking of such amounts might create very 
significant administrative burdens, we believed it would be appropriate 
to provide an umbrella exclusion for IDA benefits.
    While we were convinced by the arguments for excluding supportive 
services for working families from the definition of assistance, we 
have noted a few consequences of this narrower definition of assistance 
that were of some concern. For example, many of the funding 
restrictions in section 408 are restrictions on which families may 
receive ``assistance,'' section 404(e) of the Act only authorizes 
States to use the ``rainy day'' funds that they reserve for future 
years ``for providing assistance,'' many working families will not be 
included in the TANF work participation rate calculations, and we will 
receive data on fewer families and types of benefits from the 
aggregated and disaggregated reporting.
    In order to compensate for the loss of reporting, we have added 
some additional detail to the expenditure information required in the 
TANF Financial Report (see Appendix D). (See the preamble for 
Sec. 263.11 and the Instructions for Completion of ACF-196 (the TANF 
Financial Report) in Appendix D for additional information on the use 
and reporting of reserved funds.)
    Comment: One commenter asked whether expenditures on ``work 
activities'' were the same as expenditures on ``employment services.''
    Response: We assume this commenter wanted to know if all 
expenditures on work activities, as specified in section 407(d) of the 
Act, would be excluded from the definition of assistance. The 
exclusions we provide in the final rules would generally cover the 
specified work activities, including on-the-job training, subsidized 
employment, and most education and training activities (i.e, since most 
do not represent income support). They would also cover payments to 
employers and third parties for supervision and training and payments 
under performance-based contracts for success in achieving job 
placements and job retention. As discussed above, there may be types of 
education and training benefits (e.g., stipends or allowances) that 
fall within the definition. Also, the definition does not generally 
exclude payments to individuals participating in work experience or 
community service (or any other work activity). Nor does it exclude 
needs-based payments to individuals in any work activity whose purpose 
is to supplement the money they receive for participating in the 
activity.
    The distinction we make between work subsidies paid to employers 
and payments to participants in work experience and community service 
is similar to distinctions made under tax law. For example, we would 
refer you to Notice 93-3, issued by the Internal Revenue Service on 
December 17, 1998. This notice explains that TANF payments that meet 
certain conditions would not be income, earned income, or wages for 
Federal income and employment tax purposes. The notice provides that: 
``Payments by a governmental unit to an individual under a 
legislatively provided social benefit for the promotion of the general 
welfare that are not basically for services rendered are not includible 
in the individual's gross income and are not wages for employment tax 
purposes, even if the individual is required to perform certain 
activities to remain eligible for the payments. * * * Similarly, these 
payments are not earned income for Earned Income Credit (EIC) 
purposes.'' It also notes that, under amendments to the Internal 
Revenue Code under the Taxpayer Relief Act of 1997, Pub. L. 105-34, 
``earned income for EIC purposes does not include amounts received for 
[TANF work experience and community service activities] to which the 
taxpayer is assigned * * *, but only to the extent such amount is 
subsidized under [TANF].' ''
    Our definition of assistance distinguishes between work subsidies 
paid to employers and community service and work experience on a 
similar basis. We believe that payments to participants in work 
experience and community service are closely associated with 
traditional welfare benefits and are designed primarily to meet basic 
needs rather than as compensation for services performed. This view is 
also reflected in the Conference Report, H. Rep. 105-217, for Pub. L. 
105-34, which added the WtW program. In discussing the treatment of WtW 
cash assistance for time-limit purposes, it indicates that wage 
subsidies are indirect cash assistance. We believe the reference to 
wage subsidies as cash assistance is to such payments as part of work 
experience and community service where, as in the tax provisions, 
welfare law determines the size of the payments and limits the hours of 
work so that it is, in effect, assistance received indirectly. Thus, we 
generally include such subsidies in the definition of assistance.
    We do not believe that the mere fact that the benefits received by 
recipients in work experience or community service activities are 
conditional on work is sufficient to view it as nonassistance. The 
expectation under TANF is that adult recipients will generally 
participate in work activities as a condition of receiving TANF. This 
expectation is evident in the work requirement in section 
402(a)(1)(A)(ii) and the fact that Congress based the calculation for 
work participation in section 407 on all families with adults, instead 
of retaining the numerous exemptions that existed under JOBS.
    The regulatory text also indicates that benefits conditioned on 
other work activities (e.g., job search) are not excluded from the 
definition of assistance. We do not think that anyone would conclude 
that such benefits would be excluded, because there would be no 
historical basis for such a conclusion. However, we decided to include 
the broader reference to foreclose any future questions.
    Comment: One commenter said we should exclude on-site case 
management services provided by an employer under contract from the 
definition of assistance.
    Response: Our definition already excludes case management services 
provided under the TANF program. It is irrelevant who provides the case 
management services.
    Comment: One commenter noted that the preamble in the NPRM excluded 
``information about child care, child care referral services, child 
care counseling services and child care provide on an ad hoc basis'' 
and asked that we add that language to the regulatory text.

[[Page 17759]]

    Response: We do not believe it is appropriate or even possible to 
specify all types of excluded services in the regulatory text. However, 
we have inserted ``child care information and referral'' as an example 
of an excluded service.
(e) Nonrecurrent, Short-Term Benefits
    Comment: We received a significant number of comments from 
respondents who were concerned about the narrowed exclusion for ``one-
time, short-term'' assistance. The major concern of commenters was that 
the 30 existing State welfare diversion programs, together with their 
local variations, could not meet such a tight definition because they 
might provide more than one payment in a year if a family encounters an 
unforeseen subsequent crisis. They suggested broader language that 
would exclude short-term, episodic assistance for families in discrete 
circumstances and encompass nonrecurrent, short-term payments that 
could occur more than once in 12 months. They questioned the basis for 
creating restrictions based on the old EA definitions. They raised 
concerns about the negative effect on State innovation. They also 
raised concerns about the administrative burdens associated with 
tracking eligibility, especially when outside providers, such as 
emergency shelters, deliver emergency services or when a State is 
operating both diversion and emergency assistance programs and has not 
administratively connected those programs.
    Response: In part, the narrower language in the proposed rule 
reflected a concern that States could avoid TANF requirements by 
changing the manner in which they assisted families. We did not believe 
that it would be appropriate to exempt families that received a 
substantial amount of assistance, assistance over a significant period 
of time, or assistance provided on a recurring basis from child support 
assignment, work requirements, and time limits. Based on prior 
experience with the Emergency Assistance program, we believed that 
States could expand the concept of one-time, short-term assistance to 
cover benefits that extended over time and encompassed substantial 
expenditures.
    At the same time, we did not intend our definition to undermine 
existing State efforts to divert families from the welfare rolls by 
providing short-term relief that could resolve discrete family 
problems. Based on both the comments we received and other sources of 
information, we realize that diversion activities are an important part 
of State strategies to reduce dependency and that restrictive Federal 
rules in this area could stifle the States' ability to respond 
effectively to discrete family problems. We also understand that 
subjecting families in diversion programs to all the TANF 
administrative and programmatic requirements would not represent an 
effective use of TANF or IV-D resources. For example, it does not 
necessarily make sense to require that, for a single modest cash 
payment, the State must open up a TANF case, collect all the case-
record data which that entails, require the assignment of rights to 
child support, open up a IV-D case, and start running a Federal time-
limit clock.
    Much of the aid provided through these programs is work-focused, 
and, under our definition, the benefits to these families are 
nonrecurrent and short-term in nature. Thus, we believe that excluding 
this aid from the definition of assistance does not undermine the TANF 
provisions on work, time limits, or self-sufficiency. However, as we 
proposed in the NPRM, we will be collecting aggregate information on 
expenditures on aid that is not assistance (i.e., on 
``nonassistance''). This information will be valuable in helping us to 
assess the extent to which benefits being provided with TANF and MOE 
funds fall under, or outside of, the major TANF program requirements.
    Finally, we recognize that this is a policy area where policy and 
programs are evolving quite rapidly. Within the next year or two, we 
would expect to have a better knowledge base for assessing diversion 
programs and making policy judgments. For example, the Office of the 
Assistant Secretary for Planning and Evaluation and ACF are jointly 
sponsoring a study by George Washington University to examine the State 
diversion programs and activities and explore their Medicaid 
implications.
    Thus, the final rules include a revised definition that excludes 
more than one payment a year, so long as such payments provide only 
short-term relief to families, are meant to address a discrete crisis 
situation rather than to meet ongoing or recurrent needs, and will not 
provide for needs extending beyond four months. The revised definition 
uses the term ``nonrecurrent'' rather than ``one-time'' because the 
former term is more consistent with the intended policy. A family may 
receive such benefits more than once. However, the expectation at the 
time they are granted is that the situation will not occur again, and 
such benefits are not to be provided on a regular basis. We believe the 
revised exclusion is limited enough in nature and scope not to 
undermine the statutory provisions of the TANF program, while giving 
States the flexibility to design effective diversion strategies.
    The definition also would exclude supports provided to individuals 
participating in applicant job search. Applicant job search is a common 
form of diversion that clearly fits within the goals of TANF and within 
this exclusion's view of a ``short-term'' benefit. (The job search 
itself would be excluded under the general services exclusion at 
paragraph (6).)
    Similarly, the definition would exclude supports for families that 
were recently employed, during temporary periods of unemployment, in 
order to enable them to maintain continuity in their service 
arrangements. Unnecessary disruptions in these arrangements could 
negatively affect the family's ability to re-enter the labor force 
quickly and, in the case of child care, could negatively affect the 
children in the family.
    The four-month limitation reflects our belief that we could not 
maintain the integrity of the short-term exclusion without providing 
some regulatory framework. As written, the four-month limitation does 
not restrict the amount of accrued debts or liabilities (such as 
overdue rent) that a State may cover or impose a specific monetary 
limit on the amount of benefits that the State may provide.
    You should note that we have added a new requirement at 
Sec. 265.9(b)(6) for States to report annually on the nature of 
nonrecurrent, short-term benefits. More specifically, we are asking 
States to describe the benefits they are providing, including their 
eligibility criteria (together with any restrictions on the amount, 
duration, or frequency of payments), any policies they have instituted 
that limit such payments to families eligible for assistance or that 
have the effect of delaying or suspending eligibility for assistance, 
and any procedures or activities developed under the TANF program to 
ensure that individuals diverted from TANF assistance receive 
appropriate information about, referrals to, and access to Medicaid, 
food stamps, and other programs that provide benefits that could help 
them successfully transition to work.
    To the extent that a State provides the required information either 
in the State plan or in the data it reports under Sec. 265.9(b)(6), it 
would not have to duplicate this information.
    Because of the tremendous importance of food stamp and Medicaid as 
supports for working families, we

[[Page 17760]]

strongly encourage States to maintain critical linkages among these 
programs because accessing these other program benefits could further 
the goals of TANF. In addition, diverting individuals from programs 
where they have an entitlement to benefits or to prompt action on a 
request for assistance could represent a violation of rules in the 
other programs.
    According to the Health Care Financing Administration (HCFA), 
section 1931 of the Social Security Act establishes rules for Medicaid 
eligibility for low-income families based on the income and resources 
of the family. Under section 1931, States must provide Medicaid 
coverage at least to families with a dependent child living with them 
whose income and resources would have qualified them for AFDC benefits 
under the State plan in effect on July 16, 1996. Therefore, Medicaid 
eligibility is not tied to or based on eligibility for TANF-financed 
assistance. Also, States cannot limit Medicaid eligibility to families 
receiving TANF.
    Medicaid regulations (at 42 CFR 435.906) require States to provide 
the opportunity for families to apply for Medicaid without delay.
    In States that use joint TANF-Medicaid applications or utilize the 
State TANF agency to make Medicaid eligibility determinations, the TANF 
office is considered a Medicaid office. Therefore, in this situation, a 
TANF agency, like any Medicaid agency, must immediately furnish a 
Medicaid application (joint or separate) upon request and act upon that 
application promptly. If there is a delay in accepting or filing an 
application for TANF assistance (e.g., because the family is served 
through a diversion program, is subject to up-front job search 
requirements, or faces other behavioral or administrative requirements 
that delay assistance), the agency must make a Medicaid application 
available immediately. If there is a delay in processing the TANF 
portion of a joint application, the agency must process the Medicaid 
portion of the application immediately.
    According to the Food and Nutrition Service (FNS), at the 
Department of Agriculture, in enacting PRWORA, Congress thoroughly 
reviewed the Food Stamp Act of 1977, as amended, and made changes to 
many of its provisions. However, it made clear that the Food Stamp 
Program continued to have a distinct set of nationwide application 
rights and responsibilities. Section 11(e) of the Food Stamp Act sets 
forth requirements that a State agency administering the Food Stamp 
Program must follow. Among other things, it requires that the Agency: 
(1) provide timely, accurate, and fair service for applicants for, and 
participants in, the Food Stamp Program; (2) develop an application 
containing the information necessary to comply with the Act; (3) permit 
an applicant household to apply to participate in the program on the 
same day the household first contacts the food stamp office in person 
during office hours; and (4) consider an application that contains the 
name, address, and signature of the applicant to be filed on the date 
the applicant submits the application.
    Where PRWORA did not amend the Food Stamp Act, current food stamp 
regulations remained in effect. The regulations at 7 CFR 273.2(c) 
provide that: (1) each household has the right to file an application 
on the same day that it contacts the food stamp office during office 
hours; (2) the State agency must advise the household that it does not 
have to be interviewed before filing an application, and it may file an 
incomplete application as long as the applicant's name and address are 
recorded on an appropriately signed form; (3) State agencies shall 
encourage households to file an application form the same day the 
household contacts the food stamp office and expresses interest in 
obtaining food stamp assistance. If individuals express interest in the 
Food Stamp Program, or have concerns about food security, States have a 
responsibility to inform them about the Food Stamp Program and their 
right to apply; and (4) the State agency must make application forms 
readily accessible to potentially eligible households.
    Although PRWORA amended section 11(e) of the Food Stamp Act by 
eliminating the requirement for joint processing of food stamp and TANF 
applications, State agencies that continue to do so must abide by the 
food stamp regulations at 7 CFR 273.2(j). These regulations set forth 
requirements regarding interviews, verification, and application 
processing procedures for joint applications. Most importantly, the 
regulations at 7 CFR 273.2(j)(1)(iii) provide that households whose 
public assistance applications are denied shall not be required to file 
new food stamp applications, but shall have their food stamp 
eligibility determined or continued on the basis of the original 
applications filed jointly for public assistance and food stamp 
purposes.
    We advise you to look for additional guidance on food stamp and 
Medicaid requirements through the HCFA and FNS web sites (www.hcfa.gov/
medicaid/medicaid.htm and www.usda.gov/fcs/, respectively).
    We strongly believe that effective procedures to ensure that 
diverted individuals access Medicaid, food stamps, or other programs 
are critical to the success of TANF programs in achieving lasting 
employment for the families they serve. In addition, such procedures 
might help States avoid compliance and legal problems in the other 
programs. Given the importance of this issue, the additional 
information on State practices that we are requiring in the annual 
report will be extremely helpful in assuring the role TANF agencies are 
playing with individuals receiving diversion benefits.
    While we dropped our proposal for a separate annual program and 
performance report, we still need information on key aspects of State 
programs in order to prepare the annual report to Congress required at 
section 411(b)(3) of the Act. To the maximum extent possible, we will 
draw upon data available through the State plans and other reports 
submitted by the States. However, because diversion benefits fall 
outside of the definition of assistance, and we have chosen not to set 
standards of completeness for State plan submissions, we may not have 
adequate information on this major feature of TANF programs to fulfill 
our responsibilities under section 411(b)(3).
    The new reporting focuses on diversion because it is one of the 
major new tools States are using to achieve the work objectives of the 
Act and, under section 413(d), Congress has shown an interest in 
looking at State performance in this specific area. Also, the burden 
associated with providing this aggregate program information is 
substantially less than the burden that would be associated with 
providing disaggregated data; because diversion payments fall outside 
the definition of assistance, the disaggregated data requirements do 
not apply.
    Comment: Several commenters also expressed concerns about the 
proposed limits on the amount of assistance and the meaning of the 
proposed 90-day restriction. Commenters were not sure whether the 90-
day restriction represented a limit on the period of needs to be met or 
a limit on the total monetary value of assistance. They objected to 
both possible interpretations. While they generally seemed to prefer an 
interpretation that limited the duration of need that could be met, 
they also expressed concern about restrictions that would affect the 
States' ability to deal effectively with past debts or liabilities or 
meet needs that extended beyond 90 days.
    Response: As discussed previously, we have replaced the 90-day 
limitation

[[Page 17761]]

with a more flexible four-month limitation. The new provision is more 
flexible with respect to past debts or liabilities; it merely limits 
the extent to which payments for future needs can be excluded from the 
definition of assistance. We also clarified in the preamble that the 
four-month limitation does not impose a specific monetary limit on the 
amount of benefits that may be excluded. Rather, the limitation 
reflects the period of time for which future needs can be addressed by 
a single ``nonrecurrent, short-term'' benefit.
    When we issued the proposed rule, we did not necessarily envision a 
single Federal interpretation of the 90-day limitation. Our intent was 
to keep State payments for needs that were ongoing or extended over a 
significant period of time within the definition of assistance. We did 
not want a State to bundle several months' worth of assistance into a 
single assistance payment in order to avoid TANF requirements for 
itself or the family.
    Our expectation for the language in the final rule is no different. 
It is appropriate for States to treat short-term assistance that 
addresses discrete episodes of need as ``nonassistance.'' It is not 
appropriate for States merely to condense the time period over which 
they pay assistance to needy families so that they can categorize the 
benefits as ``nonassistance'' and avoid TANF requirements. Also, if a 
family's emergency is not resolvable within a reasonably short period 
of time, the State should not keep the case indefinitely in emergency 
status, but should convert it to a TANF assistance case.
    At the same time, if a family receives aid in one month that falls 
under the nonrecurrent, short-term exclusion, but suffers a major set-
back later in the year, develops a need for ongoing aid, and starts 
receiving TANF assistance, we would not require the State to re-define 
the month of initial aid as assistance and retroactively subject the 
family to TANF requirements.
(f) Benefits and Supports for Noncustodial Parents
    Comment: Commenters also expressed some concern about the potential 
effects on the custodial parent and children (especially under time 
limits) when a noncustodial parent receives benefits. This issue was of 
particular concern in light of the focus given to assistance for 
noncustodial parents under Welfare-to-Work.
    Response: Many services and supports that States might provide to 
noncustodial parents (such as transportation and most work activities) 
are excluded under the final definition of assistance. Also, as we 
discuss in the preamble to Sec. 264.1, assistance provided to 
noncustodial parents does not count against the time limit of the 
custodial parent or children living in a different household unless the 
noncustodial parent is receiving assistance as a member of that same 
family and is the spouse of the head of the TANF household.
    Comment: A couple of commenters expressed concern about the effect 
of assistance that might be paid to a noncustodial parent. For example, 
a noncustodial father is paying support. However, the noncustodial 
parent of a second child in the family is receiving assistance. The 
State takes the support paid by the first noncustodial father and 
reimburses itself for assistance paid to the noncustodial parent of the 
second child. The mother and two children are not receiving any 
assistance for themselves and do not receive any child support because 
the State is retaining it. Commenters believe that it would be unfair 
to the custodial parent and children if assistance provided to a 
noncustodial parent resulted in the custodial parent's losing her right 
to receive child support and remaining subject to child support 
cooperation requirements.
    Response: We do not believe that the statute intends or requires 
this absurd result. Rather, the assignment of the rights to support by 
the custodial parent is only intended to cover assistance paid to the 
custodial parent and the child(ren) living with the custodial parent. 
It does not cover assistance that the noncustodial parent receives 
based on his or her inclusion in the family as a noncustodial parent. 
Thus, the State may not reimburse itself for assistance given to the 
noncustodial parent, as a noncustodial parent, from child support paid 
for the children. However, if noncustodial parents of a TANF child are 
receiving assistance as the custodial parents or caretakers of another 
TANF child, they may be subject to separate assignment requirements. 
They might also have responsibility under individual State law to 
reimburse the State for assistance provided.
(g) Benefits and Supports From the WtW Program
    Comment: A couple of commenters said that we should exclude noncash 
assistance paid through WtW funds from the definition of assistance. 
One commenter indicated that we had mentioned this exclusion in the 
preamble to the NPRM, but did not exclude it in the regulatory text. 
Another commenter expressed particular concern about child care 
assistance under WtW because States do not have the same authority to 
transfer WtW funds to the Discretionary Fund of the Child Care and 
Development Fund as they do with Federal TANF funds.
    Response: Section 408(a)(7)(G) of the Act, which was added by the 
Balanced Budget Act, provides that noncash assistance paid by WtW funds 
``shall not be considered assistance.'' However, this exclusion is only 
for the purpose of the time limit, and the regulation at Sec. 264.1 
provides that we will not count months of receipt of noncash WtW 
assistance against an individual's Federal clock.
    We do not believe that the statutory language supports a broader 
exclusion of WtW assistance from the definition of assistance. However, 
the general changes we have made to the definition of assistance in 
this final rule should help alleviate this concern. Further, we would 
point out that many of the TANF requirements (such as participation 
rates) do not apply to WtW because they apply only to the ``State 
program funded under this part.'' This latter phrase refers to TANF 
only, not to WtW. (At the same time, the spending restrictions 
generally do apply to WtW, as they refer to grants under section 403 
and WtW grants are provided under section 403(a)(5).)
    The Department of Labor has received numerous questions from its 
grantees about the definition of ``noncash'' assistance and asked us to 
define the term in our rules. At the new Sec. 260.32, you will find a 
definition for WtW cash assistance. If a benefit falls within the 
definition of assistance, but does not meet the definition of ``WtW 
cash assistance,'' it would be ``noncash'' assistance. Examples of 
``noncash'' assistance would include housing vouchers or a State 
version of food stamps. You will find additional discussion in the 
preamble for Sec. 260.32.
(h) Transitional Services
    Comment: We received a few comments suggesting that we should 
explicitly exclude ``transitional assistance'' or services in support 
of continued employment from the definition of assistance.
    Response: We do not believe it is possible to exclude 
``transitional assistance'' from the definition of assistance without 
substantially altering the basic time-limited nature of the TANF 
program, and we find no statutory basis for such an exclusion.
    The concept of ``transitional'' services for families that get a 
job and are no longer eligible for regular benefits is

[[Page 17762]]

recognized in the statute at section 411(a)(5), which requires a report 
on expenditures and a description of the services provided. However, 
the language there only addresses ``transitional services.'' Thus, it 
does not indicate that Congress envisioned a full array of transitional 
benefits, including ongoing needs-based payments, being available to 
former recipients.
    To the extent that States provide only supports for working 
families, such as child care and transportation or work subsidies, or 
work-related services such as counseling, coaching, referrals, and job 
retention and advancement services under their transitional services 
programs, we already exclude those services from the definition of 
assistance. Also, we would exclude short-term benefits such as cash 
assistance to stabilize a housing situation as ``nonrecurrent, short-
term'' assistance.
    States wanting to provide ongoing transitional payments that meet 
the definition of assistance to former recipients have three options: 
(1) fund those programs under TANF as assistance, but use different 
need standards than they do for other forms of TANF assistance; (2) 
fund those programs with MOE money under a separate State program; or 
(3) transfer the funds from TANF under section 404(d). If they fund 
transitional benefits with State-only money, the Federal time limit 
will not apply, regardless of whether they provide the benefits within 
TANF or in separate State programs. States may also provide 
transitional services without invoking time limits by transferring 
funds to either the Discretionary Fund of the Child Care and 
Development Fund or the Social Services Block Grant.
(i) Housing and Related Benefits
    Comment: One commenter said the short-term, one-time rules should 
exclude some of the former EA benefits for arrears and shelter.
    Response: The proposed and final language would both exclude 
certain payments for rent arrears, utility arrears, security deposits 
and other shelter-related expenses that were previously covered in 
State EA programs.
    However, we cannot categorically state that all former EA benefits 
would be excludable from the definition of assistance. For example, in 
some cases, States claimed shelter expenses under EA that addressed 
long-term, ongoing needs of families.
    Comment: One commenter said that we should not consider housing and 
utilities to be part of ``income support.''
    Response: We disagree with the comment. Housing and utilities have 
traditionally been major components in the definition of basic needs 
used in determining welfare payments. Further, the TANF statute 
provides no basis for excluding them from the definition of assistance 
under TANF. However, certain shelter or utility costs might be 
excludable under the two general exclusions (i.e., because they are 
``nonrecurrent, short-term'' or they entail services such as counseling 
that do not provide income support).
(j) Foster Care and Child Welfare
    Comment: A few commenters asked that we exclude payments for foster 
care, out-of-home placements, and substitute care from the definition.
    Response: With regard to foster care or other out-of-home 
maintenance payments, we would note that such costs are not allowable 
TANF costs under section 404(a)(1) of the Act since they are not 
reasonably calculated to further a TANF purpose. However, in some 
cases, where a State previously covered such benefits under its IV-A 
plan, they could be allowable TANF costs under section 404(a)(2).
    There are additional costs related to foster care or out-of-home 
maintenance payments that may be allowable and referred to, in short-
hand, as foster care. For example, there are costs for family 
preservation activities, such as counseling, home visits, and parenting 
training, that would be allowable TANF costs because they are 
reasonably calculated to enable a child to be cared for in his or her 
own home.
    There may also be other costs that were authorized under a State's 
EA program for which Federal TANF funds could be used, under section 
402(a)(2). Examples include costs such as administrative costs for 
activities associated with determining whether an emergency exists and 
costs for the temporary placement of the child, if determined 
necessary, while an investigation takes place.
    Comment: One commenter asked that we strengthen the definition of 
assistance to urge States to use this flexibility in order to maintain 
families intact, where services can achieve that end.
    Response: Both the proposed and final definitions exclude certain 
services directed at family preservation and certain forms of crisis 
intervention from the definition of assistance. Some commenters would 
have liked us to go further and exclude foster care, substitute care, 
and out-of-home placements. As we just discussed, maintenance payments 
for foster care, substitute care, and out-of-home placements (except 
perhaps temporary emergency placements during an investigation of 
abuse) are not eligible TANF expenditures unless allowable under 
section 404(a)(2).
(k) Emergency Assistance
    Comment: In different ways, a few commenters asked that we exclude 
assistance provided under the prior EA program from the definition of 
assistance. Among their underlying concerns were assistance that was 
paid for longer than 90 days, emergency shelter, and certain child 
welfare services.
    Response: We can find no legal justification for categorically 
excluding prior EA benefits from the definition. The statute authorizes 
States to use Federal TANF funds for activities that were previously 
authorized under EA, but otherwise does not give EA special status.
    Most assistance that was provided under EA is excludable under one 
or more of the general exclusions. However, there were EA programs that 
provided assistance to families for basic needs and extended periods of 
time. If we categorically excluded all prior EA benefits from the 
definition of assistance, we could be perpetuating some of the same 
problems that existed under prior law.
(l) Other Definitional Issues
    Comment: One commenter requested exclusion of emergency shelters 
for victims of domestic violence; of particular concern was the 
potential running of the time-limit clock when individuals were 
receiving such assistance.
    Response: Depending upon the form and duration of this assistance, 
it might be excludable under one of the general exclusions we provide. 
We do not think a special, categorical exclusion is justified for this 
type of benefit.
    However, we would point out that, under section 402(a)(7) of the 
Act, known as the Family Violence Option, States may waive program 
requirements, including time limits, for victims of domestic violence. 
If States exceed the 20-percent cap on time-limit exceptions as the 
result of granting such waivers, they may be eligible for reasonable 
cause. You should see the prior discussion entitled ``Treatment of 
Domestic Violence Victims'' and the regulatory text at subpart B of 
part 260 for additional information.
    Comment: One commenter expressed concern about inclusion of 
relatively insignificant amounts of assistance and the negative effect 
of such a policy on

[[Page 17763]]

a family's willingness to seek assistance in light of time limits.
    Response: While we understand the commenter's concern, we have no 
basis for protecting families that receive small amounts of assistance 
from the time limits; nothing in the statute or legislative history 
suggests that a family would have to be receiving a threshold payment 
level in order to be considered to be receiving assistance.
    We have some early indication that families who have other income 
and are eligible for smaller amounts of assistance are not necessarily 
choosing to forego aid in order to reserve their months of assistance. 
We will be paying attention to this issue over the coming months.
    Comment: One commenter expressed concern about a broad definition 
of assistance because other programs might count any aid in the form of 
``assistance'' as income in determining eligibility for benefits.
    Response: We must create a definition that conforms with the TANF 
statute and the statutory intent of the TANF program. In that context, 
we cannot assure that our definition will have no negative spill-over 
effects on other programs. However, the additional exclusions from the 
definition in the final rule should alleviate this concern. Further, if 
we find out that definition is having adverse effects on other 
programs, we are willing to work with the other programs in exploring 
ways to resolve such problems. For example, we have worked with the 
Office of Child Support Enforcement in revising guidance on the child 
support distribution rules so that the interim definition of TANF 
assistance did not inadvertently cause child support collections 
intended for families to be diverted to government coffers.
    Comment: One commenter asked that we explicitly exclude supportive 
services provided to applicants from the definition of assistance, 
particularly when the case does not get approved for regular TANF 
benefits.
    Response: We do not believe it is necessary to add this situation 
as a separate exclusion. We would expect such applicant services to be 
covered by the exclusion for nonrecurrent, short-term benefits or as 
supports for working families. Also, if we explicitly excluded 
applicant benefits, we might create an incentive for States to leave a 
case open rather than to complete the eligibility determination 
process. We would not want to create such an incentive; it is important 
for States to act on applications and provide assistance in a timely 
manner.
    Comment: One commenter said we should clarify the definition of 
assistance to exclude such items as State tax refunds. A few commenters 
specifically suggested that we exclude earned income tax credits.
    Response: We have excluded refundable earned income credits, but 
have otherwise not given special consideration to tax refunds in the 
definition. We had two basic concerns. First, we did not want to 
suggest that tax refunds were categorically appropriate as either 
Federal TANF or State MOE expenditures. It would depend on what the 
nature and purpose of the ``refund'' was. Any payments have to meet at 
least two tests--be an ``expenditure'' and be consistent with the 
purposes of the program. In the case of MOE, it would also have to be 
targeted at needy families. We believe a refundable earned income 
credit can meet these tests. However, the vast majority of tax refunds 
probably would not. For example, if a family gets a refund of its 
income taxes because of over-withholding, that refund check does not 
represent an allowable expenditure for Federal TANF or State MOE 
purposes. If there were tax refunds (analogous to refundable tax 
credits) that were allowable expenditures for TANF-related purposes, 
they would be included or excluded from the definition of assistance 
based on the existing principles and language in the definition.
    We provide an exclusion for refundable earned income tax credits 
because we consider them a work support rather than basic income 
support. They normally serve to compensate low-income working families 
for some of the tax-related costs of employment. Thus, they more 
closely resemble work supports than traditional welfare payments.
(m) Tracking of Exclusions
    Comment: A number of commenters objected to language in the 
preamble of the NPRM indicating that we would track State expenditures 
on assistance and nonassistance and look more closely if we found a 
large portion of program resources being spent on ``nonassistance.'' We 
also received a few comments saying that we needed to collect more 
information on State TANF and MOE expenditures in order to maintain the 
integrity of the program and protect the interests of needy families.
    Response: In the preamble of the proposed rule, we expressed 
concern that information showing large amounts of expenditures on 
nonassistance might indicate that the flexibility we provided in the 
definition of assistance might be undermining the goals of the 
legislation. We believe this is a valid concern and have not changed 
either the reporting requirements or our plans to look at this 
information. In fact, because we have significantly narrowed the 
definition of assistance (and thereby the categories of benefits and 
supports on which State must report disaggregated and aggregate data), 
we have decided to strengthen the fiscal reporting requirements. You 
will find a discussion of these changes in part 265 and the specific 
changes in Appendix D.
    We are not saying that we will automatically change the definition 
of assistance or take other action if we find large amounts of 
resources on ``nonassistance.'' In fact, commenters noted some valid 
reasons why we might expect to see growth in the amount of 
``nonassistance'' as welfare reform progresses. For example, we might 
see increasing investments in interventions and prevention strategies 
(such as work supports, case management, mentoring, and job retention 
services). Thus, we would not presume that growth in ``nonassistance'' 
was inappropriate. However, we would want to understand and be able to 
explain the reason for the growth.
    At this point, we are not going to prejudge State actions or write 
rules that unduly limit State flexibility to develop innovative 
programs that can effectively serve their needy families. However, in 
light of our responsibility for ensuring program accountability, the 
evolving and increasingly diverse nature of State TANF and MOE 
programs, and the flexibility inherent in these rules, we believe it is 
appropriate to gather information and monitor what is happening.

Section 260.32  What Does the Term ``WtW Cash Assistance'' Mean? (New 
Section)

    This is a new section in the final rule. As we discussed briefly in 
the last section, the Department of Labor has received numerous 
questions about the definition of the terms ``cash assistance'' and 
``noncash assistance'' because if assistance provided under WtW is 
noncash, it does not count against the TANF time limit. Therefore, at 
the request of the Department of Labor, we have added a definition of 
``WtW cash assistance'' in this new Sec. 260.32. This definition (in 
conjunction with the regulation at Sec. 264.1(b)(1)(iii)) clarifies the 
circumstances under which benefits received by a family under WtW count 
against the TANF 60-month time limit. By statute (section 408(a)(7)(G) 
of the

[[Page 17764]]

Act), WtW ``noncash assistance'' does not count for this purpose.
    In defining ``WtW cash assistance'' (i.e., what does count), we 
started with the presumption that, to be considered ``WtW cash 
assistance,'' a benefit must fall within the definition of 
``assistance.'' Thus, services, work supports, and nonrecurrent, short-
term benefits that are excluded from the definition of assistance at 
Sec. 260.31(b) are not ``WtW cash assistance.'' Also excluded are 
supportive services for nonworking families. Although they are 
assistance, these benefits are services designed to meet specific 
nonbasic needs and thus are not like cash.
    Then, the definition clarifies what types of ``assistance'' under 
WtW would be considered ``WtW cash assistance.'' First, it includes 
assistance designed to met a family's ongoing, basic needs. Second, it 
includes such benefits as cash assistance to the family, even when 
provided to participants in community service or work experience (or 
other work activities) and conditioned on work; the Conference Report 
(H. Rept. 105-217) specifically mentions ``wage subsidies'' as an 
example of WtW ``cash assistance.'' Finally, our definition 
incorporates both cash payments and benefits in other forms that can be 
legally converted to currency (e.g., electronic benefit transfers and 
checks).
    This definition does not limit the types of WtW benefits for which 
families that have received 60 months of TANF benefits are eligible. 
Under Sec. 264.1(a)(3), State and local agencies may provide cash and 
noncash WtW assistance and other benefits to such families beyond the 
60-month limit on assistance.

Section 260.33  When Are Expenditures on State or Local Tax Credits 
Allowable Expenditures for TANF-Related Purposes? (New Section)

    As discussed previously, in Sec. 260.30, we have added a definition 
of ``expenditure'' that helps define what would be a qualified 
expenditure of Federal TANF funds or State MOE funds. Within this 
definition of ``expenditure,'' we indicate that refundable tax credits 
could be an expenditure. The purpose of this section is to clarify how 
to determine the amount of allowable expenditures in this situation. 
More specifically, it says that, for an earned income tax credit or 
other allowable credit, we would count as an expenditure only the 
State's actual payment to the family for that portion of the credit 
that the family did not use to offset their tax liability.
    The family generally determines its income tax liability by 
following a number of basic steps. First, the family determines its 
adjusted gross income (income subject to a State's income tax). Then it 
applies any allowable exemptions and deductions to reduce the adjusted 
gross income. The net figure is the total amount of income that is 
subject to taxation. The taxable income is the basis for determining 
the amount of taxes owed. Then, the family applies any allowable 
credits to reduce the amount of taxes that it owes.
    For example, a wage earner qualifies for a $200 earned income tax 
credit. The family's tax liability prior to the application of any 
credits is $75. When reconciling at the end of the income tax year, the 
eligible family uses the first $75 of the credit to reduce its State 
income tax liability to zero. If the State elects to refund any part of 
the remaining $125 in EITC, then the amount that it actually pays out 
to the family is a qualified expenditure and counts toward the State's 
TANF MOE. The $125 represents an actual outlay from State funds to 
provide extra money to the family. In this regard, the State has spent 
its own funds to provide a benefit to the family that is consistent 
with a purpose of TANF.
    For emphasis, this section also reiterates that, in order to count 
as an expenditure of Federal TANF funds or State MOE funds, the purpose 
of the tax credit program must be reasonably calculated to accomplish 
one of the four purposes of the TANF program. We recognize that tax 
credits might be an appropriate and highly efficient method for getting 
benefits to needy families and want to support those efforts. In 
particular, State earned income tax credits provide valuable supports 
and incentives for low-income working families, and we do not want to 
discourage more States from establishing these policies. At the same 
time, we want to be sure that our policies support the goals of TANF 
and promote continued State investments in needy families.
    Also, because tax credits represent an area of significant interest 
to States, the Congress, and fiscal authorities, we have added new 
lines to the TANF Financial Report that will tell us how many Federal 
and State dollars are going to refundable earned income tax credits or 
other refundable State and local credits.
    The mere fact that the State issues a tax refund check to a 
taxpayer does not necessarily indicate that the family has received a 
refundable tax credit. For example, a TANF-eligible family could 
receive a refund check simply because the aggregate amount withheld 
from its paychecks exceeded its tax liability. Such a refund would not 
meet the definition of a refundable EITC.
    For example, assume an individual has a $75 State income tax 
liability for a year. Yet, through withholding, he or she paid a total 
of $150 in State income taxes throughout the year. After reconciliation 
at the end of the income tax year, the amount that the State owes the 
individual due to tax withholding is not considered a refundable tax 
credit. Nor is the return of an individual's overpayment of taxes an 
expenditure of the State.
    In determining the amount of MOE that may be claimed, all credits 
would be subtracted from the amount of the tax liability. The family's 
tax liability is the amount owed to the State prior to any adjustments 
for credits or payments. Any excess credit remaining that the State 
refunds to the family may count as an expenditure if the program for 
tax credits is reasonably calculated to accomplish a purpose of the 
TANF program.
    Taking another example, suppose the wage earner, who has paid $150 
through withholding, actually qualifies for an earned income tax credit 
of $200. The $125 portion of the credit that exceeds the individual's 
$75 State income tax liability could qualify as an expenditure if the 
State pays it out to the family. The $150 withheld is irrelevant to the 
calculation because this does not represent the family's actual income 
tax liability. If the family were to receive a $275 refund, $125 (the 
balance remaining of the EITC after the tax liability is subtracted) 
would qualify as an expenditure.
    Tax relief measures, including nonrefundable tax credits, as well 
as exemptions, deductions, and tax rate cuts, that serve only to offset 
a family's income tax liability do not qualify as expenditures.
    In addition, tax credits that serve to rebate a portion of another 
State or local tax, including sales tax credits and property tax 
credits, are not expenditures under the definition of expenditure at 
Sec. 260.30. This definition is consistent with longstanding Federal 
policy on the meaning of expenditure, as reflected in the single 
definition for outlays and expenditures at 45 CFR 92.3.
    Also, if a State administers more than one tax credit program 
allowable for Federal TANF or State MOE purposes, the State may count 
as an expenditure the amount by which the combined value of the 
allowable credits exceeds a TANF-eligible family's State income tax 
liability prior to application of all allowable credits.

[[Page 17765]]

    The questions about State tax credits generally arose in the 
context of what is a ``qualified State expenditure'' for MOE purposes. 
In particular, the issue principally centered on whether States might 
count the portion of an earned income credit attributable to revenue 
loss toward their MOE. To properly address this issue, it is important 
to note that, in addition to the ``eligible families'' requirement 
discussed at Sec. 263.2, the statute requires two key criteria to be 
met for MOE purposes. These criteria are: (1) the State's cost must be 
an expenditure; and (2) the expenditure must be reasonably calculated 
to accomplish a purpose of the TANF program. The second criterion is 
not a difficult standard to meet. States just need to be able to 
demonstrate that the specific tax benefit program is ``reasonably 
calculated'' to accomplish a purpose of the TANF program. Because more 
questions were raised as to what is an expenditure, this issue required 
more extensive deliberation.
    To consider fully the argument that the entire cost of an earned 
income credit might represent an expenditure, we had to consider this 
issue within the broader framework of the full range of potential tax 
relief measures. Since we published the NPRM, we have received several 
inquiries regarding whether the cost of other tax relief measures were 
expenditures for MOE purposes.
    An earned income credit is but one example of a tax relief measure. 
Some States also have other credits available to residents. These 
include, but are not limited to, property tax and homestead credits, 
child and dependent care credits, sales tax credits, credits for 
families that purchase a car seat, and credits for individuals with 
significant medical expenses. Tax relief also takes the form of income 
tax deductions and exemptions. Some States also offer tax credits to 
investors and businesses, e.g., credits that help or promote employment 
of low-income residents such as a rent reduction program credits, 
neighborhood assistance act credits, an enterprise zone act credits, 
day-care facility investment tax credits, and major business facility 
job-tax credits.
    Few of these activities result in refunds in excess of any tax 
liability (whether it be income, sales, property tax liability). But, 
all of these activities cost the State lost tax revenue. Therefore, we 
had to consider whether lost revenue equals an expenditure. While the 
statute under 409(a)(7) uses the term ``expenditures,'' it does not 
define it. However, since 1988, when the Department issued its common 
administrative rule at 45 CFR 92.3, the term expenditures has been 
defined as outlays, for purposes of Federal grant funds. Because 
Congress did not provide another definition of expenditure in the TANF 
statute, we have presumed that the existing regulation defining 
expenditure as an outlay is applicable.
    To outlay is to expend, spend, lay out, or pay out. We therefore do 
not consider that a decrease in a State's revenue associated with a tax 
credit program or other tax relief measure meets the common rule 
definition of an ``expenditure.'' Accordingly, we conclude that tax 
provisions that only serve to provide a family with relief from State 
taxes such as income taxes, property taxes, or sales tax represent a 
loss of revenue to the State, but not an expenditure. However, the 
portion of a tax credit that exceeds a family's income tax liability 
and is paid to the family is an expenditure. That expenditure would 
count toward a State's TANF MOE requirement if it is reasonably 
calculated to meet a purpose of the TANF program.
    Arguably, accepting less revenue (taxes) from the income of 
families (or business), provides a financial benefit to the family (or 
business) by allowing them to retain a greater share of their own 
money. As such, tax relief activities in general can serve to 
complement welfare reform efforts. However, tax relief measures that 
solely provide a family (or business) with relief from various State 
taxes are not expenditures.
    In determining that the common rule Federal definition of 
expenditures was appropriate to use in the TANF context, we also 
examined the broader policy implications. Including nonrefundable 
credits and other tax relief measures that served solely to reduce tax 
liability could redirect Federal TANF and State MOE expenditures away 
from the neediest families (who get no direct benefit from 
nonrefundable credits) and could allow States to claim as MOE an 
extremely wide range of tax cuts. We do not think this result would be 
consistent with the intent of TANF.
    At Sec. 263.2, you will find additional discussion about the 
treatment of tax credits and other tax provisions.

Section 260.35--What Other Federal Laws Apply to TANF? (New Section)

    As we indicated in the section of the preamble entitled ``Recipient 
and Workplace Protections,'' a number of commenters expressed concerns 
about the NPRM's failure to support the protections available to TANF 
recipients under Federal nondiscrimination and employment laws. We 
added this section to the regulations in response to those comments. 
Please see the earlier preamble section for a more detailed discussion 
of the commenters' concerns and our response.

Section 260.40--When Are These Provisions in Effect? (Sec. 270.40 of 
the NPRM)

Background
    This section of the proposed rules provides the general time frames 
for the effective dates of the TANF provisions. As we noted in the 
NPRM, many of the penalty and funding provisions had statutorily 
delayed effective dates. For example, most penalties would not be 
assessed against States in the first year of the program, and 
reductions in grants due to penalties would not occur before FY 1998 
because reductions take place in the year following the failure. We 
referred readers to the discussion on the individual regulatory 
sections for additional information.
    We also made the important point that we did not intend to apply 
the TANF rules retroactively against States. We indicated that, with 
respect to any actions or behavior that occurred before final rules, we 
would judge State actions and behavior only against a reasonable 
interpretation of the statute.
    As we reviewed the comments, we noted a discrepancy between this 
preamble discussion and the proposed regulatory text. The preamble 
indicated that States would operate under a ``reasonable interpretation 
of the statute'' until issuance of final rules; the regulatory text 
said that the ``reasonable interpretation'' standard would apply until 
the ``effective date'' of the final rules. As you will see in the 
regulatory text at Sec. 260.40 of this final rule, the correct policy 
is that the ``reasonable interpretation'' standard applies to all State 
behavior prior to October 1, 1999, the effective date of these rules.
    Also, in the proposed rule, at Sec. 270.40(a), we incorporated 
language explaining when the statutory requirements went into effect 
for States implementing their TANF programs. Because States all 
implemented their TANF programs by July 1, 1997, as required by 
statute, this language is obsolete, and we deleted it from the final 
rule.
Comments and Responses
    We received several comments on this section of the rule. 
Commenters' greatest concern was the effective date of the proposed 
rule.
    Comment: A significant number of commenters asked that we delay the 
effective date of the final rule to allow

[[Page 17766]]

States time to implement all the regulatory provisions, e.g., to change 
their administrative rules, conduct staff training, make necessary 
computer systems modifications, and ensure data validity. Clearly, the 
major area of concern was the States' ability to implement new rules on 
data collection and reporting. We received three dozen comments that 
specifically asked for a phase-in period for meeting the reporting 
requirements.
    A number of commenters did not offer a specific suggestion as to 
how long this phase-in period should be. Among the commenters who did 
make suggestions, the suggested period of time ranged from 9 months to 
2 years. The most common suggestion was 12 months. Some commenters 
noted that States would be simultaneously addressing Year 2000 
compliance problems and would need added time for that reason.
    Response: In response to those comments, we have decided to make 
the effective date of the final rule the beginning of the next fiscal 
year. Our initial inclination was to make the rule generally effective 
within two to three months of publication, but to lag the data 
reporting requirements an additional six months. However, we realized 
that we could not successfully implement some of the general provisions 
until we had the revised data reporting in place. For example, we could 
not adjust a State's work participation rates based on the new welfare 
reform waiver provisions before the new reporting took effect. Also, 
many of the significant provisions in this rule (including the caseload 
reduction credit and the administrative cost caps) would be difficult 
to implement part way into a fiscal year.
    To clarify the meaning of this effective date, States will continue 
program and fiscal reporting under the ``emergency reporting'' 
provisions for assistance provided, and expenditures made, through 
September 30, 1999. The last reports under this old system will be due 
November 14, 1999. States will begin reporting under these rules and 
the forms in the appendices effective with the first quarter of fiscal 
year 2000. The first TANF Data and Financial reports under these new 
requirements will be due February 14, 2000.
    The timeframes we have provide in this final rule are fairly 
rigorous. Also, they are substantially shorter than many States 
requested. However, we think that States have sufficient resources to 
meet these deadlines, and they will receive our continued support in 
doing so. Any further delays could undermine the purposes of the law.
    At the same time, we recognize that Y2K compliance and these new 
TANF requirements may be placing extraordinary, simultaneous demands on 
State staff and resources. For States that commit significant resources 
to achieve Y2K compliance in time, we have added a reasonable cause 
criterion at Sec. 262.5(b)(1). This new provision will provide some 
penalty relief to States that cannot report one or both of their first 
two quarters of TANF data on time due to Y2K compliance activities. You 
will find additional discussion of that decision at Secs. 262.5, 265.5, 
and 265.8.
    Comment: Several commenters expressed support for our decision not 
to apply the rules retroactively. A few commenters expressed concerns 
about the ``reasonable interpretation'' standard we intended to apply 
prior to issuance of rules was too strenuous. One said we should exempt 
States from ``all but the most flagrant program infractions.'' Another 
expressed concerns about the level of Secretarial discretion in such a 
standard and the lack of clear criteria about what it meant. Another 
asked that we accept any behavior that did not ``contradict any 
provision of the law, court decisions or due process.''
    Response: This section of the rule retains our proposal to judge 
State actions prior to the effective date of these rules under a 
``reasonable interpretation of the statute'' standard. We understand 
the commenters' interest in clearer criteria. However, the standard in 
the rule is a term of art and does in fact give most parties a very 
good sense of where one would draw the line. Also, to develop very 
specific criteria at this point would in fact amount to retroactive 
rulemaking, which we promised we would not do.
    At the same time, we want to assure States that we recognize that 
this statute is complicated and do not intend to penalize anyone who 
has exercised reasonable discretion and judgment during the period 
before final rules take effect.
    For example, we understand that there is a broad range of views 
about the interpretation of section 415 on continuation of waiver 
policies. Thus, in determining whether a State is liable for a penalty 
for failing work participation rates for FY 1997, 1998, or 1999, we 
would give substantial deference to the State's proposal for rate 
adjustments based on waiver policies that it continued.
    Also, we point out that States have the opportunity to dispute any 
penalty finding through the administrative processes available at part 
262. These processes provide a vehicle for addressing and resolving any 
disagreements about whether a State was operating under a ``reasonable 
interpretation of the statute.''
    We disagree with that the view that the standard we proposed is too 
strenuous. We do not necessarily want to provide cover to States that 
pushed the envelope beyond reasonable bounds in terms of interpreting 
the statute.

Subpart B--Domestic Violence

    As we have noted earlier, we decided to consolidate the regulatory 
provisions on domestic violence in this new subpart to part 260. You 
can find a discussion of these provisions and the comments received on 
the proposed rule in the earlier section of the preamble entitled 
``Treatment of Domestic Violence Victims.''

Subpart C--Waivers

    As we have noted earlier, we decided to consolidate the regulatory 
provisions on section 1115 waivers in this new subpart to part 260. You 
can find a discussion of these waiver provisions and the comments 
received on the proposed rule in the earlier section of the preamble 
entitled ``Waivers.''

VI. Part 261--Ensuring That Recipients Work

Section 261.1--What Does This Part Cover? (Sec. 271.1 of the NPRM)

    This section identifies the scope of part 261 as the mandatory work 
requirements of TANF.
    We did not receive any comments that relate solely to the scope of 
this part.

Section 261.2--What Definitions Apply to This Part? (Sec. 271.2 of the 
NPRM)

    This section cross-references the general definitions for the TANF 
regulations established under part 260. We did not receive any comments 
on this section. We have responded to cross-cutting comments under 
other sections of this part.

Subpart A--What Are the Provisions Addressing Individual 
Responsibility?

    During our extensive consultations, a number of groups and 
individuals asked how the requirements on individuals relate to the 
State participation requirements and penalties. To help clarify what 
the law expects of individuals (as opposed to the requirements that it 
places on States), we have decided to outline a recipient's statutory 
responsibilities as part of this regulation. In so doing, we only 
paraphrase the statute, without interpreting these provisions. 
Inclusion of these provisions in the regulation does not indicate our 
intent to enforce these statutory provisions; rather, we

[[Page 17767]]

have included the requirements in the regulation for informational and 
contextual reasons. Nevertheless, our expectation is that States will 
comply with these requirements.

Section 261.10--What Work Requirements Must an Individual Meet? 
(Sec. 271.10 of the NPRM)

    PRWORA promotes self-sufficiency and independence by expanding work 
opportunities for welfare recipients while holding individuals to a 
high standard of personal responsibility for the support of their 
children. The legislation expands the concept of mutual responsibility, 
introduced under the Family Support Act of 1988. It espouses the view 
that income assistance to families with able-bodied adults should be 
transitional and conditioned upon their efforts to become self-
sufficient. As States and communities assume new responsibilities for 
helping adults get work and earn paychecks quickly, parents face new, 
tougher work requirements.
    The law imposes a requirement on each parent or caretaker to work 
(see section 402(a)(1)(A)(ii) of the Act). That requirement applies 
when the State determines the individual is ready to work, or after he 
or she has received assistance for 24 months, whichever happens first. 
For this requirement, the State defines the work activities that meet 
the requirement.
    In addition, there is a requirement that each parent or caretaker 
participate in community service employment if he or she has received 
assistance for two months and is neither engaged in work in accordance 
with section 407(c) of the Act nor exempt from work requirements. The 
State must establish minimum hours of work and the tasks involved. A 
State may opt out of this provision if it chooses. A State may impose 
other work requirements on individuals, but there is no further Federal 
requirement to work.
    Readers should understand that these individual requirements are 
different from the work requirements described at section 407 of the 
Act. Section 407 applies a requirement on each State to engage a 
certain percentage of its total caseload and a certain percentage of 
its two-parent caseload in specified work activities. For the State 
requirement, the law lists what activities meet the requirement. A 
State could choose to use this statutory list for the work requirement 
on individuals described above, but is not required to do so. Subpart B 
below explains more fully what the required work participation rates 
are for States and how we calculate them. Subpart C explains the work 
activities and the circumstances under which an individual is 
considered ``engaged in work'' for the purpose of those rates.
    We made a minor change to the text of the regulation from the NPRM, 
removing the reference to the date that the community service 
employment provision took effect, since that date has already passed.
    In addition to the comments discussed below, we received several 
comments in support of the language that we used in this section.
    Comment: A few commenters suggested that this section should 
reference the fact that these work requirements must be consistent with 
the provisions of section 407(e)(2) of the Act, exempting a single 
custodial parent who cannot obtain needed child care from work.
    Response: We agree that the work requirements on individuals should 
more clearly refer to the child care exception and have amended 
Sec. 261.10(a) and (b) accordingly.
    Comment: One commenter urged us to specify that individuals in 
active military service or participating in a National Community 
Services Act program be considered to be meeting the individual work 
requirement.
    Response: As we indicated above, it is the State's prerogative and 
responsibility to define the activities it considers to meet these 
requirements; therefore, we have not modified the regulations in this 
area.
    Comment: One commenter expressed concern that States will classify 
recipients prematurely as ``job-ready'' and urged us to ensure that 
States assess the needs of recipients properly.
    Response: The statute vests responsibility for determining when a 
recipient is ``job-ready'' in the State. It requires each State to 
assess the skills, prior work experience, and employability of each 
recipient who is either 18 years of age or who has not completed high 
school (or equivalent) and is not attending secondary school (see 
Sec. 261.11).
    We agree with the commenter that it is important for States to 
assess individuals adequately before requiring them to work or engage 
in any activity; however, as we indicated above, this section of the 
regulation is intended to paraphrase the statute rather than to 
interpret it. We have included these provisions to clarify the 
differing work expectations that the statute imposes on individuals and 
States.

Section 261.11--Which Recipients Must Have an Assessment Under TANF? 
(Sec. 271.11 of the NPRM)

    Each State must make an initial assessment of the skills, prior 
work experience, and employability of each recipient who is at least 
age 18 or who has not completed high school (or equivalent) and is not 
attending secondary school.
    With respect to the timing of assessments, the State may make the 
assessment within 30 days of the date on which the individual is 
determined to be eligible for assistance, but may opt to increase this 
period to as much as 90 days.
    Several commenters expressed support for the inclusion of this 
section in the regulations.
    Comment: One commenter urged us to define what an appropriate 
assessment is to ensure that the examination of each recipient is 
thorough and sensitive to barriers that a recipient may hesitate to 
identify, such as domestic violence or substance dependence. Another 
suggested including guidelines or standards for assessments. Others 
urged us to indicate how we would address a State's noncompliance with 
this provision or to include a penalty related to this requirement.
    Response: Because we have included this provision in the 
regulations for informational purposes, it would be inappropriate to 
define its terms or include standards. We expect States to comply with 
the requirements of this subpart, but including them in the regulations 
does not indicate our intent to create regulatory expectations or to 
enforce these statutory provisions. We do not have the authority to add 
a penalty related to this requirement.
    Comment: One commenter suggested that we do not have authority to 
require assessment of recipients. Others expressed concern about which 
clients must be assessed and urged us to interpret the requirement to 
apply only to certain recipients, such as those who are subject to work 
requirements.
    Response: Section 408(b)(1) of the Act requires the State to assess 
each recipient who is at least age 18 or who has not completed high 
school (or equivalent) and is not attending secondary school. The 
regulations reflect this language. Because we have included this 
provision for informational purpose, we do not think it is appropriate 
to interpret the statute further in this area.
    Comment: One commenter thought that the regulations lacked clarity 
concerning the timing of assessments for

[[Page 17768]]

TANF recipients who had been receiving AFDC compared to the timing for 
those who become eligible for assistance after the State began its TANF 
program. Another urged us to allow States more time for conducting 
assessments.
    Response: Because the statute specifies the timeframes in which 
States may comply with the requirement for an assessment, we do not 
think it is appropriate to modify those timeframes. However, we agree 
that it was confusing to describe two different assessment periods for 
different segments of a State's caseload. Since all States should 
already have conducted assessments of any recipients that they 
converted from AFDC to TANF, we have included only the description of 
the assessment period for new TANF cases in these regulations.

Section 261.12--What Is an Individual Responsibility Plan? (Sec. 271.12 
of the NPRM)

    A State may require individuals to adhere to the provisions of an 
individual responsibility plan. Developed in consultation with the 
individual on the basis of the initial assessment described above, the 
plan should set forth the obligations of both the individual and the 
State. It should include an employment goal for the individual and a 
plan to move him or her into private-sector employment as quickly as 
possible. The regulation includes more detailed suggestions for the 
content of an individual responsibility plan.
    Comment: One commenter, acknowledging the ultimate goal of private-
sector employment, thought that the individual responsibility plan 
should recognize and address all barriers to employment, such as mental 
health or literacy problems. Another commenter suggested that the 
State's responsibilities to the individual should be more explicit. 
Another commenter thought that paragraph (d) did not accurately reflect 
the statute.
    Response: We agree that the plan should include whatever activities 
the State, in consultation with the individual, deems appropriate for 
overcoming barriers to employment. We reiterated the statute's list of 
possible plan obligations in paragraph (b) as examples, not as an 
exhaustive list. We think that paragraph (d) ensures that the plan will 
describe the State's obligation to the individual. States have the 
flexibility to draft the plan as explicitly as they find appropriate. 
We also understand the commenter's concern about the accuracy of 
paragraph (d) and have amended it to reflect the statute's references 
to services that enable an individual to obtain and keep employment and 
to job counseling.
    Comment: Some commenters thought that we had overstepped our 
authority by including anything in the regulations about individual 
responsibility plans or that our language was too restrictive, 
preventing States from including plan requirements that do not relate 
to work. Others commended our inclusion of this section.
    Response: As we indicated above, we have included this provision 
for informational and contextual purposes. In doing so, we paraphrased 
requirements specified in the statute. For this reason, we do not think 
we have overstepped our authority or that the language is more 
restrictive than the statute. Moreover, neither the regulations nor the 
statute prohibits a State from including in the individual 
responsibility plan other requirements that it finds appropriate for 
the individual.

Section 261.13--May an Individual Be Penalized for Not Following an 
Individual Responsibility Plan? (Sec. 271.13 of the NPRM)

    If the individual does not have good cause, he or she may be 
penalized for not following the individual responsibility plan that he 
or she signed. The State has the flexibility to establish good cause 
criteria, as well as to determine what is an appropriate penalty to 
impose on the family. This penalty is in addition to any other 
penalties that the individual may have incurred.
    We received comments expressing support for the inclusion of this 
section in the regulations.
    Comment: Several commenters urged us to ensure that the good cause 
exception referred to in this section protects a recipient from penalty 
where the individual failed to follow the individual responsibility 
plan due to a violation of employment laws, such as sexual harassment 
or other forms of job discrimination. Another suggested we define the 
term ``good cause'' to give States guidance about the appropriate 
circumstances for imposing a penalty and urged a broad definition to 
cover the many barriers to employment that welfare recipients face. 
Another commenter wanted us to ensure that victims of domestic violence 
are protected from penalty, i.e., to define good cause to cover these 
individuals, regardless of whether the State has adopted the Family 
Violence Option (FVO).
    Response: We do not believe it is necessary to define ``good 
cause'' exceptions. States have substantial experience in this area 
based on prior law. We encourage States to recognize the special needs 
of victims of domestic violence elsewhere in the preamble. Although we 
recognize that it is optional for States, we promote adoption of the 
FVO. We also encourage States to coordinate their policies on good 
cause determinations to provide consistent protection for families.
    While we have chosen not to regulate ``good cause'' criteria, in 
order to protect individuals from violations of other employment laws, 
we have included a new regulatory section at Sec. 260.35 to reference 
employment protections that exist under other Federal laws. These laws 
apply equally to welfare beneficiaries and other workers.
    Comment: One commenter thought the regulations should explicitly 
state that a State may define ``good cause'' differently in different 
subdivisions.
    Response: As we indicated above, States have the flexibility to 
define ``good cause'' as they deem appropriate. Under section 
402(a)(1)(A)(i) of the Act, they also have the flexibility to implement 
their programs differently in different parts of the State. Thus, a 
State could vary its good cause criteria from one subdivision to 
another. Since the language of this section tracks that of the statute, 
we do not think it necessary or appropriate to amend the regulatory 
text in this regard.
    Comment: One commenter urged us to ensure that the individual 
responsibility plan includes the individual's right to challenge the 
contents of the plan.
    Response: States may design individual responsibility plans as they 
determine suitable. Because we have included this provision for 
informational and contextual purposes, we do not think it is 
appropriate for us to expand upon the provisions of the statute, which 
we have tracked closely in this section. However, section 
402(a)(1)(B)(iii) of the Act requires the State to provide 
opportunities for recipients who have been adversely affected to be 
heard in a State administrative or appeal process. States should 
consider when and how to accommodate this recipient right in the 
development and implementation of individual responsibility plans.

Section 261.14--What Is the Penalty if an Individual Refuses To Engage 
in Work? (Sec. 271.14 of the NPRM)

    If an individual refuses to engage in work in accordance with 
section 407 of the Act, the State must reduce the amount of assistance 
otherwise payable to the family pro rata (or more, at State

[[Page 17769]]

option) with respect to any period during the month in which the 
individual refused, subject to good cause and other exceptions 
determined by the State. These exceptions include the statutory 
exception for single custodial parents of children under the age of six 
who cannot obtain needed child care, which is included in the 
regulations at Sec. 261.15. The State also has the option to terminate 
the case.
    In addition to the child care exception, each State may establish 
its own criteria for determining when not to impose a penalty on an 
individual, that is, when an individual has ``good cause'' for not 
engaging in work. States may also establish other rules governing 
penalties as needed.
    Under the Family Violence Option, a State may waive work 
requirements in cases where compliance would make it difficult for an 
individual to escape domestic violence or would unfairly penalize 
individuals who are or have been victimized by such violence or 
individuals who are at risk of abuse. The State must determine that the 
individual receiving the program waiver has good cause for failing to 
engage in work.
    The final regulations include a cross-reference to the State 
penalty for failure to impose sanctions in accordance with section 
407(e) of the Act (at Sec. 261.54). We added this reference for the 
convenience of the reader; it does not represent an additional 
requirement.
    Comment: We received many comments urging us to change the language 
of the regulations concerning the pro rata reduction of a recipient's 
assistance. The commenters thought that the way in which we paraphrased 
the statute altered its meaning and excluded certain types of pro rata 
reductions. Most urged us to clarify that a State can make a pro rata 
reduction based on any reasonable method; some asked us to indicate 
that a pro rata reduction is based on the head-of-household's share of 
assistance or on the share of those refusing to work. A few commenters 
also noted that States should have the flexibility to define the 
timeframe for applying a pro rata reduction. Several commenters 
suggested that the NPRM inappropriately restricted a State's ability to 
impose a greater penalty.
    Response: We recognize that the language we used in the NPRM may 
have caused confusion concerning the meaning of a pro rata reduction, 
and we have modified the regulations to reflect the statutory language 
more closely. It was not our intention to prescribe one method of 
proration or to proscribe other legitimate methods; a State may make a 
pro rata reduction based on any reasonable method. With respect to 
imposing a greater penalty, we think that the NPRM's regulatory text 
and preamble were very clear that a State could impose a penalty 
greater than a pro rata reduction, up to and including terminating the 
case, and thus have not substantially altered the regulations in that 
regard.
    Comment: One commenter, concerned about the burden on caseworkers 
of tracking an individual's participation, urged us to establish 
specific, fixed penalties on an individual for certain periods of time 
for refusal to work. The commenter gave an example of reducing the 
grant by the individual's share for the first month of refusal and 
gradually increasing it.
    Response: As we indicated above, a State may establish any method 
of pro rata reduction that it chooses that comports with section 407(e) 
of the Act. Since we do not intend to dictate one proration method over 
another, it would not be appropriate to adopt the penalty scheme that 
the commenter suggests.
    Comment: Several commenters expressed the same concern in this 
section that they did in Sec. 261.13 regarding the applicability of 
employment protections to welfare recipients. They urged us to ensure 
that good cause exceptions in this section protect recipients from 
penalty where the individual refused to work due to a violation of 
employment laws, such as sexual harassment or other forms of job 
discrimination. Others urged us to provide guidance about appropriate 
good cause exceptions.
    Response: States have the flexibility to define ``good cause'' as 
they deem appropriate. Because of the States' extensive experience in 
this area, we think it is not necessary to provide specific guidance 
regarding what good cause exceptions a State should acknowledge. 
However, we have included a new regulatory section at Sec. 260.35 to 
reference employment protections under other laws that apply to working 
welfare recipients. We certainly agree that welfare recipients should 
not have to choose between unsafe or discriminatory working conditions 
and losing benefits, especially where there are protections under 
Federal law.
    Comment: A commenter urged us to exempt from the work requirements 
any foster parents with birth children in the home.
    Response: The statute does not provide for an exemption from the 
work requirements for such individuals; however, States may define 
``good cause'' as they find appropriate. Since the statute specifically 
gives States the authority to establish good cause and other 
exceptions, we do not intend to dictate specific good cause criteria, 
other than the child care exception provided for at section 407(e)(2).

Section 261.15--Can a Family Be Penalized if a Parent Refuses To Work 
Because He or She Cannot Find Child Care? (Sec. 271.15 of the NPRM)

    A State may not reduce or terminate assistance to a single 
custodial parent caring for a child under age six for refusing to 
engage in required work, if the parent demonstrates an inability (as 
determined by the State) to obtain needed child care. This exception 
applies to penalties the State imposes for refusal to engage in work in 
accordance with either section 407 or section 402(a)(1)(A)(ii) of the 
Act. The parent's demonstrated inability must be for one of the 
following reasons:
     Appropriate child care within a reasonable distance from 
the individual's home or work site is unavailable;
     Informal child care by a relative or under other 
arrangements is unavailable or unsuitable; or
      Appropriate and affordable formal child care arrangements 
are unavailable.
    This penalty exception underscores the pivotal role of child care 
in supporting work and also recognizes that the lack of appropriate, 
affordable child care can create unacceptable hardships for children 
and families.
    We have substantially modified this section of the regulations, in 
part by moving much of what constituted Sec. 271.15 under the NPRM to a 
new section, Sec. 261.56. This new section specifies the State's 
responsibilities in carrying out the penalty exception, while 
Sec. 261.15 describes the impact of the provision on the individual. We 
have also moved the State penalty provision associated with this child 
care exception (formerly Sec. 274.20) to a newly created Sec. 261.57. 
Our intent in making these changes is to preserve the informational and 
contextual nature of subpart A of part 261 and to make the State's 
responsibilities and the possible penalty associated with them easier 
to follow. In this section of the rule, we have added cross-references 
to these two new sections for clarity.
    Readers can find all comments associated with this exemption in the 
preamble discussion for Sec. 261.56.

Section 261.16--Does the Imposition of a Penalty Affect an Individual's 
Work Requirement? (Sec. 271.16 of the NPRM)

    Section 408(c) of the Act, as amended by section 5001(h) of Pub. L. 
105-33,

[[Page 17770]]

clarifies that penalties against recipients under TANF ``shall not be 
construed to be a reduction in any wage paid to the individual.'' In 
the NPRM, we indicated that imposing such a penalty does not require 
the State to reduce the number of hours of work required, as it would 
otherwise do if the individual's wages decreased, due to the provisions 
of the Fair Labor Standards Act.
    In the final rule, we have modified this section of the regulations 
to reflect the statutory language more precisely. This change does not 
signify any shift in our interpretation of the provision: we continue 
to believe that Congress intended to permit a State to sanction an 
individual who is subject to the Fair Labor Standards Act (FLSA) 
without also being forced to reduce the individual's required hours of 
work. FLSA requirements, including the Federal minimum wage, apply to 
any welfare recipients that meet the broad definition of ``employees'' 
under that law, which includes participants in many work activities. By 
indicating that a penalty does not reduce the individual's wages, the 
State does not need to recalculate hours of work subject to FLSA. A 
State is, of course, free to decide to reduce the work hours of a 
sanctioned individual or to reassign the individual to activities that 
are not subject to FLSA.
    In addition to the comments described below, we received several 
comments expressing support for the inclusion of this provision in the 
regulations. Others indicated that some readers were confused by the 
intent of this section; we hope the explanation above and the change in 
the regulatory text have reduced this confusion.
    Comment: Some commenters urged us to delete the last clause in 
Sec. 271.16 of the NPRM, which indicated that a penalty would not 
result in a reduction in the number of hours of required work. Others 
asked us to substitute the word ``participation'' for the word ``work'' 
in that clause.
    Response: We have removed the last clause from the regulation 
because we did not want to preclude a State from reducing an 
individual's hours of work.
    Comment: Some commenters thought this provision would act as an 
incentive for States to penalize recipients to avoid the minimum wage 
requirements and urged us to monitor sanctions under this provision by 
collecting data on State sanctions. Another commenter inquired whether 
this provision applied where the penalty is disqualification of the 
individual from the program, such as for an intentional program 
violation.
    Response: The commenters seem to be suggesting that a State would 
have an incentive to penalize a recipient because this provision 
prevents the State from considering the penalty to be a reduction in 
wages and therefore it could engage the recipient in hours of work for 
which he or she is not compensated. We do not agree. An individual's 
hours of work are established in accordance with the FLSA based on the 
benefits the family receives, long before and independent of the 
sanctioning process. The State may only impose a work sanction for 
failure to engage in required work. If an individual thinks that the 
State has penalized him or her inappropriately, he or she has recourse 
to appeal the sanction decision; section 402(a)(1)(B)(iii) of the Act 
requires the State to provide opportunities for recipients who have 
been adversely affected to be heard in a State administrative or appeal 
process.
    With respect to monitoring sanctions and application of this 
provision, readers should understand that no individual is sanctioned 
``under this provision''; rather, this provision applies to any 
recipient who is sanctioned. Thus, no sanctioned recipient is 
considered to have had a reduction in wages as a result of the penalty.
    Readers should also note that we have improved the information we 
are collecting about sanctions and should refer to Appendix A for 
further discussion of these data requirements.
    Comment: Some commenters urged us to clarify that a penalty against 
a family is not a reduction in assistance or other payments. They 
thought the phrase ``reduction in any wage paid to the individual'' 
raised doubt about this point. One commenter specified that States 
should be relieved of FLSA liability regardless of whether the 
individual is in a wage or nonwage work assignment.
    Response: We think the language of the provision is clear and does 
not need further interpretation. As we indicated above, the FLSA 
requirements apply to any welfare beneficiaries that meet the broad 
definition of ``employees'' under that law; thus, the term ``wage'' is 
the appropriate one to use.
    Comment: One commenter thought we should specifically state that 
the FLSA does not apply where the State has sanctioned an individual, 
so as to protect a State from reducing an individual's hours out of 
fear of violating the FLSA to the point where he or she would no longer 
count toward the participation rate. As an alternative, the commenter 
suggested that we deem an individual's hours of work, as determined by 
the FLSA, as automatically meeting the work requirement or give States 
broader authority to include the value of other benefits when 
calculating an individual's work obligation.
    Response: Because the FLSA includes other provisions not affected 
by this provision, it would not be accurate to state that the FLSA does 
not apply. We think the regulatory language explains the interaction of 
the FLSA and this provision adequately. Regarding the commenter's 
suggested alternative, the statute is very clear about the number of 
hours an individual must be engaged in work to count toward the 
participation rate (see subpart B). Regarding the comment suggesting 
broad authority for a State to include other benefits in calculating an 
individual's work obligation, this matter is governed by the FLSA and 
thus is outside the scope of these regulations.
    Comment: One commenter urged us to clarify that, although a 
sanction would not result in a reduction in the number of required 
hours of work, it might result in a reduction in certain activities, in 
order to comply with Federal, State and local labor laws.
    Response: As we have indicated, this provision is intended to avoid 
forcing a State to reduce the hours an individual must work because his 
or her benefits decreased as a result of a penalty imposed under TANF, 
as it would otherwise have to do in accordance with Federal labor law. 
If the State chooses to reduce the individual's hours of work, or to 
shift the individual to other appropriate activities, it has the 
flexibility to do so. If there are State or local labor laws that 
restrict the State's actions in this area, it is the State's 
responsibility to adhere to applicable laws.

Subpart B--What Are the Provisions Addressing State Accountability?

Section 261.20--How Will We Hold a State Accountable for Achieving the 
Work Objectives of TANF? (Sec. 271.20 of the NPRM)

    Work is the cornerstone of welfare reform. Research has 
demonstrated that early connection to the labor force helps welfare 
recipients make important steps toward self-sufficiency. The rigorous 
work participation requirements embodied in the legislation provide 
strong incentives to States to concentrate their resources in this 
crucial area.
    This summary section makes the legislation's focus on work and the 
requirements for work clear, while other sections address each of these 
areas in more detail.

[[Page 17771]]

    This section describes what a State must do to meet the overall and 
two-parent work participation rates. It explains that a State must 
submit data to allow us to measure each State's success with the work 
participation rates. It notes that a State meeting the minimum rates 
will have a reduced MOE requirement, while a State failing to meet them 
risks a financial penalty.
    We received only one comment relating to this section alone.
    Comment: Regarding the reference to data that a State must submit 
for us to calculate the participation rates, the commenter contended 
that the process for calculating the participation rates is too 
complicated. As an alternative the commenter suggested that a State 
should calculate its own participation rate, which we should then 
review.
    Response: Section 411(a) of the Act requires States to report to us 
various data necessary to calculate the participation rates. Therefore, 
we think that it is clear that Congress intended us to make the 
calculations of the participation rates and gives us the authority to 
specify the data elements we need. As we have done prior to the 
publication of final regulations, we will continue to work in 
partnership with States to ensure that data are accurate and correctly 
portray their participation rates.

Section 261.21--What Overall Work Rate Must a State Meet? (Sec. 271.21 
of the NPRM)

    Section 407(a) of the Act establishes two minimum participation 
rates that a State must meet beginning with FY 1997.
    The first, the overall work rate, is the percentage of all families 
receiving assistance who must participate in work activities by fiscal 
year. This section lists the statutory overall participation rate that 
applies to each fiscal year.
    The second is the work rate for two-parent families, which we 
address at Secs. 261.23 and 261.24.
    We received no comments concerning this section.

Section 261.22--How Will We Determine a State's Overall Work Rate? 
(Sec. 271.22 of the NPRM)

    This section of the regulation restates in clear terms the 
participation rate calculation specified in the statute. In particular, 
without changing its meaning, we have phrased the denominator in a way 
that we think is easier to understand than the statutory language.
    We received many requests for guidance concerning how, for purposes 
of the participation rates, we treat a family that the State exempts 
from work requirements.
    A State has the flexibility to establish any exemptions it chooses; 
however, with two exceptions (discussed below), the legislation offers 
no room to remove categories of recipients from the denominator, as 
prior law did. PRWORA embodies the views that: (1) Work is the best way 
to achieve independence; and (2) each individual should participate to 
his or her greatest ability. As waiver projects have demonstrated, 
innovative State programs can often find meaningful ways for nearly 
every recipient to participate in work-related activities. Therefore, 
the statute and the regulation require nearly all families to be 
included in the calculation of the participation rates.
    The two exceptions to this requirement are certain families that 
are subject to a penalty and, at State option, families in which a 
single custodial parent is caring for a child under 12 months of age. 
When directed by the State's reported data to do so, we will disregard 
from the calculation for a month--that is, not include in either the 
numerator or the denominator--families: (1) Receiving assistance that 
are subject to a penalty for refusing to engage in work required in 
accordance with section 407 of the Act, but that have not been subject 
to a penalty for more than three of the last 12 months; and (2) in 
which a single custodial parent is caring for a child under one year of 
age. The latter exception is limited by statute to a maximum of 12 
months for any parent. Although the first exception is not a State 
option under the statute, a State may choose to include a sanctioned 
family in the rate even though it has been subject to a penalty for 
three or fewer months in the last 12 because the family is nevertheless 
working enough hours to count toward the participation rate. In such a 
situation, we would include the family in both the numerator and 
denominator of the calculation.
    The policy described above with respect to families subject to a 
penalty is slightly different from that of the NPRM. We are removing 
``excepted'' families from the entire calculation, rather than just the 
denominator. We have made this change after reexamining Congressional 
intent. We think it unlikely that very many individuals would have been 
subject to a sanction while still working sufficient hours to count in 
the numerator, but we believe it would not be consistent with 
Congressional intent to permit inclusion in the numerator but not in 
the denominator. By creating the exception to inclusion in the 
denominator, Congress intended to avoid penalizing a State when it 
tries to get a nonparticipating individual to participate. However, 
Congress did not intend to create an advantage for such a State by 
allowing ``excepted'' individuals to be included in the numerator when 
they were not in the denominator. Therefore, if a State wishes to count 
a family in the numerator, that family must also appear in the 
denominator.
    The regulation makes clear that a State may count as a month of 
participation any partial months of assistance, if, in each full week 
of assistance in that month, an adult in the family is engaged in work 
for the minimum weekly average number of hours. These families are 
already included in the denominator since they are recipients of 
assistance in that month.
    This provision ensures that a State receives credit for its efforts 
in the first and last months that a family receives assistance. Without 
it, a State would have an inadvertent incentive to start and end 
assistance as close as possible to the beginning of the month, rather 
than as families need it. We think that measuring work in full weeks of 
assistance during a partial month is consistent with the spirit of 
PRWORA. We have established the same policy for partial months of 
assistance under the two-parent rate at Sec. 261.24.
    In the preamble to the proposed regulation for this section, we 
included a significant discussion about the relationship among waivers 
granted under the Family Violence Option (FVO), work participation 
rates, and a State's access to penalty forgiveness under ``reasonable 
cause.'' We recognized that there were circumstances under which a 
State should and would temporarily waive work requirements for domestic 
violence victims. Two questions we considered were: (1) How such 
waivers would affect the calculation of the participation rates; and 
(2) how they would affect a State's penalty liability.
    As we discussed earlier in the preamble, instead of changing the 
basic calculation of the work participation rates, we chose to address 
this situation through our penalty liability determinations. We chose 
this targeted approach so as not to provide blanket exemptions for 
those who have ever suffered domestic violence, but instead to provide 
appropriate protections and supports for TANF recipients who need them.
    Because of the nature of the comments we received on the domestic

[[Page 17772]]

violence provisions in the proposed rule, we decided to consolidate the 
discussion of those comments in the preamble and to consolidate the 
regulatory provisions in a new subpart B of part 260. You can find the 
consolidated preamble discussion in the earlier section entitled 
``Treatment of Domestic Violence Victims.''
    As the result of the comments and the changes we made to part 260 
of the rule, we have also revised the language that was proposed at 
Sec. 271.52(b)(1). Under the revised language, we no longer define the 
criteria for ``reasonable cause'' related to federally recognized 
domestic violence waivers in this section, but cross-reference the 
regulatory provisions in part 260. Also, we have added language to 
Sec. 261.52 indicating we would take waivers of work requirements 
granted under subpart B of part 260 into account in deciding if a State 
is eligible for a penalty reduction based on the degree of its 
noncompliance. Please see Sec. 261.52 for further discussion of these 
issues.
    We received many comments concerning our proposal to redefine 
``family'' to include in the participation rate any families the State 
has excluded (based on defining a family as ``child-only'') for the 
purpose of avoiding a penalty. We have removed this provision from this 
section, as well as from Sec. 261.24 describing the two-parent 
participation rate. Please refer to the earlier preamble discussion in 
the section entitled ``Child-Only Cases'' for further discussion of 
this decision and the comments that relate to it.
    Comment: One commenter thought that the overall participation rate 
as we described it in this section could be interpreted as either 
having a State average the 12 monthly rates or calculate a weighted 
average, taking caseload size into account.
    Response: The statute does not provide for a weighted average in 
calculating the participation rates; rather, it specifically states 
that the annual rate is the average of the State's monthly rates for 
the fiscal year. Moreover, readers should understand that States are 
not responsible for calculating the participation rates. We calculate 
the rates based on the data that States report to us. For further 
discussion of the required data and reporting provisions, please refer 
to part 265 of this chapter.
    Comment: Several commenters suggested that we exclude certain 
groups of individuals from the participation rate, in addition to those 
specified in the regulations. In particular, various commenters urged 
us to remove from the rate calculation: women in the third trimester of 
a pregnancy; cases that include a child and a grandparent who is over 
60 years of age; families not receiving cash assistance; individuals 
working for employers that engage in discriminatory conduct; cases 
engaged in federally mandated administrative reviews prior to a 
sanction; and individuals who have received assistance for fewer than 
60 days and therefore are not required to participate. Another 
commenter agreed with our statement that States should establish 
whatever exemptions they choose, but thought those State-exempted 
individuals should be removed from the rate calculation.
    Response: As we indicated in the NPRM and the above discussion, we 
believe the statute is very clear regarding the calculation of the 
participation rates and does not give us the flexibility to exclude 
additional categories of individuals from the calculations. The 
participation rates are written in terms of ``families receiving 
assistance'' that include an adult, thus we could not limit the rates 
to those receiving cash assistance. (For further discussion of the 
definition of assistance, please refer to Sec. 260.30 of this chapter.)
    Concerning individuals in work activities where the employer 
engages in discriminatory conduct, again, we do not think we have the 
latitude to remove such families from the denominator; however, we 
fully expect States to conduct programs that are lawful and uphold 
employment laws that apply to working welfare recipients. Please refer 
to the section entitled ``Recipient and Worker Protections'' for a more 
detailed discussion of this issue.
    It is not entirely clear to us what the commenter means by 
``federally mandated administrative review process prior to being 
placed in sanction.'' There is no longer a federally mandated 
conciliation process, as there was under the JOBS program. It is 
possible that the commenter is referring to the provision at section 
402(a)(1)(B)(iii) of the Act, requiring an explanation in the State 
plan of how the State will provide opportunities for recipients who 
have been adversely affected to be heard in a State administrative or 
appeal process. If so, recipients appealing an adverse action may 
already be under a sanction and therefore would not be included in the 
rate, if they have not been subject to one for more than three months 
in the last 12. Further, there is nothing in the statute to suggest 
that State administrative or appeal process should be lengthy; on the 
contrary, we hope States will establish expedited processes, in the 
interests of both the families and the State. We think there is neither 
the need nor the authority to remove such families from the 
participation rates.
    Regarding the commenter's concern that individuals are not required 
to participate in work activities until they have received 60 days of 
assistance, the commenter is confusing the requirement on individuals 
to work with the requirement on States to achieve certain participation 
rates. Although the activities may be the same, they are separate 
requirements under the law. Please refer to the discussion at 
Sec. 261.10 for further explanation of this distinction.
    The statute is clear in giving a State the flexibility to establish 
``such good cause and other exceptions'' as it chooses, but does not 
remove those with good cause exceptions from the rate calculations. We 
encourage States to adopt fair and practical good cause exceptions. 
While we understand the commenter's concern that a State has no 
incentive to create good cause exceptions if the excepted families 
remain in the denominator, it is worth noting that the overall 
participation rate leaves room to grant good cause exceptions under a 
variety of different circumstances.
    Comment: A commenter suggested that there should be follow-up on 
individuals for three months following employment and that such 
individuals should be included in the participation rate as an 
incentive to States to find employment for recipients. The commenter 
stated that currently individuals are not included in the rate once 
they become employed.
    Response: Neither the statute nor the regulations excludes employed 
recipients from the participation rate, as long as they are still 
actually receiving TANF assistance. In fact, unsubsidized employment is 
the first work activity that permits TANF recipients to be considered 
``engaged in work'' and other forms of employment immediately follow 
it. Moreover, recognizing that the participation rate calculations did 
not give States credit for those who became employed and left the 
welfare rolls, Congress created a ``caseload reduction credit'' for 
that purpose. (See subpart D for discussion of the Caseload Reduction 
Credit.)
    We do require States to collect data on families no longer 
receiving assistance (please refer to Sec. 265.3), but we believe it is 
burdensome and impractical to require all States to follow such 
families for any period of time. We do agree that this is important 
information in understanding the effect of the TANF program and 
encourage States to

[[Page 17773]]

conduct follow-up studies where possible. Also, we have designed the 
initial high performance bonus system to give us follow-up information 
on the employment of recipients without imposing a substantial new 
burden on State TANF agencies.
    Comment: One commenter stated that the denominator of the 
participation rate changes daily and that we need a standardized 
formula to allow programs to meet their goals. Another asked whether 
the rate is calculated based on a sample or the universe of cases, 
suggesting that the universe was preferable where feasible.
    Response: While the denominator of the participation rate can 
change from month to month, States will have ongoing access to 
information about their caseloads, which should enable them to adjust 
for shifts in the number and types of cases. The participation rates 
are based on monthly data of families receiving assistance that include 
an adult. Therefore, a family that receives assistance for even one day 
in a month contributes to the total number of families receiving 
assistance in that month. We think the participation rate calculations 
are quite clear. However, we have incorporated some opportunities in 
the penalty relief provisions to consider a State's special 
circumstances. For example, in reducing the work participation penalty, 
the final rule adds a new adjustment factor that could help States that 
substantially increase the number of participants, but fail the 
participation rate because they are experiencing significant caseload 
increases.
    Regarding whether a State should report the universe of caseload 
data, Sec. 265.5 permits a State to report participation and other data 
for the universe or a sample of cases and outlines acceptable sampling 
methods. States should weigh the advantages and disadvantages of 
sampling and make their own decisions about whether to report on a 
universe or sample basis.
    Comment: One commenter urged modifying the regulations to ensure 
that, if one parent in a two-parent family is subject to a penalty but 
the other parent continues to work the minimum hours required for the 
overall participation rate, the family should count toward the overall 
rate. If the second parent subsequently is subject to a penalty, the 
commenter thought we should measure the months of sanction in the last 
12 months separately for each parent, thus maximizing the time a family 
would be excluded from one or both participation rates.
    Response: First, we think it is clear in both the statute and these 
regulations that families, and not individuals, are subject to 
penalties. The State has the flexibility to determine the amount of the 
penalty, up to and including terminating the case, but must impose a 
penalty that is at least a pro rata reduction of the family's 
assistance (see Sec. 261.14 for further discussion of pro rata 
reductions). Thus, we would look at whether the family, not the 
individual, is a sanction case.
    If the family continues to receive assistance and meets the 
standard for being ``engaged in work'' under the overall rate while 
being sanctioned, as it would in the commenter's example, then the 
State may choose to count that family in the numerator and denominator 
of the calculation. However, since it is a family and not an individual 
that is subject to a penalty, should the other parent subsequently 
refuse to work and the State take action, it would simply be a second 
sanction for the family and does not call for separate tracking for 
purposes of calculating the denominator.
    Comment: One commenter objected to the fact that two-parent 
families are counted twice, once in the two-parent participation rate, 
and once as part of the overall rate. The commenter thought that two-
parent families should be counted only in their own rate.
    Response: The composition of the overall participation rate is 
statutory. The two-parent rate measures State success with that sub-
population, while the overall rate measures success with the entire 
caseload of families that include an adult.
    Comment: Several commenters expressed support of the provision 
excluding a single custodial parent caring for a child under 12 months 
of age from the participation rate calculation. However, some 
commenters thought that we should not tie the exclusion from the rate 
to whether the State has adopted the option not to require the parent 
to engage in work. In essence, they argue that there are two separate 
decisions: whether to require the parent to work and whether to exclude 
the parent from the rate. Others questioned whether this provision 
allows for a one-time exclusion of up to 12 months or whether the 
parent could be excluded again should he or she be caring for another 
child under one year old.
    Response: Based on the comments and after reexamining the statutory 
provision, we agree that we need not link the State's option not to 
require a single custodial parent of a child under 1 to work to the 
exclusion of such parents from the rate calculations. The State can 
make separate decisions about exempting and excluding a family from its 
rate. The statute describes a certain individual, that is, ``a single 
custodial parent caring for a child who has not attained 12 months of 
age'' and then separately indicates that ``such an individual'' may be 
disregarded in calculating the participation rates. We have re-written 
the regulation to allow disregard of a family with such an individual, 
since the rates actually measure families and not individuals.
    Regarding whether this is a one-time provision or is renewable, the 
law plainly states that a parent may be disregarded from the rate for 
not more than 12 months. We interpret this language to mean a 
cumulative, lifetime limit of 12 months for any single custodial 
parent, but not necessarily a one-time disregard. Thus, if a parent 
were disregarded from the rate for four months while caring for one 
child under a year old, he or she could be disregarded for as much as 8 
months with a subsequent baby.
    Comment: We received many comments in support of the provision to 
give a State credit for a month of participation if the individual is 
engaged in work for the minimum average number of hours in each full 
week the family receives assistance in a partial month; however, some 
commenters found the provision too narrow to accommodate States that 
assign an individual to an activity weeks after the beginning of a 
benefit period. Some urged us to count an individual's time in 
assessment toward the participation rate. Another suggestion was that 
we should only consider a month of assistance (partial or full) to 
begin from the time the individual is assigned to a countable activity. 
One commenter thought we should only count families in the denominator 
from the first full month of assistance. One commenter asserted that we 
should include only recipients, and no applicants, in the participation 
rate; thus, this provision would affect only partial months following 
approval of assistance.
    Response: The law and these regulations permit participation in 
only 12 specific work activities to count toward the participation 
rates. (Please refer to subpart C.) While we appreciate the time it 
takes a State to assess an individual and assign him or her to an 
activity, we do not have the flexibility to add assessment to the list 
of allowable activities. By the same token, we cannot simply decide 
that some period of time for which an individual receives assistance--
such as time prior to assignment in a work activity or a partial month 
of assistance--should not

[[Page 17774]]

be considered a period of assistance and therefore exclude the 
individual's family from the participation rate for that month. On the 
contrary, if a family receives assistance for any portion of a month, 
then we must include the family in the denominator of the participation 
rate for that month, subject to the caveat in the paragraph below.
    With respect to the assertion that we should not include applicants 
in the participation rate, we agree that States should not be forced to 
count individuals in the participation rates while their applications 
are pending. At the same time, we do not want to deny States that are 
successful in moving applicants into work activities credit for their 
efforts. It is for this very reason that we wanted to give States 
credit in the participation rates for a partial month of assistance 
where an adult works at a level equivalent to the standard for a full 
month. Further, under these final rules, we will give States some 
discretion to decide when a family begins to receive assistance, for 
the purposes of the participation rates. If a State pays benefits 
retroactively, i.e., for the period between application and approval, 
the State would have the option to consider the family to be receiving 
assistance either during the retroactive period or only during the 
month of payment.
    This comment included an example in which the State ``prorated 
[benefits] from the date of application,'' even though it did not 
approve the application until about four weeks later. Each State has 
some flexibility to decide when benefits begin; in this example, the 
State chose the date of application. The statute is unclear whether 
receipt of assistance for a prior period is assistance in that prior 
month or only during the month of payment. Thus, when a State chooses 
to pay retroactively back to the date of application, it has the option 
to choose whether the recipient is receiving assistance during the 
month or part of the month covered by the retroactive payment. Because 
many States require applicants to engage in some form of work, such as 
job search, this partial month provision should prove to be an 
advantage for States that pay benefits retroactively for the 
application period.

Section 261.23--What Two-Parent Work Rate Must a State Meet? 
(Sec. 271.23 of the NPRM)

    As in Sec. 261.21, this section restates the minimum work 
participation rates for two-parent families established in the statute.
    As States are aware, the two-parent participation rate increases 
sharply. Congress has high expectations that States will help the vast 
majority of adults in two-parent families find jobs or participate in 
other work activities. We note that most States had difficulty meeting 
the less ambitious JOBS participation rates for unemployed parent 
families (UPs), the primary two-parent cases under AFDC, and about half 
the States subject to the rates in FY 1997 failed the two-parent TANF 
participation rate. For several reasons, the new rates under TANF are 
much more demanding than they were under JOBS. First, the TANF rate is 
a ``two-parent'' rate, not a rate just for UPs. Secondly, the 
denominator includes much more of the caseload; it recognizes many 
fewer exemptions. Finally, PRWORA lifted the restrictions on providing 
assistance to two-parent families. Thus, in some States, many more two-
parent families could be eligible for assistance and subject to the 
work requirements than under prior law.
    We strongly encourage each State to consider carefully what it must 
do to get two-parent families working. In some cases, States may need 
to make substantial changes to their program designs. In the first few 
years of operating TANF, the participation rates are at their lowest 
and caseload reduction credits may significantly reduce the minimum 
required rates. We think it is important for States to capitalize on 
this initial period to invest in program designs that will allow them 
to achieve the higher participation rates in effect in later years. We 
intend to assist States in this endeavor through technical assistance 
and by sharing promising models as they emerge.
    We received only one comment relating to this section.
    Comment: A commenter urged us to eliminate the two-parent 
participation rate once the two-parent caseload represents less than 
five percent of a State's overall caseload.
    Response: We do not have the authority to eliminate the 
participation requirement related to the two-parent caseload. The 
statue is very clear about the required minimum rates that States must 
achieve and the penalty associated with failing to meet participation 
rates. We have tried to give States some relief with respect to the 
demanding two-parent participation rate through both the structure of 
the caseload reduction credit and the penalty reduction provisions. 
Please refer to subparts D and E for further discussion of these areas.

Section 261.24--How Will We Determine a State's Two-Parent Work Rate? 
(Sec. 271.24 of the NPRM)

    The regulations express the two-parent work participation rate in 
terms very similar to those we used for the overall rate. Any family 
that includes a disabled parent is not considered a two-parent family 
for purposes of the participation rate. Thus, we do not include such a 
family in the numerator or denominator of the two-parent rate.
    It is important to note that, in accordance with the statute, we 
calculate both participation rates in terms of families, not 
individuals. Whether we include the family in the numerator depends on 
the actions of individuals, but an entire family either counts toward 
the rate or does not. In the case of a two-parent family, whether a 
family counts may depend on the actions of both parents.
    In response to issues raised by the comments, and questions raised 
by States dealing with interim participation rate calculations, we have 
added language to the final regulations clarifying what constitutes a 
two-parent family in the two-parent participation rate calculation. We 
have found that States had divergent readings of which parents to 
consider in determining whether a family was a two-parent family. 
Therefore, we included this provision to ensure greater consistency 
across States in measuring participation among two-parent families.
    The final regulations state that, for the purposes of this 
calculation, a two-parent family includes, at a minimum, all families 
with two natural or adoptive parents (of the same minor child) 
receiving assistance and living in the home, unless both are minors and 
neither is a head-of-household.
    The preamble to the NPRM indicated that providing a noncustodial 
parent with TANF services need not cause a State to consider the family 
a two-parent family for the participation rate. This policy has not 
changed in the final regulations and is consistent with the new 
definition of a two-parent family. A State may, but is not required to, 
treat a family in which a noncustodial parent receives TANF assistance 
as a two-parent family.
    As in Sec. 261.22, where States direct us to, we exclude from the 
participation rate calculation for a month the families that are 
subject to a penalty for refusing to engage in work required in 
accordance with section 407 of the Act, but have not been subject to a 
penalty for more than three of the last 12 months. This is a change 
from the NPRM, which only excluded them from

[[Page 17775]]

the numerator of the calculation. Please refer to the discussion at 
Sec. 261.22 for an explanation of this change.
    Section 408(a)(7) of the Act limits the receipt of Federal TANF 
assistance to 60 months for any family, unless the family qualifies for 
a hardship exception or disregard of a month of assistance. (In our 
discussion of Sec. 264.1, we explain that months of receipt are 
disregarded when the assistance was received either: (1) by a minor 
child who was not the head of a household or married to the head of a 
household; or (2) while an adult lived in Indian country or in an 
Alaska Native Village with 50 percent or greater unemployment.) We have 
received inquiries concerning the effect of a time-limit exception or 
disregard on the participation rates. In fact, the time limit does not 
have a bearing on the calculation of the participation rate. All 
families must be included in the participation rate, unless they have 
been removed from the rate for one of the two work-related exemptions 
(i.e., the family is subject to a penalty, but has not been sanctioned 
for more than three of the last 12 months; or the parent is a single 
custodial parent of a child under one year of age and the State has 
opted to remove the family from the rate).
    We received many of the same comments about the calculation of the 
two-parent participation rate that we received in connection with the 
calculation of the overall participation rate. In particular, please 
refer to the preamble for Sec. 261.22 for discussion of the comments 
and our responses about excluding groups of recipients from the 
participation rate and counting partial months of participation.
    As we indicated in Sec. 261.22, we have not kept in the final rules 
our proposal to redefine families to include in the participation rate 
any families that the State has excluded (based on its defining a 
family as a child-only family) for the purpose of avoiding a penalty. 
Please refer to the earlier preamble section entitled ``Child-Only 
Cases'' for further discussion of this decision and the comments that 
relate to it.
    Comment: One commenter asked what the definition of a two-parent 
family is and whether it includes a household in which both parents are 
not available for work. Another commenter stated a family's status as 
two-parent or not often changes in the course of a month and that, 
therefore, a family should not be considered a two-parent family in a 
month in which its status change.
    Response: We believe that Congress did not intend to exclude from 
the definition of a two-parent family a family with two parents 
receiving assistance, neither of whom is disabled, even if they are 
``not available for work'' or the family's status changed during the 
month. We interpret the statute to mean that, if a State grants 
assistance for both parents in a family (and neither is disabled), then 
it must be considered and reported as a two-parent family. If one 
parent is coming and going from the family in the month and the State 
does not provide assistance for that parent, then it seems reasonable 
not to consider it a two-parent family.
    Comment: Several commenters noted that the NPRM did not define the 
term ``disabled parent,'' thus making it unclear which families should 
be excluded from the two-parent participation rate. Some urged us to 
leave the definition to States or to define it broadly to accommodate 
State policy. Others specifically urged defining it to include people 
who are temporarily disabled or incapacitated.
    Response: We have not defined the term ``disabled parent'' in the 
final regulations so that each State may define the term as it deems 
appropriate.
    Comment: Commenters urged removing from the denominator all persons 
exempt from work requirements based on valid State welfare reform 
waivers in effect prior to enactment of PRWORA.
    Response: Please refer to subpart C of part 260 for discussion of 
how we will treat welfare reform waivers under the participation rates.
    Comment: One commenter thought that we should remove families that 
are subject to a penalty from the calculation for the entire duration 
of a penalty rather than only if they have been in penalty status for 
less than three of the last 12 months. Alternatively, the commenter 
thought we should remove such a family if it has been subject to a 
penalty for less than three months in a fiscal year instead of the 
preceding 12 months.
    Response: We do not have the authority to make either of the 
changes the commenter suggested because the statute is very precise 
about this provision. It specifies that sanctioned families are removed 
from the rate, but not if the family has been subject to the penalty 
for more than three months within the preceding 12-month period.

Section 261.25--Does a State Include Tribal Families in Calculating 
These Rates? (Sec. 271.25 of the NPRM)

    States have the option of including in the participation rates 
families in the State that are receiving assistance under an approved 
Tribal family assistance plan or under a Tribal work program. If the 
State opts to include such families, they must be included in the 
denominator as well as the numerator.
    Comment: A commenter urged that any rewards or bonuses a State 
receives due to including Tribal participants in the calculations 
should be shared with the Tribes in question.
    Response: Nothing in these regulations precludes a State from 
sharing rewards or bonuses with Tribes; however, we do not have the 
authority to require a State to do so.
    Comment: One commenter was confused by our discussion in the 
preamble to the NPRM. We said that where the State opts to include 
families receiving assistance under a Tribal TANF or Tribal NEW 
program, the families must be in the denominator as well as the 
numerator ``where appropriate.'' The commenter asked us to clarify 
whether a State is free to include or exclude such families from the 
numerator and denominator. The commenter also asked us to clarify the 
standards of participation and activities that applied for a State to 
count such a Tribal family.
    Response: A State may, at its option, include or exclude families 
receiving assistance under a Tribal TANF or Tribal NEW program from the 
denominator of the State TANF participation rates. To be included in a 
State participation rate numerator for a month, a family must meet the 
standards for counting a family in that rate, both with respect to 
hours of participation and allowable activities. These standards apply 
whether the family receives assistance under a State TANF program, a 
Tribal TANF program, or a Tribal NEW program. We realize that many 
Tribal programs will have different standards of work and different 
activities, but to count toward a State rate, the family must meet the 
standards associated with that rate.
    We wanted to be clear that, if a State did plan to count a family 
receiving assistance in a Tribal program, that family had to be 
included in just the same way that a State TANF family would be 
included, that is, in the denominator of the rate as well as the 
numerator. But since inclusion in the numerator is not automatic 
(because the family must meet the hours of participation in allowable 
activities), we added the phrase ``where appropriate.'' Since this was 
confusing, we modified the preamble discussion in the final rules.

[[Page 17776]]

Subpart C--What Are the Work Activities and How Do They Count?

Section 261.30--What Are the Work Activities? (Sec. 271.30 of the NPRM)

    Section 407(d) of the Act specifies the 12 work, training, and 
education activities in which individuals may participate in order to 
be ``engaged in work'' for the purpose of counting toward the work 
participation rate requirements. Congress did not define these 
activities further. While some have commonly understood meanings from 
their use over time or from prior employment and training programs, 
several of the activities, such as ``vocational educational training'' 
and ``job readiness assistance,'' are subject to interpretation.
    In considering whether to provide greater definition of the 
activities as part of the NPRM, we examined legislative intent and 
sought the views of a variety of groups on the matter. Most groups 
urged us to leave further definition to the States. Some urged us to 
define work activities in ways that fostered education while promoting 
work, emphasizing the importance of education and training in 
empowering many recipients to find meaningful employment, let alone to 
advance. Ultimately, we chose not to define the individual work 
activities in the NPRM in favor of giving States greater flexibility; 
we have not changed that position in the final regulations.
    Because this flexibility could also be used in ways that do not 
further Congressional intent, under the data collection requirements at 
Sec. 265.9, we are requiring each State to provide us with its 
definitions of work activities for its TANF program and with a 
description of work activities for any separate State program that 
requires them. We are concerned that different TANF definitions could 
affect the vulnerability of States to penalties for failure to meet the 
participation rate. This data collection will help us determine whether 
this is in fact a serious problem; to the extent possible, we want to 
ensure an equitable and level playing field for the States. Over the 
next several years, we will carefully assess the types of programs and 
activities States develop and will share the results of our findings. 
If necessary at some time in the future, we will initiate further 
regulatory action.
    We would also like to remind States about some key research 
findings from prior welfare-to-work programs. According to the Manpower 
Demonstration Research Corporation's publication, Work First, the most 
successful work first programs have shared some characteristics: a 
mixed strategy including job search, education and training, and other 
activities and services; an emphasis on employment in all activities; a 
strong, consistent message; a commitment of adequate resources to serve 
the full mandatory population; enforcement of participation 
requirements; and a cost-conscious management style.
    While the most successful programs consistently and strongly 
emphasize work, the actual program designs recognize and address the 
critical role education plays in preparing adults for work. As more and 
more recipients engage in work, State caseloads may reflect higher 
proportions of the educationally disadvantaged. In combination with 
other work activities, education may become more important in improving 
basic communication, analytical, and work-readiness skills of 
recipients. Thus, States may need to integrate adult basic skills, 
secondary education, and language training with high-quality, 
vocational education programs. Such program designs encourage 
recipients to continue acquiring educational skills necessary for 
higher-skill, higher-wage jobs.
    We encourage States to adopt program designs that take advantage of 
existing educational opportunities. States may use the statutory 
flexibility to design programs that promote educational principles by:
     Actively encouraging adults and children to finish high 
school or its equivalent;
     Expecting family members to attain basic levels of 
literacy and to supplement their education in order to enhance 
employment opportunities;
     Encouraging family literacy; and
     Promoting community-based work-related vocational 
education classes, created in collaboration with employers.
    States could also make it easier for individuals to combine school 
and work. For example, they could develop on-campus community work 
experience program positions, where child care is also available. They 
could also encourage schools to use work-study funds for students on 
welfare and then count the hours worked in those programs toward work 
requirements.
    While we have not regulated the definition of work activities, we 
want to ensure that recipients and children both experience positive 
outcomes. This is a particularly significant issue when child care is 
the work activity. For this to happen, child care arrangements should 
be well developed, implemented and supported.
    Research has found that quality child care is critical to the 
healthy development of children and that providers who choose to care 
for children create more nurturing environments than those who feel 
they have no choice and are providing care only out of necessity. Thus, 
States should assess whether recipients have an interest in providing 
child care before assigning them to this activity.
    In addition, States should provide training, supervision and other 
supports to enhance caregiving skills if they wish recipients to attain 
self-sufficiency. Such supports, including training in health and 
safety (e.g., first aid and CPR), nutrition, and child development, 
would assist the development of both the caregivers and the children in 
care.
    Finally, the stability of child care arrangements affects outcomes 
for both parents and the children in care. When parents feel 
comfortable with their child care arrangements, their own participation 
in the work force becomes more stable. This stability, in turn, fosters 
emotional security for children. Thus, States should take stability 
into account when assigning participants to child care as a work 
activity.
    The majority of those who commented on this section of the proposed 
regulations supported our decision not to define work activities beyond 
the statutory list. We discuss other comments below.
    Comment: Several commenters made suggestions about the content of 
work activities. Some urged us generally to ensure the quality of work 
activities by establishing minimum standards for the activity and for 
the provider. Others made suggestions about specific activities, urging 
us to give guidance or make requirements concerning particular elements 
of an activity. For example, one commenter thought that vocational 
educational training should conform to the definition of vocational 
education in the Carl D. Perkins Vocational Education Act; another 
suggested discontinuing on-the-job contracts with employers that do not 
provide long-term employment. In essence, these commenters wanted us to 
define certain of the activities or ensure that certain activities 
would be counted as work.
    Response: We appreciate and share the commenters' concerns that 
work activities be designed to meet the needs of recipients and be 
effective in helping them become self-sufficient. However, we think 
that the goals and objectives of the legislation will be better served 
by having each State define the work activities. We believe States will 
use the flexibility of the statute to formulate a variety of reasonable 
interpretations leading to greater innovation,

[[Page 17777]]

experimentation, and success in helping families become self-sufficient 
quickly. It is true that States could conceivably include a range of 
activities that may not enhance work skills or might not be considered 
valid work experience by potential employers. However, in light of the 
five-year time limit and the criteria for the high performance bonus, 
we expect that States will work to establish programs that promote a 
family's long-term success in the workplace.
    Comment: One commenter pointed out that we omitted the statute's 
limitation of the activity of ``work experience'' to instances where 
sufficient private-sector employment is not available.
    Response: We have amended the regulations to reflect the statute's 
limitation.
    Comment: A couple of commenters urged us to require that work 
activities comport with Federal employment laws in order to count for 
participation. One suggested that we require employers to post 
appropriate nondiscrimination notices. Another stated that Congress 
failed to include any provision limiting work activities to work at the 
minimum wage.
    Response: We agree fully with the commenters that all TANF work 
activities should be lawful and should not subject participants to 
discrimination, unsafe working conditions or other circumstances 
prohibited by employment law. Nevertheless, we do not think the 
appropriate way to address the issue is to exclude certain work 
activities from the participation rate calculation in some States. 
Adjusting the rates would be administratively cumbersome and not 
necessarily equitable. As we have discussed earlier in the section of 
the preamble entitled ``Recipient and Workplace Protections,'' there 
are other entities, such as the EEOC, DOL and our Office of Civil 
Rights, that enforce compliance with civil rights and employment laws. 
Their mechanisms for monitoring and enforcing compliance are not linked 
to the timing of the participation rate calculation. In other words, a 
finding of noncompliance that they might issue would not necessarily be 
available within our timeframes for calculating participation rates. 
Moreover, even if we did receive timely information about noncompliance 
with employment requirements, because the participation rates may be 
based on sample data, it might be very difficult to determine the 
appropriate adjustments to make to the rates based on such findings.
    Given these complications, we have not modified the regulation as 
the commenters suggest. We think it makes better sense to support the 
enforcing entities in carrying out their responsibilities. If, over 
time, we find significant problems that could warrant adjustments 
within the TANF program, we will consult with States, labor interests, 
Congress, and other interested parties about the appropriate steps to 
address these problems.
    We have also included a new regulatory section at Sec. 260.35 that 
addresses employment protections available to TANF recipients. Please 
refer to the preamble section entitled ``Recipient and Workplace 
Protections'' for a discussion of additional comments related to this 
issue.
    We have addressed the Fair Labor Standards Act (FLSA) at 
Sec. 260.35 of the final rule, in the preamble to Sec. 261.16, and in 
the preamble discussion entitled ``Recipient and Workplace 
Protections.'' Please refer to those preamble sections for further 
discussion of the application of FLSA, including the minimum wage 
requirement, to TANF work activities.
    Comment: We received support from a number of commenters for the 
discussion of the importance of education to TANF recipients that we 
included in the preamble to the NPRM. In response, we have repeated 
much of that discussion in this preamble to the final rule. We also 
received support for our guidance concerning the provision of child 
care as a work activity.
    A couple of commenters urged us to incorporate that discussion, 
particularly our program design suggestions, into the text of the 
regulation itself. They argued that States would not create broader 
activities that combine work and education unless we specifically 
regulated in this area. Similarly, one commenter urged us to specify 
that we would not penalize a State for including a range of educational 
activities, from literacy programs through post-secondary education, in 
its definitions of work activities.
    One commenter thought the proposed rule did not truly support the 
integration of work and education because it allowed each State to 
define the work activities. Instead, the commenter urged us to provide 
definitions that guide States in integrating work and education.
    Response: We have not included our discussion of program designs 
within the text of the regulation. That discussion is intended to spark 
creative thinking about State choices in implementing TANF, rather than 
to prescribe a particular design for all States. It is also intended to 
underscore the important role we think education can play in TANF.
    We have not included the kind of blanket statement the commenter 
suggests absolving States of any potential penalty liability for 
including a wide array of educational components in its work 
definitions. There are statutory limits on counting educational 
activities in the participation rates; a State that exceeded those 
limits could be subject to a penalty. Readers should refer to 
Sec. 261.33 for a discussion of the limits on counting participation in 
educational activities in the participation rates.
    As we indicated above, we have opted not to define the work 
activities to a greater degree than the statute does. We think that the 
preamble discussion gives States ample suggestions of ways to integrate 
education with work activities. We are also available to work with any 
State and its education community to help them design programs that 
will meet their particular needs.
    Comment: One commenter stated that there is no provision to count 
participants in a GED program, adult basic education or English as a 
Second Language (ESL) in the participation rates and urged making them 
countable work activities. Another commenter urged adding a basic 
skills ``refresher'' course for those already holding a GED. A third 
commenter encouraged us to include student internships as a work 
activity.
    Response: While we have no authority to add to the list of 12 work 
activities, a State could provide the education programs described in 
the first two comments under the existing activities. In particular, we 
point out that GED is explicitly part of the eleventh activity: 
``satisfactory attendance at secondary school or in a course of study 
leading to a certificate of general equivalence for a recipient who has 
not received a high school diploma or a certificate of high school 
equivalency.'' Similarly, student internships, depending on their 
content, may well meet a State's definition of one or another of its 
work activities. We would be glad to provide technical assistance to a 
State that has questions about incorporating activities such as these 
into its program design.
    Comment: One commenter urged us to require States to include 
vocational educational training among their work activities.
    Response: We understand the commenter's interest in seeing that 
recipients have the opportunity to enroll in training programs that 
will give them the skills to qualify for and keep higher paying jobs; 
however, we do not have

[[Page 17778]]

the authority to require a State to provide any specific work 
component.
    Comment: One commenter expressed support for the development of 
micro-enterprises and other forms of self-employment, particularly in 
rural settings. The commenter urged increasing flexibility in this area 
by counting the period necessary to develop a business as 
participation.
    Response: Again, the State has the flexibility to design and define 
work activities that meet the needs of its caseload, including creating 
a micro-enterprise development program. It is unclear from the comment 
precisely what activities the commenter believes should be considered 
work that are excluded either by statute or by a State's policies. We 
agree that any legitimate hours of work in the development of a 
business could contribute to the participation rate; however, for 
example, if the recipient is waiting for a loan approval, but not 
otherwise participating, it hardly seems reasonable to count that time 
as participation. The fact that something has value or is integral to a 
countable activity does not necessarily mean it can count as 
participation. We would be happy to work with States that would like 
technical assistance in this area.
    Comment: One commenter expressed support for the requirement that a 
State provide us with its work definitions, citing its value for 
research into effective employment-related services. Another commenter 
objected to this requirement, maintaining that States must already 
submit this information as part of the State TANF plans.
    Response: We think it is important to know how States are defining 
the activities because of the implications they have for penalties. We 
want to ensure that we enforce the requirements of TANF in a way that 
is as equitable to States as possible. We also agree that the 
definitions will help with research into effective program designs. We 
think it is reasonable to collect these definitions as an annual 
addendum to other data collection. Unfortunately, the TANF State plans 
do not necessarily include a State's work activity definitions. 
However, we have revised the reporting requirements at Sec. 265.9(d) to 
allow a State that included such information in its plan to reference 
the plan or attach the appropriate plan pages.
    Comment: One commenter objected to ``such a restricted list of 
countable work activities'' protesting that low-grant States will not 
be able to make use of several of the components because recipients 
will have too much income to continue receiving assistance. The 
commenter also stated that low-grant States will be adversely affected 
by the minimum wage requirements of the Fair Labor Standards Act 
(FLSA).
    Response: States must weigh carefully their decisions about grant 
amounts and earnings disregards as they formulate State policy. The 
commenter is correct that a State's benefit rules may have implications 
for its participation rates, as well as for a family's time limit and 
for State budgets. However, these are largely matters of State 
discretion; the regulations reflect the statutory work activities. 
Readers should refer to the preamble at Sec. 261.16 for a more detailed 
discussion of the FLSA and its effect on TANF work activities.

Section 261.31--How Many Hours Must an Individual Participate To Count 
in the Numerator of the Overall Rate? (Sec. 271.31 of the NPRM)

    Section 407(c) of the Act specifies the minimum hours an individual 
must participate to count in the State's overall participation rate 
calculation. There are two related requirements. First, there is a 
minimum average number of hours per week for which a recipient must be 
engaged in work activities. The average weekly hours are reflected in 
the following table:

------------------------------------------------------------------------
                                                               Then the
                                                               minimum
                   If the fiscal year is:                      average
                                                              hours per
                                                               week is:
------------------------------------------------------------------------
1997.......................................................           20
1998.......................................................           20
1999.......................................................           25
2000 or thereafter.........................................           30
------------------------------------------------------------------------

    Second, the law requires that at least an average of 20 hours per 
week of the minimum average must be attributable to certain specific 
activities. These activities are:
     Unsubsidized employment;
     Subsidized private-sector employment;
     Subsidized public-sector employment;
     Work experience;
     On-the-job training;
     Job search and job readiness assistance for no more than 
four consecutive weeks and up to six weeks total in a year;
     Community service programs;
     Vocational educational training not to exceed 12 months;
     Provision of child care services to an individual who is 
participating in a community service program.

(Note: the limitation that at least 20 hours come from certain 
activities does not apply to teen heads of households; however, 
there are other limitations related to teen heads of households. 
Please refer to Sec. 261.33 below.)

    After an individual meets the basic level of participation, the 
following activities may count toward the total work requirement hours 
of work:
     Job skills training directly related to employment;
     Education directly related to employment for those without 
a high school diploma or equivalent;
     Satisfactory attendance at a secondary school or GED 
course for those without a high school diploma or equivalent.
    In our consultations prior to drafting the NPRM, several people 
asked whether a State may average the hours of participation of 
different recipients to reach the minimum average hours required by the 
work participation rate, as they could in the JOBS program. PRWORA does 
not permit combining and averaging the hours of work of different 
individuals. However, the regulation and the statute permit averaging 
an individual's weekly work hours over the month to reach the minimum 
average number of hours per week required for that individual to be 
engaged in work.
    We have reorganized the regulatory text slightly from the way it 
appeared in the NPRM for the sake of clarity, but this section still 
paraphrases the statute in simple, understandable terms.
    The final regulations do not contain the chart we included in the 
NPRM depicting which work activities count in the first 20 hours and 
which count thereafter. We decided the chart no longer added to 
readers' understanding of the provision since legislative changes 
simplified the rules and its inclusion disrupted the regulatory text, 
making the policy more difficult to follow.
    Comment: We received several comments expressing support for our 
clarification in the NPRM that a State may average an individual's 
weekly hours of work over a month. One commenter supported averaging, 
but without reference to an individual's hours in a month.
    Response: For clarity, we would like to reiterate that the statute 
does not permit combining and averaging of hours of work of different 
individuals in the overall participation rate. Rather, it is an 
individual's hours of work from different weeks within a month that may 
be averaged.
    Comment: Several commenters expressed concern about the effects of 
the FLSA in restricting the number of hours a State may require an 
individual to participate in certain work activities,

[[Page 17779]]

particularly work experience and community service. They emphasized the 
importance of these activities to individuals not ready for 
unsubsidized employment.
    Concerned that the FLSA will impede a State's ability to meet the 
participation rate requirements, some commenters urged us to exempt 
these activities from the wage and hour requirements of the FLSA.
    Response: We have no authority to exempt an activity from the 
requirements of the FLSA. We have tried to explain the basic effect of 
the requirements on TANF work activities in the preamble to 
Sec. 261.16, but we urge interested parties to consult the Department 
of Labor's guidance entitled ``How Workplace Laws Apply to Welfare 
Recipients (May 1997)'' for more information. We would also like to 
point out that States have the option of increasing the amount of a 
family's grant and thus permitting an individual to engage in more 
hours of work in accordance with the FLSA. States should weigh policy 
decisions in this area very carefully; the interrelated effects on 
participation rates, a family's remaining months under the Federal time 
limit, and State spending on the TANF program are crucial aspects of 
TANF program design.
    Comment: A couple of commenters expressed opposition to separating 
the work activities into those that count for the first 20 hours and 
those that count thereafter, questioning the regulation's support for 
educational attainment despite the preamble's discussion of its 
importance.
    Response: The requirement that the three education-based activities 
can only count for participation after the first 20 hours is a 
statutory one; thus, we have no authority to alter it. That fact does 
not change our commitment to education for recipients who need it. We 
have suggested several possible models for combining education with 
other activities and stand ready to help States that would like 
technical assistance in this area.
    Comment: A commenter urged us to make GED preparation and English 
as a Second Language (ESL) ``stand alone, countable'' activities 
because substantial portions of some State caseloads need basic 
education and language skills before they can hold even entry-level 
jobs.
    Response: Clearly, both GED preparation and ESL fit within the list 
of 12 work activities enumerated in the statute.
    We presume that the commenter's real concern is that the State 
cannot receive full participation credit for such educational 
activities because of the requirement that the first 20 hours of 
participation be attributable to the noneducational activities. This is 
a statutory requirement that we have no authority to change in the 
regulations. We urge States and localities to consider combining work 
and educational activities where it is appropriate in order to maximize 
participation credit. Although some individuals will not be able to 
engage in multiple activities, this could be a viable solution for many 
recipients.
    Comment: One commenter, in stressing the importance of education to 
permanent self-sufficiency, urged us to include time spent on homework 
and fieldwork when calculating an individual's hours of participation.
    Response: As we have indicated, it is each State's responsibility 
to define its work activities in a reasonable manner; thus a State 
could choose to include homework time as part of an activity. However, 
we encourage States to consider carefully how Congress intended to 
treat homework in determining ``engaging in work'' to ensure that its 
interpretation is reasonable.
    It is unclear to us exactly what the commenter means by 
``fieldwork''; if this refers to practical, career-based experience 
within the context of an educational activity, it might meet a State 
work activity definition. We have spoken to this issue in response to a 
comment about student internships above in the comments to Sec. 261.30.
    Comment: A commenter urged us to give partial credit for placing 
individuals in countable activities for fewer than the minimum average 
number of hours. For example, if the required hours are 20 and the 
individual participates for 10 hours per week, the commenter would have 
us count the case as 0.5 in the participation rate for that month. 
Another urged us to develop a means of giving a State credit for an 
individual's participation over a longer period of time than one month.
    Response: The statute does not provide for counting a portion of a 
case in the participation rate and measures participation on a monthly 
basis; either the adult is engaged in work and the family counts in the 
rate or it does not and is not in the rate.
    Comment: One commenter urged us to modify this section to include 
the provisions of Sec. 261.35 or to include a cross-reference to it. 
That section indicates that we will count a single custodial parent 
caring for a child under the age of six as engaged in work if the 
parent participates in work activities for an average of at least 20 
hours per week.
    Response: The language of this section is consistent with the 
statute and does not need to incorporate the provisions of Sec. 261.35 
to take into account the full range of ways in which a family may meet 
the participation rate. We have tried to make these regulations easy to 
read. This means, in part, keeping sections reasonably short and 
separating different ideas into new sections. In this subpart in 
particular, we have tried to group all the provisions that relate to 
counting hours of work; it would be simply impractical to include all 
these provisions in one section.
    We have decided not to reference Sec. 261.35 to avoid multiple 
references to the other sections in subpart C, which we think readers 
will readily notice due to their proximity.
    Comment: A couple of commenters urged us to give a State credit for 
an individual's ``excused'' absences from work, such as holidays or 
jury duty, as opposed to counting only actual hours of work. They 
thought that an absence beyond the individual's control should count as 
participation. Another commenter suggested that we count at least a 
portion of an individual's commute time when he or she must travel an 
extended distance to reach the job.
    Response: The statute specifies the standard by which we must 
measure whether an individual is engaged in work. That standard is that 
a recipient ``is participating in work activities for at least the 
minimum average number of hours per week'' specified in the table in 
this section. Although the JOBS program gave us the discretion to 
establish a participation standard that considered scheduled hours and 
actual hours worked, TANF does not provide that flexibility.
    However, consistent with ordinary practice for counting work time, 
a State could base the hours of work it reports on an employer's record 
of hours for which an employee is paid, thus accounting for paid 
holidays and jury duty days. Similarly, consistent with the ordinary 
practice for counting work time, we do not believe that commuting time 
can reasonably be considered ``engaging in work'' for any activity and 
therefore will not count it toward the participation rates.

Section 261.32--How Many Hours Must an Individual Participate To Count 
in the Numerator of the Two-Parent Rate? (Sec. 271.32 of the NPRM)

    For two-parent families, section 407(c) of the Act specifies that 
the parents must be participating in work activities for a total of at 
least 35 hours per week and that a specified number of

[[Page 17780]]

hours be attributable to specific work activities. A State may have one 
parent participate for all 35 hours, or both parents may share in the 
work activities. If the family receives federally-funded child care 
assistance and an adult in the family is not disabled or caring for a 
severely disabled child, then the parents must be participating for a 
total of at least 55 hours per week. As before, a specified number of 
hours must be attributable to certain activities (listed below).
    In the first situation (where the weekly total must be at least 35 
hours), at least 30 hours must be attributable to the same narrow group 
of activities that applies to the 20-hour standard in the overall rate. 
In the second situation (where the weekly total must be at least 55 
hours), 50 hours must be attributable to this narrow group of 
activities. Again, these are:
     Unsubsidized employment;
     Subsidized private sector employment;
     Subsidized public sector employment;
     Work experience;
     On-the-job training;
     Job search and job readiness assistance for no more than 
four consecutive weeks and up to six weeks total in a year;
     Community service programs;
     Vocational educational training (for not more than 12 
months);
     Provision of child care services to an individual who is 
participating in a community service program.
    Therefore, no more than five of the relevant minimum hours may be 
attributable to education related to employment, high school (or 
equivalent), or job skills training activities.
    During our consultations prior to developing the NPRM, many thought 
it was unclear whether the 35-hour requirement was a minimum for each 
week or a minimum weekly average, as is the case in the overall rate. 
For example, if a parent participated 40 hours one week and 30 hours 
the next, the question arose whether he or she would meet the minimum 
requirement for both weeks. To provide maximum flexibility for States 
to meet the program goals, we clarified in the proposed rule and have 
maintained in the final regulations that, as long as the parents' 
average total hours equal at least 35 hours per week, the individual 
meets the participation requirement.
    Other than this clarification, we have mirrored the statute. As in 
Sec. 261.31, we have reorganized the regulatory text slightly from the 
way it appeared in the NPRM to make it clearer, but this section still 
paraphrases the statute in simple, understandable terms.
    The majority of the comments on this section expressed support for 
our interpretation that the weekly hours requirement was a weekly 
average within a month and not a fixed number of hours for each week. 
Commenters emphasized that this will help States work flexibly with 
families and respond to emergencies or other family needs that affect 
hours of work in a particular week.
    We also received many of the same comments in this section that we 
received in connection with the hours of work required for the overall 
participation rate. In particular, please refer to the preamble for 
Sec. 261.31 for discussion of the comments and our responses about: the 
requirements of the FLSA; counting ``excused'' absences from work 
toward the participation rate; giving partial participation credit for 
participating below the hours of work standard; and reporting 
requirements for a week that spans two months.
    Comment: A commenter noted that this section refers to ``an 
individual'' counting as engaged in work and urged us to substitute the 
word ``family'' instead.
    Response: We recognize that both parents may actually be 
participating and contributing to the total number of hours required to 
be engaged in work, 35 or 55 hours depending on whether they receive 
federally-funded child care. We used the word ``individual'' because 
the statute, at section 407(c)(1)(B), uses that term. While this is not 
necessarily strictly accurate, it is no more accurate to describe the 
``family'' as working; a family is counted in the participation rate, 
but it is one or two individuals who engage in work. We thought that 
relying on the language of the statute would be less confusing in this 
case.
    Comment: One commenter advised us to modify this section to 
indicate that a family with a disabled parent should not be considered 
a two-parent family for the purposes of the participation rate 
calculations in accordance with the statute.
    Response: The commenter is correct that the statute excludes 
families with a disabled parent from the two-parent participation rate 
calculation. We included this provision in subpart B where we describe 
the calculations for the participation rates. Please refer to 
Sec. 261.24(d).

Section 261.33--What Are the Special Requirements Concerning 
Educational Activities in Determining Monthly Participation Rates? 
(Sec. 271.33 of the NPRM)

    Section 407(c)(2)(C) of the Act provides that a teen who is married 
or the single head-of-household is deemed to be engaged in work for a 
month if he or she maintains satisfactory attendance at a secondary 
school or the equivalent or participates in education directly related 
to employment for an average of at least 20 hours per week. Paragraph 
(b) of this section paraphrases the language of this statutory 
provision.
    To reinforce the emphasis on work, section 407 of the Act limits 
educational activities in two ways:
    (1) An individual's participation in vocational educational 
training may count for participation rate purposes for a maximum of 12 
months; and
    (2) For each participation rate, not more than 30 percent of 
individuals determined to be engaged in work for a month may count by 
reason of participation in vocational educational training. In fiscal 
year 2000 and thereafter, this 30-percent limit also includes the teens 
deemed to be engaged in work by reason of maintaining satisfactory 
attendance at secondary school (or the equivalent) or participating in 
education directly related to employment, whom we described above.
    When PRWORA was enacted, there was substantial controversy about 
precisely how the second limitation would apply. However, Pub. L. 105-
33 modified this provision, making the limitation much clearer. The 
description above and the regulation at Sec. 261.33 reflect the new 
provision, as amended by Pub. L. 105-33.
    Based on some of the comments we received, we have made some minor 
modifications to the regulatory language as it appeared in the NPRM. 
The proposed regulatory language inadvertently suggested that only 
married heads-of-households, as opposed to any married teen, could be 
deemed to be engaged in work by virtue of this provision. In addition 
to correcting that error, we have modified the wording of the 30-
percent cap to reflect the statute more closely.
    We also want to explain the technical details of how we will 
interpret the provision relating to counting teens in educational 
activities for the purposes of calculating the participation rates. We 
are interpreting the deeming of teens as engaged in work based on 
satisfactory attendance in secondary school (or the equivalent) or 20 
hours per week of

[[Page 17781]]

education directly related to employment to apply to both participation 
rates. While the provision might appear at first glance to apply to the 
overall rate alone, after considering Congressional intent and the 
legislative history, we think it is appropriate to apply it in the two-
parent rate as well.
    Because the two-parent rate, as amended by Pub. L. 105-33, permits 
the hours of the two parents to be combined to achieve the required 
weekly average, we needed to determine how many, if any, additional 
hours the parents would need to work in order to count in the two-
parent rate when one parent was maintaining satisfactory attendance in 
high school or the equivalent. It seemed unreasonable and contrary to 
the spirit of the law to count the family without any additional hours; 
for example, that would allow a two-parent family to count based solely 
on the attendance of one parent in a GED class. Such a policy would 
support neither the educational welfare of the other parent nor the 
economic self-sufficiency of the family, faced with time-limited 
benefits.
    To address these concerns, our rules incorporate the following 
policy for two-parent families: (1) we will consider satisfactory 
attendance at secondary school or the equivalent of a single head-of-
household or married recipient under the age of 20 to equate to 20 
hours per week of participation; thus, the parents would need a 
combination of 15 or 35 additional average hours per week (depending on 
which standard of hours applied to them) to count for the two-parent 
participation rate; and (2) if both parents in the family are under 20 
years of age, we will consider them to be engaged in work if both meet 
the conditions of Sec. 261.33(b), that is, if both are either 
satisfactorily attending school or equivalent or participating in 
education directly related to employment for at least 20 hours per 
week. Our rationale for equating satisfactory attendance in secondary 
school with 20 hours of participation is that the statute makes the 
presumption that such attendance is equivalent to 20 hours in education 
directly related to employment.
    Comment: One commenter, while acknowledging the statutory origin of 
the 30-percent cap, nevertheless objected to the provision as it 
relates to teens in secondary education. The commenter stated that a 
mandated activity cannot have a cap.
    Response: The commenter is correct that the 30-percent limitation 
is required by the statute; however, we would like to address the 
question of secondary education as a mandated activity. The commenter 
is referring to section 408(a)(4) of the Act, which prohibits a State 
from using TANF funds to assist a single parent under the age of 18 who 
has not completed high school (or equivalent) unless he or she attends 
high school (or equivalent) or a State-approved alternative education 
or training program. Both provisions underscore the importance of basic 
education for teens but are distinct in their effects within TANF. Even 
if the teen populations and the activities described were identical, 
which they are not, the central difference between the two provisions 
is that one mandates what the teens must do and the other restricts 
what a State receives credit for in the participation rate.
    Comment: We received several comments urging us to count post-
secondary education toward the participation rate and recommending that 
the regulations explicitly indicate that it is a TANF work activity.
    Response: As we have indicated above, we do not have the authority 
to create additional work activities beyond the 12 statutory 
activities. Nevertheless, depending on whether and how the State chose 
to incorporate it into its TANF structure, post-secondary education 
could fit within the definition of 1 or more of the 12 activities. The 
appropriateness of categorizing it as one activity versus another would 
depend on the nature of the post-secondary program, such as whether it 
were vocational training.
    We would also like to emphasize that States have the flexibility to 
design programs that allow recipients to combine school and work. We 
have suggested some possible models for this in the preamble to 
Sec. 261.30 and are ready to work with States that want help in 
pursuing such program designs.
    Comment: A couple of commenters objected to the limitations on 
vocational educational training, both an individual's limit to 12 
months and the 30-percent cap. They stressed that States should be free 
to design vocational programs that are effective in moving participants 
into permanent employment, which may require more than one year of 
training.
    Response: States are free to design and operate vocational programs 
that take longer than one year to complete; the limitation is strictly 
about the period of time for which a State could receive credit for a 
recipient's participation in that program. The limitation, while 
potentially discouraging States from designing certain long-term 
programs, is statutory and beyond our authority to modify. Again, we 
would like to point out that combining vocational training with 
practical experience that could count as another activity may be a 
viable approach in many cases. Moreover, States should consider that 
effective vocational education programs, or other programs that succeed 
in moving recipients from welfare to work, will contribute to the 
likelihood that the State will qualify for a high performance bonus or 
caseload reduction credit. We are awarding the high performance bonuses 
based on several criteria, including the number of new hires, increases 
in earnings and job retention. Thus, in spite of the limits on counting 
vocational educational training as participation, there are other 
incentives to designing effective vocational education programs.
    Comment: A commenter noted that the proposed regulations and 
preamble did not indicate that a State has discretion to determine how 
to measure the 12-month limit on counting an individual's participation 
in vocational educational training.
    The commenter also urged us to amend the regulations to indicate 
that a State that combines education with other activities would 
necessarily be able to count these activities in the participation 
rates.
    Response: States have limited flexibility in this area. If a family 
is included in the numerator of a participation rate for a month by 
virtue of participation in vocational educational training, then that 
month counts against the 12-month limit for that individual.
    If a State reports hours of participation in an activity that meet 
the requirements of this subpart, then the hours would count in the 
participation rates, and the month would count as a month or 
participation in the activity, regardless of whether the individual 
performed them in combination or separately.
    We have stressed the possibility of combining education and work 
activities in part because of the statutory limits, reflected in these 
regulations, on how educational activities may count for participation 
purposes. In addition, we believe that encouraging recipients to 
acquire new and more advanced skills after they have entered the work 
world will help them attain and keep higher-paying jobs, leading to 
more economic security for families.

Section 261.34--Are There Any Limitations in Counting Job Search and 
Job Readiness Assistance Toward the Participation Rates? (Sec. 271.34 
of the NPRM)

    Section 407(c)(2)(A)(i) of the Act limits job search and job 
readiness assistance in several ways.

[[Page 17782]]

    First, an individual generally may not count as engaged in work by 
virtue of participation in job search and job readiness assistance for 
more than six weeks. No more than four of these weeks may be 
consecutive. During our consultations prior to drafting the NPRM, we 
were asked whether these limitations applied for the lifetime of the 
individual, per spell of assistance, or per fiscal year.
    Based on those consultations, after an analysis of the statute, we 
decided in the NPRM to interpret it as a fiscal-year limit for two 
policy reasons. First, since the participation rate itself is tied to 
the fiscal year, it makes sense to apply the limitation to the same 
timeframe. Second, a different policy could force States to place 
individuals in other, less appropriate activities just to meet the 
participation rate. Moreover, research indicates that job search 
activities are an instrumental component in effective work program 
designs.
    The statutory language supports the fiscal-year interpretation. The 
job search language at section 407(c)(2)(A)(i) of the Act limiting the 
weeks of participation states that the limit is ``notwithstanding 
paragraph (1).'' Paragraph (1) refers to the determination of whether a 
recipient is engaged in work for a month ``in a fiscal year.'' Thus the 
reference to paragraph (1) puts the job search limitation in the 
context of a calculating whether an individual is engaged in work in 
the fiscal year. Based on these considerations, we clarified in the 
proposed rules that the six-week limitation applies to each fiscal year 
and have not changed that interpretation in the final regulations.
    The legislation and our rules allow the 6-week limit on job search 
and job readiness assistance to extend to 12 weeks if the unemployment 
rate of a State exceeds the national unemployment rate by at least 50 
percent, or if the State could qualify as a needy State for the 
Contingency Fund.
    Finally, our rules paraphrase the statute (at section 
407(c)(2)(A)(ii) of the Act) in allowing a State to count three or four 
days of job search and job readiness assistance during a week as a full 
week of participation on one occasion for the individual.
    Comment: We received many comments in support of our interpretation 
that the job search and job readiness limit applies on a fiscal-year 
basis. However, one commenter thought we were too specific and should 
allow States to interpret the limitation.
    Response: We have not modified the regulation as the commenter 
suggests. We think it is reasonable to apply one standard to all 
States. Given the overwhelming support for the fiscal-year 
interpretation and the statutory and policy support we provided for it 
above, the final regulations maintain that policy. This policy only 
limits the maximum job search and job readiness that count for 
participation purposes. States still have flexibility in determining 
how much an individual should actually participate in such activities, 
including the flexibility to apply the job search and job readiness 
limit on a lifetime basis for an individual if they so choose.
    Comment: A commenter thought that the way in which we paraphrased 
the statute's limit on job search and job readiness to not more than 
four consecutive weeks was confusing and urged us to use the statutory 
wording.
    Response: We have modified this section to follow the statute's 
language more closely. We have left the provision limiting the number 
of consecutive weeks separate in paragraph (c) because we think it is 
easier to follow this way, but have changed the wording within the 
paragraph in response.
    Comment: A few commenters objected to limiting job search and job 
readiness to four consecutive weeks, arguing that there is no rationale 
for stopping at that point or that it is simply too short a period of 
time to ensure that recipients will find jobs. A couple of other 
commenters objected to the six-week total limitation for essentially 
the same reasons and urged us to create a longer time period.
    Response: There is no limit on the amount of job search and job 
readiness a State may require of an individual. However, the statute 
imposes limitations on how much the activity counts toward the 
participation rate. We have no authority to extend the it counts, other 
than when a State meets the criteria for counting 12 weeks of job 
search and job readiness assistance instead of 6.
    Comment: Two commenters recommended that we separate job search 
assistance from job readiness assistance and establish separate limits 
on each activity.
    Response: In determining whether an individual is ``engaged in 
work'' for the participation rates, the statute provides for 12 
different work activities. One of those activities is ``job search and 
job readiness assistance''; the statute does not recognize them as 
separate components. As we indicated in the discussion at Sec. 261.30, 
we do not have the discretion to add to those activities or to separate 
job search from job readiness. If a State has two different activities 
as part of its TANF program, it would have to count an individual's 
participation in either one toward the limits described in this 
section.
    Comment: A commenter suggested that we clarify the regulations to 
allow a State to apply the extended job search and job readiness 
provision to a ``needy political subdivision'' as it would if the State 
were a ``needy State.''
    Response: The statute is very specific in describing the two 
conditions under which 12, rather than 6, weeks of job search and job 
readiness can count toward the participation rates. One of those 
conditions is when the ``State'' qualifies as ``needy'' under the 
Contingency fund definition. That definition applies to a State as a 
whole; therefore, there is no mechanism by which to apply it to a 
political subdivision.
    Comment: One commenter recommended that the regulations ensure that 
a State has advance notice of whether it qualifies to count individuals 
for the extended 12 weeks of job search and job readiness in a fiscal 
year. The commenter argued that this would let the State plan which 
activities to make available to its recipients in order to meet its 
work participation rate.
    Response: As we indicated above, there is no limit on the amount of 
job search and job readiness a State may require of an individual; the 
limitation is on how many hours of the activity count toward the 
participation rates. We hope that a State would not, as the commenter 
suggests, withhold access to job search and job readiness--or any 
activity, if it were the most appropriate for a recipient--and require 
participation in another activity, solely for the purpose of meeting 
the participation rate. The participation rates represent a requirement 
on the State, not a requirement on specific individuals, and the State 
can inherently meet the participation rates even if every individual is 
not in a countable activity.
    Further, we have no ability to make an advance determination that a 
State qualifies for a 12-week job search limit because the data are not 
available in advance and the statute authorizes the 12-week limit based 
on a State's current situation.
    Comment: One commenter objected to the provision permitting a State 
to count three or four days of job search and job readiness assistance 
as a full week of participation because the data collection system in 
the commenter's State does not allow it to count hours of participation 
on that basis.
    Response: This provision is not a requirement. Any State that does 
not wish to count three or four days of this

[[Page 17783]]

activity as a full week of participation is not required to do so. The 
origin of the provision is statutory; we presume the intent was simply 
to make it easier for States to receive participation credit for this 
activity.

Section 261.35--Are There Any Special Work Provisions for Single 
Custodial Parents? (Sec. 271.35 of the NPRM)

    Section 407(c)(2)(B) of the Act provides a special participation 
rule for single parents or caretakers with young children. A single 
parent or caretaker with a child under the age of six will be deemed to 
be engaged in work for a month if he or she participates in work 
activities for an average of at least 20 hours per week.
    This provision has little relevance in FYs 1997 and 1998, when, for 
the overall rate, the required number of hours for all individuals is 
20 hours per week. But, when the required number of hours rises to 25 
hours per week in FY 1999 and to 30 hours per week thereafter, this 
provision allows single parents or caretakers to spend time with 
younger children. It also may enable those with young children to 
fulfill their work obligations while their children are in preschool 
activities.
    The regulations paraphrase this statutory provision.
    There were no substantive comments on this section.

Section 261.36--Do Welfare Reform Waivers in a State Affect the 
Calculation of a State's Participation Rates? (Sec. 271.36 of the NPRM)

    This section is simply a cross-reference to subpart C of part 260, 
which addresses welfare reform demonstration waivers. We thought it 
would be helpful to include it so that readers would know to refer to 
this important exception to the work activities and hours specified in 
subpart C. We have changed the reference from what it was in the NPRM, 
in light of our consolidation of the regulatory provisions relating to 
waivers under part 260.
    There were no comments on this section.

Subpart D--How Will We Determine Caseload Reduction Credit for Minimum 
Participation Rates?

Section 261.40--Is There a Way for a State to Reduce the Work 
Participation Rates? (Sec. 271.40 of the NPRM)

    To ensure that States receive credit for families that have become 
self-sufficient and left the welfare rolls, Congress created a caseload 
reduction credit. The credit reduces the required participation rate 
that a State must meet for a fiscal year. It reflects the reduction in 
the State's caseload in the prior year compared to its caseload under 
the title IV-A State plan in effect in FY 1995, excluding reductions 
due to Federal law or to State changes in eligibility criteria.
    This provision enhances the inherent interest of States to help 
families become independent. As a State reduces its caseload, its risk 
of incurring a penalty lessens because lower work participation rates 
are easier to achieve. This provision also increases a State's chance 
of qualifying for a lower basic MOE requirement, which would reduce its 
risk of incurring an MOE penalty.
    To establish the caseload base for FY 1995, we proposed using the 
number of AFDC cases and AFDC Unemployed Parents reported on ACF-3637. 
To avoid artificial reductions in the minimum participation rates, the 
NPRM included cases in any separate State program used to meet the 
maintenance-of-effort (MOE) requirement in determining the prior-year 
caseload. Under the proposed rules, we would not have granted a 
caseload reduction credit unless the State reported case-record 
information for its separate State programs.
    Comment: Some commenters suggested that allowing States to reduce 
their work participation rates emphasizes caseload reduction over the 
goal of self-sufficiency. Others strongly supported the caseload 
reduction concept.
    Response: By including this provision in the statute, Congress 
sought to recognize State success in moving individuals off assistance. 
We believe this provision comports closely with both statutory language 
and intent.
    Comment: One commenter asked us to include explicit language to the 
effect that we would apply the caseload reduction credit to reduce the 
participation standards before evaluating State performance.
    Response: Different groups will evaluate State performance in a 
variety of ways. For purposes of determining potential penalty 
liability, we will compare a State's actual participation rates with 
the rates that apply following any adjustments due to caseload 
reduction credits.
    Comment: A substantial number of comments addressed our proposed 
method of using reported AFDC data to establish the 1995 caseload 
baseline. First, several correctly pointed out that the Statistical 
Report on Recipients Under Public Assistance is ACF-3637, not ACF-3697. 
In addition, many commenters thought that, to conform to the statute, 
the base-year calculation should include not only the AFDC population, 
but also recipients of assistance under the Emergency Assistance 
program (EA) funded under title IV-A and cases receiving At-Risk and 
transitional child care benefits.
    Other commenters suggested that two-parent families receiving TANF 
assistance are not comparable to AFDC Unemployed Parent (AFDC-UP) cases 
because TANF does not restrict two-parent families as AFDC-UP 
eligibility rules did. They argued that, to be fair, we ought to 
compare ``apples to apples'' and ``oranges to oranges.'' Most 
recommended either not counting two-parent cases at all or allowing 
States to adjust the base-year caseload reports to include any two-
parent cases that were not AFDC-UP cases. They also recommended 
adjusting the reports to correct inaccuracies.
    Response: We agree with these commenters that, to some extent, our 
proposal compared ``apples to oranges.'' In developing the NPRM, we 
recognized that the calculation should reflect an unduplicated count of 
cases receiving ``assistance'' under either AFDC or EA. However, from 
the data reported to us, we could not unduplicate the AFDC and EA case 
counts or determine which, if any, of the EA benefits constituted 
``assistance.'' In our consultations, many State staff told us that 
they would also not now be able to unduplicate AFDC and EA cases for 
fiscal years 1995 and 1996. Thus, for consistency, we limited the base-
year data to AFDC cases reported on the ACF-3637. Based on the comments 
and further internal discussion, however, we believe it would be fairer 
to afford States the opportunity to adjust and correct baseline data if 
they can do so because adjustments would make the base-year and prior-
year caseload figures more comparable. For example, it would not be 
appropriate to include certain EA cases in the base-year caseload 
because, as recipients of ``one-time, short-term'' benefits, such cases 
would not be receiving TANF ``assistance'' and do not show up in the 
prior-year TANF caseload. However, if there were EA cases in 1995 that 
received ``assistance'' and that did not receive both EA and AFDC 
benefits, it would be appropriate to include those cases in the base-
year caseload.
    To allow for more comparable caseload data, we have modified the 
final rule. We will adjust the base-year case count for any State that 
can provide accurate adjustment data or unduplicated case counts, for 
example, through a computer match of each month's 1995 AFDC and EA 
caseload and subsequent years. This includes reliable information on 
the actual

[[Page 17784]]

number of two-parent cases in its AFDC caseload for applicable years. 
However, we will only include EA cases to the extent that the 
assistance provided under EA would meet the TANF definition of 
assistance.
    Comment: Some commenters suggested that some types of cases from FY 
1995, such as State General Assistance (GA) cases, are not included in 
the baseline, but should be. They argued that analogous cases are 
served in separate State programs and thus will be included in the 
comparison year.
    Response: We appreciate the commenter's point and agree that, in 
this regard, we are not comparing like cases. However, we cannot 
include GA or similar cases in the base-year because the statute 
specifies that we compare cases ``that received aid under the State 
plan approved under part A (as in effect on September 30, 1995) during 
fiscal year 1995.'' To the extent that such cases are in the prior-year 
caseload, but not in the 1995 base because the State has expanded its 
eligibility criteria since 1995, the net caseload decrease calculation 
will adjust for this difference. Please refer to Sec. 261.42 for 
additional discussion.

Section 261.41--How Will We Determine the Caseload Reduction Credit? 
(Sec. 271.41 of the NPRM)

    In the proposed rule, we explained how difficult it was to develop 
an appropriate methodology to quantify the different types of caseload 
reductions. We had considered and rejected two alternatives, i.e., the 
use of Medicaid records to estimate the effect of eligibility changes 
(since Medicaid eligibility is based on the July 1996 AFDC eligibility 
rules) and a computer simulation model. Neither alternative could 
produce reasonably accurate estimates of the effect of eligibility 
changes on the caseload size. Nor did our extensive consultations 
provide a straightforward methodology that could be universally 
applied.
    As a result, the NPRM proposed a caseload reduction methodology 
based on State-submitted information and estimates. These regulations 
incorporate the same basic approach. Under the final rules, we 
determine the appropriate caseload reduction for each State using the 
following process:

    Step 1--We compare 1995 AFDC and Unemployed Parent caseload data 
to State-reported TANF and SSP-MOE caseload data for the prior-year.
    Step 2--The State submits a Caseload Reduction Report that 
provides: a complete listing and implementation dates of State and 
Federal eligibility changes since FY 1995; a numerical estimate of 
the impact on the caseload since 1995 of each eligibility change; an 
overall estimate of the net cases diverted from assistance as a 
result of eligibility changes; an estimate of the State's caseload 
reduction credit; the number and distribution of caseload closures 
and application denials, by reason; a description of the methodology 
for the estimate, as well as supporting data to document the 
information in the report; a certification that it incorporated all 
net reductions, there was an opportunity for public comment on the 
content of the report, and it considered such comments; and a 
summary of all public comments. (We have included the Caseload 
Reduction Report form and instructions at Appendix H.)
    Step 3--We compare and analyze each State's methodology, 
estimates, and data to determine whether they are plausible. We may 
request that a State submit additional information within 30 days to 
support the estimates. In addition, we will conduct periodic on-site 
visits and examine case records to validate the information we have 
received.

    Because eligibility changes often affect two-parent cases 
differently from the overall caseload and the two-parent rates are 
distinct, the NPRM required States to submit separate estimates and 
information for the overall and two-parent rates to receive a caseload 
reduction credit.
    Comment: Many comments noted how difficult it is to measure the 
impacts of policy changes and achieve comparability or equity among 
States. One suggested that the only accurate way to determine the 
caseload impact of a policy change is to use experimental and control 
groups. A few commenters suggested using a ``quality control'' model or 
system based on sampling, exception criteria, and audits to establish 
the estimates of policy changes.
    A number claimed that we had shifted the statutory burden and 
responsibility for calculating the caseload reduction credit from us to 
the States, with mixed views as to whether this was appropriate. One 
cited the specific statutory language requiring that the regulations 
``shall place the burden on the Secretary to prove that such families 
were diverted as a direct result of differences in such eligibility 
criteria.'' Some expressed concerns about the standards to which we 
might hold States seeking caseload reduction credits (i.e., in 
quantifying the effects of eligibility changes).
    Another suggested that the Secretary has an obligation to pay for 
obtaining such data.
    Others, while expressing concern with the proposal, agreed that it 
would be difficult for us to develop a sounder methodology that could 
be used in every State. Several commenters noted that the methodology 
imposed a tremendous burden because States may not have retained or may 
never have collected the information needed to make estimates. Some 
urged working with States to find a reasonable or less burdensome 
method of measuring the caseload reduction. Others suggested that, 
working in partnership with States, we should provide technical 
assistance to help States do the required analysis.
    Response: We are glad that commenters clearly understood the 
difficult dilemma posed in developing a caseload reduction methodology, 
and we are sympathetic to their concerns about the burden our proposed 
methodology would impose on States. However, we believe that the 
specific recommendations for methodological alternatives, such as a 
quality control model, ultimately would impose an even greater 
information collection burden on States, without a guarantee of more 
precise estimates. Therefore, in the final rule, we are retaining the 
same general approach, while adopting some suggested improvements. We 
have clarified that we will accept State estimates of the impact of 
eligibility changes and the resultant caseload reduction credit, unless 
they appear to be implausible, based on the common experience of other 
States. In these situations, we will ask the State to re-examine its 
estimate in light of this new or additional information.
    At the same time, we have clarified our expectation that States 
provide aggregate information on the number and distribution of case 
closures, by reason. At a minimum, States must provide this information 
for the base year (1995) and prior year. The NPRM asked for a listing 
of reasons, but did not directly say we were looking for quantitative 
information that might reveal any significant shifts in the causes of 
case closures that might be associated with changes in State policies. 
We also decided to ask for similar data on application denials and 
added an explicit requirement that States report an overall estimate of 
the net number of cases diverted due to eligibility changes.
    We understand that the caseload closure and application denial 
information that we are requesting may not directly measure the 
caseload effects of eligibility changes, especially over time as the 
effects of changes decay and reporting practices may shift. However, it 
is useful information for a State to consider in preparing its Report, 
it will give the public a context for assessing and commenting on the 
State's methodology and estimates, and it will give us a national set 
of data that will

[[Page 17785]]

enable us to judge the plausibility of individual State determinations.
    As suggested, we have consulted--and intend to work in partnership 
with--States, State groups, and advocates to develop appropriate 
estimates, complete the caseload reduction analysis, and refine their 
estimating methodologies.
    We thought it would be helpful for States to have all forms related 
to the rule published together. As a result, we have included, under 
Appendix H, the Caseload Reduction Report form and instructions for 
completing it. Although the form itself was not part of the NPRM, we 
addressed the burden associated with the caseload reduction estimates 
in our paperwork burden estimate. Anyone wishing to comment on the form 
or burden should submit comments to the Office of Management and 
Budget. Please refer to the section of the preamble titled ``Paperwork 
Reduction Act'' for further information.
    Regarding the suggestion that the Secretary pay for obtaining such 
data, we would say: (1) Congress did not appropriate funding for this 
purpose; (2) many States can draw upon analyses done for other purposes 
to reduce the cost burdens associated with these determinations (For 
example, in proposing changes to eligibility rules, some States will 
routinely prepare estimates of caseload and budgetary impacts of those 
changes as part of the State budgetary and legislative process.); (3) 
if such estimates are not otherwise available, because of caseload 
reductions and the strong economy, in general, States have substantial 
funds available to do research and analysis; and (4) we expect the 
burden of these reports to diminish over time because State program 
rules should become less subject to change and States will have 
developed the methodological framework for producing their estimates.
    Comment: Several commenters objected to using case closure 
information as the basis for estimates, because the reason for closure 
is often unknown and the coded reason is sometimes incorrect. Others 
suggested that different eligibility rules affect applicants as well as 
recipients and thus the reason for an application denial is just as 
important as case closure information in determining the effect of a 
policy on the caseload.
    Response: While we recognize the deficiencies in both case closure 
information and application denial information, it is generally the 
most readily available State information that we can use to help assess 
the impact of policy decisions. Therefore, we have retained the 
requirement of submitting case closure information in the final rule. 
Also, we have added a requirement to submit similar application denial 
information. In addition, we have clarified that we are looking for 
quantitative information.
    While we are not requiring it, a State may conduct surveys or in-
depth reviews to establish more accurate estimates of the effect of 
policy changes and use this information in place of case closure and 
application denial data from case files.
    Comment: Numerous comments noted that the statute does not address 
whether there should be separate caseload reduction calculations for 
the overall and two-parent rates. Some thought that, if the State had 
achieved an overall caseload reduction, it was unfair to penalize it 
for an increase in two-parent households (especially when it 
implemented these policies to help keep families together--a purpose of 
the statute). Some commenters recommended applying an overall caseload 
reduction credit to both rates. Others liked our proposed approach of 
two separate calculations, each based on reductions in the applicable 
caseload. Many suggested that States should be afforded the option to 
choose whether to use one or two calculations. One commenter suggested 
that, if we retained the approach of two separate calculations, we 
should allow a State to request and submit estimates on only one rate, 
if a reduction credit were not appropriate for the other.
    Response: Resolving this issue is critically important because of 
its impact on preparing families for work and self-sufficiency, the 
potential penalty liability of States, and the lack of guidance on 
Congressional intent. We were persuaded by the comments that providing 
an option would be an appropriate way to ensure that States that adopt 
policies to promote two-parent families would not be penalized. In 
particular, we thought it made sense to allow States credit for success 
with its total population, since the two-parent caseload is a subset of 
that total, generally a very small subset. It also allows us to give 
flexibility to States to accommodate differing circumstances. At the 
same time, we were concerned that allowing an option could reduce the 
strong Congressional mandate for two-parent families to prepare for and 
engage in work, because States that were particularly successful in 
achieving overall caseload reductions could reduce their target two-
parent participation rates to minimal levels.
    To help us make this decision, we analyzed caseload data for fiscal 
years 1995, 1996 and 1997, TANF participation rates for FY 1997, and 
preliminary participation rates for FY 1998. We determined that 
providing a State option would not nullify the two-parent participation 
requirements, as we had feared. In fact, our analysis showed that more 
States derive a greater caseload reduction credit from calculating two 
separate credits, i.e., applying the two-parent caseload reduction to 
the two-parent rate.
    Based on this analysis and to accommodate State circumstances 
better, we have decided to allow States an option regarding the 
caseload reduction credit for the two-parent participation rate. A 
State may use the overall reduction credit for its two-parent rate or 
may opt to submit separate caseload reduction information on its two-
parent caseload and base the credit for the two-parent rate on 
reductions in the two-parent caseload alone. States do not have the 
option of applying to the overall rate a reduction credit based on 
reductions in the two-parent caseload.
    Comment: A commenter asked that the rules clarify that the State's 
methodology must account for the ongoing effects of an eligibility 
change beyond the initial year.
    Response: We agree with this comment. The final rule requires 
estimates of the effects of all eligibility changes since FY 1995.
    Comment: Many State commenters noted that it would be better to 
know their caseload reduction credits earlier in the year, but then 
noted that two weeks might not be enough time to provide any additional 
information requested by ACF. Several suggested that States need at 
least one month to provide supplemental information. Others suggested 
that we negotiate an appropriate deadline with each State, based on the 
information needed.
    Response: We recognize that States may need more than two weeks to 
provide additional information. Therefore, we have modified the final 
rule to allow a State to negotiate the information deadline or submit 
it within 30 days of the request. We believe that it is important to 
resolve such matters within a short timeframe so that States will know 
what participation rates they must meet as soon as possible.
    Comment: Several commenters suggested that States and the 
Department would both benefit from making each State's methodology and 
plan available for public review and comment. That way, other 
organizations would be able to provide another perspective on 
eligibility changes and their impacts on the caseload. For the

[[Page 17786]]

purpose of public review and comment as well as sharing methodologies 
and approaches among States, several commenters suggested that we 
electronically post each State's estimates and methodology.
    Response: We agree that both States and the Department would 
benefit from public input on the estimates and methodology. Therefore, 
in the final rule, we have required a State to certify that it has 
provided the public an appropriate opportunity to comment on the 
estimates, methodology, and reductions. To allow time for public input, 
we have extended the due date of the Caseload Reduction Report until 
December 31 of each year. We also require a summary of the public 
input. To enable us to learn effective estimating techniques from each 
other, we intend to post electronically useful illustrative estimates, 
techniques, and comments on the ACF World Wide Web page at http://
www.acf.dhhs.gov.
    Comment: Several commenters objected to the requirement that the 
Governor certify the caseload reduction figures, e.g., ``the not-too-
subtle implication that States will not be truthful is both offensive 
and unnecessary.'' One suggested that surely the Governor's designee 
should be able to ``certify'' that the State had taken into 
consideration all reductions.
    Response: We agree with the suggestion and have made the 
appropriate change in the rule.
    Comment: A number of comments suggested that we strike the 
provision that requires a State to report disaggregated data on 
families in separate State programs in order to qualify for a caseload 
reduction. Some maintained that requirements for disaggregated data on 
separate State program cases exceed our authority. As an alternative, 
some suggested that aggregated caseload data should suffice.
    Response: If a State moves a family receiving TANF assistance to a 
separate State program where it receives benefits meeting the 
definition of assistance, this change in the family's status would 
represent an eligibility change if we did not include separate State 
program (SSP) cases in the caseload count. Therefore, unless we require 
and receive the SSP information, it would be impossible to calculate 
the appropriate caseload reduction credit. However, we point out that, 
under the final rule, we have significantly reduced the amount of data 
we are requesting on SSP cases. Most of this cutback is due to a 
reduction in the number of programs and types of cases for which States 
must report data. This is one of the effects of changing the definition 
of assistance. We have also reduced the burden by changing some data 
elements and changing the amount of data we expect on other individuals 
in the family (i.e., those not receiving assistance).
    Comment: Some comments suggested reducing the data collection 
burden by actually treating a transfer to a separate State program as a 
change in eligibility and estimating the impact on the caseload 
reduction.
    Response: We do not agree with this suggestion. Since we are 
expecting States to report case-record information on separate State 
programs, we believe actual caseload numbers will be available and 
there is no reason to develop or accept estimates.
    Also, States and other commenters argued that, to the extent 
possible, the methodology should compare ``apples'' with ``apples,'' 
not ``oranges.'' We believe that including the SSP cases in the prior-
year caseload best serves that objective. Because SSP cases will be 
receiving benefits that address their basic needs, we expect that, 
generally, they will be comparable to AFDC cases.

Section 261.42--Which Reductions Count in Determining the Caseload 
Reduction Credit? (Sec. 271.42 of the NPRM)

    Congress enacted the caseload reduction provision to give States 
credit toward participation for families that have achieved self-
sufficiency or left the welfare rolls due to work, marriage, child 
support, or other means of support. The statute does not give caseload 
reduction credit for Federal or State eligibility changes that deny 
assistance to vulnerable families.
    In the NPRM we gave States full credit for caseload reductions, 
except when those caseload reductions arose from changes in rules that 
directly affect a family's eligibility for benefits (e.g., more 
stringent income and resource limitations, time limits, grant 
reductions, more restrictive residency, age, demographic or categorical 
factors). States could take credit for the calculable effects of 
mechanisms or procedural requirements used to enforce eligibility 
criteria (such as fingerprinting or other verification techniques) only 
to the extent that they identify or deter ineligible families under the 
State's rules.
    We also proposed that, in order to qualify for a caseload 
reduction, a State must report data on families in separate State 
programs. Based on the type of family served or the nature of benefits 
provided, we proposed that we would exclude some families in separate 
State programs from this calculation, if a State demonstrated that the 
cases would not have been included under AFDC or EA, based on specific 
data on the family.
    Comment: In determining the Federal and State eligibility changes 
that do not count for the caseload reduction credit, a number of 
commenters recommended using a concept of net caseload change. They 
suggested that eligibility changes that result in caseload reductions 
should be offset by the positive policy choices of States that increase 
the caseload. To illustrate: if a State-imposed time limit resulted in 
the termination of 1,000 cases in a year, but the elimination of the 
``100-hour rule'' and the ``attachment to the workforce'' requirements 
to encourage two-parent family formation added 300 families, only 700 
cases would not count toward the State's caseload reduction credit. 
These commenters suggest that an alternative reading discourages States 
from adopting proactive policies that are consistent with the intent of 
the law, such as making work more attractive and encouraging and 
supporting the formation of two-parent families.
    Response: Like commenters who offered these suggestions, we are 
very supportive of policies that promote work, enhance family formation 
and help make work pay. Given our desire to encourage family-supportive 
policies, we found this proposal to mitigate caseload reduction 
incentives appealing. We also think that the concept of a net 
eligibility decrease, taking all eligibility changes into 
consideration, provides an opportunity to improve the comparability of 
caseloads, i.e., it would result in comparing ``apples to apples'' 
rather than ``apples to oranges.'' Many States have dramatically 
increased their earned income disregards and resource limits and 
eliminated various categorical requirements. Thus, many current 
recipients would not have been eligible under the 1995 AFDC criteria. 
To avoid penalizing States for such positive changes, we have adopted 
the recommendation of using the net number of cases diverted from TANF 
due to eligibility changes in determining the caseload reduction 
credit.
    Two examples illustrate how the concept will actually work. 
Consider a State in which the caseload was 100,000 in FY 1995 and fell 
to 75,000 in FY 1997. The State estimates a caseload decrease of 15,000 
due to time limits and other restrictive eligibility rules and a 
caseload increase of 10,000 because of increased earnings disregards 
and resource standards. In this example, the net caseload reduction due 
to eligibility changes is 5,000. This means that, of the actual decline 
of 25,000 cases, 20,000 count toward the caseload reduction

[[Page 17787]]

credit. Thus, the State's caseload reduction credit for FY 1998 is 20 
percent, (because 20,000 is 20 percent of 100,000).
    To demonstrate what happens when caseload increases due to 
eligibility changes exceed eligibility-related decreases, we simply 
reverse the example above. The State's caseload fell 25 percent, from 
100,000 to 75,000 between FYs 1995 and 1997. In this example, the 
estimated decline attributable to time limits and other restrictions is 
10,000. The estimated increase due to higher earnings disregards and 
resource limits is 15,000. Because the net effect of eligibility 
changes is a 5,000 increase in the caseload, there would be no net 
number of cases diverted from TANF as a result of eligibility changes. 
Since there is no net reduction, we do not disregard any cases from the 
actual decline of 25,000. Thus, the State would be entitled to the 
entire 25-percent caseload reduction credit.
    Comment: Several commenters suggested that cases analogous to some 
cases in separate State programs were not included in the FY 95 
baseline and therefore would improperly inflate the comparison year 
caseload, if included. All these commenters asked that we exclude 
families in separate State programs from the caseload reduction 
calculation. Others noted that, while the statute does not directly 
address this issue, there is a legitimate need to look at cases in 
separate State programs in the calculation. Otherwise, a State could do 
something like simply move half of its cases to a separate State 
program and assert a 50-percent caseload reduction.
    Response: Congress did not intend to give States credit for 
caseload reductions resulting from changes in eligibility. We believe 
that when a State moves a family receiving TANF assistance to a 
separate State program, it would represent an eligibility change if we 
did not include it in the caseload count; therefore, we have not 
modified the regulation as some of the commenters suggest. However, as 
noted elsewhere, we have modified the reporting for separate State 
programs. This change has the effect of reducing the number and type of 
SSP cases reported by the State.
    Comment: Commenters objected that we had inappropriately retained 
discretion (by using the language, ``we will consider excluding 
cases'') to exclude cases in separate State programs that duplicate 
TANF cases or were made ineligible for Federal benefits by Pub. L. 104-
193. Several found that the three categories of exclusions appear to be 
more ambiguous and discretionary than appropriate. Some commenters 
thought the third category--cases receiving tax credits, child care or 
transportation subsidies or other benefits for working families that 
are not directed at their basic needs--was particularly confusing. Most 
recommended that we explicitly exclude from the caseload reduction 
calculation, cases in separate State programs that: (1) duplicate cases 
in the TANF caseload; (2) provide assistance to immigrants made 
ineligible for Federal benefits; and (3) provide income support or 
services to low-income, working families for whom employment provides 
the primary source of income.
    Response: Generally, we agree with the comments and have made 
appropriate changes in the final rule. If a State provides 
documentation on cases in separate State programs that meet either of 
the following conditions, we will exclude them from the caseload count: 
(1) cases that duplicate TANF cases; or (2) cases made ineligible for 
Federal benefits by PRWORA and that are receiving only State-funded 
cash assistance, nutrition assistance, or other benefits. We did not 
include the third exception suggested by commenters since these cases 
are no longer reported as SSP cases under the revised definition of 
assistance.
    However, we note that these are the only circumstances under which 
we will exclude separate State program cases from the caseload 
reduction calculations. As we have indicated already, we believe that 
moving a family receiving TANF assistance to a separate State program 
where they are receiving assistance would represent a change in 
eligibility criteria if we did not include such programs in the 
caseload reduction calculation.
    Comment: We had wide-ranging and divergent comments on the 
methodology and supporting data required of States. Several commenters 
noted that a State policy that denies assistance when an individual 
does not comply with work requirements, child support cooperation 
requirements, or other behavioral requirements is the same as any other 
eligibility requirement--it defines the categories of families that do 
or do not qualify for assistance. Some commenters suggested that 
enforcement mechanisms such as fingerprinting also deter eligible 
families. They recommended that States receive credit only to the 
extent that the number of families removed exceeds the number wrongly 
denied, deterred or removed. Several commenters requested that the 
final rule explicitly consider full-family sanctions, burdensome 
verification requirements, and requirements that applicants engage in 
certain activities to be changes in conditions of eligibility. Most 
recommended that a State should not receive credit for any such changes 
in its policy. Others suggested just the opposite, that full caseload 
reduction credit is appropriate for all denials of assistance for 
failure to comply with a behavioral requirement.
    Response: Under the final rules, we consider behavioral 
requirements that divert families to be eligibility changes, and we 
exclude them from assistance from the caseload reduction credit. We 
believe it is appropriate to treat both full-family sanctions and 
behavioral requirements as eligibility changes. Based on the comments, 
we have tried to clarify explicitly that no type of Federal or State 
eligibility change since FY 1995 that directly affects a family's 
eligibility for assistance will count in a State's caseload reduction 
credit. These changes include more stringent income and resource 
limitations, time limits, full-family sanctions, and other new 
requirements that deny families assistance when an individual does not 
comply with work requirements (e.g., applicant job search), cooperate 
with child support, or fulfill other behavioral requirements. A State 
may count the reductions attributable to enforcement mechanisms or 
procedural requirements that are used to enforce existing eligibility 
criteria (e.g., fingerprinting or other verification techniques) to the 
extent that such mechanisms or requirements identify or deter families 
otherwise ineligible under existing rules.

Section 261.43--What Is the Definition of a ``Case Receiving 
Assistance'' in Calculating the Caseload Reduction Credit? (Sec. 271.43 
of the NPRM)

    To determine the caseload reduction credit, we proposed to consider 
caseloads in both TANF and in any separate State programs that are used 
to meet the maintenance-of-effort (MOE) requirement. Using the 
definition of assistance proposed under part 270, we proposed to base 
the calculation on all cases in the State receiving AFDC in FY 1995 and 
TANF assistance for all other fiscal years.
    Comment: Several commenters asked us not to use the definition of 
``assistance'' to calculate caseloads for periods prior to the State's 
implementation of TANF. They argued that, since there was no definition 
of assistance similar to the TANF definition, many States granted 
assistance based on broader criteria. In particular, they pointed out 
that EA cases often did receive one-time, short-

[[Page 17788]]

term assistance. Since they were legitimate IV-A cases, the commenters 
maintained that the cases should be included in the number of cases 
receiving assistance in 1995.
    Response: In the NPRM, we specified that the definition of 
``assistance'' should be applied to the caseload count, but our 
methodology did not actually allow a State to use the definition until 
it had implemented the TANF program. The caseload information reported 
by States on ACF-3637, which applied to a State until it implemented 
the TANF program, reflected the AFDC and EA definitions. Under the 
final rule, to get caseload data that are comparable to TANF, we adjust 
the baseline AFDC and EA data, as appropriate, to estimate the 
unduplicated cases receiving benefits under State programs in those 
years that would have met the TANF definition of ``assistance.''
    We point out that this final rule does not dictate the 
determination of caseload reduction credits for fiscal years 1997, 
1998, or 1999. Thus, it does not cover the determination of credits for 
periods when States were still operating AFDC and EA programs. For such 
earlier periods, it would be appropriate to keep all unduplicated AFDC 
and EA cases in the calculations because the base-year and prior-year 
caseload figures would be comparable.
    These rules cover caseload reduction credits that apply in FY 2000 
and thereafter--after States had converted to TANF. Since the 
definition of ``assistance'' determines the prior-year caseload 
numbers, it is appropriate to adjust the 1995 caseload numbers to 
mirror the TANF definition of assistance, in order to compare ``apples 
with apples.'' In some instances, that could mean that EA cases should 
not be part of the 1995 base.
    Comment: One commenter recommended that we clarify this section to 
ensure that, in calculating the caseload reduction credit, we only 
include a percentage of the separate State program cases that equals 
the State's MOE requirement (either 75 or 80 percent). Otherwise, the 
commenter argued, the policy would discourage States from investing 
more than the required MOE amount.
    Response: We agree with the comment and have revised the final rule 
accordingly.

Section 261.44--When Must a State Report the Required Data on the 
Caseload Reduction Credit? (Sec. 271.44 of the NPRM)

    Under the NPRM, we required a State to submit its caseload report 
and estimates for each fiscal year by November 15. We proposed to 
approve or reject a State's estimated reduction credit within 90 days, 
that is, by February 15.
    Comment: Commenters expressed mixed feelings about the timeframes. 
On the one hand, nearly everyone wanted States to receive the caseload 
reduction credit and net participation requirement as early as 
possible. On the other hand, most commenters, and especially State 
commenters, suggested that the timeframes for responding to additional 
information requests from the Department and for resolving issues were 
not sufficient.
    Response: To give the public an opportunity to comment on State 
estimates and ensure that States have adequate time to provide 
additional requested information, we have modified the final rule. The 
caseload reduction report and estimates are now due from States on 
December 31. States may negotiate the deadline for additional 
information or submit it within 30 days. As a result, we will provide 
States with their caseload reduction credits no later than March 31. 
Any extensions for submitting additional data that we grant to States 
must be consistent with this deadline.

Subpart E--What Penalties Apply to States Related to Work Requirements?

    While PRWORA embodies State flexibility in program design and 
decision-making, it also embodies the principle of accountability. 
Where a State does not live up to the minimum standards of performance, 
it faces serious financial penalties. One of the principal areas of 
accountability is the State's provision of work and work-related 
activities to promote employment and self-sufficiency. The work 
participation rates are demanding, but designed to ensure that 
recipients move as quickly as possible into work and toward 
independence. This is especially important given the time-limited 
nature of Federal TANF benefits.
    In structuring this part of the regulations, we have attempted to 
balance the imperative of State accountability in the work 
participation rates with the knowledge that each State enters TANF from 
a different standpoint and with different ideas about the best way to 
help its recipients.

Section 261.50--What Happens if a State Fails To Meet the Participation 
Rates? (Sec. 271.50 of the NPRM)

    In accordance with section 409(a)(3) of the Act, as amended by Pub. 
L. 105-33, if we determine that a State has not achieved either or both 
of the minimum participation rates in a fiscal year, we must reduce the 
SFAG payable for the following fiscal year. The initial penalty is five 
percent of the adjusted SFAG and increases by two percentage points for 
each successive year that the State does not achieve the participation 
rates. We reduce the penalty amount based on the degree of 
noncompliance, as discussed at Sec. 261.51. The total work 
participation penalty can never exceed 21 percent of the adjusted SFAG. 
(See Sec. 262.1(d) for a discussion of the total penalty limit under 
TANF.)
    If a State fails to provide complete and accurate data on work 
participation, as required under section 411(a) of the Act and 
Sec. 265.8 of the regulations, we may determine that a State has not 
achieved its participation rates, and the State will be subject to a 
penalty under this part. We also have the authority to penalize a State 
that does not report its work participation data for failure to report 
(under section 409(a)(2) of the Act). However, in this case, we thought 
it would be more appropriate to penalize the State for failure to meet 
its work rate. First, this policy is consistent with the approach we 
are taking when a State fails to report information related to other 
penalty determinations. Also, we did not want to create a situation 
where nonreporting States would face lesser penalties than reporting 
States, and we did not believe duplicate penalties were warranted.
    We received some comments regarding the year in which we will 
impose a penalty. We have addressed these comments at Sec. 262.1 of 
this chapter.
    Comment: We received quite a few comments concerning our preamble 
language indicating that we would impose a penalty for failure to meet 
the work participation rates if a State failed to report complete and 
accurate data on the work participation rates. Some commenters objected 
to the policy altogether. Others suggested that we should only impose 
the work participation penalty where, as a result of incomplete or 
inaccurate data, we are unable to determine whether the State failed 
the participation rates. Another commenter suggested that we specify 
what ``complete and accurate'' means for the purposes of calculating 
the participation rates.
    Response: Our intent in including this policy in the preamble was 
only to impose a work participation penalty based on a State's failure 
to report complete and accurate data if the lack of data impeded our 
ability to determine whether the State actually achieved the required 
rates. In fact, at Sec. 262.3 of this chapter, we indicate that this is 
our

[[Page 17789]]

policy, stating that we will impose the participation rate penalty ``if 
we find information in the reports * * * to be insufficient or if we 
determine that the State has not adequately documented actions 
verifying that it has met the participation rates.'' For clarity, we 
have changed the wording above to indicate that we ``may'' impose such 
a penalty, and we will implement the policy as explained in Sec. 262.3.
    Comment: One commenter urged us to penalize a State where an entity 
with jurisdiction or group of people affected finds a systemic 
violation of any applicable Federal law (e.g., title VI of the Civil 
Rights Act).
    Response: We think it is appropriate to defer to the entity that 
enforces a given Federal law to penalize a State that violates that 
law. In general, the laws the commenter alludes to include specific 
remedies for individuals that are adversely affected. At the same time, 
we encourage States to make sure recipients are informed of their 
rights to remedies under Federal, State and local laws.
    If, at a later date, we learn of a specific problem in this regard, 
we will consider further action, but we think it is unnecessary to 
include such penalties in the regulation at this time.

Section 261.51--Under What Circumstances Will We Reduce the Amount of 
the Penalty Below the Maximum? (Sec. 271.51 of the NPRM)

    The statute requires us to reduce the amount of the penalty based 
on the degree to which the State is not in compliance with the required 
participation rate. The required rate for a State is the rate at 
Sec. 261.23, adjusted for any applicable caseload reduction credit; 
however, it specifies neither the measures of noncompliance nor the 
extent of reduction. The statute also gives us the discretion to reduce 
the penalty if the State's noncompliance resulted from certain specific 
causes; we address this latter issue separately, in the section 
entitled ``Discretionary Reductions.''
    As we indicated earlier, we have not included in the final 
regulations the NPRM proposals that would have linked a State's 
decisions about implementing separate State programs to its eligibility 
for penalty relief. Thus, we have removed from Sec. 261.51 the 
provision that would have denied penalty reduction to a State that 
diverted cases to a separate State program for the purpose of avoiding 
the work participation requirements. Please refer to the section 
entitled ``Separate State Programs'' for a discussion of this policy 
and the comments that we received relating to it.
Required Reduction
    We have significantly modified this part of the penalty reduction 
section after considering the comments we received. In the NPRM, we 
defined degree of noncompliance first by which of the rates a State 
missed and second by how far it came from meeting the required rate. 
Thus, if a State missed only the two-parent participation rate, we 
proposed imposing a penalty that equaled, as a percentage of the 
maximum possible penalty, no more than the State's percentage of two-
parent cases. Second, if the State missed the overall rate (or both 
rates), we proposed reducing the penalty only if the State achieved a 
threshold of 90 percent of the required rate. Above 90 percent, the 
reduction was to be proportional.
    The final regulations use five basic criteria to measure the degree 
of noncompliance: which participation rate the State failed; the amount 
by which it failed; how well it succeeded in increasing the number of 
recipients engaged in work (despite failing the participation rate(s)); 
the number of consecutive years in which the State failed the rates; 
and the number of rates that the State failed.
    First, as in the NPRM, we will measure noncompliance on the basis 
of whether the State failed one or both rates for the fiscal year and 
which participation rate it failed, if only one. We believe that a 
State that fails the two-parent rate should be subject to a smaller 
penalty than a State that fails the overall rate or both. In addition, 
we believe that it is appropriate to consider the size of the two-
parent caseload in deciding how much weight to give a failure of only 
the two-parent rate.
    In looking at the data for FY 1996, we noted that the two-parent 
participation rate, on average, affected a very small percentage of a 
State's entire caseload--the mean State percentage was about 6.6 
percent, but the median was only about 2.4 percent. We think a State 
that failed with respect to only a small percentage of its cases should 
not face a huge penalty. At the same time, we want to ensure that 
States make adequate commitments to achieving the two-parent 
participation rate and that our policies support State efforts to 
extend benefits to two-parent families. We have attempted to balance 
these goals.
    Under this rule, the maximum penalty a State could face for failure 
to meet only the two-parent rate depends directly on how much of the 
State's total caseload consisted of two-parent families. We have not 
created a similar proportional reduction for a State that fails only 
the overall rate because all cases, including two-parent cases, are 
reflected in the overall rate.
    Second, we measure noncompliance on the basis of the severity of a 
State's failure to achieve the required rate. In drafting the 
regulation, we wanted to strike the right balance between the 
importance of work and the requirement to reduce the penalty based on 
the degree of noncompliance. Although our first inclination was to make 
reductions in direct proportion to the State's achievement toward the 
required rate, our experience in the JOBS program led us to consider 
creating a threshold below which we would grant no reduced penalty. We 
were concerned that, as in the JOBS Unemployed Parent participation 
rates, there would be States with negligible levels of achievement, 
particularly with respect to the two-parent caseload, and thus did not 
merit a reduced penalty. Given that experience, we thought it was 
essential to have a threshold.
    In the NPRM, we set the participation threshold at 90 percent, in 
an effort to support the emphasis in the statute on making the work 
penalty meaningful. In particular, Pub. L. 105-33 amended the work 
penalty provision so that the amount was fixed, removing the discretion 
we had under PRWORA to set a lesser penalty amount. We thought (and 
continue to think) that this shows Congressional intent to provide a 
work penalty of consequence. To avoid undercutting this intent, our 
proposed rules required that a State make substantial progress in 
meeting the target rates before we would consider a reduction. We 
continue to believe that a threshold is a key part of the penalty 
structure.
    We received extensive comments about the proposed 90-percent 
threshold. Some commenters accepted our reasoning for creating a 
threshold, but virtually all found a 90-percent standard to be 
excessively high. They argued that it bases large fiscal consequences 
on small and hard-to-measure differences in reported data. While the 
NPRM maintained that we did not want to give relief to States with 
negligible levels of achievement, thus leading us to a threshold, 
commenters asserted that a high threshold treats achievers and 
nonachievers the same. For example, a State that reaches 2 percent of 
the required rate and one that reaches 88 percent of that rate are 
subject to the same penalty. This, they argued, gives States a strong 
incentive not to serve families with significant barriers. Further, 
they pointed out that

[[Page 17790]]

it would also subject States with similar achievement levels to very 
different penalties. For example, with a 40-percent participation rate, 
a State that reaches 35 percent would be subject to a full penalty, but 
a State that reaches 38 percent would be subject to less than half the 
penalty. Although most commenters opposed having a threshold at all, 
believing that any threshold is arbitrary, many suggested that if we 
found it essential to have one, it should be set significantly lower. 
Most recommended a threshold of 50 to 75 percent. A few commenters 
suggested a lower threshold for the two-parent rate than for the 
overall rate.
    After reviewing those comments and analyzing preliminary data, we 
have set the threshold at 50 percent. We chose this threshold both 
because it was the most widely recommended alternative level and 
because we believe it is a logical standard. Requiring States to reach 
at least half of the target rate draws a clear line between achievers 
and nonachievers. We think it is reasonable not to grant penalty 
reduction to States that are closer to a participation rate of zero 
than they are to achieving the requirement.
    Under the final rules, we will reduce the penalty for any 
qualifying State in direct proportion to the State's level of 
achievement above a threshold of 50 percent. To achieve this, we will 
compute a ratio whose numerator is the difference between the 
participation rate a State actually achieved and the applicable 
threshold rate and whose denominator is the difference between the 
applicable required participation rate and the applicable threshold 
rate.
    In the final rule, we have also clarified that the applicable 
required participation rate and the applicable threshold both reflect 
any caseload reduction credit that the State receives pursuant to 
subpart D of part 261. In other words, the standard against which we 
judge the degree of noncompliance recognizes that Congress wanted 
States to get credit for the caseload reductions they achieve, as long 
as they are not due to eligibility changes. If we did not include this 
clarification, the threshold standard for some States could actually be 
higher than the target (i.e., full compliance) rate provided under the 
statute.
    For example, assume a State's adjusted target rate (i.e., after 
applying its caseload reduction credit) equals 30 percent. Further 
assume the State achieved 18 percent, which exceeds the threshold of 15 
percent (one half of 30 percent) by 3 percentage points. The 3 
percentage points equal 20 percent of 15 percent, the difference 
between the required rate and the threshold. Therefore, we would reduce 
the penalty amount by 20 percent.
    Commenters also urged us to consider a wide range of alternative 
means of measuring noncompliance. On the whole, they urged us to give 
States credit for their level of effort, rather than looking 
specifically to a percentage of the participation rate. One commenter 
offered that, if the purpose of penalties is to give States a strong 
incentive to take the requirements seriously rather than to punish 
those that fail, then a broader view of State achievement is in order. 
In particular, several commenters suggested variations of the following 
alternative factors for determining penalty reduction:
     An increase in a State's caseload (in either the current 
year or prior year);
     Improvement in a State's performance over the prior year;
     Increase in the number of participants in countable work 
activities in a State, or in the number of participants in work 
activities but below the required number of hours to count for 
participation; and
     The extent to which a State exceeded the overall rate, 
even though it missed the two-parent rate.
    Some also suggested that we should recognize a combination of 
alternatives, perhaps without even specifying a comprehensive list in 
the regulation.
    One set of extensive comments on this issue put forward an argument 
for treating any penalty reduction factors that we adopt in a formulaic 
way so that a State's penalty liability is clear. Although this can 
make for a complex provision, we have responded to this concern by 
adding some detail to the final rule. We believe that this formula will 
help States foresee the possible fiscal consequences of their policy 
decisions.
    We considered all these alternatives measures from the perspective 
that our primary interest in the participation rates is to encourage 
work. As a result, we have modified the regulations to include as our 
third measure of noncompliance an adjustment factor that reflects a 
State's success in engaging additional recipients in countable work 
activities. The factor rewards a State that increases the number of 
individuals it engages in work by at least 15 percent over the previous 
fiscal year. If the number of individuals engaged in work decreases, 
the State would not be eligible for a penalty reduction, beyond the 
proportional reduction for failing only the two-parent rate. For this 
calculation, we will use the average monthly participation data, just 
as we do in calculating the participation rates themselves.
    We calculate the adjustment factor by dividing the change in the 
average number of individuals the State has engaged in work by 15 
percent of the number it engaged in work the prior year. For example, 
if the State engaged an average of 2,000 individuals each month in the 
prior year, and 2,400 individuals in the current year, we would divide 
400 (the change) by 300 (15 percent of 2,000, the prior year's average 
monthly number engaged in work). This would result in an adjustment 
factor of 1.33. In other words, in the example, the State's increase in 
participants exceeded 15 percent of the prior year's level by one 
third. Thus, under these rules, the State's penalty reduction would 
increase by one third, compared to the reduction it would have received 
if it had achieved only a 15-percent increase.
    We chose to tie the adjustment factor to a 15-percent increase to 
approximate the average annual increase in the overall participation 
rate.
    We based the adjustment factor on an increase in the number of 
participants in work instead of on an increase in the percentage of 
participants in work for two reasons. First, the proportional reduction 
above the threshold already takes a percentage of participants into 
account through the increase in the participation rate. Second, 
commenters made a persuasive argument that measuring individuals would 
reward States that actually showed greater success with work, where 
participation percentages would be affected by caseload changes that 
might have nothing to do with work or the State's efforts to engage 
individuals in work.
    Readers will note that, in addition to the threshold, the 
adjustment factor also serves as a trigger for penalty reduction; the 
State must have an adjustment factor above zero to qualify for penalty 
reduction beyond the proportional reduction for failing only the two-
parent rate. We needed to cut off the adjustment factor at zero because 
a negative number would actually increase the penalty above the amount 
described in Sec. 261.50, which we have no authority to do. We then 
linked the presence of an adjustment factor to further penalty 
reduction because we did not want to reward a State with a decrease in 
the number of working recipients more than a State with a small 
increase (under 15 percent) in the number engaged in work.
    Finally, we adjust the penalty reduction on the basis of whether 
the State failed both participation rates in

[[Page 17791]]

the current year and how many consecutive years it failed them. If the 
State met both participation rates in the previous year and only failed 
one rate in the penalty year, we will apply the full reduction to the 
penalty. If it failed both rates, but failed none the previous year, we 
will decrease the penalty reduction by one half.
    For the second consecutive year of penalty liability, we will 
prorate the penalty reduction by 50 percent if the State failed just 
one rate; if it failed both rates, it is entitled to a 25 percent 
reduction.
    If the State fails to meet the participation rates for three or 
more years in a row, we will not reduce the penalty at all. We think 
that this is a fair and reasonable approach to avoid rewarding a State 
that has not successfully addressed a persistent problem and that 
repeated failures is an appropriate indicator of the degree of 
noncompliance. A State with successive failures could still claim a 
discretionary work penalty reduction (as discussed below), claim a 
reasonable cause exception, or enter the corrective compliance process.
    We have also added a paragraph indicating that we will adjust the 
calculations in this section to exclude cases for which a State has 
granted federally recognized good cause domestic violence waivers. 
Based on the comments we received in this area, and given our 
reasonable cause exception policy with respect to cases with federally 
recognized good cause domestic violence waivers, we thought these 
waivers should play a similar part in penalty reduction. For comments 
about domestic violence waivers, please refer to the preamble section 
entitled ``Treatment of Domestic Violence Victims.''
    To summarize the entire penalty adjustment process, we begin with 
the proportional reduction based on the amount by which the State 
exceeded the 50-percent threshold. Second, we calculate the adjustment 
factor for increasing the number of individuals working and multiply 
the reduction by the adjustment factor if it is positive, arriving at 
an adjusted reduction. If the adjustment factor is zero or negative, 
there is no adjusted reduction. Then we multiply the adjusted reduction 
by the applicable penalty percentage, derived from whether the State 
failed just the two-parent rate. Finally, we adjust the penalty based 
on whether the State failed both rates and on the number of consecutive 
years of failure.
    As we stated earlier, if a State does not qualify for an adjusted 
reduction, it still may be eligible for the proportional penalty 
reduction for failing only the two-parent rate.
    In spite of our desire to make this regulation as simple as 
possible, we realize that this process is more complex than the 
approach we adopted in the NPRM. We have taken very seriously the 
commenters criticism that the proposed penalty reduction provision did 
not look broadly enough at State success in work. We think the new 
provision treats States more fairly and will be more effective at 
encouraging work. Factoring in multiple ways of looking at such success 
naturally makes the new methodology more complicated. In fact, we 
considered several of the other alternatives that commenters suggested, 
but ultimately decided that additional factors would make the 
calculation too convoluted, without adding to the balance or the work 
focus.
    Comment: We received a great many comments about linking the size 
of the penalty for missing only the two-parent participation rate to 
the proportion that two-parent cases make up of the State's total 
caseload. Nearly all agreed with our approach; however, commenters put 
forward two additional ideas. First, one commenter suggested linking 
the size of the two-parent penalty to the national two-parent 
proportion, rather than varying the penalty based on each State's two-
parent caseload. The second idea was to provide penalty relief for 
States that have made policy choices that have expanded the 2-parent 
caseload.
    Response: We have not adopted either of these recommendations. 
While using a national caseload proportion would remove a possible 
inadvertent incentive for a State to reduce the size of its two-parent 
caseload, or a disincentive to expand eligibility, two-parent cases are 
not distributed evenly across the States. Moreover, we think the 
difference in penalty amounts would not be enough of an incentive to 
drive State policy regarding two-parent cases.
    Regarding the issue of policies that increase the two-parent 
caseload, we think that our policy of adjusting the penalty base to 
reflect the two-parent caseload is the appropriate mechanism for 
helping States with the two-parent participation rate. (We also 
considered this issue in the context of the caseload reduction factor, 
as addressed above. Please refer to subpart D of this part for further 
discussion.)
    Comment: As we indicated above, we received many comments 
suggesting alternative measures to use in penalty reduction. We listed 
above the ones that were most persuasive or appeared most frequently. 
The comments included others that we have not listed.
    Response: We think the new penalty reduction methodology we have 
adopted gives States credit fairly for making substantive progress in 
reaching the participation rates and supports State efforts to engage 
recipients in work. It should be viewed as a whole because its various 
components are designed to work in combination to achieve a balanced 
result. While there are other factors that might also have worked well, 
we believe that we have selected elements that would achieve these 
goals and are easily calculable.
    Comment: A few commenters urged us to require a State to have a 
system for monitoring and enforcing compliance with Federal employment 
laws within its TANF program in order to qualify for a penalty 
reduction.
    Response: As we have indicated earlier, we fully expect States to 
conduct programs that are lawful and to uphold employment laws that 
apply to working welfare recipients. We have chosen not to adopt this 
suggestion out of deference to the enforcement mechanisms already 
available under Federal law. However, we have created a new regulatory 
section at Sec. 260.35 to reference existing employment and recipient 
protections. Please refer to the section entitled ``Recipient and 
Workplace Protections'' for a more detailed discussion of this issue.
Discretionary Reductions
    The final regulations reflect the discretion that we have to reduce 
the amount of the penalty if the State could qualify as a needy State 
for the Contingency Fund. The definition of ``needy State'' at 
Sec. 260.30 is based on especially high unemployment or large numbers 
of Food Stamp recipients in the State. (See subpart B of part 264 for 
more discussion of how a State qualifies for the Contingency Fund.)
    Pub. L. 105-33 gave us the added discretion to reduce the penalty 
if the State failed to meet the participation rate due to extraordinary 
circumstances such as a natural disaster or regional recession. We have 
modified this provision from the NPRM to include substantial caseload 
increases among the examples of extraordinary circumstances. Although 
this criterion is not given as an example in the statute, based on the 
comments we received, we believe such a condition could constitute an 
extraordinary circumstance and think it is appropriate to include it.
    To ensure that we take any such circumstances into consideration, 
States should submit information describing

[[Page 17792]]

the extraordinary circumstances and their effects on the ability of the 
State to meet the participation rates. We must provide a written report 
to Congress to justify any penalty reductions that we grant under this 
provision.
    One criterion for discretionary reductions is similar to the 
criterion at Sec. 262.5(a)(1) for granting a reasonable cause exception 
to a penalty due to a natural disaster. We will evaluate any 
information a State submits concerning the effects of a natural 
disaster on its ability to achieve the participation rates. If the 
material does not support granting a reasonable cause exception, we 
will consider whether it is sufficient for penalty reduction purposes. 
For example, if the disaster caused a failure in only one small area of 
the State, but the State missed the required participation rate by a 
significant amount, we would not grant a reasonable cause exception, 
but we might reduce the penalty in proportion to the TANF caseload in 
that area. We intend to use a similar approach to evaluating the 
effects of a regional recession.
    Comment: Some commenters urged us to add other factors to the 
examples of discretionary reductions. Some suggested an open-ended 
example such as ``other circumstances beyond the State's control'' 
while others gave specific suggestions, including: caseload increase; 
sub-state recessions; widespread economic disruption from the closing 
of a plant or significant numbers of lay-offs; chronic unemployment; 
bad weather; and mismatch between available jobs and skills of 
recipients.
    Response: As we indicated above, we have added substantial caseload 
increases to the list of examples of extraordinary circumstances; 
however, it is simply a list of examples. We believe the provision 
leaves the flexibility for a State to make a claim of ``extraordinary 
circumstances'' based on other factors. The final regulation indicates, 
as did the NPRM, that we will consider the objective evidence of 
extraordinary circumstances that a State submits. We have not specified 
the basis on which we will evaluate that evidence or apply a reduction. 
We believe this responds to the recommendation of commenters that we 
should have flexibility under our rules to address situations that we 
could not foresee at this writing. Since the extraordinary 
circumstances are likely to be different in each case, we think it is 
most appropriate to use the discretion available to us to evaluate the 
materials that a State submits to determine whether its claim warrants 
a reduction in penalty amount.

Section 261.52--Is There a Way To Waive the State's Penalty for Failing 
To Achieve Either of the Participation Rates? (Sec. 271.52 of the NPRM)

    Section 409(b) of the Act creates a reasonable cause exception to 
the requirement for certain penalties, including failure to meet the 
minimum participation rates. If we determine that a State has 
reasonable cause, we cannot impose a penalty.
    We have included general reasonable cause criteria at Sec. 262.5. 
These apply to any of the penalties for which there are reasonable 
cause exceptions. The preamble to Sec. 262.5 discusses how we arrived 
at these criteria, as well as our general philosophy about the role of 
reasonable cause exceptions.
    For the work participation rate penalty, two additional, specific 
reasonable cause exceptions apply. Under the regulation at Sec. 261.52, 
a State may demonstrate that its failure can be attributed to its 
granting of federally recognized good cause domestic violence waivers 
under the Family Violence Option. In this case, the State must show 
that it would have achieved the required work rates if cases with these 
waivers were removed from both parts of the calculation (i.e., from the 
numerators described in Secs. 261.22(b)(1) and 261.24(b)(1) and the 
denominators described in Secs. 261.22(b)(2) and 261.24(b)(2)). A State 
must grant domestic violence waivers in accordance with criteria in 
subpart B of part 260 to be eligible to qualify as federally recognized 
good cause domestic violence waivers and to receive a reasonable cause 
exemption on these grounds. We have explained this policy and responded 
to comments on this subject in subpart B of part 260.
    The regulation also provides that a State may receive a good cause 
exemption if it demonstrates that its failure to achieve the work 
participation rates can be attributed to the provision of assistance to 
refugees in a federally-approved alternative project.
    Finally, this section of the regulation indicates that States may 
dispute our findings that they are subject to a penalty.
    Comment: Many commenters urged us to expand the reasonable cause 
exceptions specifically available for failure to meet the work 
participation rates. They suggested a variety of additional criteria, 
such as a high incidence of recipients with severe employment barriers, 
a significant refugee population, correcting unlawful employment 
discrimination, conflicts with other Federal requirements (including 
the FLSA) or litigation, and enforcing the nondisplacement provisions. 
Some commenters, paralleling the domestic violence exception, suggested 
that the provision of targeted services to other groups of recipients 
with significant barriers to employment should entitle a State to a 
reasonable cause exception. Others recommended many of the same 
criteria suggested for reducing a participation rate penalty, including 
caseload increases, economic downturns, and increases in the number of 
recipients the State engages in work or places in countable activities 
but below the hours standard. Many also suggested granting a reasonable 
cause exception for a combination of factors. Also, a number of 
commenters urged us to leave the reasonable cause criteria in this 
provision open-ended so that a State could present its arguments for an 
exception as situations arise and each could be evaluated on its own 
merits.
    Response: Although these comments appear in the context of 
exceptions to the work participation rate penalty, many commenters made 
the same arguments regarding the general reasonable cause criteria at 
Sec. 262.5. We have addressed comments that apply broadly to reasonable 
cause exceptions in that section.
    We continue to believe that the best way to address a State's 
difficulty in meeting a program requirement is through the corrective 
compliance process. This holds true for the participation rates as much 
as, if not more than, any other requirement. Families, States, and the 
Federal government are better served by solving the problem than by 
forgiving it, or by imposing a penalty. It is for this reason that we 
have chosen to limit reasonable cause exceptions, particularly those 
that relate to a specific provision, as in the case of the 
participation rates, and have not added the criteria suggested. 
Nevertheless, under Sec. 262.5, a State may present a case for a 
reasonable cause exception outside the ones specifically listed. We 
think that the revised language in this section, together with a 
State's ability to dispute our finding of a penalty, the corrective 
compliance process, and the opportunities for work penalty reduction, 
sufficiently recognize the difficulties States may face in meeting the 
participation rates.

Section 261.53--May a State Correct the Problem Before Incurring a 
Penalty? (Sec. 271.53 of the NPRM)

    The process for developing a corrective compliance plan does not 
differ from one penalty to the next,

[[Page 17793]]

although the content of the plan naturally would. Thus, the regulation 
refers to Sec. 262.6, the general section on submittal of a corrective 
compliance plan for any penalty.
    Readers should note that Sec. 262.6(e) establishes a maximum 
corrective compliance period for failure to meet the work participation 
requirements. Since we measure participation annually, we will measure 
compliance based on performance during the fiscal year that ends at 
least six months after we receive the State's corrective compliance 
plan.
    In this section, we establish a specific threshold that States must 
achieve in order to be considered for a reduced work penalty under 
Sec. 262.6(j) for making significant progress toward achieving 
compliance. A State must increase its participation rate during the 
compliance period enough to fill at least half the gap between the 
participation rate it achieved in the penalty year and the required 
rate for the compliance period. In other words, we will divide the 
difference between the rate achieved during the compliance period and 
the rate achieved during the penalty year by the difference between the 
required rate for the compliance period and the rate achieved during 
the penalty year; a result of at least 0.50, qualifies the State for a 
possible reduction.
    You should note that, in this final rule, the required rate for the 
compliance period reflects any caseload reduction credit that the State 
receives under subpart D of part 261. We believe that this adjusted 
rate reflects the performance standard that Congress intended would 
apply to States.
    We also believe that making more progress toward the rate than 
failure--that is, achieving at least 50 percent--is a reasonable 
standard for significant progress. Thus, at the point at which a State 
reaches this threshold, we may reduce its work penalty under the 
corrective compliance provision.
    This approach is similar to the one taken in Sec. 261.51, with 
respect to potential reductions in work penalties based on degree of 
noncompliance. In both cases, we expect significant compliance in order 
to merit a reduced penalty. However, we look at performance over 
different periods in the two provisions.
    Comment: Several commenters thought that the 50-percent standard of 
achievement measured against the ``new'' rate was restrictive and 
arbitrary. Commenters proposed two basic alternatives. Many urged us to 
set a threshold of achievement based on a particular State's 
circumstances or to negotiate a State's threshold in the corrective 
compliance plan process. Some thought that we should consider a State 
to be in compliance if it achieves the participation rate associated 
with the year for which it was subject to the penalty. (Presumably, if 
we were to use a threshold to reduce the penalty in this scenario, it 
would be applied against the latter rate.) One commenter thought that 
we should link the threshold to the average increase among States with 
corrective compliance plans, and another suggested that States should 
be able to show significant improvement by means other than reaching 
the threshold. Another commenter remarked that we made no provision for 
circumstances arising in the year following the penalty year that 
prevent a State from reaching the threshold.
    Response: We note that this provision applies a second reduction to 
a State's penalty amount, the first (described at Sec. 261.51) having 
been significantly expanded over the original proposal. This reduction 
follows a corrective compliance period in which the State should have 
been applying the steps of its plan to resolve the participation rate 
problem. Given these circumstances, we think it is appropriate to 
maintain a fairly rigorous standard for reducing a penalty still 
further. Moreover, we do not think that a 50-percent threshold is 
overly demanding--it simply requires a State to be more successful, 
rather than less successful, in coming into compliance. We measure 
progress against the ``new'' rate (i.e., the one that applies for the 
corrective compliance plan year) because to do otherwise would suggest 
that the State is not being held to the same standard as all the others 
for that year. Otherwise, we would effectively give a State an extra 
year to achieve the minimum participation rate. We expect a corrective 
compliance plan to allow a State to come into compliance with the 
applicable rates. Thus, the penalty reduction associated with 
corrective compliance should use that standard.
    If circumstances arise during the corrective compliance plan period 
that prevent the State from achieving the threshold, it is free to 
claim a reasonable cause exception or develop a corrective compliance 
plan for the penalty year, but we do not think it is appropriate to 
reduce the prior penalty on that basis. In addition, the State might 
qualify for penalty relief under Sec. 262.6(j)(2), relating to natural 
disasters or regional recessions during the compliance period.

Section 261.54--Is a State Subject to Any Other Penalty Relating to Its 
Work Program? (Sec. 271.54 of the NPRM)

    In accordance with section 409(a)(14) of the Act, as amended by 
Pub. L. 105-33, if we determine that a State has violated 407(e) of the 
Act in a fiscal year, which relates to when a State must impose 
penalties on individuals who refuse to engage in required work, we must 
reduce the SFAG payable for the following fiscal year by between one 
and five percent of the adjusted SFAG.
    Comment: One commenter thought we did not provide adequate guidance 
concerning the means by which we will judge whether a State has 
violated the sanctioning requirement. Without such guidance, the 
commenter thought that States might sanction families more severely 
than necessary to avoid a potential penalty.
    Response: As we indicated at Sec. 262.3, we will use the single 
audit to assess whether a State is complying with section 407(e) of the 
Act and thus whether it is liable for a penalty under this provision. 
We expect that, if there are widespread problems with States' 
sanctioning practices, our data collection and the audits will help 
identify them.
    While we understand the commenter's concern that States will 
``over-sanction'' to avoid this penalty, it is important to understand 
that this penalty applies both to a State's failure to sanction when it 
should have and to its imposition of a sanction when it should not have 
imposed one. Thus, a State that overreacts by sanctioning too readily 
could be equally liable for a penalty. If the commenter is concerned 
that States will impose larger sanctions than they would otherwise, we 
would point out that States have the explicit authority, independent of 
this penalty provision, to impose sanctions that are greater than pro 
rata reductions, up to and including terminating assistance to the 
case.
    Comment: One commenter objected to our intention to collect 
sanction policy information via Sec. 265.9, stating that such 
information was available in the TANF State plans.
    Response: While some States may have included sanctioning policies 
in their TANF plans, the statute does not require it. Thus, we cannot 
count on obtaining this information through the plans. Also, at best, 
the plan information would only tell us about State policy, not State 
practice (e.g., the nature and scope of sanctions imposed).

[[Page 17794]]

Section 261.55--Under What Circumstances Will We Reduce the Amount of 
the Penalty for Not Properly Imposing Penalties on Individuals? 
(Sec. 271.55 of the NPRM)

    The statute requires us to reduce the amount of the penalty based 
on the degree to which the State is not in compliance with the section 
407(e) of the Act.
    In determining the size of any reduction, we will consider two 
factors. First, we will examine whether the State has established a 
control mechanism to ensure that the grants of individuals are reduced 
for refusing to engage in required work. Second, we will consider the 
percentage of grants that the State has failed to reduce in accordance 
with the statute.
    As we indicated in the preamble to Sec. 261.14, States have the 
discretion to define the term pro rata reduction. Under Sec. 265.9, as 
part of the annual report we require each State to provide us with a 
description of how it will carry out a pro rata reduction. This 
information will help us determine whether States are taking sanctions 
appropriately. Also, these definitions will help us determine whether 
States face an equitable and level playing field under this penalty 
provision.
    Some commenters noted that the proposed rules incorrectly specified 
that reasonable cause and corrective compliance did not apply to this 
penalty. We have deleted the provision that included this inadvertent 
error.
    Comment: One commenter urged us to clarify what we mean by control 
mechanisms.
    Response: We did not want to limit a State's range of possible 
control mechanisms by creating a single definition. However, one 
example of a possible control mechanism would be a system that 
identifies cases in which an individual refused to participate, then 
cross-checks those cases against information on sanction actions, and 
corrects any errors in sanctioning.
    Although we did not define a control mechanism in the regulation, 
there are some additional elements that we expect a State to include in 
a control mechanism to ensure appropriate sanctioning of recipients. 
Section 402(a)(1)(B)(iii) of the Act provides that a State must set 
forth objective criteria for fair and equitable treatment of 
recipients, including an explanation of how the State will provide an 
opportunity for recipients who have been adversely affected to be heard 
in a State administrative or appeal process. We think that any State 
mechanism that controls whether sanctions have been imposed properly 
should ensure that recipients are informed of their rights to fair 
hearings and advised of the process for invoking that right. In 
addition, we encourage States to consider adding procedures to advise 
recipients of their rights to pursue other remedies that might be 
available under State and local laws.
    Comment: A commenter, citing the fact that States have a right 
under the regulations at Sec. 262.7 to appeal a finding that it is 
subject to a penalty, urged us to ensure that individuals are accorded 
a similar right.
    Response: As we explained in the previous comment, section 
402(a)(1)(B)(iii) of the Act accords recipients the right to appeal 
adverse actions. While we are not regulating this provision itself, we 
do expect that States will address this requirement as part of their 
sanctioning control mechanisms, and we will take it into consideration 
in determining any reduction to the amount of this penalty.
    Comment: A commenter expressed concern that examining only 
sanctioning data, without data from cases not sanctioned, as the basis 
for the penalty would lead to unnecessarily harsh sanctions. The 
commenter recommended basing the penalty determination solely on 
whether the State has established control mechanisms.
    Response: As we indicated in the previous section, this penalty 
applies to all violations of the sanctioning requirement, whether 
failing to sanction inappropriately or imposing sanctions 
inappropriately. For example, we anticipate sampling sanctioned cases 
to determine whether a State has imposed sanctions without evidence of 
a recipient's refusal to participate. Thus, a State has just as much 
incentive to exercise restraint in sanctioning as to impose sanctions 
too readily. At the same time, States may impose sanctions that are 
greater than pro rata reductions without violating section 407(e) of 
the Act.
    Comment: A commenter urged us to base the penalty amount on the 
amount of the sanctions that should have been imposed, as a percentage 
of the total amount of grants the State awards, or as a percentage of 
the total grants that should have been reduced but were not.
    Response: This approach seems overly complex to us. We see no 
advantage to basing the reduction on dollar amounts instead of case 
percentages.
    Comment: A commenter recommended that we allow a tolerance for 
errors before imposing a penalty under this provision.
    Response: We have built a tolerance for errors into the reasonable 
cause exceptions at Sec. 262.5. In addition, States have the right to 
dispute our determination that it is subject to a penalty, in 
accordance with the provision at Sec. 262.4.
    Comment: A commenter urged us to deem 80-percent compliance as full 
compliance with the requirement because the penalty amount must be 
between 1 and 5 percent.
    Response: We have not established a specific formula for 
determining and reducing the amount of the penalty. We will factor in 
objective evidence of whether the State has established a control 
mechanism, as discussed above, and of how many cases have been 
improperly sanctioned.

Section 261.56--What Happens if a Parent Cannot Obtain Needed Child 
Care? (Sec. 271.15 of the NPRM)

    Readers will note that we have moved the substance of this section 
from Sec. 271.15 of the NPRM to Sec. 261.56 of the final rule. The 
proposed rules contained two sections dealing with the question of 
sanctions for parents of young children who refuse to work because they 
cannot find needed child care. The first section specifically addressed 
the statutory protections from sanctioning available to such 
individuals who could not obtain child care; the second dealt with the 
penalties that a State would face if it sanctioned individuals in 
violation of the exception. Because of the close interrelationship 
between these two provisions and the number of comments we received on 
them, we thought that putting the regulatory sections adjacent to one 
another would make the provisions easier to follow. We have retained 
Sec. 261.15 to ensure that subpart A, which relates to the 
responsibilities of individuals under TANF, continues to discuss the 
child care exception.
    To support the intent of the statute to move people to work, 
section 407(e) of the Act requires that States reduce or terminate 
assistance to individuals who refuse to engage in work required by 
section 407 of the Act. However, as we discussed in the preamble to 
Sec. 261.15, a State may not reduce or terminate assistance to a single 
custodial parent caring for a child under age six for refusing to 
engage in required work, if the parent demonstrates an inability (as 
determined by the State) to obtain needed child care. This exception 
applies to penalties the State imposes for refusal to engage in work in 
accordance with either section 407 or section 402(a)(1)(A)(ii) of the 
Act. The

[[Page 17795]]

parent's demonstrated inability must be for one or more of the 
following reasons:
     Appropriate child care within a reasonable distance from 
the individual's home or work site is unavailable;
     Informal child care by a relative or under other 
arrangements is unavailable or unsuitable; or
     Appropriate and affordable formal child care arrangements 
are unavailable.
    Refusal to work when the State determines an acceptable form of 
child care is available is not protected from sanctioning.
    Because each State has the authority to determine whether the 
individual has adequately demonstrated an inability to obtain needed 
child care, we expect the State to define the terms ``appropriate child 
care,'' ``reasonable distance,'' ``unsuitability of informal care,'' 
and ``affordable child care arrangements.'' The State must also provide 
families with the criteria (including the definitions) that it applies 
in implementing the exception and the means by which a parent can 
demonstrate an inability to obtain needed child care.
    To keep families moving toward self-sufficiency and to promote 
State compliance with this penalty exception, our rules provide that 
States must have processes or procedures in place that: (1) enable a 
family to demonstrate its inability to obtain needed child care; (2) 
inform parents that the family's benefits cannot be reduced or 
terminated when they demonstrate that they are unable to work due to 
the lack of needed child care for a child under the age of six; and (3) 
advise parents that the time during which they are excepted from the 
penalty will still count toward the time limit on Federal benefits at 
section 408(a)(7) of the Act, if applicable.
    In response to numerous comments, as discussed below, the language 
in Secs. 261.56 and 261.57 reflects these expectations. In this 
section, which focuses on the responsibilities of the State to inform 
parents, we also require that the information States provide must 
include the definitions or criteria that the State uses in its 
determination process.
    The regulations for the Child Care and Development Fund (CCDF) 
reinforce the importance of providing this vital information to parents 
by also requiring the child care lead agency, as part of its consumer 
education efforts, to inform TANF parents seeking child care in the 
CCDF system of the existence of the child care exception and how to 
demonstrate an inability to obtain needed child care.
    The CCDF rule requires the lead agency for child care to coordinate 
with the TANF agency in order to understand how the TANF agency defines 
and applies the terms of the statute regarding the penalty exception 
and to include the definitions of the terms or criteria in the CCDF 
plan.
    We took this child care rule into consideration in drafting our 
proposed rule. Under Sec. 271.15, we required that the definitions and 
criteria be submitted, but did not specifically require that the TANF 
agency submit them. Our goal was to ensure that this information was 
available for audit and penalty purposes and that it be part of the 
public record, not to create an unnecessary burden for States. We have 
not altered this policy in these final regulations.
    We received many comments on the provisions in this section and 
made changes as discussed below.
    Comment: Most commenters objected to having the responsibility for 
informing families about the child care exemption in the hands of the 
child care lead agency and urged that we give the responsibility to the 
TANF agency.
    Response: In the NPRM, we did not specifically require the TANF 
agency to inform clients about the exception to sanctioning because the 
CCDF NPRM (now the CCDF final rule) already required it. In the NPRM 
preamble, we stated our expectation that States would inform clients, 
but did not name the entity responsible. Our intent was to avoid 
imposing an additional Federal burden on the States where the CCDF 
requirement addressed the situation adequately. However, advocates and 
States alike made a compelling argument that not all TANF clients 
covered by this protection would necessarily be referred to the child 
care lead agency. Therefore, we have revised the regulatory language at 
Sec. 261.56. In the final rule, the TANF agency must inform clients of 
the existence of the child care exception to sanctions and how to 
demonstrate an inability to obtain needed child care. This requirement 
is in addition to the requirement, in the CCDF rules, that the CCDF 
agency inform TANF parents about the exception.
    Comment: Many States objected to our requiring criteria and 
definitions, arguing that we had shifted the burden of proof from the 
individual to the State. We also received a few general comments to the 
effect that our rules did not adequately protect individuals from harsh 
State policies.
    Response: We do not believe that requiring States to inform parents 
of their rights, including the definition of key terms in those rights, 
shifts the burden of proof to States. The individual needs to know how 
the State defines key terms to determine whether the exception applies 
to his or her case.
    Regarding the concern over harsh State policies, States have 
considerable latitude in implementing the child care protections. We 
think the final regulations protect families as much as possible, given 
the regulatory restraints of section 417.
    Comment: A few commenters urged us to require States to inform 
recipients about available child care subsidies and to assist them in 
obtaining appropriate and affordable child care.
    Response: While we agree that assisting recipients locate child 
care is a reasonable expectation, the statute at section 417 limits our 
ability to regulate in this area. Given that child care is widely 
recognized as a fundamental supportive service, necessary for 
recipients to obtain and maintain employment, we are confident that 
States will adopt practices that inform recipients about available 
child care providers. States understand the importance of employment 
retention and career advancement for recipients. In fact, the 
publication ``Working Out of Poverty'' by the NGA Center for Best 
Practices, recognizes the need to inform recipients of the availability 
of transitional supports such as child care and transportation 
assistance early, for example, during eligibility determinations and 
assessments, and as part of job search and job readiness programs.
    Comment: Some commenters were concerned that the NPRM left room for 
a parent who wishes to use a particular type of child care that is not 
available to refuse appropriate available child care arrangements, 
without risk of a penalty. For example, they feared that a parent who 
wants only informal relative care, but has no relative available to 
provide care, could refuse affordable, suitable center-based care. 
States argue that this result would be contrary to Congressional intent 
and the goals of the Act. They urged us to make clear that refusing 
work under such circumstances is not protected under the child care 
exception to a sanction.
    Response: This issue stems from an interpretation of the wording of 
the statute, which uses the phrase ``one or more'' in describing the 
reasons for a parent's demonstrated inability to obtain needed child 
care. However, we agree with the commenters that such a result would be 
contrary to Congressional intent, which was to protect individuals from 
sanction when there was no appropriate child care, not

[[Page 17796]]

to give families a loophole to avoid work requirements. Further, such 
an interpretation would be contrary to the best interest of the family, 
because the TANF clock continues to run during such a period. 
Therefore, we have revised the regulatory language at Sec. 261.56 to 
clarify that refusing to work when an acceptable form of child care is 
available is not protected from sanctioning.
    Comment: One commenter was concerned that the NPRM, as written, 
might create a larger problem of inadequate child care due to informal, 
uncertified or unlicensed child care providers. The commenter was 
concerned that this would result in caregivers with inadequate training 
in child development or basic life-saving skills, poor or no 
curriculum, or no health or dental care referrals.
    Response: The statute, as reflected in the NPRM, intended to give 
parents some choice in child care arrangements. Informal care is only 
one possible type of child care arrangement that families could use. If 
the State uses CCDF funds to provide child care, the regulations 
governing the CCDF program require States to have standards for 
informal providers, as well as those providers who are licensed. Under 
TANF, we do not have the authority to regulate child care providers. 
Accordingly, we have not amended the rules in response to the comment.

Section 261.57--What Happens if a State Sanctions a Single Parent of a 
Child Under Six Who Cannot Obtain Needed Child Care? (Sec. 274.20 of 
the NPRM)

    As we discussed in the prior section, the statute at section 
407(e)(2) protects single custodial parents of children under age six 
from sanction for refusing to work when they cannot obtain needed child 
care. They must demonstrate that they could not obtain child care for 
one or more of the following three reasons: (1) Appropriate child care 
was not available within a reasonable distance from the parent's home 
or work site; (2) informal child care, by a relative or under other 
arrangements, was unavailable or unsuitable; and (3) appropriate and 
affordable formal child care arrangements were unavailable. However, 
refusal to work when an acceptable form of child care is available is 
not protected from sanctioning.
    Section 409(a)(11)(A) of the Act directs the Secretary to reduce by 
no more than five percent of the adjusted SFAG, the SFAG payable to a 
State that violates this sanctioning protection. To determine that a 
State is liable for a penalty, we must find that the State reduced or 
terminated assistance to a parent who qualified for a sanctioning 
exception under the definitions or criteria that the State developed 
regarding a parent's ``demonstrated inability'' to obtain needed child 
care.
    We will consider the following factors in determining whether a 
State has violated the exception to the sanctioning requirement at 
section 407(e)(2) of the Act:
     Whether the State informs families about the exception to 
the penalty for refusing to work, including the fact that the exception 
does not extend the time limit on benefits;
     Whether the State informs families about the process or 
procedures by which they can demonstrate an inability to obtain needed 
child care;
     Whether the State has defined ``appropriate child care,'' 
``reasonable distance,'' ``unsuitability of informal care,'' and 
``affordable child care arrangements,'' and informed parents of these 
definitions;
     Whether the State notifies the parent of its decision to 
accept or reject the parent's demonstration in a timely manner;
     Whether the State has developed alternative strategies to 
minimize the amount of time parents are excepted from work requirements 
due to their inability to obtain needed child care. For example, a 
State that uses the services of a child care resource and referral 
office might grant ``good cause'' based on a statement from that office 
attesting to the unavailability of appropriate or affordable child 
care. However, it could implement a system for automatically rechecking 
the availability of care every few weeks. If the inability to work were 
due to difficulty in arranging transportation, the State could use bus 
and rail rates and schedules to help the recipient find appropriate 
child care within a reasonable distance.
    We are not specifying the process or procedures that States should 
develop or the documents, if any, States should require. However, we 
suggest that, if States plan to require documents, they select ones 
that are readily available to families. We recommend that the process 
or procedures be simple and straight-forward. In addition, we recommend 
frequent contact with parents, since the penalty exception does not 
stay the time limit and there may be fluctuations in the availability 
of child care services.
    We will impose the maximum penalty if a State does not have a 
process or procedure in place that enables families to whom this 
provision applies to demonstrate that they have met the guidelines 
provided by the State. Additionally, we will impose the maximum penalty 
if there is a pattern of substantiated complaints from parents or 
organizations verifying that a State has reduced or terminated 
assistance in violation of the requirement at section 409(a)(11) of the 
Act. We may impose a reduced penalty if the State demonstrates that the 
incidents were isolated or that a minimal number of families were 
affected.
    States faced with a penalty under this provision may claim 
reasonable cause and/or submit a corrective compliance plan as 
described in part 262.
    We expect that, because of the interrelationship between TANF and 
CCDF, TANF staff will work in close coordination with the lead agency 
for child care. Our expectation is that TANF staff will provide 
families with information about the penalty exception and the process 
and procedures developed by the State to demonstrate an inability to 
obtain needed child care. Under the CCDF rule, ACF requires that the 
lead agency for the CCDF program provide the same information to TANF 
parents who are seeking child care in the CCDF system. In addition, ACF 
requires the lead agency for child care to include in the CCDF plan the 
TANF agency's definitions for ``appropriate child care,'' ``reasonable 
distance,'' ``unsuitability of informal care,'' ``affordable,'' and 
``child care arrangements.'' Thus, we expect the State TANF agency to 
share its definitions of these terms with the child care agency. Both 
agencies will then be able to share them with families whom they may be 
assisting with child care arrangements.
    We received few comments on this section. They are discussed below. 
We also made one minor editorial change to Sec. 261.57(c); the word 
``will'' was changed to ``may'' in recognition of the variables that we 
need to consider in a decision to impose a reduced penalty.
    Comment: One commenter suggested that we should review a sample of 
cases of sanctioned individuals to ensure that they were actually 
informed of their rights and that the State did not disregard a 
demonstration of the lack of availability of care.
    Response: We agree. Since the primary vehicle for monitoring the 
requirement will be the single State audit, we are developing 
procedures that include the review of a sample of cases in which 
benefits have been reduced or terminated due to a parent's failure to 
comply with the work requirements.

[[Page 17797]]

    Comment: One commenter disagreed with the proposed regulation 
because States are threatened with penalties based on isolated 
instances when they do not follow the procedures they have reported to 
us. The commenter argued that imposing a penalty for isolated 
noncompliance would have a chilling effect on enforcing work-related 
sanctions.
    Response: We disagree with the comment. In the proposed rule, we 
stated that we would impose the maximum penalty of five percent if: (1) 
The State did not have a statewide process in place that enables 
families to demonstrate their inability to obtain child care (although 
the State's process does not need to be uniform statewide, there simply 
needs to be a process in all areas of the State); and (2) there were a 
pattern of substantiated complaints that verifies that a State had 
terminated assistance in violation of the requirement. A ``pattern of 
substantiated complaints'' does not include isolated cases that affect 
few families and occur in relatively few jurisdictions. This means that 
we will not impose a maximum penalty based on a few aberrant situations 
when it is clear that the State established a statewide procedure. 
Accordingly, we have not modified the final rules in this regard.

Subpart F--How Do Welfare Reform Waivers Affect State Penalties?

Section 261.60--How Do Existing Welfare Reform Waivers Affect a State's 
Penalty Liability Under This Part? (Sec. 271.60 of the NPRM)

    Based on our changes to the regulatory provisions relating to 
waivers, we have modified this section. Under the NPRM, this section 
described how welfare waivers affected the participation rates. In the 
final rule, it merely cross-references subpart C of part 260, which 
addresses welfare reform demonstration waivers comprehensively.
    We have responded to all comments relating to waivers in the 
preamble section entitled ``Waivers.''

Subpart G--What Nondisplacement Rules Apply in TANF?

Section 261.70--What Safeguards Are There To Ensure That Participants 
in Work Activities Do Not Displace Other Workers? (Sec. 271.70 of the 
NPRM)

    The regulations incorporate the statutory prohibition against 
allowing an individual participating in TANF work activities from 
displacing another employee. A participant in a work activity may not 
fill a vacancy that exists because another individual is on layoff from 
the same or equivalent job. Also, a participant may not fill a vacancy 
created by an involuntary reduction in workforce or by the termination 
of another employee for the purpose of filling a vacancy with a 
participant.
    The statute and the final rule also require States to establish and 
maintain grievance procedures for resolving complaints of alleged 
violations of the restrictions on displacing workers. Readers should 
note that we have added a new reporting requirement at 
Sec. 265.9(b)(7), under which each State must provide us with a 
description of its grievance procedures for resolving complaints of 
displacement as part of its annual report if it has not included a 
description in its State TANF plan.
    We encourage States to take aggressive steps to ensure that the 
current work force is not harmed or their employment jeopardized in any 
way by a State's efforts to place welfare recipients in employment or 
work-related positions. Our ultimate goal, and that of States, is to 
increase the ranks of the employed, not to substitute one group of job-
seekers for another. Displacing current workers is counter-productive 
and damages the overall stability of the labor force. We are confident 
that States will develop procedures for working with employers to 
protect against displacing other employees.
    Comment: A few commenters urged us to establish minimum standards 
for State grievance procedures and to require that a State notify 
workers of those procedures and of the remedies available to displaced 
workers. Similarly, another commenter urged us to create standards for 
other aspects of this provision. At least one commenter recommended 
that, if we thought we did not have the authority to impose such 
requirements, then instead we should deny penalty reduction to States 
that do not establish effective grievance procedures or ensure 
widespread notice of their procedures.
    Some commenters urged us to reference the WtW interim rules, which 
included more extensive nondisplacement provisions, and to recommend 
that States use one set of grievance procedures for both programs.
    Response: Section 417 of the Act limits the authority of the 
Secretary to regulate the conduct of States or enforce TANF provisions, 
except where specifically provided for in the statute. Thus, it is not 
consistent with the principle of State flexibility embodied in PRWORA 
for us to regulate a State's administrative procedures. In particular, 
in this provision, there is an explicit expectation of deference to 
State and local laws, which we have reflected in paragraph (c) of this 
section. Moreover, we do not have penalty authority with respect to the 
enforcement of the nondisplacement provision and would be reluctant to 
create a structure that duplicates or conflicts with existing 
enforcement mechanisms that have a clear foundation under law. For 
these reasons, we have not modified the regulation to establish minimum 
standards for grievance procedures or to deny access to penalty 
reduction.
    Using one set of grievance procedures for both programs should 
prove easier for States, employers, and workers alike. We urge States 
to consider adopting this approach. However, we note that not all 
States have established WtW programs, and there may be reasons that a 
unified grievance procedure would not be appropriate.
    Comment: One commenter urged us to add several provisions to the 
nondisplacement section in order to prevent displacement more broadly. 
The suggested additions included prohibiting filling a position that: 
would otherwise be a promotional opportunity for a current employee; 
did not comply with applicable personnel procedures; was caused by a 
strike or other labor dispute; or was an established unfilled public 
agency position, unless unfunded in the budget.
    Response: The nondisplacement provisions in the statute are very 
explicit. Under PRWORA, we do not have the authority through 
regulations to expand the definition of nondisplacement, even if we 
support the commenter's suggestions. However, expanded definitions may 
be available under State law or policy.
    Comment: One commenter asked us to explain how we would educate 
State welfare administrators regarding compliance with the 
nondisplacement provisions.
    Response: The section entitled ``Recipient and Workplace 
Protections'' describes initiatives by various agencies within our 
Department and elsewhere in the Federal government to inform State 
agencies about the requirements of Federal employment laws. Please 
refer to that section for further information on these efforts.

VII. Part 262--Accountability Provisions--General (Part 272 of the 
NPRM)

    As we noted earlier in the preamble under our discussion of 
waivers, we moved the waiver provisions of Sec. 272.8 of the NPRM to 
subpart C of part 260. You will find the comments that we received on 
Sec. 272.8 there.

[[Page 17798]]

Section 262.0--What Definitions Apply to This Part? (Sec. 272.0 of the 
NPRM)

    This section cross-references the general TANF regulatory 
definitions established under part 260.
    We received no comments on this section.

Section 262.1--What Penalties Apply to States? (Sec. 272.1 of the NPRM)

    Section 409 includes 15 penalties that may be imposed on States. 
This rule covers 14 of the 15. This rule does not include the specific 
penalty dealing with substantial noncompliance with requirements under 
title IV-D (section 409(a)(8)). Our Office of Child Support Enforcement 
is addressing this penalty in a separate rulemaking. However, since the 
penalty is one of the TANF penalty provisions, the general procedures 
and the appeal process in this rulemaking will apply.
    The penalties that we are regulating are:
    (1) A penalty for using the grant in violation of title IV-A of the 
Act, as determined by findings from a single State audit and equal to 
the amount of the misused funds;
    (2) An additional penalty of five percent of the adjusted SFAG, 
based on our determination that such misuse was intentional;
    (3) A penalty of four percent of the adjusted SFAG for the failure 
to submit an accurate, complete and timely required report;
    (4) A penalty of up to 21 percent of the adjusted SFAG for the 
failure to satisfy the minimum participation rates;
    (5) A penalty of no more than two percent of the adjusted SFAG for 
the failure to participate in the Income and Eligibility Verification 
System (IEVS);
    (6) A penalty of no more than five percent of the adjusted SFAG for 
the failure to enforce penalties on recipients who are not cooperating 
with the State Child Support Enforcement agency;
    (7) A penalty equal to the outstanding loan amount plus interest 
for the failure to repay a Federal loan provided for under section 406;
    (8) A penalty equal to the amount by which qualified State 
expenditures fail to meet the appropriate level of historic effort in 
the operation of the TANF program;
    (9) A penalty of five percent of the adjusted SFAG for the failure 
to comply with the five-year limit on Federal funding of assistance;
    (10) A penalty equal to the amount of contingency funds that were 
received for a fiscal year, but were not remitted by a State, if the 
State failed to maintain 100 percent of historic effort in the 
operation of its TANF program in that year;
    (11) A penalty of no more than five percent of the adjusted SFAG 
for the failure to maintain assistance to an adult single custodial 
parent who cannot obtain child care for a child under age six;
    (12) A penalty of no more than two percent of the adjusted SFAG, 
plus the amount a State has failed to expend of its own funds, to 
replace the reduction to its SFAG due to the assessment of penalties 
under Sec. 262.1 in the fiscal year that immediately succeeds the year 
in which the reduction was made;
    (13) A penalty equal to the amount of the State's Welfare-to-Work 
formula grant for failure to maintain the required historic effort 
during a year in which a State receives this formula grant; and
    (14) A penalty of not less than one percent and not more than five 
percent of the adjusted SFAG for failure to impose penalties properly 
against individuals who refuse to engage in required work in accordance 
with section 407 of the Act.
    If applicable, in calculating the amount of the penalty, we will 
use the adjusted SFAG as defined in Sec. 260.30. Except for the penalty 
at Sec. 262.1(a)(12), all penalties are either a percentage of the 
adjusted SFAG or a fixed amount. In calculating the amount of these 
penalties, we will add all applicable penalty percentages together, and 
we will apply the total percentage reduction to the amount of the 
adjusted SFAG that would have been payable if we had assessed no 
penalties against the State. As a final step, we will subtract other 
(fixed) penalty amounts.
    The penalty at Sec. 262.1(a)(12) requires that we reduce a State's 
adjusted SFAG if, in the fiscal year immediately following the fiscal 
year when we have taken a penalty under this section, a State does not 
expend its own funds on the State's TANF program in the amount of the 
penalty (i.e., the amount by which we reduced the adjusted SFAG). 
Unlike the other penalties, this penalty represents both a percentage 
of the adjusted SFAG (up to two percent) and a fixed amount (the amount 
of the reduction a State has failed to expend replace with its own 
funds). We believe it is appropriate to calculate the amount of this 
penalty by including the amount of the penalty based on a percentage 
with other applicable penalty percentages. We will then subtract the 
fixed amount of this penalty with the other fixed-amount penalties. 
Finally, we will add the amount based on the percentage for this 
penalty and the fixed amount for this penalty to determine the total 
amount of this penalty.
    We will not reduce a State's quarterly grant by more than 25 
percent. If the 25-percent cap prevents us from recovering the full 
penalty imposed on a State all at once, we will apply the remaining 
amount to the SFAG payable for the immediately succeeding quarters 
until we have finally taken the penalty in full.
    In preparing this final document, we noticed a few places where we 
should revise the regulatory text to be clearer.
     In both the preamble discussion and the regulations of the 
NPRM, we may not have described the Contingency Fund MOE penalty and 
the penalty for failure to replace penalty amounts clearly enough. 
Accordingly, we have clarified the regulation at Sec. 262.1(a)(10) to 
say that we may penalize a State for failure to remit contingency funds 
if it does not incur State TANF expenditures (i.e., State expenditures 
within its TANF program) equal to at least 100 percent of its 
historical State expenditures. In determining Contingency Fund MOE 
requirements, historical State expenditures do not include expenditures 
under the IV-A child care programs.
     At Sec. 262.1(a)(12), we have clarified that States must 
replace penalty amounts in the year after we actually take the 
penalties.
     At Sec. 262.1(a)(2), we have clarified that the penalty 
for intentional misuse is in addition to the penalty for misuse.
    We received some comments on the provisions in this section and 
have made a few changes to the regulations, as noted in our responses 
to the comments below.
    Comment: Some commenters expressed the view that the regulations 
placed too much emphasis on penalties and included too many penalties. 
Another commenter mentioned that these provisions will lead to an 
adversarial relationship reminiscent of the one that previously 
surrounded quality control penalties under AFDC.
    Response: The statute mandates all of the penalties included in 
these regulations. As we mentioned in the NPRM, it is clear that 
Congress intended for State flexibility to be balanced with State 
accountability. To assure that States fulfilled their new 
responsibilities under the TANF program, Congress established a number 
of penalties and requirements under section 409(a). The penalties 
indicate the areas of State performance that Congress found most 
significant and for which it gave us clear enforcement authority. While 
we want to maintain supportive partnerships with States, we cannot 
avoid our responsibilities under the statute. Although the regulation 
may seem unduly slanted toward penalties,

[[Page 17799]]

this is because we have limited authority to regulate outside the 
penalty provisions. Most of program policy and design is up to the 
States and is not the subject of regulations.
    Comment: One commenter asserted that only one penalty, the one that 
will be imposed if a State fails to maintain assistance to an adult 
single custodial parent who cannot obtain child care for a child under 
age six, focuses on protecting and serving families and children.
    Response: We do not agree with this observation. All of the 
penalties have been enacted to assure that States operate programs that 
promote the goals of the legislation. Many are designed to ensure that 
States use Federal and State funds appropriately to provide assistance 
to needy families and end dependence by promoting work and self-
sufficiency. Even the penalty for failure to submit an accurate, 
complete and timely report supports program goals in that it requires 
States to submit information about what is happening to needy families 
and whether specific requirements are being met. Also, as we have said 
elsewhere in this preamble, the penalty system is part of a much 
broader structure that helps to protect families and promotes positive 
State responses to the opportunities under TANF.
    Comment: A few commenters pointed out that some of the penalties 
are inter-related and can have an escalating impact on States, i.e., if 
a State fails one provision, it is likely to fail one or two others. A 
commenter suggested that instead of imposing penalties and requiring 
States to replace funds lost due to penalties, we should require States 
to reduce claims for disallowed costs. Another argued that States 
should reinvest penalty amounts since withholding funds may have the 
effect of making it more difficult for the States to achieve the goals 
of the program.
    Response: In establishing this new block grant program, Congress 
wanted to give States flexibility to design programs that would best 
serve their families. It enacted the penalty provisions in order to 
assure that States use funds to achieve TANF program goals. The law 
requires States to replace penalty amounts with their own funds so that 
they will continue to serve needy families and meet the requirements of 
the Act. Congress also enacted a maximum on the total penalty amount 
that can be taken in any year in order to protect the interests of 
needy families and children in the State.
    Comment: A commenter suggested that we should not design a system 
that perpetuates failure based upon failure, but, instead, we should 
design a system that rewards States for excellence.
    Response: Although it felt the penalties were necessary to focus 
State performance, Congress did not rely solely on penalties to ensure 
that States work towards achieving program goals. As we previously 
discussed, it also enacted provisions to reward States for excellence 
when it established bonuses for high performance and for decreases in 
out-of-wedlock births.
    Comment: One commenter noted that the statute specifies that the 
penalty for failure to meet the basic MOE requirement applies for 
fiscal years 1998 through 2003 and suggested that we include this limit 
in our regulations.
    Response: Since the TANF program is currently funded only through 
fiscal year 2002, we did not think it was necessary to include this 
limitation in our regulations. When Congress re-authorizes TANF, it 
could well extend this provision in the statute. As the rules are 
written, we would not need to reissue regulations to keep them current. 
If the provision were not extended, the penalty would no longer be in 
effect, and we would consider making conforming changes to the rules.
    Comment: A commenter asked if there is a penalty that applies when 
a State fails to screen applicants and recipients and thus fails to 
deny assistance to fleeing felons, or parole or probation violators.
    Response: The statute, at section 408(a)(9), prohibits States from 
using their Federal TANF funds to provide assistance to fugitive felons 
and probation and parole violators. While there is no specific penalty 
covering this prohibition, the penalty for misuse (or intentional 
misuse) of funds will apply if States provide TANF assistance to such 
individuals.
    Comment: In the NPRM, we based penalties on the amount of the SFAG 
minus any reductions due to the implementation of a Tribal TANF 
program, without consideration of any transfers of funds to the 
Discretionary Fund of the Child Care and Development Fund (CCDF) and/or 
the Social Services Block Grant (SSBG). While one commenter expressed 
appreciation for the fact that we assessed penalties against the 
adjusted SFAG, other commenters asked that, for the sake of consistency 
and fairness (since we subtracted transferred amounts before applying 
the administrative cost cap), we should consider transfers of funds to 
the CCDF and/or the SSBG in determining the adjusted SFAG.
    Response: As we discuss elsewhere, we have revised the definition 
of the adjusted SFAG to remove any funds transferred to the 
Discretionary Fund of the CCDF and/or the SSBG. The adjusted SFAG will 
be the same as the SFAG for States without Tribal grantees and with no 
transfers of funds to the Discretionary Fund of the CCDF or the SSBG. 
You can find additional discussion of this issue in the preamble 
discussions for Secs. 260.30 and 263.0.
    Comment: We received some comments about our interpretation of the 
statutory language that requires penalties to be imposed ``for the 
immediately succeeding fiscal year'' or the ``immediately succeeding 
fiscal quarter.'' Commenters pointed out that we did not follow the 
statute precisely, but did not express opposition to our 
interpretation.
    Response: We are applying penalties for the fiscal year (or 
quarter) immediately following our final decision in order to establish 
a practical method for implementing the statute. This method allows us 
to give States the opportunity to plead reasonable cause and to correct 
violations under corrective compliance plans before we actually take a 
penalty. Consequently, as one commenter noted, it is possible that a 
State might incur a violation in FY 1998, be determined to be subject 
to a penalty in FY 1999, and actually have its funding reduced in FY 
2000.
    Comment: A commenter pointed out that, rather than limiting penalty 
reductions to a State's grant to 25 percent during a fiscal year, the 
statute prohibits us from reducing any quarterly payment by more than 
25 percent. Another commenter asked us to clarify this provision.
    Response: The commenter is correct that the statute does not permit 
us to reduce any quarterly payment by more than 25 percent. While on an 
annual basis, capping each quarter's reduction at 25 percent would be 
the same as capping the annual reduction at 25 percent, there could be 
a difference when penalty reductions begin mid-year, as provided under 
Sec. 262.1(c)(1). We have modified the language at Sec. 262.1(d) 
slightly to clarify that we will not withhold more than 25 percent of a 
State's quarterly grant.
    Comment: A commenter asked that we assess the penalties in four 
equal quarterly installments during the year.
    Response: The statute requires us to take some penalties by 
reducing the SFAG payable for the quarter that immediately follows our 
final decision. In these cases, if the amount exceeds 25 percent of the 
SFAG payable for that quarter, we will take the remaining amount from 
the next quarter's SFAG.

[[Page 17800]]

    The statute requires us to take the majority of penalties by 
reducing the SFAG payable for the fiscal year that immediately follows 
our decision. In these cases, if taking the penalty in a single quarter 
would have an adverse impact on the State's ability to administer the 
TANF program, the State may ask that we take the penalty in two, three, 
or four quarterly installments in the fiscal year. However, we must 
take the full amount during that fiscal year unless we are prevented 
from doing so by the 25-percent cap. Also, we would take a minimum of 
the pro-rata share of the penalty amount from each quarter's grant; in 
other words, we would not allow States to defer a disproportionate 
share of the penalty amount to the latter part of the fiscal year.
    Comment: A couple of commenters noted that, in paragraphs 
272.1(c)(1) and (c)(2), we incorrectly categorized when we would take 
two of the penalties.
    Response: The commenters are correct. We made errors in listing 
when we would take the penalties for failure to repay a Federal loan or 
to enforce child support penalties. We have corrected paragraphs 
Sec. 262.1(c)(1) and (c)(2) of the regulations to indicate that we will 
take penalties for failure to repay a Federal loan by reducing the SFAG 
payable for the quarter that immediately follows our final decision and 
penalties for failure to enforce child support penalties by reducing 
the SFAG payable for the fiscal year that immediately follows our final 
decision.
    Comment: Another commenter argued that, if we take penalties in the 
quarter following our final decision, it will be difficult for States 
to fill in with their own funds.
    Response: The statute requires us to take any penalties for misuse 
of funds and failure to repay a Federal loan by reducing the SFAG 
payable for the quarter that immediately follows our decision. 
Generally, however, States will have an early indication that these 
penalties are likely to occur and will be able to plan accordingly.

Section 262.2--When Do the TANF Penalty Provisions Apply? (Sec. 272.2 
of the NPRM)

    Congress recognized that, in certain circumstances, States should 
face the consequences for failing to meet the requirements of the 
penalty provisions from the first day the State operates the TANF 
program. It also recognized, however, that States needed some lead time 
in implementing other TANF requirements.
    Section 116(a)(2) of PRWORA delayed the effective date of some of 
the penalty provisions in title IV-A. For those provisions where it did 
not delay the effective date, we believe that Congress intended that a 
State could be subject to a penalty from the first day it began to 
operate TANF.
    During the interim period between publication of the NPRM and the 
effective date of final rules, we required States to implement the TANF 
provisions in accordance with their own reasonable interpretations of 
the statute. In the NPRM we stated that we would not impose a penalty 
if we were to find that a State's actions were inconsistent with the 
final regulations, but consistent with a reasonable interpretation of 
the statute. However, if we were to find that a State operated its TANF 
program in a manner that was not based on a reasonable interpretation 
of the statute, we would penalize the State.
    We received a few comments in support of these provisions and a 
couple of other comments as discussed below. We made no changes to this 
section of the regulations.
    Comment: In addition to the supportive comments, one commenter 
expressed the view that the penalties should not apply until the final 
regulations are adopted and the States have a reasonable period of time 
to adjust to the new provisions. Another commenter asked that we give 
States a hold-harmless period and not subject them to penalties while 
they implement the regulations.
    Response: We have followed the statutory requirements for 
determining when penalties apply. We do not have the authority to delay 
the penalties. However, as we discussed in the preamble to Sec. 260.40, 
prior to the effective date of these final regulations, we will not 
penalize States if they operated their TANF programs in a manner that 
is consistent with a reasonable interpretation of the statute. Also, we 
decided to delay the effective date of these rules so that States have 
a reasonable period of time to implement the new regulatory provisions. 
Please refer to Sec. 260.40 for additional discussion of issues related 
to the effective date.

Section 262.3--How Will We Determine if a State Is Subject to a 
Penalty? (Sec. 272.3 of the NPRM)

    We have concluded that no one method can be used for monitoring 
State performance. The following discussion explains the three 
methods--the single audit, data collection and reporting, and financial 
reporting--that we will use to determine State noncompliance with 
requirements that may lead to penalties.
Single Audit
    Under the requirements of the Single Audit Act, as of July 1, 1996, 
States operating Federal grant programs meeting a monetary threshold of 
$300,000 must conduct an audit under the Act. Most States must audit 
annually; a few may audit biennially. Because of the substantial 
funding under TANF, all TANF States meet the audit threshold.
    The single audit is an organization-wide audit that reviews State 
performance in many program areas. We will implement the Single Audit 
Act through use of Office of Management and Budget (OMB) Circular A-
133, ``Audits of States, Local Governments, and Non-Profit 
Organizations.'' Because of amendments to the Act in 1996, OMB recently 
revised the Circular, merging former Circulars A-128 and A-133. It 
published the new Circular in the Federal Register on June 30, 1997, at 
62 FR 35277.
    In conducting their audits, auditors use a variety of tools, 
including the statute and regulations for each program and a compliance 
supplement issued by OMB. This supplement focuses on certain areas of 
primary concern to that program. We prepared, and OMB has issued, a 
TANF program compliance supplement for those penalties for which the 
single audit will be our primary or secondary compliance instrument. We 
will update the compliance supplement based on these final regulations.
    The Single Audit Act does not preclude us or other Federal offices 
or agencies, such as the Office of the Inspector General (OIG), from 
conducting additional audits or reviews. In fact, there is specific 
statutory authority to conduct such additional audits or reviews. In 
particular, 31 U.S.C. 7503(b) states:

    Notwithstanding subsection (a), a Federal agency may conduct, or 
arrange for additional audits that are necessary to carry out its 
responsibilities under Federal law or regulation. The provisions of 
this chapter do not authorize any non-Federal entity (or sub-
recipient thereof) to constrain, in any manner, such agency from 
carrying out or arranging for such additional audits, except that 
the Federal agency shall plan such audits to not be duplicative of 
audits of Federal awards.

    Additionally, we will conduct quality control reviews of selected 
State audits to determine whether States conducted their audits in 
accordance with the Single Audit Act, OMB Circular A-133, and the 
compliance supplement. Pursuant to OMB Circular A-133, sections 
____.400(a)(3) and (5), we will

[[Page 17801]]

take appropriate action when we find any audits to be deficient.
    We will use the single audit, in conjunction with other reviews, 
audits, and data sources, as appropriate, to identify noncompliance for 
which the State may be liable. We will rely heavily on Single Audit Act 
activities for determining a State's liability for some penalties and 
will use the single audit to gather and verify information for other 
penalties. For example, we will use the single audit, supplemented by 
other reviews, audits, and activities under the Single Audit Act, to 
identify situations where a State used funds under section 403 in 
violation of the Act. (See Sec. 263.10 on Misuse of Funds.) The misuse-
of-funds penalty is the only penalty for which the statute identifies a 
specific method (i.e., the Single Audit Act) for determining penalty 
liability.
    We will supplement information from the single audit with our own 
audits and reviews, and reviews and audits conducted by OIG and its 
contractors. We may identify a need to conduct such audits as the 
result of complaints from individuals and organizations, requests by 
the Congress to review particular areas of interest, information 
collected by our reporting systems, or other indications of problems in 
State compliance with TANF program requirements.
    When we determine that a State is subject to a penalty for the 
misuse of funds, we may apply a second penalty if we determine that the 
State intentionally misused Federal TANF funds. (You will find the 
criteria for determining ``intentional misuse'' at Sec. 263.12.) The 
single audit will be the primary vehicle for this penalty because of 
its link to the determination of misuse of funds.
    The single audit will also help us identify noncompliance that 
could result in imposition of the following four penalties: (1) Failure 
to participate in the Income and Eligibility Verification System (see 
Sec. 264.11); (2) Failure to comply with paternity establishment and 
child support enforcement requirements under title IV-D of the Act (see 
Sec. 264.31); (3) failure to maintain assistance to an adult single 
custodial parent who cannot obtain child care for a child under age six 
(see Sec. 261.57); and (4) failure to sanction recipients who refuse to 
work (see Sec. 261.54). For these process-focused penalties, we 
determined that we can make appropriate use of the single audit, 
supplemented by other reviews and audits, to monitor State compliance.
    The audit compliance supplement includes guidance to auditors on 
how to audit these areas. As in the case of the misuse-of-funds 
penalty, we may conduct other reviews and audits, if necessary. For 
example, we anticipate that we may receive complaints from individuals 
and organizations concerning the penalty for a State's failure to 
maintain assistance to an adult single custodial parent who cannot 
obtain child care. A number of substantiated complaints might indicate 
that we need to conduct an additional review.
    The single audit might identify a lack of State compliance in other 
penalty areas, e.g., the five-year limit on Federal assistance. If it 
does, we will not ignore those findings. Therefore, we will also impose 
a penalty based on single audit findings in other penalty areas.
    For most programs, other than TANF, the Single Audit Act procedures 
provide for disallowance in cases of substantiated monetary findings. 
However, in accordance with section 409(a), under TANF, we will be 
taking penalties, rather than disallowances. When the single audit 
determines a specific violation, the penalty amount that we will apply 
is the penalty amount associated with the specific penalty provision or 
provisions, for example, misuse of funds and failure to end Federal 
assistance after 60 months of receipt. Likewise, where we, or OIG, 
conduct an audit or review, the penalty amount that will apply is the 
penalty amount associated with the specific penalty or penalties 
specified under section 409 and these rules.
Data Collection and Reporting
    We will monitor State compliance with the penalties for failure to 
satisfy minimum participation rates (see Sec. 261.21) and failure to 
comply with the five-year limit on Federal assistance (see Sec. 264.1) 
primarily through the information required to be reported by section 
411(a) (i.e., State reporting of disaggregated case-record 
information). (See part 265 and the Appendices for data collection and 
reporting requirements.)
    We believe that Congress intended that the data elements in section 
411(a) be used to gather information for these two penalty areas. Thus, 
we concluded that the section 411(a) data collection tools would be our 
primary means for determining these penalties. We may also need to 
conduct reviews in the future to verify the data submitted by States, 
particularly in these two areas where a fiscal penalty is applicable. 
States should maintain records to adequately support any report in 
accordance with 45 CFR 92.42.
    Accurate data are essential if we are to apply penalties fairly. If 
the State submits insufficient data to verify its compliance with the 
requirements, or if we determine that a State cannot adequately 
document the data that it has submitted to show that it has met its 
participation rates or the five-year time limit, we will enforce the 
participation rate penalty or five-year time-limit penalty.
    In the consultations we held during the development of the NPRM, 
some participants recommended that we use the single audit as the means 
for determining all the penalties. However, since States must otherwise 
report the data that directly speak to their compliance in these two 
areas, and timely determination of State compliance is necessary, we 
did not accept that recommendation. Instead, we will rely on the 
quarterly reports required under part 265 of these regulations.
Financial Reporting
    All States are subject to the basic MOE penalty for failure to 
maintain a certain level (i.e., 80 or 75 percent) of historic effort. 
Those States that choose to receive contingency funds under section 
403(b) are subject to a separate maintenance-of-effort penalty for 
failure to maintain 100 percent of historic effort. Also, in a year 
that they receive WtW formula grants, States are subject to an 
additional penalty for failure to meet the basic MOE requirement.
    We have developed a TANF Financial Report (see Appendix D of part 
265). We designed this report to gather information required under 
sections 403(b)(4), 405(c)(1), 409(a)(1), 409(a)(7), 409(a)(10), 
409(a)(12), 409(a)(13), 411(a)(2), 411(a)(3), 411(a)(5), including data 
on administrative costs and types of State expenditures. It will also 
gather financial information to enable us to award grant funds, close 
out accounts, and manage other financial aspects of the TANF program. 
In addition, we will use this report to monitor State compliance with 
the basic MOE and Contingency Fund requirements and to aid us in 
determining if Federal TANF funds have been used properly.
    Consistent with section 5506(a) of Pub. L. 105-33, the TANF 
Financial Report is due 45 days after the end of each quarter. Upon 
receipt of the report for the fourth quarter, i.e., by November 14, we 
should have State-reported information indicating whether or not the 
State met its MOE requirements for the prior fiscal year.
    On the TANF Financial Report, States will inform us of the amount 
of expenditures they have made for basic and Contingency Fund MOE 
purposes. For the basic MOE, States must inform

[[Page 17802]]

us of the amount of expenditures made in the State TANF program and in 
separate State programs. (See part 264, subpart B, for more information 
on the Contingency Fund MOE requirement.)
    In addition, to collect the necessary information on all MOE 
programs--both those operated within the TANF program and separate 
State programs--we require supplemental information in an annual 
report. The annual report, which may be provided as a separate report 
or as an addendum to the fourth quarter TANF Data Report, requires that 
States submit for each program for which the State claims MOE 
expenditures, the total annual State expenditures and the total annual 
State expenditures claimed as MOE. (See Sec. 265.9(c) for more 
information on the contents of the annual report.)
    If we reduce a State's SFAG as the result of a penalty, the State 
must expend an equal amount of its own funds in the immediately 
succeeding fiscal year. If the State fails to replace the funds as 
required, the State is subject to the penalty at Sec. 262.1(a)(12). The 
penalty amount is up to two percent of the adjusted SFAG plus the 
amount not expended to replace the reduction to the SFAG due to the 
penalty.
    We will use the TANF Financial Report (or Territorial Financial 
Report) to determine if a State has complied with these replacement 
provisions. Instructions to the TANF Financial Report (see Appendix D) 
require States to include amounts that they are required to contribute 
as a result of any penalties taken against the State. (We will include 
a similar requirement in the Territorial Financial Report.)
    As in the case of the penalties for failure to meet the 
participation rates or comply with the five-year limit on assistance, 
our program management responsibilities may require us to verify the 
data submitted by States on the TANF Financial Report and annual 
report, particularly data on MOE expenditures and ``replacement 
funds.'' States should maintain records in accordance with 45 CFR 
92.42. We will also use the annual report to help us to determine 
whether a State met its MOE requirements.
    If the State submits insufficient MOE data to verify its compliance 
or if we determine that the State cannot adequately document data that 
it has submitted showing that it has met its MOE requirements, we will 
apply the penalties for failure to meet the basic MOE requirements 
(including the penalty related to WtW funding) and the Contingency Fund 
MOE requirements. For the basic MOE, we may have to estimate the actual 
level of qualifying MOE expenditures. We would then base the amount of 
the penalty on the degree to which the State has not adequately 
demonstrated that it has met the applicable MOE requirement.
    We will penalize States for failing to repay a loan provided under 
section 406 (see Sec. 264.40). A specific vehicle for determining a 
State's compliance with these requirements is unnecessary. In our loan 
agreements with States, we will specify due dates for the repayment of 
the loans, and we will know if States are not making the required 
payments.
    We will penalize States for failing to submit a report required 
under section 411(a) by the established due dates (see Secs. 265.4 and 
265.7). As noted before, we are requiring that the reports must not 
only be timely, but they must also be complete and accurate. Thus, we 
may take actions to review the accuracy of data reporting if 
appropriate. If we determine that the data required under section 
411(a) are incomplete or inaccurate, we may apply the penalty for 
failing to submit a report. As discussed above, if the data that are 
inaccurate or incomplete pertain to other penalties (i.e., the 
participation rate, the five-year time limit on assistance, the basic 
MOE, the WtW MOE penalty, or the Contingency Fund MOE requirements) and 
their unavailability impedes our ability to determine a State's penalty 
liability, we will apply the penalties associated with these 
requirements in lieu of a reporting penalty.
    Regardless of how we determine that a State is subject to a 
penalty, the determination of whether a State has access to a possible 
reasonable cause exception or corrective compliance depends on the 
specific penalty provision. States cannot avoid all penalties through 
the reasonable cause exception or a corrective compliance plan (see 
Sec. 262.4).
    We received a few comments on this section and made some changes to 
the regulations in response. A discussion of the comments and responses 
follows.
    Also, in preparing the final rules, we noticed that we did not 
discuss how we will determine that a State is subject to a Welfare-to-
Work formula grant penalty. We have added this discussion to the final 
rule.
    Comment: Commenters suggested that we should permit the use of the 
single audit for uncovering noncompliance with additional requirements 
beyond those we identified in the NPRM.
    Response: Although we discussed the direct and indirect uses of the 
single audit in determining compliance with a number of requirements, 
we wrote the regulation itself more narrowly. We agree with these 
comments and have revised the regulation at Sec. 262.3(a) to indicate 
that, in addition to using the single audit as the primary method to 
determine if a State is subject to certain penalties, we will use the 
single audit, as appropriate, as a secondary method of determining if a 
State is subject to other penalties.
    Comment: A commenter noted that, in paragraph (c), our reference to 
Sec. 275.6 of the NPRM was incorrect.
    Response: We agree and have corrected Sec. 262.3(c) to refer to 
verification of data in accordance with the provisions of Sec. 265.7 of 
this chapter.
    Comment: Commenters suggested that our standards for determining 
penalties are vague. Other commenters asked what we mean when we say 
that information in the data or financial reports is ``insufficient.''
    Response: In some cases, our standards are specific, such as for 
determining work participation rates and compliance with time limits. 
However, we find that, given that this is a new program, it is 
impossible to draw sharp lines that fully define all situations, and it 
is appropriate to leave room for discretion in a block grant 
environment. Moreover, since States can dispute our determinations and 
have appeal rights, they have protection from arbitrary decisions.
    Obviously, we want strong, clear standards for ``complete and 
accurate'' because the information reported by States in their data and 
financial reports is critical in determining States' compliance with 
TANF requirements and their potential penalty liability. However, our 
standards have to be fair at the same time.
    In the preamble to part 265, you will find a broader discussion of 
the importance of accurate, complete and timely reporting of 
information.

Section 262.4--What Happens if We Determine That a State Is Subject to 
a Penalty? (Sec. 272.4 of the NPRM)

    If we determine that a State is subject to a penalty, we will send 
the State agency a notice that it has failed to meet a requirement 
under section 409(a). This notice will: (1) Specify the penalty 
provision at issue, including the applicable penalty amount; (2) 
specify our source of information and the reasons for our decision; (3) 
invite the State to present its arguments if it believes that the 
information or method we used were in error or were insufficient, or 
that its actions, in the absence of Federal regulations, were based on 
a reasonable interpretation of the statute; and (4) explain if, how, 
and

[[Page 17803]]

when the State may submit a reasonable cause justification under 409(b) 
and/or corrective compliance plan under 409(c). States must postmark 
their responses to our notice within 60 days of their receipt of our 
notice.
    For penalties where the reasonable cause and the corrective 
compliance plan provisions both apply, we encourage States to submit to 
us both their justification for reasonable cause and a corrective 
compliance plan within 60 days of receipt of our notice of failure to 
comply with a requirement. Our objective is to expedite the resolution 
of a State's failure to meet a requirement.
    A State may choose to submit a reasonable cause justification 
without a corrective compliance plan. In this case, we will notify the 
State if we do not accept the State's justification of reasonable 
cause. Our notice will also inform the State that it has an opportunity 
to submit a corrective compliance plan. The State will then have 60 
days from the date it receives this notice to submit a corrective 
compliance plan. (Under this scenario, we will send the State two 
notices--the first will inform the State that it may be subject to a 
penalty, and the second will inform the State that we determined that 
it did not have reasonable cause.) We have added a provision to the 
regulations to clarify this process. A State may also choose to submit 
only a corrective compliance plan if it believes that the reasonable 
cause factors do not apply in a particular case.
    The reasonable cause and corrective compliance provisions in the 
statute do not apply to five penalties: (1) failure to repay a Federal 
loan on a timely basis; (2) failure to maintain the applicable 
percentage of historic State expenditures for the basic MOE 
requirement; (3) failure to maintain 100 percent of historic State 
expenditures for States receiving contingency funds; (4) failure to 
expend additional State funds to replace grant reductions due to the 
imposition of one or more penalties listed in Sec. 262.1; and (5) 
failure to maintain 80, or 75, percent, as appropriate, of historic 
State expenditures during a year in which the State receives a Welfare-
to-Work grant.
    If, upon review of the State's submittal, we request additional 
information in order to determine reasonable cause, the State must 
provide this information within 30 days of the date of our request. We 
have established this deadline to make sure the process is not delayed. 
However, under unusual circumstances we may give the State an extension 
of the time to respond to our request for additional information.
    We received some comments on this section. One expressed the view 
that our notification provisions were reasonable; others raised issues 
about the proposed rule. Below, we address the comments and resulting 
changes we made to the regulations. In addition to these changes, we 
reversed the order of sub-paragraphs (e) and (f) so that they follow 
the logical sequence of actions in the penalty process.
    Comment: A commenter recommended that we send our notice that a 
State is subject to a penalty to the State agency director.
    Response: In the NPRM we said we would notify the State. By State, 
we meant the State agency. We assume the commenter thought we would 
notify the Governor. We have modified the regulation to say that we 
will notify the State agency and added a definition of State agency to 
Sec. 260.30.
    Comment: One commenter suggested that we list in the regulation the 
four components of the initial penalty notice to the State that we 
included in the preamble to the NPRM.
    Response: We agree with this suggestion and have amended the 
regulation at Sec. 262.4(a) accordingly.
    Comment: Another commenter asked that we include, in our penalty 
notice to a State, a description of the data and method we used to 
determine that the State is subject to a penalty.
    Response: We thought that we covered this in the NPRM when we said 
we would specify which penalty we would impose and the reasons for the 
penalty. However, in the final rule at Sec. 262.4(a), we have revised 
the language to list the source of information as one of the four 
specific components that we will include in our notice to the State.
    Comment: A commenter asserted that States should be able to raise 
any relevant issue in response to a penalty notice and not be limited 
to responding on the three grounds of incorrect penalty determination, 
reasonable cause, or corrective compliance.
    Response: Unfortunately, the commenter did not include any examples 
of issues that would not fit in these three categories. We think that a 
State will be able to include all relevant considerations under one of 
these three categories.
    Comment: A few commenters noted that the regulation proposed at 
Sec. 272.4(d) conflicted with Sec. 271.55(c), which said that 
reasonable cause and corrective compliance were not available when a 
State was being penalized for failing to impose penalties on 
individuals.
    Response: The proposed regulation at Sec. 272.4(d) was correct. 
Reasonable cause and corrective compliance are available when a State 
is being penalized for failing to impose penalties on individuals. The 
final rules at Secs. 262.4(d) and 261.55 reflect this policy.
    Comment: A commenter asked that we make reasonable cause and 
corrective compliance available to States that are being penalized for 
failing to expend additional State funds to replace penalty amounts.
    Response: We do not have the authority to make this change, since 
the statute specifies that the reasonable cause exception and 
corrective compliance plan do not apply to this penalty.
    Comment: Several commenters asked that we establish a time frame 
for when we will respond to a State's reply to our penalty notice.
    Response: We have added a provision to the regulations at 
Sec. 262.4(f) to say that, generally, we will respond within 60 days to 
the State's reasonable cause submittal, and that we will either accept 
or reject the State's corrective compliance plan within 60 days of our 
receipt of the plan.
    Comment: A commenter asked whether a State may request 
reconsideration or submit additional information based on our decision, 
or whether its only recourse at that point is to file a formal appeal.
    Response: Although there are no further formal steps available to 
the State short of a formal appeal, it is our hope that State and 
Federal staff will engage in an ongoing dialogue in an effort to 
address any penalty-related issue. This dialogue may begin as soon as 
the State is working to develop new policies or begins to have trouble 
meeting a requirement, and well before we notify the State that we 
intend to penalize it. It may continue until the issue is resolved, but 
will not extend the time frames States have for responding to our 
notices. Therefore, we advise States to make their complete and best 
arguments during the time allotted.
    Comment: A number of commenters asserted that two weeks is not long 
enough for States to respond to our request for further information.
    Response: We agree that under some circumstances two weeks may not 
be long enough, so we are increasing the time States have to respond to 
30 days. Also, under unusual circumstances, we may give States an 
extension of the time that they have to respond to our request for 
information. We have amended the regulation at Sec. 262.4(e) 
accordingly.
    Comment: Commenters suggested that notices and requests be sent by 
certified mail so that there is evidence of receipt.

[[Page 17804]]

    Response: A State may choose to send its responses by certified 
mail, but we are not convinced that we need to include this as a 
regulatory requirement.
    Comment: A commenter asked that we specify in the regulations that 
we would not assess any penalties pending the resolution of a State's 
claim of reasonable cause.
    Response: If a State claims reasonable cause and we find against 
the State, the State may then submit a corrective compliance plan or 
file an appeal to the HHS Departmental Appeals Board (DAB), as 
discussed in Sec. 262.7. If the State does not take either action, we 
will assess the penalty in the quarter or fiscal year that immediately 
follows our final decision, as appropriate. However, if the State 
submits a corrective compliance plan, we will not assess a penalty 
until the corrective compliance process is completed. If the State 
appeals to the DAB, we will not assess the penalty until the appeals 
process is completed. If the DAB upholds our decision, we will take the 
penalty and charge interest back to the date of our final response that 
formally notifies the Governor of the State of an adverse action.

Section 262.5--Under What General Circumstances Will We Determine That 
a State Has Reasonable Cause? (Sec. 272.5 of the NPRM)

    Under the provisions of section 409, we will not impose certain of 
the penalties if a State demonstrates that it had reasonable cause. 
Also, we will reduce or excuse certain penalties if a State corrects or 
discontinues the violations under an accepted corrective compliance 
plan.
    After reviewing these statutory provisions, we decided that we 
should not consider the reasonable cause exception of the statute in 
isolation. Rather, we would view it in conjunction with the provision 
for developing corrective compliance plans. In this context, we 
acknowledge the new Federal and State roles under TANF and commit to 
working with States to minimize adversarial Federal-State issues. Our 
primary task is to help each State operate the most effective program 
it can to meet the needs of its caseload and the goals and provisions 
of the law. Through these rules, we hope to focus States on positive 
steps that they should take to correct situations that resulted in a 
determination that they are subject to a penalty, rather than to let 
them simply avoid the penalty. As such, we consider it appropriate to 
emphasize the use of the corrective compliance plan process over the 
reasonable cause exception. Consequently, we have decided to limit the 
list of reasonable cause criteria.
    In the discussion that follows, we describe: (1) the factors that 
we will consider in deciding whether or not to excuse a penalty based 
on a State's claim of reasonable cause; (2) the contents of an 
acceptable corrective compliance plan; and (3) the process for applying 
these provisions. Our goal is to treat the reasonable cause and 
corrective compliance plan provisions as part of an integrated process.
    We have included factors that would be applicable to all penalties 
for which the reasonable cause provision applies. We will find that a 
State has reasonable cause under the following situations: (1) Natural 
disasters and other calamities (e.g., hurricanes, tornadoes, 
earthquakes, fires, floods, etc.) whose disruptive impact was so 
significant as to cause the State's failure to meet a requirement; (2) 
formally issued Federal guidance that provided incorrect information 
resulting in the State's failure; and (3) isolated problems of minimal 
impact that are not indicative of a systemic problem (e.g., although a 
State's policies and procedures require that Federal TANF assistance be 
time-limited to five years and include computer safeguards to protect 
against violations, ten families somehow slip through and receive 
assistance for longer than five years).
    We also have included two separate factors that would apply in 
cases when the State fails to satisfy the minimum participation rates, 
and one specific factor that would apply to cases when the State fails 
to meet the five-year limit. We discuss these specific factors in our 
preamble discussion of domestic violence and Secs. 261.52 and 264.3.
    As discussed elsewhere in this preamble, we have also added a 
factor that will apply if States fail to meet either of the first two 
deadlines for FY 2000 for submitting complete and accurate reports 
under the new reporting requirements. We added this factor in response 
to comments and out of our own concern about the possible concurrent 
demands of Y2K and TANF reporting requirements. States must be in a 
position to commit the systems resources necessary to become Y2K 
compliant in order to ensure that there is no disruption in the 
benefits to their neediest citizens.
    We did not have the latitude under the law merely to extend the 
reporting deadlines (because they are set in statute). Also, we were 
unwilling to extend the ``emergency reporting'' into FY 2000 and 
provide a later effective date for the new reporting provisions because 
important TANF provisions (e.g., the work participation rates) depend 
upon consistent data and policies throughout the entire fiscal year. 
Thus, we have addressed the concern as a reasonable cause issue.
    Under the new provision, States that miss the deadlines for 
submitting complete and accurate data for the first two quarters of FY 
2000 will receive reasonable cause if: (1) they can clearly demonstrate 
that their failure was attributable to Y2K compliance activities; and 
(2) they submit the required data by July 1, 2000.
    In determining reasonable cause under all of these regulatory 
criteria, we will consider the efforts the State made to meet the 
requirement. We will also take into consideration the duration and 
severity of the circumstances that led to the State's failure to 
achieve the requirement. The burden of proof rests with the State to 
explain fully the circumstances, events, or occurrences that constitute 
reasonable cause for its failure to meet a particular requirement. The 
State must provide us with sufficient relevant information and 
documentation to substantiate its claim of reasonable cause. We have 
added a provision to the regulations to clarify the factors that we 
will consider and the State's burden of proof. If we find that the 
State has reasonable cause, we will not impose the penalty.
    We received quite a number of comments on this section. We discuss 
the comments and the changes we made to the regulations below.
    Comment: Virtually all commenters with comments on this section 
argued that our proposed list of reasonable cause factors was too 
narrow and that we needed to give ourselves more discretion. Commenters 
gave a number of examples of factors that we should consider, including 
good faith effort, circumstances beyond the State's control, inadequate 
Federal guidance, increases in a State's caseload, characteristics of 
the caseload, high unemployment rates or other labor market 
characteristics, changing economic conditions, and other adverse 
economic factors.
    Response: As we noted in the NPRM, PRWORA did not specify any 
definition of reasonable cause or indicate what factors we should use 
in deciding whether to grant a reasonable cause exception for a 
penalty. In our deliberations on reasonable cause factors, we 
considered the diverse opinions expressed during our consultation 
process and our NPRM comment period, as well as the need to support the 
commitment of Congress, the Administration, and States to the work and 
other objectives of the TANF program. In keeping with these objectives, 
we are providing reasonable

[[Page 17805]]

cause factors for a limited number of circumstances that are beyond a 
State's control and placing a greater emphasis on corrective solutions 
for those circumstances a State can control. We strongly believe that 
States must correct problems that detract from moving families from 
welfare to self-sufficiency.
    At the same time, we agree with the commenters that it would be 
difficult to foresee all possible circumstances under which we would 
want to grant reasonable cause. Accordingly, while we have included the 
same general factors that we included in the NPRM, we no longer limit 
ourselves to considering only these factors. While we do not anticipate 
routinely determining that a State had reasonable cause based on other 
factors, we do not want to preclude a State from presenting other 
circumstances. Also, we decided that we were more restrictive than we 
intended when we limited the third reasonable cause factor to isolated, 
nonrecurring problems. We have amended the regulations to say that we 
may grant a State reasonable cause when it has encountered isolated 
problems of minimal impact that are not indicative of a systemic 
problem.
    Comment: A number of commenters were opposed to our provisions 
precluding reasonable cause if a State diverted families to a separate 
State program that achieved the effect of avoiding the work 
participation rates or diverted the Federal share of child support 
collections.
    Response: As we previously discussed in the section of the preamble 
entitled ``Separate State Programs,'' we have eliminated the proposed 
connection between a State's decisions on separate State programs and 
its eligibility for reasonable cause. Therefore, we have deleted the 
provisions that were at paragraphs Sec. 272.5(c) and (d) of the 
proposed rule.
    Comment: A commenter suggested that the regulations should provide 
that, as part of the process of determining when we would impose 
penalties and penalty amounts, we should give consideration to factors 
such as whether the State has administered its TANF program fairly, 
whether it has provided services and supports to families to enable 
them to comply with program requirements, and whether State-imposed 
requirements on families are reasonable.
    Response: The TANF legislation assumed that States are in the best 
position to determine which families will be served and what assistance 
they will receive. As we previously discussed, our authority to 
regulate and judge State policies and actions are limited, and we have 
decided not to stretch our regulatory authority by incorporating such 
factors into all our penalty determinations. There are other provisions 
in the statute (such as the bonus and ranking provisions, the annual 
reports to Congress, and annual reports on State child poverty rates) 
that provide an opportunity to look at whether at-risk families are 
being helped or hurt by State TANF programs. At the same time, there 
are a couple of penalty provisions (e.g., those dealing with the 
imposition of sanctions) where the issues of fairness and adequate 
recipient protections are more germane and we specifically address some 
of these issues. You should look to the preamble discussion entitled 
``Worker and Recipient Protections'' and the preamble for part 261 for 
other ways we are addressing this concern.

Section 262.6--What Happens if a State Does Not Demonstrate Reasonable 
Cause? (Sec. 272.6 of the NPRM)

    Section 409(c), as amended by section 5506 of Pub. L. 105-33, 
provides that, prior to imposing a penalty against a State, we will 
notify the State of the violation and allow the State the opportunity 
to enter into a corrective compliance plan. If a State does not claim 
reasonable cause or if it claims reasonable cause simultaneously with 
submitting a corrective compliance plan, it will have 60 days from the 
date it receives our notice of a violation to submit its corrective 
compliance plan. If, in response to our notice of a violation, the 
State initially submits only a claim of reasonable cause, and if we 
deny this claim, the State has 60 days from the date it receives our 
second notice (i.e., denying its reasonable cause claim) to submit its 
corrective compliance plan. If a State does not submit an acceptable 
corrective compliance plan on time, we will immediately send the State 
a formal notice of adverse action and assess the penalty. Outside of 
the notice(s), we will not remind the State that the corrective 
compliance plan is due.
    The corrective compliance plan must provide a complete analysis of 
the situation and factors that prevented the State from meeting the 
requirement. It also must identify the time period in which the State 
will correct or discontinue the violation, and the milestones, 
including interim process and outcome goals, the State will achieve to 
assure that it will fully correct or discontinue the violation within 
the specified time period. In order to highlight the importance of 
corrective compliance, the plan must include a certification by the 
Governor that the State is committed to correcting or discontinuing the 
violation in accordance with the plan.
    We recognize that each plan must be specific to the violation (or 
penalty) since each State operates its TANF program in a unique manner. 
Thus, we will review each plan on a case-by-case basis. In determining 
whether or not to accept a plan, we will consider the extent to which 
the State's plan indicates that it will completely correct or 
discontinue, as appropriate, the situation leading to the penalty.
    The steps that a State takes to correct or discontinue a violation 
may vary. For example, where we penalize a State for misusing Federal 
TANF funds, we would expect it to remove this expenditure from its TANF 
accounting records (charging it to State funds, as allowable) and 
provide steps to assure that such a problem does not recur. Where a 
State has reduced or denied assistance improperly to a single custodial 
parent who could not find child care for a child under six, correcting 
the violation might require that the State reimburse parents 
retroactively for the assistance that it improperly denied them. The 
State's corrective compliance plan also would have to describe the 
steps to be taken to prevent such problems in the future.
    Section 409(c)(3) requires that a violation be corrected or 
discontinued, as appropriate, ``in a timely manner.'' A State's timely 
correction of a problem is critical to assuring that the State is not 
subject to a subsequent penalty. At the same time, we recognize that 
the causes of violations will vary, and we cannot expect States to 
rectify all violations in the same time frame. Thus, we do not want to 
unduly restrict the duration of corrective compliance plans. At the 
same time, we do not want to allow States to prolong the corrective 
compliance process indefinitely and leave problems unresolved into 
future fiscal years. Accordingly, in our NPRM, we proposed that the 
period covered by a corrective compliance plan end no later than six 
months after the date we accept a State's corrective compliance plan. 
We have amended this provision, as discussed below.
    We will consult the State on any modifications to the corrective 
compliance plan that we believe are necessary and seek mutual agreement 
on a final plan. Such consultation will occur only during the 60-day 
period for acceptance specified in the law. Any modifications to the 
State's corrective compliance plan resulting from such consultations 
will constitute the State's final corrective compliance plan and will 
obligate the State to take the actions

[[Page 17806]]

and meet the time frames specified in the plan.
    We will either accept or reject the State's corrective compliance 
plan, in writing, within the 60-day period that begins on the date that 
we receive the plan. If a State does not agree to modify its plan as we 
recommend, we may reject the plan. If we reject the plan, we will 
immediately send a formal notice to the State of the adverse action. 
The State may appeal our decision to impose the penalty in accordance 
with the provisions of section 410 of the Act and the regulations at 
Sec. 262.7.
    If we have not rejected a plan in writing by the end of the 60-day 
period, the plan is deemed to be accepted, as required by the statute 
at section 409(c)(1)(D).
    If a State corrects or discontinues the violation in accordance 
with its corrective compliance plan, we will not impose the penalty.
    The statute permits us to collect some or all of the penalty if the 
State has failed to correct or discontinue the violation. Therefore, we 
may reduce the amount of the penalty if a State has not fully rectified 
the violation in one or more of the following limited situations: (1) 
The State made significant progress in correcting or discontinuing the 
violation; or (2) a natural disaster or regional recession prevented 
the State from coming into full compliance.
    We received a number of comments on these provisions that led us to 
make some changes to the regulations. Also, we made some minor edits to 
ensure consistency within the parts of this regulation. We discuss the 
comments and changes below.
    Comment: In the NPRM, we asked for comments from States and other 
interested parties on our proposal to restrict the time period for a 
corrective compliance plan. Commenters supported the general concept of 
a corrective compliance plan, and one commenter thought the six-month 
period was reasonable for most cases. However, most commenters replied 
that the period we had proposed was unreasonably short, especially 
since the statute does not require a short time frame. Many suggested 
that we extend the time period to 9, 12, or 24 months. Others suggested 
that the State should determine the time frame, or that it be part of 
the negotiation of the plan by the State and ACF and be determined on a 
case-by-case basis. Another commenter suggested that the period extend 
until 90 days after the close of the State's next legislative session. 
Commenters argued the need for more time based on the possible need to 
adjust contracts, re-design programs, change policies and procedures, 
notify recipients, make data system changes, train staff, and get the 
State legislature to take necessary action.
    Response: In responding to these comments, we want to reinforce the 
importance of achieving compliance with the statute quickly, but we 
also recognize that we need to consider a State's ability to make the 
changes necessary to achieve compliance within a fixed time frame. We 
are not interested in setting a time frame that States cannot meet, but 
we also do not want to give States more time than they absolutely need. 
In addition, in the case of the work participation rate and time-limit 
penalties, where we measure performance over the course of a fiscal 
year, we thought it was important that corrective compliance also be 
measured over the course of a fiscal year. Based on this thinking, we 
have revised the regulations. In general, the final rules provide more 
flexibility in establishing time frames for corrective compliance 
plans. For the work participation rate and time-limit penalties, they 
incorporate a modified six-month corrective compliance period. More 
specifically, they provide that the State achieve compliance for the 
first fiscal year that ends at least six months after our receipt of 
the corrective compliance plan. For example, if a State failed its work 
participation rate in a prior fiscal year and we received its 
corrective compliance plan on February 1, the State would have to 
achieve the participation rates in effect for the current fiscal year. 
If we received the plan after April 1, the State would have to achieve 
the participation rates in effect for the following fiscal year.
    We made this adjustment to the rules in large part because we 
calculate liability for work participation and time-limit penalties 
based on fiscal year data. We also realized that there could be 
significant delays in the submittal of corrective compliance plans 
(because participation rate and time-limit information is not available 
immediately, and we need time both to resolve disputes about the 
penalty findings and to decide State claims for reasonable cause). 
Thus, we could not necessarily expect a State to achieve compliance 
during the first year following a failure.
    Nevertheless, we would hope that a State could achieve compliance 
during that time frame. We would not want to see a State's failure 
extend into a third fiscal year. If it did, there could be negative 
consequences for the State. States especially need to work towards 
increasing their work participation rates as quickly as possible 
because: (1) the rates increase over time; (2) the base penalty amount 
increases when a State incurs consecutive penalties; and (3) a State is 
eligible for a smaller reduction based on degree of noncompliance if it 
fails to meet the rates in successive fiscal years.
    For both the work participation and time-limit penalties, a State 
will normally have indication that a problem exists during the year for 
which it is penalty-liable, and it should begin to address the problems 
well before it submits its corrective compliance plan. For example, by 
July of a fiscal year, a State should have a good idea of whether it is 
on track to meet its work participation requirements. If it is not, and 
does not begin to make changes soon, not only will it fail to meet the 
requirements for the current fiscal year, but it is unlikely that it 
will be able to increase its performance enough to meet the required 
rates for the next fiscal year. Our notice to a State that it is 
subject to a penalty should serve as confirmation of information the 
State already has. A corrective compliance plan period does not 
necessarily have to be lengthy in order to provide the State sufficient 
time for correcting or discontinuing a violation.
    For the remaining penalties that are eligible for corrective 
compliance, we would permit a State to propose a time frame in its 
corrective compliance plan. We would expect the State to achieve 
compliance expeditiously, often in less than six months. States should 
correct some failures, for example, for failing to comply with IEVS 
requirements or submitting a data report late, within a month or two.
    We expect each State to justify its time frame for each penalty. We 
will assess the time frame proposed by the State based on the nature of 
the violation, any unusual circumstances, and other factors that affect 
the speed with which the State can respond, such as whether it would 
need to make systems changes or take legislative action.
    Comment: A commenter asked that we notify States of our acceptance 
of a corrective compliance plan and asked us to clarify when the 
corrective compliance period begins.
    Response: We did not address these factors in the NPRM, but have 
revised the regulations to specify that we will accept or reject the 
plan in writing and that the time period for the corrective compliance 
plan begins on the date that the State receives our written acceptance 
of the plan. If we fail to respond, the time period for the corrective 
compliance plan begins on

[[Page 17807]]

the date that is 60 days after the date we received the State's plan.
    Comment: Several commenters stated that 60 days is insufficient for 
a State to prepare a corrective compliance plan and recommended that we 
give States 90 days.
    Response: We are prevented from making this change by the statute, 
which specifies that a State has 60 days from the date that it receives 
our notification to submit a corrective compliance plan.
    Comment: A couple of commenters noted that the proposed rules at 
Sec. 272.6 contained an incorrect citation.
    Response: While the commenters were correct that the citation in 
the NPRM was erroneous, we have made changes to the paragraphs in that 
section that corrected that problem.
    Comment: Some commenters expressed the view that the contents we 
specified for the corrective compliance plan are reasonable. Other 
commenters objected to our requiring certification of the plan by the 
Governor, and one commenter suggested that the certification be made by 
the director of the State agency.
    Response: The Governor is responsible for submitting the State TANF 
plan and for committing State funds to the program. On this basis, we 
believe it is also important for the Governor to demonstrate awareness 
of and support for the corrective compliance plan.
    Comment: A commenter asked that we consider a State's good faith 
effort in determining the amount of a penalty when a State fails to 
completely correct or discontinue the violation pursuant to its 
corrective compliance plan. Other commenters asked that we broaden the 
circumstances under which a penalty is reduced, with some recommending 
that we consider other factors such as natural disasters, economic 
circumstances, or other unanticipated or extreme events.
    Response: We have said that we will reduce the penalty if the State 
can demonstrate that it made significant progress toward correcting or 
discontinuing the violation or that its failure was due to a natural 
disaster or regional recession. We believe this gives us sufficient 
latitude to consider mitigating circumstances and the good-faith effort 
a State has made. For a discussion of the specific standards we will 
use in deciding to reduce work participation rate penalties, please see 
the preamble for Sec. 261.51.
    Comment: A number of commenters opposed our provisions denying a 
penalty reduction if a State diverted families to a separate State 
program that achieved the effect of avoiding the work participation 
rates or diverted the Federal share of child support collections.
    Response: As we previously discussed, we have eliminated the 
connection between a State's decisions regarding its separate State 
programs and penalty reductions and have removed the provisions that 
appeared in Sec. 272.6(i)(2) of the NPRM.

Section 262.7--How Can a State Appeal our Decision To Take a Penalty? 
(Sec. 272.7 of the NPRM)

    Once we make a final decision to impose a full or partial penalty, 
we will formally notify the State that we will reduce the State's SFAG 
payable for the quarter or the fiscal year and inform the State of its 
right to appeal to the Departmental Appeals Board (the Board).
    Section 410, which covers any adverse actions with respect to the 
State TANF plan or the imposition of a penalty under section 409, 
provides that the Secretary will notify the Governor of the State of 
the adverse action within five days. To facilitate the appeal, we will 
also send a copy of the notice to the State agency.
    Within 60 days after the date a State receives this notice, the 
State may file an appeal of the action, in whole or in part, with the 
Board. We indicated in the NPRM that the statute allowed only 60 days 
for the Board to reach a decision after the appeal is filed. A number 
of commenters believed that the 60 days in the statute indicated a 
minimum time before a decision could be issued, not a maximum time. The 
NPRM interpretation was based on the conference report which indicated 
a Board decision was required ``within 60 days'' (H.R. Rep. No. 725, 
104th Cong., 2d sess., p. 302). However, in light of the comments, we 
have re-examined the language of the statute itself, which states that 
a decision will be made in ``not less than 60 days'' after the appeal 
is filed. ``Not less than'' is usually interpreted as a minimum 
requirement, as the commenters indicated. Therefore, we have revised 
the regulation to allow a minimum time of 60 days before a decision is 
made. Nevertheless, we believe that penalties procedures should be 
handled as expeditiously as possible. We also believe that this is 
possible in the TANF penalty situation because the opportunity for 
reasonable cause and corrective compliance before most TANF penalties 
should have clarified the issues before the penalty decision.
    We are requiring that the State submit its brief and the supporting 
documentation for its case when it files its appeal. To further 
facilitate this process, we have added a provision to the regulation at 
Sec. 262.7(a)(1) that ACF's notice must include sufficient factual and 
legal information on the basis for imposition of the penalty to allow 
the State to respond in an appeal. In addition, we have allowed the 
State the opportunity to respond to ACF's reply brief and to submit any 
additional documentation it considers necessary. A State should send a 
copy of any appeal documents to the Office of the General Counsel, 
Children, Families and Aging Division, Room 411-D, 200 Independence 
Avenue, S.W., Washington, D.C. 20201.
    In the final rule, we have slightly increased the time for us to 
submit our reply brief and supporting documentation-- to 45 days after 
our receipt of the State's submission. This 45 days, plus the 21 days 
allowed for the State's reply brief, will ensure that the DAB makes no 
determination prior to 60 days after a State has filed its appeal. 
Further, briefing and argument will be at the discretion of the Board, 
but could include an evidentiary hearing. A State's appeal to the Board 
will also be subject to the following regulations at part 16 of title 
45: Secs. 16.2, 16.9, 16.10, and 16.13-16.22, to the extent they are 
consistent with this section.
    Section 410(b)(2) provides that the Board will consider an appeal 
on the basis of the documentation the State submits, along with any 
additional information required by the Board to support a final 
decision. In deciding whether to uphold an adverse action or any 
portion of such action, the Board will conduct a thorough review of the 
issues.
    Finally, a State may obtain judicial review of a final decision by 
the Board by filing an action within 90 days after the date of the 
final decision. States may file either with the district court of the 
United States in the judicial district where the State agency is 
located or in the United States District Court for the District of 
Columbia. The district courts will review the final decision of the 
Board on the record established in the administrative proceeding, to 
determine if it is arbitrary, capricious, an abuse of discretion or 
otherwise not in accordance with law, or unsupported by substantial 
evidence. The court's review will be on the basis of the documents and 
supporting data submitted to the Board.
    We discuss below the comments on this section and our responses.
    Comment: A number of commenters believed the time period for the 
appeal process was too constrained to allow

[[Page 17808]]

adequate consideration of the issues. These commenters noted that the 
statute could be interpreted to require a minimum of 60 days before a 
determination could be made, rather than the maximum the NPRM proposed.
    Response: For the reasons previously discussed, we agree with the 
commenters and have revised the regulation accordingly.
    Comment: One State indicated that the notice should include details 
on the reasons for the penalty.
    Response: We agree with the commenter that the notice should 
contain sufficient detail on the factual and legal basis for the 
penalty to allow the State to respond and have revised the regulation. 
However, we believe the agency should have the opportunity to raise new 
issues in response to the State's brief and therefore have not 
specified that reasons not raised in the notice are waived. Since the 
State now has an opportunity to respond to the ACF brief and to submit 
additional documentation, we do not believe this policy will 
disadvantage the State.
    Comment: One State noted that the practice of notifying the 
Governor differed from past practice of notifying the agency and 
suggested that we also notify the TANF agency.
    Response: Although the statute requires notice to the Governor, we 
agree with the commenter that it would facilitate the process if we 
also give the TANF agency a copy of the notice and have amended the 
regulation accordingly.
    Comment: A number of commenters suggested the State should be able 
to submit a reply brief as a matter of right. They also suggested the 
Board's authority to develop the record be clarified.
    Response: The NPRM limited the State's right to submit a reply 
brief as a matter of right because of the limited time availability 
under the proposed 60-day maximum. Since we have eliminated this 60-day 
time issue in the final regulation, we agree with the commenters that 
the State should be able to submit an appeal as a matter of right and 
have amended the regulation.
    We have also clarified that the Board's discretion to develop the 
record included the discretion to hold an evidentiary hearing. We would 
note that Secs. 16.9 and 16.10 of this title, which are made applicable 
by Sec. 262.7(e), contain additional detail on the Board's discretion 
to develop the record.
    Comment: One State expressed concerns about using the Departmental 
Appeal Board as the forum for hearing appeals.
    Response: The statute specifies the Departmental Appeals Board as 
the entity to hear appeals.
    Comment: One commenter believed that we should include all sections 
of 45 C.F.R. part 16 as part of the appeal process. This commenter also 
believed that we should not treat failure to file a copy of an appeal 
with the Office of the General Counsel as a jurisdictional defect.
    Response: We selected the provisions of part 16 that fill in the 
gaps in the TANF statutory framework. We have not added additional 
sections because we do not think they are necessary.
    The failure to file the appeal with the Office of the General 
Counsel is not a jurisdictional defect. However, we would toll the time 
period for filing of our reply brief until OGC receives the brief.
    Comment: One State noted that the specific provision on when the 
State's appeal is considered filed, at Sec. 272.7(f)(1) of the NPRM, 
varied from the time contained in 45 C.F.R. 16.20, which we adopted in 
the NPRM.
    Response: As part of the changes in the timing of an appeal in the 
final rule, we have deleted this NPRM provision and thus eliminated the 
conflict. However, we have also added a provision to Sec. 262.7(e) to 
clarify that the named provisions of part 16 are adopted only to the 
extent that they are consistent with the specific provisions of this 
section.

VIII. Part 263--Expenditures of State and Federal TANF Funds (Part 
273 of the NPRM)

Section 263.0--What Definitions Apply to This Part? (Sec. 273.0 of the 
NPRM)

Administrative Costs
(a) Background
    Under the TANF statute, States may not spend more than 15 percent 
of either their Federal TANF funds or their State MOE dollars on 
administrative costs. At section 404(b), the statute excludes 
expenditures for ``information technology and computerization needed 
for tracking or monitoring'' from the administrative cost cap that 
applies to Federal TANF funds (i.e., the Federal cap).
    The proposed rule addressed the subject of administrative costs in 
five separate places: (1) the definition of qualified expenditures at 
Sec. 270.30 provided that, for MOE purposes, administrative costs were 
subject to a 15-percent cap (i.e., the MOE cap); (2) Sec. 273.0 
provided a definition of administrative costs; (3) Sec. 273.2(a)(5) 
discussed the 15-percent limit on the amount of MOE expenditures that 
could be spent on administrative costs and reflected our decision to 
exclude the same information technology and computerization costs from 
the MOE cap as the Federal cap; (4) the preamble for Sec. 273.11 
explained that we would consider expenditures of more than 15 percent 
of a State's Federal TANF funds on administrative funds to be a misuse 
of Federal TANF funds; and (5) the preamble and regulation at 
Sec. 273.13 provided that, in determining the Federal cap, we would use 
the definition of administrative costs at Sec. 273.0(b) and not count 
information technology and computerization for tracking and monitoring 
as administrative costs. The preamble for Sec. 273.13 also explained 
that we would look to see whether a State's cumulative expenditures on 
administrative costs from its grant for any fiscal year exceeded 15 
percent of the grant amount and that we would consider expenditures 
above the limit to be a misuse of funds.
    The proposed definition at Sec. 273.0(b) provided that: 
``Administrative costs means costs necessary for the proper 
administration of the TANF program or separate State programs. It 
includes the costs for general administration and coordination of these 
programs, including indirect (or overhead) costs.'' It also provided 
examples of eleven types of activities that would be classified as 
``administrative costs,'' such as salaries and benefits not associated 
with providing program services, plan and budget preparation, 
procurement, accounting, and payroll.
    In the preamble, we stated our belief that the proposed definition 
would not create a significant new administrative burden on States. We 
hoped that it was flexible enough to facilitate effective case 
management, accommodate evolving TANF program designs, and support 
innovation and diversity among State TANF programs. We also said that 
it had the significant advantage of being closely related to the 
definition in effect under the Job Training Partnership Act (JTPA). 
Thus, it should facilitate the coordination of Welfare-to-Work and TANF 
activities and support the transition of hard-to-employ TANF recipients 
into the work force.
    More importantly to commenters, the preamble also indicated that we 
would consider eligibility determinations to be administrative costs, 
but allow case management to be treated as a program cost. It also 
required that portions of a worker's time be allocated based on this 
distinction. Specifically, the NPRM preamble said:


[[Page 17809]]


    You will note that the definition we have proposed does not 
directly address case management or eligibility determination. We 
understand that, in many instances, the same individuals may be 
performing both activities. In such cases, to the extent that a 
worker's activities are essentially administrative in nature (e.g., 
traditional eligibility determinations or verifications), the 
portion of the worker's time spent on such activities will be 
treated as administrative costs, along with any associated indirect 
(or overhead) costs. However, to the extent that a worker's time is 
essentially spent on case-management functions or delivering 
services to clients, that portion of the worker's time can be 
charged as program costs, along with associated indirect (or 
overhead) costs.

    In the preamble, we also indicated that we expected administrative 
costs incurred by subgrantees, contractors, community service 
providers, and third parties to be part of the administrative cost cap 
and that we would determine such costs in the same way as agency costs. 
Specifically, we said:

    We have not included specific language in the proposed rule 
about treatment of costs incurred by subgrantees, contractors, 
community service providers, and other third parties. Neither the 
statute nor the proposed regulations make any provision for special 
treatment of such costs. Thus, the expectation is that 
administrative costs incurred by these entities would be part of the 
total administrative cost cap. In other words, it is irrelevant 
whether costs are incurred by the TANF agency directly or by other 
parties.
    We realize this policy may create additional administrative 
burdens for the TANF agency and do not want to unnecessarily divert 
resources to administrative activities. At the same time, we do not 
want to distort agency incentives to contract for administrative or 
program services. In seeking possible solutions for this problem, we 
looked at the JTPA approach (which allows expenditures on services 
that are available ``off-the-shelf'' to be treated entirely as 
program costs), but did not think that it provided an adequate 
solution. We thought that too few of the service contracts under 
TANF would qualify for simplified treatment on that basis.

    We welcomed comments on how to deal with this latter dilemma, as 
well as comments on our overall approach. We had discussed this issue 
thoroughly during our pre-NPRM consultations, but thought this was a 
policy area where no single, clear solution existed.
(b) Overview of Comments
    About one-third of all respondents to the NPRM submitted comments 
on our administrative cost provisions. A substantial majority of these 
comments came from representatives of State or local governments, but 
we also received comments from unions, community organizations, 
advocacy groups, national associations, business groups, and Congress. 
We received comments from a significant majority of the States.
    Commenters generally opposed both the breadth of the proposed 
``administrative cost'' definition and the scope of its application. To 
some extent, unions, community organizations, legal aid and advocacy 
groups were an exception to this general rule. Comments from these 
groups tended to be more supportive of the proposed rule. However, they 
expressed concern about the impact of these policies on the amount of 
resources that would be available for direct benefits to needy families 
and the potential impacts of the proposed rules on a State's decisions 
about program administration, staffing, and contracting. One argued for 
more specific exclusions from the definition (including costs 
associated with the delivery of program services and overhead) out of 
concern about the effect of a tight cap on case manager pay.
    To deal with the number and complexity of responses on this issue, 
we have decided to cluster the comments into the following five general 
categories: (1) the actual definition (including issues about the 
appropriateness of a Federal definition, adopting definitions from 
other programs, the treatment of eligibility determination and case 
management costs, and the treatment of automated data processing 
costs); (2) the treatment of costs incurred on contracted services; (3) 
general questions about the calculation of the two caps; (4) specific 
issues related to how we determine whether a State has exceeded the MOE 
cap on expenditures of State MOE funds; and (5) specific issues related 
to how we determine whether a State has exceeded the Federal cap 
(including whether the appropriate base for computing the Federal cap 
is the pre-transfer or post-transfer grant amount).
    As you will notice from the discussion that follows, regardless of 
where they appear in the rule, the administrative cost issues are 
closely connected to each other. For example, if we have a prescriptive 
definition of administrative cost, this policy would exacerbate 
concerns about the negative effects of requirements for subcontractors 
to track such costs in the same way as TANF agencies.
    Although few commenters directly addressed the combined effects of 
the proposed policies, we considered the combined effect of all these 
provisions in drafting our responses.
    The subject area that received the most attention from commenters 
was the proposed definition. Commenters disagreed about whether there 
should be a Federal definition, suggested alternative definitions that 
we could adopt, argued for exclusion of case management and eligibility 
determination costs, raised some issues about the treatment of 
automated data processing costs, and posed a few miscellaneous 
questions.
(c) Federal Definition
    Comment: A relatively small number of commenters spoke directly to 
the question of whether there should be a Federal definition of 
administrative costs. The commenters' views were mixed, although more 
argued against a Federal definition than for one.
    Among the arguments put forth in support of a definition were: the 
value of having comparable approaches among TANF jurisdictions; the 
importance of protecting benefits for needy families especially in 
light of the elimination of constraints that had existed under the 
former AFDC program; and the importance of having a meaningful and real 
Federal limitation on administrative costs.
    Those opposed to a Federal definition argued that: (1) it should be 
the State's prerogative to define administrative costs; (2) we had no 
authority to define ``administrative costs''; or (3) we could defer to 
State definitions and choose to regulate at some subsequent date if we 
found that States were not adhering to the statutory limits.
    Response: While we do believe in granting States broad flexibility 
to design their programs and have left key definitions up to the 
discretion of the States, we also believe that there is a need for 
Federal guidance on the definition of ``administrative costs.'' The 
approach in this rule is a compromise between a Federal and State 
definition. It sets a Federal framework that specifies some items that 
must be considered ``administrative costs,'' but does not attempt to 
fully define the term.
    We believe this framework is important. First, as the comments we 
received demonstrate, there is no common view of the meaning of this 
term. If we left this matter entirely to State discretion, we could 
expect a diversity of approaches, and States might be subject to widely 
different penalty standards. Also, the fear of a penalty might lead 
some States to define the term so narrowly as to substantially 
undermine the intent of the administrative cost cap provisions.
    We disagree with the comment that we lack the authority to define 
``administrative costs.'' We have

[[Page 17810]]

responsibility for four penalty provisions--two on use of Federal funds 
and two on MOE requirements--where the level of State expenditures on 
administrative costs is a key issue. On many occasions, we have heard 
statements about the importance of having clear Federal standards for 
any penalty decisions that we make. In that context, we have both the 
authority and the responsibility to provide standards in this area.
    As we indicated in the preamble to the proposed rule, we considered 
not proposing a Federal definition. While that option had some appeal, 
we were not disposed to deferring totally to State definitions. The 
philosophy underlying the administrative cost caps is very important; 
in order to protect needy families and children, it is critical that 
the substantial majority of Federal TANF funds and State MOE funds go 
towards helping needy families.
    We also indicated that we thought that, by providing a general 
framework to States, we could avoid numerous disputes with individual 
States about whether their definitions represented a ``reasonable 
interpretation of the statute.''
(d) Applying Other Federal Definitions
    Comment: A substantial number of commenters suggested that the TANF 
program adopt the definition proposed for the Child Care and 
Development Fund. A much smaller number suggested that we adopt the 
definition in effect under the Job Training and Partnership Act (JTPA) 
program. Commenters argued that adoption of these other definitions 
would improve program consistency and simplify program operations at 
the local level. They also endorsed CCDF's exclusion of ``eligibility 
determination'' as an administrative cost. One argued that the 
different definition could put local agencies in the untenable position 
of not being able to hire staff.
    Response: In terms of program coordination, we do not believe that 
there is a strong advantage to selecting the CCDF definition over 
JTPA's. Where TANF programs work extensively with local providers of 
employment and training services, compatibility with JTPA may be more 
important; where TANF and child care programs are administered by a 
single agency or use a common set of service providers, compatibility 
with child care providers may be more important.
    In the NPRM, we noted that our proposed definition was closely 
related to the JTPA definition and thus should facilitate the 
coordination of WtW and TANF activities and support the transition of 
hard-to-employ TANF recipients into the workforce. As caseloads decline 
and the proportion of hard-to-serve clients rises, coordination between 
these two programs may become even more critical.
    While adopting the CCDF definition might facilitate TANF and CCDF 
coordination, we do not believe that this coordination depends upon a 
uniform definition. Also, given the differences in the caps of the two 
programs (15 percent versus 5 percent) and the different legislative 
histories, there is little reason to believe that Congress intended a 
uniform definition.
(e) Treatment of Eligibility Determinations
    Comment: Many of those commenting on this issue objected to our 
proposed inclusion of eligibility determination within the 
administrative costs definition. Some argued that eligibility 
determination was not an administrative activity and was not easily or 
logically separable from case management. Still others commented on the 
burden associated with our proposal, the general need for State 
flexibility in this area, and the potential negative effects on a 
State's ability to fund critical staff who work directly with clients.
    One State agency indicated that the distinction in our proposal was 
not burdensome and would require only a slight change in its Random 
Moment Study.
    Many commenters took strong exception to our characterization of 
any portion of the eligibility determination process as administrative. 
Among other things, they were concerned that: (1) it was inconsistent 
with existing State practice; (2) the nature of work with families is 
undergoing significant change, and application of the traditional AFDC 
approach is no longer appropriate; (3) because eligibility 
determination is part of the case management function, it should be 
categorized as a program or service function than administration; (4) 
the administrative responsibilities of staff performing functions such 
as screening and assessment are integral to providing services; (5) 
front-line eligibility determination is arguably a direct service, 
under the first statutory goal of the TANF program; and (6) as workers 
assume new roles, differentiating between eligibility and service 
delivery is becoming increasingly difficult and less useful.
    A couple of commenters indicated that our regulations needed to 
draw a clearer line between administrative and program costs. One 
commenter provided several specific examples of situations where the 
line between administrative and program costs that we drew in the 
proposed rule was unclear, such as in diversion and sanction activities 
and in determining hardship exceptions and compliance with behavioral 
requirements.
    A significant number of commenters spoke to the burden of the 
proposed requirement on TANF agencies. They argued that State and local 
systems are not geared towards allocating expenses this way. They do 
not want to divert resources to this activity.
    Commenters also made a general plea for flexibility, saying that 
States need flexibility in order ``for the role of front line staff to 
continue to evolve to best meet the goals of welfare reform'' and to 
enable States to build partnerships with local service providers.
    Finally, several commenters noted that we presented this policy 
only in the preamble, not in the regulation itself.
    Response: While we do not want our rules to distort State choices 
about how to deliver services or to divert State resources to cost 
accounting activities unnecessarily, we have a responsibility to uphold 
the intent of the statutory administrative cost cap provisions by 
ensuring that States are not spending large amounts of money on 
eligibility determinations rather than program benefits or services.
    Also, we do not agree that States must incur a significant 
administrative burden in order to identify the costs associated with 
eligibility determination activities. We recognize that the nature of 
staff responsibilities is changing and the line between case management 
and eligibility determination is blurring. Thus, it may be more 
difficult to develop rules for allocating the time of workers between 
administrative and program activities. However, once a State develops 
its allocation rules, the process of allocating staff time is 
straightforward and no more difficult than the current cost allocation 
process.
    We also recognize that the TANF program offers the possibility for 
States to administer programs in new ways. We understand that States 
are moving towards blended functions, and we support such efforts. 
These final rules do not in any sense require States to have separate 
administrative and program staff. They merely require that States 
provide a reasonable method for determining and allocating 
administrative and program costs.
    Welfare agencies have a long history of identifying the costs of 
eligibility determinations and allocating these costs as administrative 
activities. A variety of other significant, related programs--such as 
Medicaid, the Child

[[Page 17811]]

Health Insurance Program (CHIP), and Food Stamps--continue to follow 
this practice. Thus, this kind of cost allocation has been standard 
operating procedure in a number of programs and has been accepted as a 
normal part of doing business.
    We also believe that a clear policy on eligibility determinations 
might produce more consistent penalty determinations and reduce audit 
disputes, appeals, and litigation regarding application of the misuse 
of funds and MOE penalties.
    Based on these considerations, we have decided to add eligibility 
determinations to the list of administrative activities at 
Sec. 263.0(b)(2). More specifically, this rule reflects the basic 
definition that was in the proposed regulation at Sec. 273.0(b) (with 
the same basic examples of administrative cost activities), but adds 
the NPRM preamble policy that required eligibility determination to be 
treated as an administrative cost. We recognize that this is a 
significant policy decision that merits inclusion directly in the 
regulatory text; we agree with commenters that it should not be 
relegated to the preamble.
    Under the final rule, States may develop their own definitions of 
administrative costs and cost allocation plans, consistent with this 
regulatory framework.
    Also, as we discuss later, we provide States some flexibility in 
the methods they use to determine the administrative costs associated 
with contracts. However, we want to reiterate a point we made in the 
preamble for Sec. 273.13 of the proposed rule: States must properly 
allocate costs. They must attribute administrative, program, and 
systems costs to benefiting programs and appropriate cost categories, 
in accordance with an approved cost allocation plan and the cost 
principles in part 92.
(f) Other Miscellaneous Suggestions for Inclusions and Exclusions
    Comment: A couple of commenters suggested that our definition make 
a distinction between general overhead or indirect costs (which would 
be considered administrative costs) and overhead and indirect costs 
related to the provision of program services (which would be excluded). 
A couple of commenters made the broader suggestion that our definition 
should indicate that administrative costs do not include items such as 
diversion activities, assessments, development of employability plans, 
work activities, post-employment services and supports, and case 
management.
    Response: The comments identified an area where the language in the 
proposed rule was unclear. To address this problem, we have revised the 
regulatory text. The revised language at Sec. 263.0(b)(1) excludes 
costs of providing services and the associated direct administrative 
costs from the definition of administrative costs. The revised language 
at Sec. 263.0(b)(2) clearly treats indirect (or overhead) costs as 
administrative costs. We included these costs as administrative costs 
in the final rule because we believe this approach is most consistent 
with the intent of the administrative cost caps and is the simplest and 
most straightforward approach for States to implement.
    Comment: One commenter suggested that we specify that diversion 
assessments are program costs and not administrative costs.
    Response: We believe the changes that we have made to 
Sec. 263.0(b), and just discussed, adequately address this concern. The 
rule at Sec. 263.0(b) now indicates that diversion and assessment 
activities are both program service costs and not considered 
administrative costs. (Note: Here, we would make a distinction between 
assessment activities designed to identify needs and develop 
appropriate service strategies versus assessing income, resources, and 
documentation for eligibility determination purposes; the latter are 
administrative costs.)
    Comment: One commenter said we should specifically define case 
management.
    Response: We do not believe there is a need for a Federal 
definition of this term.
    Comment: One commenter asked that we clarify that ``public 
relations'' activities would not include State expenditures on 
providing information to clients.
    Response: While we believe that the common meaning of ``public 
relations'' would not include providing client information, at the new 
Sec. 263.0(b)(1), we have added ``providing program information to 
clients'' as one example of providing program service. Thus, this 
activity would not be classified as an administrative cost under our 
rules.
    Comment: One commenter asked that we clarify that domestic violence 
and substance abuse services are not considered administrative costs.
    Response: We believe the new language at Sec. 263.0(b)(1) 
adequately addresses this concern. It more directly states that costs 
of providing services are outside the definition of administrative 
costs, and it explicitly provides that screening and assessments are 
examples of program services.
(g) Computer-Related Costs
    Comment: Several commenters had concerns that the definition of the 
exclusion for computer-related costs was not sufficiently clear in the 
NPRM. Their reasons were mixed. A couple of commenters wanted to make 
sure that States did not have ``unfettered discretion'' in this area; 
they saw this provision as a major loophole and did not want to see 
money diverted from meeting the needs of poor families. Other 
commenters felt that the regulations did not adequately address the 
information technology exclusion.
    Response: We received a variety of comments on the exclusions of 
information technology and computerization costs from the 15-percent 
caps. Based on these comments, we have made some clarifying changes to 
the regulatory language (which appear in Secs. 263.2(a)(5) and 263.13) 
and are providing some guidance in the preamble. However, we do not 
believe it is necessary or appropriate to develop detailed Federal 
regulations on this issue. While the new regulatory language makes the 
regulation more consistent with the statutory language and makes the 
language for the Federal and MOE caps more consistent, it also reflects 
our willingness to defer to State policies, as long as those policies 
reflect a reasonable interpretation of the statutory language.
    We believe that the revised regulatory language represents the best 
reading of the statutory language at section 404(b). The statute 
provides for exclusion of certain systems costs in determining whether 
a State has exceeded the Federal cap on administrative expenditures. It 
does not exclude such systems costs from the definition of 
administrative costs. Thus, in this rule, you will note that the 
systems exclusion is not part of the definition of administrative costs 
at Sec. 263.0(b). Rather, it appears in the sections where we explain 
how we determine if a State has excess expenditures on administrative 
costs.
    Comment: We received several comments asking us to clarify that 
personnel costs necessary to comply with reporting requirements and for 
tracking and monitoring computer systems are covered by the exclusion. 
Likewise, we received a few comments asking us to clarify that the 
following items would be excluded: (1) data collection and reporting 
activities (such as hardware, personnel and supply costs they incur in 
meeting the TANF disaggregated data reporting requirements); (2) 
activities such as rental and purchase of computer

[[Page 17812]]

equipment and systems procurement; and (3) preparation of reports 
required under the Act.
    Response: Under the final rules, we exclude from the 15-percent cap 
all costs associated with the portions of information technology and 
computer systems that are used for tracking or monitoring required by 
or under part IV-A of the Act. The excludable costs are the full range 
of costs directly associated with the development, maintenance, and 
support of the relevant systems or the relevant portions of larger 
systems. Nonsystems costs related to monitoring and tracking (e.g., for 
the salaries and benefits of data entry clerks, evaluation staffs, 
statisticians, and report writers) are not covered by this exclusion.
    Based on the comments, we have made some modest changes to the 
definition of administrative cost at Sec. 263.0(b) and the descriptions 
of the administrative cost caps at Secs. 263.2(a)(5) and 263.13. Under 
the language in the proposed rule, we had not generally recognized that 
some activities that would otherwise be ``administrative'' in nature 
could be part of the systems exclusion. The one exception we mentioned 
was ``management information systems,'' proposed at Sec. 273.0(b)(10).
    To provide the clarification commenters requested, we have revised 
the language at Secs. 263.2(a)(5) and 263.13 to specify that the 
systems exclusion covers items that ``would fall within the definition 
of administrative costs at Sec. 263.0(b).'' In other words, items that 
would normally be administrative costs, but are systems-related and 
needed for monitoring or tracking purposes under TANF, fall under the 
systems exclusion. Thus, we would not consider them in determining 
whether a State has exceeded either of the 15-percent caps.
    We also added language at Secs. 263.2(a)(5) and 263.13 to specify 
that the systems exclusion covers the salaries and benefits costs of 
personnel who develop, maintain, support, or operate information 
technology or computer systems used for tracking and monitoring. Under 
the revised language, it is clearer that States may exclude personnel 
and other costs associated with the automation activities needed for 
TANF monitoring and tracking purposes. For example, they may exclude 
expenditures related to computerization of both the fiscal and program 
data collection and reporting requirements in part 265 and computer 
charges related to generating required data and reports. However, they 
do not exclude nonsystems costs related to monitoring and tracking 
(such as personnel costs for data entry clerks, statisticians, and 
report writers).
    Also, we made a minor change to the last example in our list of 
examples of administrative costs. The revised language refers 
generically to ``preparing reports and other documents'' rather than 
``reports and documents related to program requirements.'' We revised 
the language to avoid confusion; the NPRM language was too similar to 
the statutory exclusion at section 404(b).
    Comment: One commenter said the regulation should address the 
permissibility, within the exclusion, of electronic benefit transfer 
(EBT), Fingerprint Imaging Projects, or other automated fraud 
prevention activities.
    Response: While all these activities might be commendable, the 
statutory exclusion is only for expenditures ``needed for tracking or 
monitoring required by or under this part.'' EBT would not fit within 
the exclusion because it is neither a tracking nor a monitoring 
activity; as the statute at section 404(g) indicates, EBT systems are 
``for providing assistance.''
    Fingerprint imaging and other anti-fraud activities might fall 
under the systems exclusion. For example, expenditures to develop a 
computerized fingerprint imaging system to identify fugitive felons or 
individuals who have fraudulently misrepresented their residence would 
clearly qualify as monitoring under the exclusion.
    Since we are not regulating the definition of this exclusion, we 
are not attempting to draw fine lines between what systems costs should 
be included versus excluded. We expect States to implement policies 
that are consistent with a reasonable interpretation of the statute and 
these regulations.
(h) Costs Incurred by Contractors
    Comment: Another area receiving a significant number of comments 
was our proposal to apply the definition of administrative costs to 
contractors and other agencies. The vast majority of commenters opposed 
this proposal.
    One State indirectly argued that the policy was unnecessary, 
pointing to the State's own cost consciousness and cognizance of the 
need to limit administrative expenditures in contracts.
    A few commenters noted that we had included this policy proposal 
only in the preamble, but not in the proposed regulatory text. At least 
one asked that we add the preamble language to the regulation.
    One TANF agency requested that we provide more guidance on how 
States should segregate the administrative costs associated with 
subcontracted services.
    We organized most of the comments on this issue into four broad 
categories: (1) suggestions that the 15-percent administrative cost cap 
apply solely to costs incurred by the TANF agency; (2) the potential 
effects of applying the administrative cost cap limitation to 
contractor agencies; (3) the possible negation of existing performance-
based contracts; and (4) functionality considerations.
    A few commenters recommended that the administrative cost cap apply 
solely to the expenditures of the TANF agency or that we should treat 
State and local agencies alike, but not contractors.
    A much larger number of commenters expressed general concerns about 
requiring the tracking of administrative costs to contractors. They 
objected to: (1) the increased administrative burden on the TANF agency 
and difficulties associated with tracking administrative costs of 
contractors; (2) diversion of resources away from needy families to 
tracking; and (3) inconsistencies between our policy and the policies 
of other programs (e.g., JOBS and JTPA). Commenters also claimed that 
our proposed policy would increase the administrative costs of the 
program, hamper State and local efforts to improve program 
administration and services, discourage collaborations with community-
based organizations and other service providers, violate Congressional 
intent in limiting our regulatory authority, and impede State 
procurement activities. For example, contractors might choose not to 
compete because they would be reluctant to provide detailed 
itemizations of their expenses, and States might refrain from 
contracting for fear that unknown contractor costs might cause them to 
exceed the cap on administrative expenditures. Several commenters 
expressed concerns that our proposed policy would discourage the 
development of performance-based contracts and similar funding 
arrangements.
    A subset of commenters said we should base the treatment of 
subcontractor costs on functionality considerations, looking at the 
function performed by the contractor or subcontractor, not whether 
contractors incur administrative costs. A few argued that direct 
program services provided by contractors were not administrative in 
nature. Commenters did not want the treatment of contract costs to be 
based on ``an extremely difficult differentiation between 
administrative and programmatic costs.''

[[Page 17813]]

    Response: We have decided that States should be able to determine 
the administrative costs associated with contracts and subcontracts 
based on the function or nature of the contract. For example, if a 
State contracts for case management or job placement services, which 
meet our definition of program services, the cost of the contracts 
would be treated as program costs, not as administrative costs. 
Further, as we discuss later, the entire costs of a contract for 
payroll services would be treated as an administrative cost subject to 
the 15-percent cap. If the State had a contract that included a mix of 
administrative and programmatic activities, it would need to develop a 
method for attributing an appropriate share of the contract costs to 
administrative costs. We have revised the regulatory language to 
reflect that decision.
    The approach in the proposed rule reflected some genuine concerns 
about weakening the administrative cost caps and distorting State 
decisions about whether to contract. Some commenters expressed similar 
concerns. However, after reflecting on the totality of comments 
received, we are convinced that the costs of our proposed approach 
would have outweighed the benefits. The approach also might have 
significantly undermined one of our regulatory objectives, i.e., to 
give States the flexibility they need to serve low-income families.
    In administering and operating its TANF Program, each State should 
make a determination of the most cost-effective and efficient method of 
performing each of the necessary administrative and programmatic 
functions. It may use in-house staff and resources, engage other State 
or local government agencies, or solicit services from outside 
contractors. Presumably, with each State's procurement procedures 
requiring free and open competition, and oversight by auditors and 
State legislative and regulatory bodies, the result of any solicitation 
will be a high-quality service delivered at a reasonable and acceptable 
cost.
    We believe that, once a particular function is determined to be 
either administrative or programmatic, that characterization does not 
vary based on the nature or identity of the service provider. 
Therefore, if a contract is for a singular administrative or 
programmatic service, the final rules would treat the entire contract 
price as an administrative or programmatic cost, respectively. A State 
would not need to further itemize the contract costs or consider the 
individual cost components used to support the contract price.
    For example, payroll services is a traditional administrative 
function. If a State opts to contract out the payroll responsibilities 
for its TANF program, a State would treat the entire cost of that 
contract as an administrative cost within the 15-percent cap. It would 
be unnecessary to further define the contractor's own administrative 
costs.
    On the other hand, if the State contracted with a third party to 
perform a variety of functions that included a mix of administrative 
and programmatic activities, the State would need to develop a method 
for attributing an appropriate share of the contract costs for 
administrative activities as administrative costs. Likewise, if another 
agency (State, local, or private) were administering a piece of the 
TANF program, the State would need to have a method for attributing an 
appropriate share of the other agency's costs to administrative 
activities.
    Presumably, in developing its individual cost proposals, each 
contractor includes an allocated portion of their own administrative 
costs or overhead. However, the matter of interest here is the extent 
to which Federal and State expenditures are going to administrative 
activities, not the individual cost components of contracted services.
    Our approach is consistent with the regulations at 45 CFR part 92 
and should maintain the integrity of the 15-percent administrative cap 
provisions.
    We do not believe this policy will necessarily bias State decisions 
about how to deliver TANF services, e.g., towards contracting out, or 
privatization, of program operations. First, the initial expenditure 
reports we have received from States suggest that their administrative 
costs are running well within the 15-percent caps; thus, they do not 
appear to have a strong incentive to change any of their administrative 
practices. Second, many other very important considerations go into 
State contracting decisions--including the State agency's internal 
capacity and expertise and larger political and budgetary 
considerations. Third, we would expect the State agency, State 
legislature, and other interested parties to consider the impact on 
public employees as part of their deliberations. Lastly, because there 
is a limited difference in the treatment of administrative costs 
incurred by TANF agencies and third parties, the potential incentive 
effects of this policy (towards privatization) are limited.
(i) Consolidated Caps
    Comment: A couple of commenters suggested that we should have a 
single administrative cost cap that covers both Federal and MOE 
expenditures.
    Response: The statute clearly requires a separate cap for each. 
Also, it would not be feasible to apply the 15-percent limitation 
across the total Federal TANF and State MOE dollars. The MOE cap 
applies to the total amount of qualified State expenditures for the 
fiscal year, i.e., per fiscal year. The Federal cap applies to the 
adjusted SFAG. If a State reserves amounts from its fiscal year grant, 
then the Federal cap could reflect expenditures over a number of fiscal 
years.
(j) Compliance Periods
    Comment: One commenter questioned the requirement for quarterly 
compliance with both the Federal and MOE caps. The commenter suggested 
annual evaluation as an alternative.
    Response: We assume this comment reflects a reaction both to the 
information required on the quarterly TANF Financial Report and some 
unclear regulatory language in the proposed rule. First, while we do 
require quarterly reporting of Federal and State administrative and 
systems costs, we never intended to make quarterly determinations 
whether the expenditure of State funds violated the MOE cap. The 
statute at section 409(a)(7) clearly provides that this would be an 
annual determination. Also, in reflecting on this comment we realized 
that our regulatory text did not clearly state that compliance with the 
MOE cap would be determined on an annual basis. Therefore, we have 
added the phrase ``for the fiscal year'' to Sec. 263.2(a)(5)(i) to 
clarify that this is an annual determination.
    The Federal administrative cost cap works somewhat differently. For 
the purpose of the Federal cap, we would look at the total cumulative 
amount spent on administrative activities from each annual Federal TANF 
grant. Unless and until the total amount expended as administrative 
expenditures (exclusive of appropriate systems costs) exceeded 15 
percent of the Federal TANF grants (except WtW grants) for any fiscal 
year, we would not identify a violation of the Federal administrative 
cost cap. The Department of Labor administers the WtW administrative 
cost limit. This policy is consistent with the discussion in the 
preamble to the proposed rule for Sec. 273.13.
(k) Base for Computing the Cap
    Comment: A significant number of commenters (particularly those

[[Page 17814]]

representing States or State interests) argued that we should calculate 
the 15-percent administrative cost cap based on the SFAG amount before 
any State transfers to title XX or CCDBG (i.e., the adjusted SFAG).
    Several of these commenters maintained that, in defining the 
Federal cap, section 404(b)(1) refers specifically to 15 percent of the 
``grant.'' They interpret this language to mean that total SFAG amount 
would be the appropriate number to use in determining the maximum 
amount for administrative costs. A few made the additional comment that 
we did not have the authority to reduce the amount of 15-percent 
administrative funds available to the State under the statute by 
applying the 15-percent limitation to a smaller base amount than the 
adjusted SFAG.
    Commenters also expressed concerns that our proposed policy would 
result in disincentives to the States to transfer funds to CCDBG or 
title XX.
    Finally, a few commenters noted that our proposed rules used a 
different base amount for computing the administrative cost cap and for 
computing penalties. More specifically, we proposed to determine 
penalties based on the adjusted SFAG (i.e., the SFAG amount minus 
Tribal adjustments, but prior to any transfer), but we computed the 
administrative cap for TANF based on the adjusted SFAG minus transfers. 
This inconsistency seemed unjustified.
    Response: As we noted briefly in the discussion for Sec. 260.30, we 
made a change to the definition of ``adjusted SFAG'' that addresses the 
consistency concerns of commenters. The revised definition, which is 
used for determining both the Federal administrative cost cap and 
penalty amounts, excludes monies transferred to either the SSBG or 
CCDBG programs. Like the proposed definition, it also excludes funds 
removed from the State's grant because Tribes in the State elected to 
operate their own TANF programs.
    Although the language of the administrative cost limit refers to 
``the grant,'' we do not believe what is ``the grant'' is clear in this 
context. We did not base the Federal administrative cap on the pre-
transfer amount because we believe that proposal would produce a 
peculiar and undesirable policy result. In effect, it would allow 
States to double-dip on their administrative expenditures. The 
transferred funds would be part of the base that we would use to 
determine how much Federal TANF money was available for administrative 
costs within the TANF program. It would also be part of the base for 
determining how much money was available in CCDBG or SSBG for capped 
administrative expenditures within these programs, since the statute 
provides that transferred funds are subject to the requirements of 
these programs.
    We understand the concern that our policy in this area might create 
modest disincentives for States to transfer Federal TANF funds to CCDF 
and SSBG. However, we would point out a few factors that should 
mitigate those concerns: (1) the initial TANF expenditure reports 
suggest that administrative costs are generally running substantially 
below the 15-percent caps; thus, States that transfer funds should be 
able to live within the post-transfer cap amount; (2) this policy 
affects the Federal cap only, not the MOE cap; (3) States that elect to 
transfer funds might enjoy some reductions in their administrative 
costs because they can operate more streamlined child care and social 
services programs; (4) some of the costs associated with the new TANF 
data rules are excludable from the cost caps under the information 
technology and computerization exclusion; and (5) in several places, 
these final rules reduce the data reporting and administrative burdens 
to which States would have been subject under the proposed rules.
    You will find the discussion of the issues related specifically to 
the MOE cap in the preamble for Sec. 263.2 and the discussion of issues 
related specifically to the Federal cap in the preamble for 
Sec. 263.13.

Subpart A--What Rules Apply to a State's Maintenance of Effort?

Section 263.1--How Much State Money Must a State Expend Annually to 
Meet the Basic MOE Requirement? (Sec. 273.1 of the NPRM)

Overview
    To ensure that States would continue to contribute their own money 
towards meeting the needs of low-income families, section 409(a)(7) 
requires States to maintain a certain level of spending on programs on 
behalf of eligible families. If a State does not meet the ``basic MOE'' 
requirements in any fiscal year, then it faces a penalty for the 
following fiscal year. The penalty consists of a dollar-for-dollar 
reduction in a State's adjusted SFAG.
    In the NPRM and in the discussion that follows, we address each of 
the terms used in the basic MOE requirement.
(a) Historic State Expenditures
    Each State's basic MOE requirement reflects its historic spending 
on welfare programs. We calculated the historic State expenditures 
based on the State's FY 1994 share of expenditures for the AFDC, EA, 
AFDC-related child care, transitional child care, At-Risk Child Care 
and JOBS programs (including expenditures for administration and 
systems operations).
(b) Adjusting a State's Basic MOE Level
    The statute authorizes an adjustment to a State's basic MOE level 
when a Tribe or a consortium of Tribes residing in the State submits a 
plan to operate its own TANF program, and we approve this plan. We will 
reduce the State's basic MOE requirement beginning with the effective 
date of the approved Tribal plan.
    Section 409(a)(7)(B)(iii) excludes from the basic MOE calculation 
any IV-A expenditures made by the State for FY 1994 on behalf of 
individuals covered by an approved Tribal TANF plan. Because TANF 
funding for Tribes may also reflect a State's IV-F (JOBS) expenditures, 
we also concluded that it was appropriate to reduce a State's basic MOE 
levels for IV-A and IV-F expenditures. In summary, we proposed to 
determine the percentage reduction in the SFAG due to Tribal programs 
and apply the same percentage reduction to the State's basic MOE 
requirement. The State's revised basic MOE level would apply for each 
fiscal year covered by the approved Tribal TANF plan(s).
    For example, if the amount of the Tribal Family Assistance Grant 
represents ten percent of the State's SFAG, then we would reduce the 
State's basic MOE requirement by ten percent. This approach provides a 
consistent method for determining both the reduction in the State's 
SFAG and its required basic MOE level.
(c) Applicable Percentage
    Under section 409(a)(7)(B)(ii), if any State fails to meet the 
minimum work program participation rate requirements in the fiscal 
year, then it must spend at least 80 percent of its FY 1994 spending 
level. If a State meets the minimum work participation rate 
requirements, then the ``applicable percentage'' is 75 percent of its 
FY 1994 spending level for the year. We refer to the dollar amount 
representing 75 percent or 80 percent of the FY 1994 State expenditures 
as the basic MOE level.
    We calculated each State's total FY 1994 expenditures and basic MOE 
levels by using data on the State share of expenditures for AFDC 
benefits and

[[Page 17815]]

administration, EA, FAMIS, AFDC/JOBS Child Care, and Transitional and 
At-Risk Child Care programs reported by States on form ACF-231 as of 
April 28, 1995, as well as the State share of JOBS expenditures 
reported by each State on form ACF-331 as of April 28, 1995.
    We transmitted tables showing FY 1994 spending amounts and basic 
MOE levels to the States via Program Instruction Number TANF-ACF-PI-96-
2, dated December 6, 1996. On October 31, 1997, we issued TANF Program 
Instruction Number TANF-ACF-PI-97-9 informing States of revised basic 
MOE levels. The revised basic MOE levels reflected a correction in the 
calculation of the State share of FY 1994 At-Risk Child Care (ARCC) 
expenditures. Although the data sources remained the same for all 
States, some of the reported ARCC expenditure amounts used were revised 
after the original calculation. As a result, the basic MOE levels for 
some States increased. As TANF-ACF-PI-97-9 was issued so close to the 
NPRM publication date, we were not able to include information on it in 
the NPRM.
    We also determined FY 1994 spending and basic MOE levels for each 
of the Territories. For IV-A expenditures for Puerto Rico, we used the 
Financial Report Form ACF-231 as of April 28, 1995. For Guam and the 
Virgin Islands, we used the share of expenditures that corresponded to 
the amount on the Federal grant awards for FY 1994, i.e., the 
Territories' share of AFDC benefit payments (25 percent), EA (50 
percent), administration (50 percent), and Child Care (25 percent). For 
JOBS, the Territories' basic MOE levels reflect expenditures reported 
on the ACF-331 as of April 28, 1995.
    In addition, for both IV-A (AFDC, EA, and child care) and JOBS, 
Guam and the Virgin Islands (but not Puerto Rico) benefit from Pub. L. 
96-205, as amended (48 U.S.C. 1469a). This law permits waiver of the 
first $200,000 of the Territories' share of expenditures. Therefore, 
for Guam and the Virgin Islands, we reduced the share that they were 
required to contribute, and thus their basic MOE amount, by $200,000.
(d) FY 1997 Basic MOE Level
    Under the proposed rules, we indicated that the State could prorate 
its basic MOE level for FY 1997 by taking the total FY 1994 State 
expenditures provided to the State in Program Instruction Number TANF-
ACF-PI-96-2, multiplying that number by the number of days during FY 
1997 that the State operated a TANF program and dividing by 365. The 
State's TANF implementation date is the date given in the Department's 
completion letter to the State. The State had to meet 80 (or 75) 
percent of the resulting amount.
Comments and Responses
    We received a few comments on this section. Two commenters 
commended our proposal to reduce a State's basic MOE proportionately 
when the State's TANF grant is reduced once a Tribe or a consortium of 
Tribes residing in a State has received approval to operate its own 
TANF program. Most of the other comments focused on the applicable 
basic MOE level relative to a State's work participation rates. We have 
made no substantive changes to the provisions in this section as a 
result of the comments we received. However, as the result of some of 
the comments we received, we have clarified the regulation. A 
discussion of the comments follows.
(a) Applicable Percentage
    Comment: A few commenters requested that we amend the regulations 
to provide that a State's failure to meet the two-parent minimum work 
participation rate for a year does not automatically require the State 
to meet 80 percent of its historic State expenditures. Instead, the 
commenters recommended that, where the State fails only the two-parent 
rate, the State must increase its spending level between 75 percent and 
80 percent based on the ratio of the State's two-parent caseload to the 
State's entire caseload. Associations representing States pointed out 
that such an adjustment would be consistent with the proposed 
regulation under Sec. 271.51 to reduce the maximum penalty amount for 
failure to meet the work participation rate if the State fails only the 
two-parent rate.
    Response: We recognize that the size of a State's two-parent 
caseload may be small in comparison to the State's total caseload. 
However, we do not have any discretion under the statute to adjust a 
State's basic MOE in this way. Section 409(a)(7)(B)(ii) explicitly 
provides that a State must meet 80 percent of its FY 1994 spending 
level unless it meets the ``requirements'' of section 407(a) of the Act 
for the fiscal year. Section 407(a) includes the minimum participation 
rate requirements for both all families and two-parent families.
    In contrast, section 409(a)(3) requiring a penalty for failing to 
satisfy minimum participation rates expressly provides for a reduction 
in the penalty with respect to a fiscal year based on the degree of 
noncompliance.
    Comment: Two commenters thought we should modify the final rule to 
provide that the 75-percent spending level applies for every fiscal 
year in which a State meets only the all-family participation rate. 
They contended that the two-parent participation rate should not affect 
the required spending level, particularly for a State that has a very 
low two-parent caseload relative to its total caseload. One of the 
commenters also believed that the 75-percent spending level should 
apply immediately unless it can be shown after the fact that a State 
has not met the work participation rate requirements.
    Response: We found no statutory basis for excluding the two-parent 
rate from a State's applicable spending requirement. The 75-percent 
spending standard, in the parenthetical at section 409(a)(7)(B)(ii), 
requires that States meet both rates.
    We also disagree with the commenter's assertion that the 75-percent 
spending level should apply immediately. To the contrary, the statute 
requires that all States maintain an 80-percent spending level for each 
fiscal year. The reduction is a parenthetical addition if the State 
meets both participation rates for the fiscal year. Thus, a State would 
need to demonstrate that it actually meets both rates for the fiscal 
year for the 75-percent spending level to apply. This language suggests 
that, to avoid the chance of penalty, it would be most prudent for a 
State to plan to spend at the 80-percent level every year.
    Comment: One commenter indicated that we must be clear in the 
regulations that a State qualifies for the 75-percent MOE standard if 
it meets the Federal requirement for the year following application of 
the caseload reduction credit.
    Response: We have revised the final rule to clarify that a State's 
basic MOE will be reduced to 75 percent of FY 1994 expenditures if it 
meets both the all-family and the two-parent participation rate that 
applies following application of the caseload reduction credit.
    Comment: Two commenters suggested that we clarify the basic MOE 
requirement for FY 1997. The commenters noted that the work 
participation rate requirements apply no earlier than the fourth 
quarter of FY 1997 for any State. As a result, the basic MOE 
requirement for FY 1997 should only be based on whether a State met the 
work participation rate requirements for the fourth quarter of FY 1997. 
If a State achieves the required work participation rate for the July-
September 1997 quarter, the State's basic MOE requirement should be 75 
percent of its historic expenditures.
    Response: We agree that the earliest period States must report 
information

[[Page 17816]]

necessary to calculate participation rates under section 407 is the 
fourth quarter of FY 1997. The penalty for failure to submit a required 
quarterly report in a timely manner is one of several penalties that 
has a delayed effective date. Section 116(a)(2) of PRWORA provides that 
certain penalty provisions do not take effect until July 1, 1997, or 
six months after we receive the State's complete TANF plan. We consider 
the State's TANF implementation date to be the date that we received 
its complete plan. Most States had to submit a report for all or part 
of the fourth quarter of FY 1997.
    However, there is no delay in the penalty for failure to meet the 
basic MOE requirement. This is one of several penalty provisions that 
apply immediately, i.e., from the date a State implements its TANF 
program. Thus, each State must maintain 80 percent of its historic 
expenditures for FY 1997 unless it meets the work participation rate 
requirements both for all families and two-parent families. (The 
penalty for failure to satisfy the minimum participation rates 
requirement also has a delayed effective date; however, that penalty is 
separate from the basic MOE requirement.)
    The participation rates for a fiscal year are an average monthly 
rate. For the States that had to submit a report for all or part of the 
last quarter of FY 1997, we will calculate the average monthly rate for 
all families and for two-parent families based on the number of months 
that must be covered in the required quarterly report.
    The remaining States must meet 80 percent of their historic 
spending levels unless they choose to submit data demonstrating that 
they actually met both participation rates either for the period during 
which they were operating their TANF program or for the last quarter of 
FY 1997, whichever they choose. We decided to give these remaining 
States this option because we did not think it would be fair to judge 
their performance over a longer period of time than States that 
implemented TANF at an earlier date. Also, we have more flexibility 
with respect to these States since the statute does not specify a 
precise time frame for measuring their performance.
    Comment: One commenter wrote that a State should not have to meet 
the 80-percent level of effort if we waive the State's penalty for 
failing to achieve either of the required work participation rates due 
to reasonable cause. Another commenter requested clarification in this 
area.
    Response: Under section 409(a)(7)(B)(ii) of the Act, the 75-percent 
standard only applies if a State meets the minimum work participation 
rates, not when a State has reasonable cause for failing to satisfy the 
rates. Granting reasonable cause does not mean that the State met the 
rates. States that fail to satisfy the minimum work participation 
rates, but receive partial or full penalty relief, must still meet the 
80-percent MOE requirement.
(b) FY 1997 Basic MOE Level
    Comment: One commenter asked that the final rule clarify how we 
will calculate the FY 1997 basic MOE level.
    Response: We calculated the prorated basic MOE levels by first 
determining the number of days in FY 1997 that a State operated the 
TANF program. We then multiplied the resulting number of days by the 
State's basic MOE level for the year, then divided by 365 (the number 
of days in FY 1997).
    We originally published the States' basic MOE levels in Program 
Instruction Number TANF-ACF-PI-96-2, dated December 6, 1996. We also 
sent letters dated January 7, 1997, to TANF program directors 
explaining that we would prorate basic MOE levels for FY 1997 only. As 
explained earlier, we have since recalculated basic MOE levels for 
States to correct for the revised State ARCC expenditure figures for FY 
1994. As a result, the basic MOE levels for some States increased. We 
transmitted the revised basic MOE levels for States via TANF Program 
Instruction Number TANF-ACF-PI-97-9 dated October 31, 1997. This 
instruction also included each State's prorated FY 1997 basic MOE 
levels.
    However, for States whose revised basic MOE level increased, we did 
not apply the revised rate retroactively. Rather, we are determining 
State compliance with the FY 1997 basic MOE level requirements based on 
the original numbers published in TANF-ACF-PI-96-2, prorated as 
applicable. All revised State basic MOE levels published in TANF-ACF-
PI-97-9 apply beginning FY 1998.

Section 263.2--What Kinds of State Expenditures Count Toward Meeting a 
State's Basic MOE Expenditure Requirement? (Sec. 273.2 of the NPRM)

Overview
(a) Qualified State Expenditures
    Section 409(a)(7)(B)(i) establishes the criteria for the 
expenditure of State funds to count toward a State's basic MOE level. 
Congress wanted States to be active partners in the welfare reform 
process. Thus, States must spend a substantial amount of their own 
money on aid to needy families. While Congress gave States significant 
flexibility in this area, it did establish a number of important 
statutory restrictions on which State expenditures qualify towards the 
basic MOE requirements.
    Section 409(a)(7)(B)(i) defines ``qualified State expenditures'' to 
include certain expenditures by the State under all State programs. We 
interpret ``all State programs'' to mean the State's family assistance 
(TANF) program plus any other separate State program that assists 
``eligible families'' and provides appropriate services or benefits. 
Thus, States could expend State funds for MOE purposes in three ways.
    In addition to expending State funds in separate State programs, 
States may expend funds within the TANF program in two different ways. 
They may commingle their State funds with Federal grant funds, or they 
may use State funds that have been segregated from their Federal grant 
funds.
    We remind States that there are specific statutory requirements 
that affect the use of State funds under a State's TANF program. States 
need to be mindful of the TANF requirements to help avert penalties 
under section 409 of the Act. The specific TANF requirements that apply 
depend upon which of various programmatic terms is used in the language 
describing the requirement.
    States may also expend State funds in a State program separate from 
TANF to provide the benefits and services listed under section 
409(a)(7)(B)(i)(I) of the Act, e.g., cash assistance, child care 
assistance, and education activities. None of the TANF program 
requirements directly apply to eligible families served in separate 
State programs.
    Requirements in the statute that use the terms ``under the 
program,'' ``under the program funded under this part,'' and ``under 
the State program funded under this part'' apply to the State's TANF 
program, regardless of the funding source. That is, they apply to 
segregated Federal programs, commingled State/Federal programs, and 
segregated State programs. Thus, all families receiving TANF assistance 
(whether funded with State or Federal TANF funds) must meet work 
participation and child support requirements.
    Conversely, some Federal requirements derive from the provisions in 
the statute that use the term ``grant,'' or ``amounts attributable to 
funds provided by the Federal government.'' These terms refer to the 
Federal TANF funds provided to the State under

[[Page 17817]]

section 403. Therefore, they only affect the use of Federal TANF funds, 
unless the State commingles its money with Federal TANF funds. If a 
State commingles its funds, the Federal and State funds become subject 
to the same rules. Thus, commingling of State and Federal TANF funds 
can reduce the total amount of flexibility available to the State in 
its use of Federal and State funds.
    Requirements pertaining solely to the use of Federal TANF funds do 
not apply to families assisted under TANF with State-only funds. 
Consequently, if a State segregates its TANF State funds from its 
Federal TANF funds, State expenditures on assistance must comply only 
with all of the rules that generally pertain to the TANF program, e.g., 
work and child support requirements. They are not subject to 
requirements that pertain only to the use of Federal TANF funds.
    A State might choose to operate a ``segregated'' TANF program 
because certain limitations, e.g., time limitations and certain alien 
restrictions, apply to the program funded with Federal TANF funds that 
would not apply to a TANF program funded wholly with State funds.
    Whether the expenditure of State funds is within the TANF program 
or separate from the TANF program, to count toward meeting the State's 
basic MOE, all expenditures must: (1) be made to or on behalf of an 
eligible family; (2) provide ``assistance'' to eligible families in one 
or more of the forms listed in the statute under section 
409(a)(7)(B)(i)(I); and (3) comply with all other requirements and 
limitations set forth in this part of the regulations, including those 
set forth in Secs. 263.5 and 263.6.
(b) Eligible Families
    Section 409(a)(7)(B)(i)(I) provides that State funds under all 
State programs must be spent with respect to eligible families to count 
toward the State's basic MOE. Section 409(a)(7)(B)(i)(IV) further 
clarifies that an eligible family means a family eligible for 
assistance ``under the State program funded under this part.'' The 
``State program funded under this part'' is the State's TANF program.
    Thus, we proposed that, in order to be considered an ``eligible 
family'' for MOE purposes, a family must have a child living with a 
custodial parent or other adult caretaker relative (or consist of a 
pregnant individual) and be financially needy under the TANF income and 
resource standards established by the State under its TANF plan. This 
definition includes two categories of families. It includes all 
families funded with MOE funds under TANF, including certain alien 
families or time-limited families who cannot be served with Federal 
TANF funds, but who are being served in a segregated State TANF 
program. (We discuss this alien limitation in detail further on in this 
section.) It also includes a family that meets these criteria, but is 
not receiving TANF, and instead is receiving benefits and services from 
a separate State program. The expenditures to provide these benefits 
and services under all State programs may count toward the MOE 
requirement, provided the expenditures also meet all other requirements 
and limitations set forth in part 263.
    A State is free to define who is a member of the family for Federal 
TANF purposes and may use this same definition for MOE purposes. For 
example, it could choose to assist other family members, such as 
noncustodial parents, who might significantly enhance the family's 
ability to achieve economic self-support and self-sufficiency. By 
including such individuals within its definition of family, a State 
could provide them with services through TANF or a separate State 
program. Noncustodial parents could then engage in State-funded 
activities such as work or educational activities, counseling, or 
parenting and money management classes.
    The NPRM stated that we expect States to define ``child'' 
consistent either with the ``minor child'' definition given in section 
419 or some other definition applicable under State law. The State must 
be able to articulate a rational basis for the age they choose.
    The definition of ``eligible family'' expressly includes families 
that ``would be eligible for such assistance but for the application of 
section 408(a)(7) of this Act.''
    Under section 408(a)(7), States may not use Federal TANF funds to 
provide TANF assistance to a family that includes an adult who has 
received federally funded assistance for a total of 60 months. 
Therefore, if a family becomes ineligible for Federal assistance under 
the TANF program due to this time limit, but still meets the definition 
of eligible family, then this family may be considered an eligible 
family for MOE purposes. (Note: In the NPRM, in Sec. 273.2(c), we did 
not accurately cite the applicable criteria. The final rule at 
Sec. 263.2(c) corrects this error; in referencing paragraph (b) of this 
section, it captures all three criteria for ``eligible families.'')
    Section 5506(d) of Pub. L. 105-33 (the Balanced Budget Act of 1997) 
clarified that the definition of an eligible family also includes 
lawfully present aliens who would be eligible for TANF assistance, but 
for the application of title IV of PRWORA.
    Thus, the definition of eligible family allows States to claim MOE 
expenditures with respect to three types of family members: (1) those 
who are eligible for TANF assistance; (2) those who would be eligible 
for TANF assistance, but for the time-limit on the receipt of federally 
funded assistance; and (3) those lawfully present who would be 
eligible, but for the application of title IV of PRWORA. An alien 
family who meets any one of these three criteria may be considered an 
eligible family provided they also meet the family composition 
requirement (i.e., have a child living with a custodial parent or other 
caretaker relative or be a pregnant individual) and financial 
eligibility criteria established by the State. These last two 
requirements are based on the statutory language stating that eligible 
families ``means families eligible for assistance under the State 
program funded under this part (TANF) * * * and that would be eligible 
for such assistance.''
    While this three-part definition of eligible families may appear to 
allow States to claim qualified expenditures with respect to all 
lawfully present alien eligible family members, i.e., both qualified 
and nonqualified aliens, as discussed further below, this is not 
necessarily the case. Nor is it the case that the amendment to the 
definition under the Balanced Budget Act precludes States from claiming 
MOE for illegal aliens under certain circumstances.
    While we mentioned the 1997 amendment in the NPRM, at that time, we 
had not fully analyzed the significance of the statutory language 
defining ``eligible families'' for MOE claiming purposes, relative to 
the extant eligibility provisions in title IV of PRWORA. Title IV of 
PRWORA sets forth the aliens who are eligible for Federal public 
benefits and for State and local public benefits; whereas, the 
definition of eligible families limits the expenditures that may be 
claimed for MOE. While there is obvious overlap between these two 
concepts, they are distinct and must be analyzed separately.
    To understand eligibility for Federal TANF benefits, readers must 
be familiar with the definition of qualified alien, Federal public 
benefit, and Federal means-tested public benefits. Section 401 in title 
IV of PRWORA provides that, in general, only qualified aliens, as 
defined in section 431 of PRWORA, are

[[Page 17818]]

eligible for Federal public benefits. (At the end of this discussion, 
we explain two very limited circumstances under which it may be 
possible for a State to provide certain benefits to all aliens.) The 
definition of ``qualified aliens'' at Sec. 260.30 refers to section 431 
of PRWORA, as amended (e.g., by the Illegal Immigration Reform and 
Immigrant Responsibility Act of 1996 (Pub. L. 104-208) and the Balanced 
Budget Act of 1997 (Pub. L. 105-33)). The revised definition of 
``qualified aliens'' includes: legal permanent residents; asylees; 
refugees; aliens paroled into the U.S. for at least one year; aliens 
whose deportations are being withheld; aliens granted conditional 
entry; battered alien spouses, battered alien children, the alien 
parents of battered children, and alien children of battered parents 
who fit certain criteria; and Cuban/Haitian entrants.
    The Department has interpreted the term ``Federal public benefit'' 
(see TANF-ACF-IM-98-5, dated August 24, 1998, transmitting the notice 
with comment period interpreting ``Federal public benefit,'' published 
in the Federal Register dated August 4, 1998, vol. 63, No. 14, and 
available on line at http://www.acf.dhhs.gov/programs/ofa/im98-5.htm). 
It has determined that the TANF program (when using Federal TANF funds) 
generally provides a Federal public benefit. The Department also issued 
an interpretation of the term ``Federal means-tested public benefit'' 
and designated the TANF program as a Federal means-tested public 
benefit. (See the Federal Register for August 26, 1997, 62 FR 45256.)
    Even qualified aliens may be ineligible for means-tested Federal 
public benefits. Section 403 of PRWORA prohibits qualified aliens, with 
exceptions, who arrive on or after August 22, 1996, i.e., newly arrived 
aliens, from receiving Federal means-tested public benefits for five 
years.
    Exceptions to the five-year bar include qualified aliens who are 
refugees, asylees, or aliens whose deportation is being withheld, 
Amerasians, and Cuban/Haitian entrants, as well as veterans, members of 
the military on active duty, and their spouses and unmarried dependent 
children.
    However, as discussed below, States may elect to help any newly 
arrived aliens who are eligible family members by providing either 
State or local public benefits or benefits that are not a State or 
local benefit. If the State uses segregated State funds in TANF or 
funds in separate State programs to provide such benefits, the 
expenditures may qualify as MOE.
    Further, in regard to whether qualified aliens may be eligible for 
Federal TANF benefits, section 402 of PRWORA provides that States have 
the authority in TANF to decide whether to help qualified aliens who 
arrived in this country prior to August 22, 1996, and qualified aliens 
who arrived on or after August 22, 1996, but for whom the five-year bar 
had expired. In other words, States are authorized to decide whether 
qualified aliens are eligible for the State's TANF program. However, a 
State may not deny certain qualified aliens eligibility even if it 
decides that as a general matter qualified aliens are not eligible to 
receive Federal TANF benefits. States may not deny eligibility to 
refugees and asylees, aliens whose deportation has been withheld, 
Amerasians, and Cuban/Haitian entrants. These groups are eligible for 
Federal TANF benefits for five years after the date of their entry into 
the country or the date asylum or withholding of deportation was 
granted. Also, States may never deny eligibility to legal permanent 
residents who have worked forty qualifying quarters or to aliens who 
are veterans, members of the military on active duty, and their spouses 
and unmarried dependent children.
    As with other parts of the TANF program, the way the State 
structures the delivery of TANF and MOE benefits determines which 
eligibility requirements apply. If a State commingles Federal TANF 
funds with State funds, then the benefits provided must follow the 
rules at section 401(c) for Federal public benefits. A State providing 
Federal public benefits to aliens and using commingled TANF funds to 
help aliens may claim, for MOE purposes, only the expenditures that it 
makes with respect to eligible qualified alien family members. Eligible 
qualified aliens include those who are eligible for TANF assistance; 
would be eligible for TANF assistance, but for the time limit on 
receiving federally funded TANF assistance; or are lawfully present in 
this country and would be eligible for TANF assistance, but for the 
application of title IV of PRWORA. If the State decides to restrict the 
eligibility of noncitizens to receive TANF benefits and commingles its 
MOE funds, then it will only be able to claim toward MOE the 
expenditures that it must make on behalf of the excepted qualified 
aliens mentioned above.
    If a State does not commingle Federal and State funds, but instead 
uses segregated State funds in its TANF program or separate State 
program funds to provide benefits that meet the definition of a State 
or local public benefit, then it must follow the rules of section 411 
of PRWORA. State or local public benefits have the meaning prescribed 
under section 411(c) of PRWORA. It is generally up to the State to 
determine if the benefits it offers are State or local public benefits 
within the meaning of the Act. However, because we interpreted that the 
TANF program, using Federal TANF or State commingled funds, generally 
provides a Federal public benefit, we also would interpret that the 
TANF program, using State TANF funds that have been segregated from 
Federal TANF funds, generally provides a State or local public benefit 
(subject to the limited circumstances explained at the end of this 
discussion). We make this interpretation because the statutory language 
in section 401(c) is identical to the language in 411(c). Within the 
meaning prescribed under section 411(c), States would also determine 
whether various separate State or local programs or activities are 
State or local public benefits.
    Section 411(a) of PRWORA provides that only qualified aliens and 
certain nonqualified aliens are eligible for State or local public 
benefits. The nonqualified aliens consist of nonimmigrants under the 
Immigration and Nationality Act or aliens paroled into this country 
under section 212(d)(5) of such Act for less than one year. There are a 
handful of legal nonqualified aliens, e.g., temporary residents under 
the Immigration Reform and Control Act (IRCA), aliens with protected 
status, and aliens in deferred action status who are prohibited from 
receiving State or local public benefits under this provision. (At the 
end of this discussion, we explain two very limited circumstances under 
which it may be possible to provide certain benefits to all aliens.)
    Section 411(d) of PRWORA permits States to expand alien eligibility 
by providing State or local public benefits to illegal aliens. But this 
may occur only if the State enacts a law after August 22, 1996, that 
affirmatively provides that illegal aliens are eligible to receive (all 
or particular) State or local public benefits.
    Section 412 of PRWORA also allows States, at their option, to 
further limit alien eligibility for State public benefits. There are 
time-limited exceptions for refugees, asylees, or aliens whose 
deportation has been withheld. Like Federal TANF benefits, these groups 
are eligible to receive State public benefits under TANF during their 
first five years following entry, the grant of asylum, or the 
withholding of deportation. The

[[Page 17819]]

other excepted qualified aliens consist of veterans, members of the 
military on active duty, and their spouses and unmarried dependent 
children, as well as permanent residents who have earned forty 
qualifying quarters. Like Federal TANF benefits, these groups are 
eligible to receive State public benefits under TANF without the time 
limit described above.
    In light of sections 411 and 412 of PRWORA, we have concluded that, 
if a State uses segregated State TANF funds or separate State program 
funds to provide State or local public benefits, it may only claim for 
MOE purposes the qualified expenditures made with respect to eligible 
family members who are qualified aliens, nonimmigrants under the 
Immigration and Nationality Act, aliens paroled into this country under 
section 212(d)(5) of such Act for less than one year, and illegal 
aliens if the State enacted a law after August 22, 1996, that 
affirmatively provides for eligibility to receive specifically 
authorized State or local public benefits.
    A State may claim the expenditures for illegal aliens for MOE 
purposes only if the law in question is broad enough to encompass TANF 
eligibility. The only avenue for claiming expenditures for illegal 
aliens in the definition of eligible families in section 
409(a)(7)(B)(i)(IV) is under the criteria of families eligible for 
assistance under TANF. Once a State affirms that illegal aliens are 
eligible for TANF assistance, then the State may provide a State or 
local public benefit as part of TANF or a separate State program. For 
example, if the State's law only authorizes for child care to be 
provided to illegal aliens through a non-TANF program (e.g., CCDF), it 
could not claim any such expenditures as MOE. However, if its law 
authorizes child care provided through TANF for illegal immigrants, it 
may claim such expenditures as MOE. Or, if it provides such a service 
to illegal aliens through a separate State program and not the TANF 
program, but the illegal aliens are eligible for both, it may claim 
those expenditures as MOE.
    A State may claim qualified expenditures for the individuals 
described in the prior two paragraphs for MOE purposes because these 
are the aliens who are either eligible for TANF benefits or lawfully 
present in this country and eligible for TANF assistance, but for the 
application of title IV of PRWORA. If a State decides to restrict alien 
eligibility for State public benefits, then it may only claim MOE for 
qualified segregated TANF expenditures or qualified separate State 
program expenditures made with respect to the excepted qualified aliens 
mentioned in section 412.
    Two limited circumstances exist in which it may be possible for a 
State to help all aliens. These circumstances apply regardless of 
funding source, i.e., whether a State uses Federal TANF, State TANF, or 
separate State program funds. These circumstances derive from section 
401(b) and (c) and section 411(b) and (c) of PRWORA, which describe 
alien eligibility for Federal public benefits and State or local public 
benefits, respectively.
    First, both sections 401(b) and 411(b) of PRWORA affirm that States 
may provide certain noncash Federal or State and local public benefits 
to any alien. Such benefits are those necessary for the protection of 
life or safety and include those specified by the Attorney General in a 
notice dated August 23, 1996 (AG Order No. 2049-96, 61 FR 45985 
available on line at http://www.acf.dhhs.gov/news/welfare/wr/
830fdreg.htm). In the notice, the Attorney General specified the kinds 
of noncash government-funded community programs, services, or 
assistance that are necessary for protection of life or safety and for 
which all aliens continue to be eligible. However, for all aliens to be 
eligible, sections 401(b)(1)(D) and 411(b)(4) both state that neither 
the government-funded programs, services, or assistance provided, nor 
the cost of such assistance, may be conditioned on the individual 
recipient's income or resources. While such service may meet one of the 
purposes of TANF and may be provided as part of TANF or a separate 
State program, a State may claim toward MOE only qualified expenditures 
with respect to eligible (needy) families. Therefore, to claim any 
expenditures that meet the Attorney General's specifications for life 
and safety, a State must have a sound methodology that enables it to 
identify and claim only the portion of total qualified expenditures for 
benefits that it has provided to eligible families.
    Second, section 401(c) defines a Federal public benefit and section 
411(c) defines a State or local public benefit. Both sections use the 
same definition. The August 4, 1998, Federal Register notice that 
identified TANF as a Federal public benefit expressly states that not 
``all benefits or services provided by these programs are `Federal 
public benefits' and require verification.'' Because sections 401(c) 
and 411(c) use the same wording to define a public benefit, we believe 
this statement may also apply to benefits provided with segregated 
State TANF funds and separate State program funds. When a benefit is 
not a Federal or State or local public benefit, a State is not 
statutorily bound to restrict eligibility to certain aliens and can 
provide that benefit to all aliens.
    The August 4, 1998 Federal Register ``Notice with Comment Period'' 
includes some general discussion about discerning whether a benefit 
should or should not be considered a Federal public benefit. We suggest 
this same discussion may be valuable to States in interpreting, per 
section 411(c), the specific services that a State would or would not 
consider a State or local public benefit under TANF or through a 
separate State or local program. If a particular benefit or service 
under the State's TANF program or separate State or local program is 
not a public benefit, then the State may claim qualified expenditures 
with respect to any alien family member who is ``eligible for TANF 
assistance.''
    In addition we proposed that States may be able to count as MOE 
expenditures, funds transferred to Tribal grantees to assist families 
eligible under an approved Tribal TANF plan. However, if the 
eligibility criteria under the Tribal TANF program are broader than 
under the State's TANF plan, then all expenditures of State funds 
within the Tribal TANF program might not count as MOE. Only 
expenditures used to assist an ``eligible family'' under the State 
program count. States must ensure that State funds are expended on 
behalf of families eligible under the State's income and resource 
standards.
(c) Types of Activities
    Section 409(a)(7)(B)(i)(I)(aa)-(ee) specifies that State 
expenditures on eligible families for the following types of assistance 
are ``qualified expenditures'' for basic MOE purposes:
     Cash assistance (see subsequent discussion on this);
     Child care assistance (see the discussion at Sec. 263.3);
     Education activities designed to increase self-
sufficiency, job training, and work (note the specific exception at 
Sec. 263.4);
     Any other use of funds allowable under section 404(a)(1) 
(see subsequent discussion on this); and
     Associated administrative costs (subject to a 15-percent 
cap, as discussed in Sec. 263.0 and subsequently).
    It is important to remember that the activities mentioned above 
count toward a State's basic MOE requirement if they are reasonably 
calculated to accomplish a purpose of the program. This restriction 
follows from the language at section 409(a)(7)(B)(I)(ee) of the Act 
authorizing as MOE, ``any other

[[Page 17820]]

use of funds allowable under section 404(a)(1).'' Section 404(a)(1) of 
the Act refers to activities that are reasonably calculated to meet a 
purpose of the TANF program. The use of the word ``other'' infers that 
the activities listed above (ee), i.e., (aa)-(dd) must also be 
reasonably calculated to accomplish a purpose of the program. Hence, 
not only must expenditures of funds pursuant to (ee) be reasonably 
calculated to accomplish a TANF purpose, so must State expenditures 
pursuant to (aa)-(dd): cash assistance, child care assistance, 
educational activities, and administrative costs (discussed in detail 
further on).
    We mentioned in the NPRM that expenditures for ``assistance'' for 
MOE purposes may take the form of cash, certificates, vouchers, or 
other forms of disbursement, as determined by the State. MOE 
expenditures may also be for ongoing, short-term, or nonrecurrent 
benefits. The definition of assistance at Sec. 260.31 (Sec. 270.30 of 
the NPRM) does not limit the nature of State-funded aid provided to 
eligible families under TANF or separate State programs that can count 
as MOE. The authorization as MOE of ``any other use of funds allowable 
under section 404(a)(1)'' indicates that Congress intended all types of 
benefits provided to families under TANF under section 404(a)(1) of the 
Act should count as MOE. These can include ``nonassistance'' benefits 
such as nonrecurrent, short-term benefits.
    Thus, State expenditures with respect to eligible families for 
activities such as pre-pregnancy family planning services, teen 
parenting programs, youth and family counseling or support services, 
job training or employment services, or forms of crisis assistance that 
meet the purposes of the program under section 404(a)(1) may also count 
toward meeting a State's MOE requirement. However, such expenditures 
are subject to other limitations and restrictions under Secs. 263.5 and 
263.6 (Secs. 273.5 and 273.6 of the NPRM).
    In the NPRM, we also addressed additional limitations and 
restrictions. We included some specific case situations that came to 
our attention and invited comment on these and other examples of aid 
for eligible families that States believed could qualify.
(1) Cash Assistance
    This category includes cash payments, including electronic benefit 
transfers, to meet basic needs; assistance with work-related 
transportation costs; clothing allowances; and any child support 
collected on behalf of an eligible child that the State passes through 
to the eligible family.
    The preamble in the proposed rule pointed out that section 5506(b) 
of Pub. L. 105-33 amended section 409(a)(7)(B)(i)(I)(aa) of the Act to 
specifically allow assigned child support collected by the State and 
distributed to the family to count toward a State's basic MOE so long 
as the amount is disregarded in determining the family's eligibility 
for and amount of TANF assistance. However, we neglected to point out 
that section 5506(b) also provided that the assigned child support 
distributed to the family must come from the State's share of the 
amount collected. The law specifically refers to the amount collected 
and distributed to the family under section 457(a)(1)(B). Section 
457(a)(1)(B) provides that the State may retain or distribute to the 
family its share of the support amount so collected. Thus, more 
accurately, section 409(a)(7)(B)(i)(I)(aa) expressly allows the State's 
share of assigned child support amount collected on behalf of the 
family and distributed to the family to count toward a State's basic 
MOE, provided that the State disregards the amount sent to the family 
in determining the family's eligibility and amount of TANF assistance. 
We have clarified this point in the final rule.
    Cash assistance also includes State expenditures on behalf of 
eligible families as part of a State's refundable Earned Income Tax 
Credit (EITC) program. Under a State EITC program, we determined that 
only expenditures, i.e., the refundable portion of EITC payments 
actually paid to eligible families, may count as MOE. Also, if the 
State had an EITC program in FY 1995, it may count the total amount of 
the refundable portion of the EITC actually paid to eligible families 
only to the extent that this amount exceeds the total amount of the 
refundable portion of the EITC actually paid in FY 1995 (see 
Sec. 263.5).
(2) Any Other Use of Funds Allowable Under Section 404(a)(1)
    Section 404(a)(1) provides that TANF funds may be used ``in any 
manner that is reasonably calculated to accomplish the purpose of the 
TANF program, including to provide low income households with 
assistance in meeting home heating and cooling costs.'' In Sec. 260.20 
(Sec. 270.20 of the NPRM), we list the statutory purposes of the TANF 
program.
(3) Medical and Substance Abuse Services
    The statute does not prohibit the expenditure of State MOE funds on 
medical expenditures. Therefore, States may count expenditures of their 
own funds to provide treatment services to individuals seeking to 
overcome drug and/or alcohol abuse when these services assist in 
accomplishing the purposes of the program. This policy would also 
comport with both the Administration's support for drug rehabilitation 
services and the congressional call for State flexibility in the 
operation of welfare programs.
    We reminded States that such expenditures must be consistent with 
the purposes of the program and made to, or on behalf of, eligible 
families. We also reminded States that section 408(a)(6) bars the use 
of Federal TANF funds for medical services. Therefore, States using MOE 
funds to provide medical treatment services may not commingle State and 
Federal TANF funds. In addition, any State expenditures on medical 
services that are used to obtain Federal matching funds under the 
Medicaid program would not count as MOE. (Refer to the discussion under 
Sec. 263.6.) Finally, State expenditures on medical and substance abuse 
services may only count as MOE subject to the ``new spending'' 
limitations set forth in Sec. 263.5.
(4) Juvenile Justice
    State funds used to pay the costs of benefits or services provided 
to children in the juvenile justice system and previously matched under 
the EA program do not count toward MOE. More specifically, as juvenile 
justice services do not meet any of the purposes of the TANF program, 
they are not an allowable use of funds under section 404(a)(1).
    While some States may expend their Federal TANF funds for this 
purpose, under section 404(a)(2), the definition of ``qualified State 
expenditures,'' for MOE purposes, does not include the reference to 
section 404(a)(2). Therefore, we have concluded that Congress did not 
intend to automatically qualify all previously authorized IV-A 
expenditures as MOE. States that expend Federal TANF funds for this 
purpose, under section 404(a)(2), must not commingle State funds with 
Federal TANF funds if they wish the State funds to count as MOE.
(5) State ``Rainy Day'' Funds
    Some States inquired whether State funds allocated or set aside 
during a fiscal year as a ``rainy day'' fund, to act as a hedge against 
any economic downturn, could count as MOE. While we understand State 
intent, these allocations or set-asides are not expenditures. States 
must actually expend funds on behalf of eligible

[[Page 17821]]

families during the fiscal year for the money to count toward the 
State's MOE for that fiscal year. (However, under section 404(e), 
States may reserve Federal TANF funds from any fiscal year for use in 
any other fiscal year.)
(6) Administrative Costs
    Administrative expenditures may count toward a State's MOE, but 
only to the extent that they do not exceed 15 percent of the total 
amount of qualified State expenditures for the fiscal year. This 
limitation is the same as the limit for Federal TANF administrative 
expenditures. Therefore, we proposed that the State apply the same 
definition of administrative costs for MOE purposes as for Federal TANF 
funds.
    Section 404(b)(2) states that expenditures of Federal TANF funds 
with respect to information technology and computerization needed for 
tracking or monitoring activities are not subject to the 15-percent 
TANF limit. We are providing the same flexibility with respect to the 
administrative cost cap on MOE expenditures. Thus, the rules do not 
include information technology and computerization expenditures under 
the administrative cost cap; they allow such expenditures to count 
toward meeting a State's MOE requirement, without being limited by the 
15-percent cap on administrative expenditures.
Comments and Responses
Summary
    We received numerous comments on Sec. 273.2 of the proposed rule. 
Many of the comments focused on the definition of eligible family. One 
commenter praised our broad interpretation of the term ``eligible 
family.'' Others indicated that it may not be broad enough. Numerous 
commenters requested clarification of the definition.
    We also received comments regarding some of the examples of 
qualified expenditures mentioned in the proposed rule as well as a few 
comments on other examples of aid for eligible families that commenters 
believe could qualify. Although we received only a few specific 
comments regarding the 15-percent cap on administrative MOE 
expenditures, we received a substantial number of comments on various 
aspects of the proposed definition of administrative costs. Since this 
definition applies to the State as well as the Federal cap on 
administrative expenditures, we refer you to the beginning of this 
subpart, at Sec. 263.0, for a fuller discussion of the various issues 
raised and conclusions reached regarding the final definition of 
administrative costs.
    Finally, a couple of the comments concerned the cash management 
principles governing the draw-down of Federal TANF funds because the 
draw-down of Federal TANF funds is tied to MOE expenditures.
    After carefully considering the comments, we made some 
clarifications and a few changes to the final rule. We will address the 
comments following the order of the NPRM preamble.
(a) Qualified State Expenditures
    Comment: One commenter noted that States have raised a number of 
questions regarding application of the Cash Management Improvement Act 
(CMIA) to the TANF program and MOE funds. The commenter recommended 
incorporating the guidance currently being developed jointly by the 
Financial Management Service (FMS) of the U.S. Department of Treasury 
and ACF in the final rule, as appropriate.
    Another commenter recommended clarifying the final rule to specify 
that States may draw down Federal TANF funds without being required to 
show that they met their MOE requirement by the end of the year. The 
commenter wrote that our rules impose a de facto match requirement that 
is burdensome on States and could cause cash flow problems.
    Response: The guidance the commenter is referring to has not yet 
been completed. We intend to release it as a separate issuance once it 
is completed. In the meantime, CMIA Policy Statement Number 19, dated 
June 1, 1997, and issued by FMS provides general cash management 
guidelines for States in drawing down their Federal TANF funds.
    Federal TANF funds are subject to the Cash Management Improvement 
Act and the grant regulations at 45 CFR 92.20(b)(7). These rules 
restrict the draw-down of Federal funds. The CMIA Policy Statement 
Number 19 requires that States must expend a proportionate share of MOE 
funds for any period the State draws down Federal TANF funds. Thus, we 
have not made the recommended clarification.
    The MOE requirement is not a de facto match requirement. However, 
it is similar to a matching requirement in one respect. It is a cost-
sharing requirement, as Congress recognized that State financial 
participation is essential for the success of welfare reform.
    To allow a State to expend Federal TANF funds first, then later 
spend State funds to fulfill the basic MOE requirement, would convey to 
the State a benefit (interest income) that was not authorized by the 
legislation establishing TANF. PRWORA did not provide for the TANF 
block grant allocations plus interest. The recommended action would 
also be in violation of 31 U.S.C. 6503(c)(1), which governs 
intergovernmental financing and the U.S. Treasury-State (cash 
management) Agreements signed by each State and Territory.
    Although States must meet their basic MOE level for a fiscal year 
by the end of that fiscal year, the guidance in CMIA Policy Statement 
Number 19 does not restrict a State's ability to draw down its full 
TANF grant. Once a State meets its basic MOE requirement, the State may 
draw down its remaining TANF funds without contributing additional MOE 
funds. However, the draw-down of Federal TANF funds must be for 
immediate cash needs. Under no circumstances may a State draw down 
funds that are not needed for a specific program expenditure.
(b) Eligible Families
    In addition to comments as discussed below, we corrected an 
incomplete citation in Sec. 273.2(c) of the NPRM. This paragraph 
addressed the circumstances under which expenditures on families that 
had exceeded the Federal time limit would count as MOE. It should have 
cited paragraphs (b)(1), (b)(2), and (b)(3)--thus indicating that the 
families receiving assistance had eligible alien status, included a 
child living with an adult relative, and were needy under the financial 
criteria in the TANF plan. However, it failed to include the reference 
for this third provision. In the final rule, we corrected this 
language.
    Comment: A few commenters argued that we should leave the 
definition of ``eligible family'' to each State. One commenter said 
that the proposed definition attempts to usurp the State's authority to 
define eligible family; another indicated that Congress was silent on 
this topic.
    Response: We do not agree that Congress was silent on the topic of 
``eligible families.'' In fact, this issue is addressed in the 
Conference Report (H.R. Rep. No. 725. 104th Cong., 2d sess., at 56, p. 
296). In pertinent part, the conferees agreed that ``qualified 
expenditures that count toward the * * * spending requirement are all 
State-funded expenditures under all State programs that provide any of 
the following assistance to families eligible for family assistance 
benefits (TANF). * * *'' More importantly, section 409(a)(7)(B)(i)(I) 
of Act provides that qualified expenditures count if made with respect 
to eligible families. Section

[[Page 17822]]

409(a)(7)(B)(iv) defines eligible families in pertinent part as 
``families eligible for assistance under the State program funded under 
this part,'' i.e., under TANF.
    Because we must enforce a penalty if a State fails to meet the 
basic MOE requirement, we must specify the standards for that penalty. 
The term ``eligible families'' is a critical part of those standards. 
In this way, States may know which expenditures may count and avert a 
penalty.
    Comment: Several commenters expressed concern that the proposed 
rule does not allow expenditures to be counted toward the basic MOE 
requirement if made for lawfully residing aliens who are not included 
in the definition of ``qualified alien,'' such as certain persons 
residing under color of law (PRUCOL). The commenters pointed out that 
section 5506(d) of the Balanced Budget Act of 1997 (Pub. L. 105-33) 
amended the welfare reform law to allow States to count towards MOE 
funds spent on ``families of aliens lawfully present in the United 
States that would be eligible for such assistance but for the 
application of title IV.''
    Response: We agree that the Balanced Budget Act made this change 
and mentioned it in the preamble to the NPRM. Also, the proposed 
regulation recognized that MOE expenditures could be used to help 
certain eligible nonqualified alien family members (nonimmigrants under 
the Immigration and Nationality Act and aliens paroled into the U.S. 
for less than one year). However, as previously mentioned, we did not 
accurately analyze the significance of this statutory language 
(defining ``eligible families'' for MOE claiming purposes relative to 
the extant provisions of title IV of PRWORA). Refer to the earlier 
extensive discussion regarding the noncitizens for whom the State may 
claim MOE expenditures.
    Comment: Several commenters questioned the proposed rule at 
Sec. 273.2(b)(2), which required that a child live with a custodial 
parent or other adult caretaker relative. One commenter noted that the 
Balanced Budget Act of 1997 eliminated the relationship requirement 
under 408(a)(1) of the Act. The commenters believed the statutory 
definition of eligible families under section 409(a)(7)(B)(i)(IV) and 
even the proposed rule permitted them to assist children who do not 
live with a custodial parent or other adult caretaker relative (e.g., 
children in foster care and juvenile justice situations). For example, 
expenditures associated with helping a child who lives in an 
alternative living arrangement had been permissible under the former 
Emergency Assistance program and therefore should count toward the 
basic MOE requirement. Another commenter believed the proposed rules 
were too narrow and recommended modifying the rules to permit qualified 
State expenditures for such children to count toward the basic MOE 
requirement.
    Response: We do not agree that the Balanced Budget Act did away 
with the relationship requirement. We do not believe that Congress 
intended to eliminate the relationship requirement for either State MOE 
dollars or Federal TANF funds. Section 5505(a) of the Balanced Budget 
Act of 1997 expressly indicates that section 408(a)(1) was amended to 
eliminate redundant language. Previously, both sections 408(a)(10) (the 
home residence requirement) and 408(a)(1) (the minor child requirement) 
explicitly stated that Federal TANF funds could only be expended on a 
family that includes a child residing with a parent or other caretaker 
relative. The Balanced Budget Act removed the redundant phrase from 
408(a)(1) and added a cross-reference to 408(a)(10), where the phrase 
remains intact.
    Section 409(a)(7)(B)(i)(IV) defines eligible families, in pertinent 
part, as ``families eligible for assistance under the State program 
funded under this part.'' The State program funded under this part is 
the TANF program, whether funded with the Federal grant and/or State 
funds. The criteria with respect to TANF assistance include the 
provisions under section 408, and specifically the provision just 
discussed under 408(a)(1). Under section 408(a)(1), no family is 
eligible for TANF assistance unless the family includes a minor child 
who resides with the parent or other caretaker relative. Therefore, we 
believe there is a direct correlation between sections 408(a)(1) and 
409(a)(7)(B)(i)(IV).
    We conclude that the intent of section 409(a)(7)(B)(i)(IV) is that 
the family include a child residing with a parent or other caretaker 
relative. A State may still choose to aid the ``child-only'' cases that 
exclude the adult(s) from the case. Nevertheless, that child must be 
residing with a parent or other caretaker relative. Qualified State 
expenditures under all programs (TANF or separate State programs) may 
count toward basic MOE if made with respect to eligible families who 
meet the above criteria and are for one of the categories of activities 
listed under 409(a)(7)(B)(i)(I). As we indicated in the proposed rule, 
not all expenditures for services that had been previously authorized 
under the former AFDC, EA, or JOBS programs qualify for MOE purposes. 
In particular, there are services (e.g., juvenile justice situations) 
that do not meet any of the purposes of the TANF program. Rather, such 
former EA services generally fall under section 404(a)(2), not 
404(a)(1). Therefore, the expenditures do not qualify.
    Comment: A few commenters requested that we revise the language at 
Sec. 273.2(b)(2) of the proposed rule to permit the provision of 
assistance to minors who are temporarily absent from the home, similar 
to the time periods given in section 408(a)(10)(A).
    Response: As we explained above, an ``eligible family'' is defined, 
in part, as one in which there is a child residing with a parent or 
other caretaker relative. Thus, the child's home is that of the parent 
or other caretaker relative. However, as with TANF, under section 
408(a)(10), we expected that States would establish policies that 
define a reasonable period of temporary absence of the minor from the 
home for MOE purposes. Otherwise, qualified expenditures to provide 
services or assistance to the child once he or she left the home would 
no longer count toward basic MOE.
    During the temporary period, the child is considered to be residing 
with the parent or other caretaker relative. Therefore, State may 
continue to help the eligible family through expenditures that are 
reasonably calculated to accomplish a purpose of the program, including 
some expenditures for the temporarily absent child (except as noted 
later in this discussion). As we previously mentioned, all qualified 
expenditures must be reasonably calculated to accomplish a purpose of 
the program.
    For example, family preservation services, such as parenting 
training or counseling, and some forms of transitional assistance, 
could help ensure that parents may care for their children in their own 
home (purpose 1). In contrast, it is unlikely that expenditures on 
child care services would be reasonably calculated to accomplish that 
purpose (or any of the other TANF purposes) if the only child in the 
eligible family is temporarily absent from the home.
    Sometimes the child is temporarily absent from the home because he 
or she has been placed in the care of a correctional facility, juvenile 
residential facility, group home, protective care, foster care, other 
facility or other nonrelative care arrangement. Since the child is 
deemed to be residing with his or her parent or other caretaker 
relative during the temporary period, expenditures reasonably designed 
to

[[Page 17823]]

accomplish the purpose of the program, including continuation of cash 
assistance, would count toward MOE. However, expenditures for 
residential care as well as assessment or rehabilitative services, 
including services provided to children in the juvenile justice system, 
do not meet any of the purposes of the TANF program and would not count 
toward basic MOE. The principal purpose for placement is to protect the 
child or to protect society because of the child's behavior, not to 
care for the child in his or her own home (purpose 1). Since the focus 
is to address the child's needs, expenditures to care for the child in 
these living situations does not end the dependence of needy parents on 
government benefits by promoting job preparation, work and marriage 
(purpose 2). The remaining two purposes do not even remotely relate to 
this situation.
    It is important to note that this interpretation does not preclude 
a State from providing foster care or other protective care assistance 
for the child. However, these expenditures do not count toward the 
State's basic MOE requirement because they are not reasonably 
calculated to accomplish a purpose of the program.
    It would be reasonable for States to use the time frames given 
under section 408(a)(10) to define ``temporary'' and to develop a 
corresponding MOE policy. (Section 408(a)(10) automatically applies 
when a State uses commingled State funds to provide TANF assistance.) 
The child must return to the home by the end of the temporary period 
established by the State. Otherwise, the child no longer resides with 
the parent or other caretaker relative. If the child is the only 
eligible minor in the eligible family, then services or assistance for 
the eligible family would no longer count toward the basic MOE 
requirement, if the child does not return after the temporary absence.
    We do not believe it is reasonable to determine that a child is 
temporarily absent from the home if the child has been adjudicated or 
otherwise determined to require placement out of the home for longer 
than the State's established temporary period. In these situations, the 
absence is for a significant period, and expenditures for the child do 
not count as qualified once the child has left the home. Further, the 
child is not deemed to be residing with his or her parent or other 
caretaker relative. If the child is the only child in the family, then 
qualified expenditures to provide services or assistance to the family 
would no longer count toward basic MOE once the child left the home.
    Comment: The NPRM indicated that a State is free to define who is a 
member of a family for TANF and MOE purposes and can choose to assist 
other family members such as noncustodial parents. Several commenters 
requested clarification regarding the effect of including the 
noncustodial parent or others as a member of the eligible family (e.g., 
applicability of sanctions). The commenters asked whether 
``assistance'' provided to a noncustodial parent counts against the 
family for purposes of the time limit; whether a State can provide 
assistance or services to a noncustodial parent without providing 
assistance to the rest of the family; and whether a State must include 
the noncustodial parent as a family member. One advocacy group also 
asked whether a State could provide assistance to other relatives not 
living in the home; define a family to include more distant relatives 
not in the home; or even include nonrelatives not living in the home. A 
community organization felt that the potential addition of noncustodial 
parents or others not historically included within the family should 
not be totally discretionary with the State. The commenter recommended 
regulatory restrictions such as not providing assistance to a 
noncustodial parent when the custodial parent is not assisted. Another 
community organization requested that we spell out the full 
ramifications of States providing assistance outside the traditional 
``AFDC household'' so that States will be aware of the consequences of 
their decisions.
    Response: A number of commenters appeared to have interpreted our 
statement that States could include the noncustodial parent as part of 
the family to mean that any persons outside of the home may be a member 
of the eligible family. However, we did not intend for other relatives 
or nonrelatives not living in the home to be included as members of the 
eligible family. Only if a child is eligible in the home in which such 
other individuals live may the State choose to include them as part of 
that eligible family.
    At minimum, an eligible family must consist of a minor child who 
resides with a parent or other caretaker relative (or consist of a 
pregnant individual). Beyond this minimum configuration, States may add 
other household members to comprise the eligible family. Thus, we 
expected that a State would configure a family from the individuals 
living in the home.
    The only exception to this rule is the noncustodial parent. As the 
child's parent, a State may choose to include the noncustodial parent 
as a member of the child's eligible family. It also may choose not to. 
Further, a State may choose the circumstances under which a 
noncustodial parent would be a member of the child's eligible family. 
We leave this to State discretion and have included a minimal 
definition of noncustodial parent at Sec. 260.30.
    However, it is important to remember that an adult may receive TANF 
assistance only as part of a TANF family. This means that an adult, 
including a noncustodial parent, cannot apply for or receive TANF 
assistance independent of the child and custodial parent or caretaker 
relative, if applicable. Once the State determines the family is 
eligible, it is up to the State to determine the most appropriate 
assistance and nonassistance benefits to provide to family members.
    Similarly, expenditures for adults only count for basic MOE 
purposes if the adult is part of a TANF or TANF-eligible family (i.e., 
a family that would be eligible for TANF assistance, but whose family 
members are not necessarily receiving it). And, as with TANF, the State 
determines the appropriate benefits to provide the eligible family.
    As a member of the child's eligible family, a State could provide a 
noncustodial parent with benefits or services that could further the 
family's ability to attain economic self-support and self-sufficiency. 
Congress clearly supported this notion. For example, in section 101 of 
PRWORA, Congress stated that promotion of responsible fatherhood and 
motherhood is integral to the well-being of children. In section 407(h) 
of the Act, Congress expressed support for requiring noncustodial, 
nonsupporting parents under the age of 18 to fulfill community work 
obligations and attend appropriate parenting or money management 
classes after school. A provision in section 466(a) of the Act permits 
a State to issue an order, or to request that a court issue an order, 
requiring an individual owing past-due child support to participate in 
work activities, as defined in section 407(d) of the Act.
    In our NPRM discussion of individual regulatory provisions, we also 
suggested that States examine the various sections of this rule where 
the term family is used. We understood that States needed to realize 
the other effects, in terms of the TANF requirements, of adding other 
persons to the eligible family. Applicability of any or all the TANF 
requirements depends on whether a family member is receiving TANF 
``assistance'' as defined in Sec. 260.31.
    Applicability of a TANF requirement also depends on the person(s)

[[Page 17824]]

mentioned in a particular requirement. The TANF requirements use 
various terms, such as ``adult or minor child head-of-household,'' 
``adult,'' ``teen parent,'' ``family member,'' ``individual,'' ``parent 
or other caretaker relative,'' or ``single custodial parent'' when 
referring to family members. The effect of a requirement may vary 
depending on the status of the person(s) receiving assistance. Each 
requirement must be examined to determine the effect of the status of 
family members on its applicability or on the amount of assistance paid 
(e.g., in sanction cases).
    For example, the calculation of the work participation rates under 
section 407(b) of the Act consists of the number of families receiving 
assistance under the State program funded under this part that include 
an adult or a minor child head-of-household who engaged in work for the 
month (the numerator), divided by the number of families receiving TANF 
assistance during the month that include an adult or a minor head-of-
household minus the number of families that are subject to a penalty 
for refusing to work in that month--except if a family has been 
sanctioned for more three of the last 12 months (the denominator). For 
this requirement, once a TANF eligible family includes an adult who 
receives some form of TANF ``assistance,'' the family is included in 
the calculation of the work participation rate, and the adult may be 
required to participate in work activities. An ``adult'' eligible 
family member receiving TANF assistance could be the custodial parent 
or other adult caretaker relative, a noncustodial parent, or any other 
adult household member as determined by the State.
    Furthermore, section 407(e) of the Act requires the State to reduce 
or terminate the family's TANF assistance if an individual in the 
family refuses to engage in required work. ``Individual'' eligible 
family members could include the noncustodial parent or other members 
of the eligible family. Yet, the child care exception applies only if 
the individual refusing is a single custodial parent caring for a child 
under age six.
    Applicability of a requirement can also depend on the context of 
the funding. The term ``under the State program funded under this 
part'' used in the above provisions, as well as the terms ``under the 
program'' and ``under the program funded under this part,'' all mean 
the State's TANF program, whether funded with Federal or State funds. 
Applicability of a TANF provision also depends on whether the State 
funds under the TANF program to provide assistance to the family member 
are commingled with, or segregated from, Federal grant funds. We 
mentioned earlier in this discussion that a State could expend State 
funds for MOE purposes in different ways. In terms of the TANF program, 
State expenditures may be commingled with, or segregated from, Federal 
grant funds. Provisions in the statute that use any of the above-
mentioned terms apply to Federal or State-funded (whether commingled or 
segregated) assistance received under the TANF program, as depicted in 
the above examples.
    In addition, under section 408(a)(3) and title IV-D of the Act, a 
family may not receive TANF assistance unless an assignment of support 
rights has been executed on the child's behalf. The assignment would 
also include the right to spousal support in the case of a custodial 
parent who receives TANF assistance. However, as discussed in the 
preamble to Sec. 260.31, if the noncustodial parent also receives TANF 
assistance as a family member, the assistance provided to the 
noncustodial parent will not be considered ``assistance'' for purposes 
of the collection and distribution of assigned child support under 
title IV-D of the Act.
    Provisions that only use the term ``grant'' or ``amounts 
attributable to funds provided by the Federal government'' (e.g., the 
five-year time limit, and expenditures for medical services) refer only 
to assistance provided using Federal TANF funds. They do not apply to 
State-funded TANF assistance unless the assistance comes from 
commingled funds. If a family member receives assistance from 
commingled State funds, then rules that would otherwise only pertain to 
the use of Federal grant funds apply.
    However, as discussed at Sec. 264.1, after further analysis, we 
have interpreted the five-year limit to only apply when the adult 
family member is the head-of-household or the spouse of the head-of-
household and receiving assistance. Thus, if the noncustodial parent 
(i.e., the parent living in another household) receives TANF assistance 
as an eligible family member, that receipt impacts the family's 
lifetime limit only if he or she is the spouse of the head-of-
household. We believe this situation will occur rarely, if ever. The 
months that any other adult eligible family member who is not the head-
of-household or the spouse of the head-of-household receives TANF 
assistance would not count toward the family's lifetime limit.
    A State may also aid eligible family members by providing various 
services under the TANF program that do not constitute ``assistance.'' 
If so, the TANF requirements explained above do not apply. Services 
that are not assistance (e.g., counseling, job readiness, employment 
placement or post-employment services) may be provided to any eligible 
family member, e.g., the noncustodial parent.
    For basic MOE purposes, expenditures must be with respect to an 
individual who is a member of an eligible family. An eligible family 
member may also receive ``nonassistance'' or ``assistance'' through a 
separate State program. The requirements applicable to ``assistance'' 
received under the TANF program do not apply to separate State programs 
or to ``nonassistance'' provided to members of an eligible family.
    Comment: The definition of eligible families prohibits States from 
counting for MOE purposes expenditures made for pregnancy prevention 
services to childless individuals.
    Response: Such expenditures would count toward meeting the basic 
MOE requirement only if the childless individual is a member of an 
eligible family, e.g., an eligible teen family member. Section 
409(a)(7)(B)(i)(I) expressly provides that only qualified expenditures 
made with respect to members of eligible families count. Thus, we have 
not changed the final rule. However, Federal TANF funds may be used for 
this purpose to provide ``nonassistance'' per section 401(a)(3) of the 
Act.
    Comment: Numerous commenters requested clarification of 
Sec. 273.2(b)(3) of the NPRM which required that an eligible family 
must be financially eligible according to the TANF income and resource 
standards established by the State under its TANF plan. The commenters 
indicated that a uniform or single income/resource standard is 
inappropriate as it would restrict States' ability to provide families 
with services such as transitional assistance, e.g., child care, 
transportation, ongoing case management, education and training, or 
diversion services for families who need one-time or short-term help to 
prevent the need for traditional TANF cash assistance. A few commenters 
noted that a State's child care program may have its own income and 
resource limits. Another commenter indicated that the lack of 
flexibility may prevent certain transfers to tribal TANF programs from 
counting toward basic MOE. Therefore, commenters asked us to clarify 
the rules to allow for different standards of need for different types 
of services. They wanted a definition broad enough to cover families 
such as those who are transitioning off TANF, those who are at risk of 
receiving TANF, and those served through separate State

[[Page 17825]]

programs. Finally, another commenter asked us to de-link MOE and TANF 
eligibility.
    Response: The proposed rule at Sec. 273.2(b)(3) provided that an 
eligible family must be financially eligible according to the TANF 
income and resource standards established by the State under its TANF 
plan. It appears that commenters interpreted our use of the plural 
term, ``standards,'' to mean that the elements used to determine 
financial eligibility (income and resources) constituted a single set 
of criteria for all the services that a State would provide. This was 
not our intention. We used the term ``standards'' in the event a State 
wanted to have multiple financial requirements based on the different 
services that it wished to provide or the scope of families it wished 
to aid.
    States have the flexibility to decide the particular income and 
resource requirements that they will use to determine whether a family 
is financially eligible to receive a service, a package of services, or 
all of the services provided with State basic MOE funds. Thus, both 
income and resource requirements may vary, as determined by the State. 
For example, a State could establish different financial criteria for 
families no longer receiving TANF cash assistance in order that family 
members may receive transitional services. Or, a State may want to 
establish standards for providing short-term or nonrecurrent assistance 
to families in order to prevent the need for ongoing TANF assistance.
    Section 409(a)(7)(B)(IV) of the Act indicates that an eligible 
family is a family who is or would be eligible (as provided in this 
section) for assistance under the State program funded under this part. 
The State's TANF program is the State program funded under this part. 
Thus, there is a statutory link between MOE and the State's TANF 
program. However, that link merely requires that an eligible family is 
or would be eligible for TANF assistance. It does not require that 
eligible family members must necessarily receive TANF cash assistance 
or any other benefit or services through the TANF program. Section 
407(a)(7)(B)(i)(I) of the Act permits the State to help eligible family 
members through activities in ``all programs,'' i.e., TANF and separate 
State programs.
    Comment: Some commenters mentioned that States should be able to 
use basic MOE funds to create programs with definitions of need that 
may not assess income and assets at all. They argued that section 
409(a)(7) allows a State to claim basic MOE spending with respect to 
eligible families for any use of funds that are reasonably calculated 
to accomplish the purpose of the TANF program. Providing assistance to 
needy families is mentioned in only two of the four purposes of the 
program under section 401(a) of the Act. Thus, the term ``eligible 
families'' should include a broader population of families, not just 
those who are needy families. Two commenters, including one national 
organization, also noted that the TANF purposes do not require that 
spending has to be made to, or on behalf of, an eligible family. For 
example, preventing and reducing the incidence of out-of-wedlock 
pregnancies and encouraging the formation and maintenance of two-parent 
families could involve the development of materials, pamphlets, 
videotapes, and counseling activities directed at teen pregnancy 
prevention and other pregnancy prevention initiatives. Such 
expenditures benefit all TANF eligible families but do not necessarily 
benefit any one family in particular.
    Response: As we explained in the above response, the statute 
defines MOE expenditures as those made ``with respect to eligible 
families.'' Thus, it clearly links MOE expenditures to eligible 
families. An eligible family is a family who is or would be eligible 
for assistance under the State's TANF program. A family may not receive 
``assistance'' under the State's TANF program unless the family is 
needy. We interpreted the term ``needy'' for TANF and MOE purposes to 
mean financial deprivation, i.e., lacking adequate income and 
resources. We continue to believe this is the most appropriate 
interpretation and decline to expand the scope of the definition of 
needy. Hence, for basic MOE purposes, eligible families are those who 
are financially eligible according to the State's applicable income and 
resource criteria.
    States may establish different income and resource criteria to 
cover the scope of needy eligible families they wish to serve or the 
various services or activities they want to provide. States are free to 
design programs involving MOE activities, including those mentioned by 
the commenter, to reach as broad a population as they choose. However, 
only that part of the total expenditures made on behalf of eligible 
families who meet the State's applicable financial eligibility criteria 
counts toward a State's basic MOE.
    We would like to point out that Federal TANF funds may also be used 
to pay for ``nonassistance'' activities (such as those described above) 
that meet the purposes of the program as given in section 401(a)(1)-(4) 
of the Act and Sec. 260.20. Federal TANF funds may also be used for 
activities that benefit non-needy families in some cases, e.g., 
activities that meet the purpose of either section 401(a)(3) or (a)(4) 
of the Act. In this respect, there may be more flexibility in the 
expenditures that are allowable uses of Federal funds than those that 
are allowable for MOE purposes. This is because federally funded 
services or benefits do not necessitate a determination of financial 
eligibility (need) if they do not meet the definition of assistance. 
Thus, States may use Federal TANF funds (in accordance with section 404 
of the Act) to provide ``nonassistance'' services or benefits to 
eligible individuals who meet the State's other, nonfinancial, 
objective criteria for the delivery of such benefits.
    Comment: Some commenters asked whether a State must make use of 
resource standards, noting that there is no statutory requirement to do 
so. Other commenters noted that the definition of ``needy'' may or may 
not include an asset test. For various benefits, a State may just 
establish income criteria to determine the families who are eligible 
for the benefit. One national organization also indicated that some 
States are considering eliminating resource standards.
    Response: Title IV-A of the Act setting forth the TANF program does 
not address income or resource requirements (except under section 
408(f) with respect to deeming an alien's sponsor's income and 
resources). Rather, it uses the term ``needy.'' Although we interpreted 
``needy'' to mean financial deprivation, i.e., lacking adequate income 
and resources, we also recognize that some State programs may just 
involve an income test. Therefore, we are not requiring States to have 
resource requirements. We have clarified this point in the final rule 
under Sec. 263.2(b)(3) by stating that a family must be financially 
eligible according to the appropriate TANF income and resource (when 
applicable) requirements established by the State and contained in its 
TANF plan. (We discuss eligibility criteria in the TANF plan further in 
response to other comments in this section.) In this way, States not 
only decide the scope of families they want to serve, but also the 
families most in need of particular programs or services.
    Comment: One commenter noted that, with respect to resources, a 
State's standard may address cash assets only. Two commenters indicated 
concern that an asset limit that does not allow a family to own a 
serviceable and reliable vehicle to get to work or services is

[[Page 17826]]

extremely counterproductive to moving people to work.
    Response: It is the State's responsibility to specify income and/or 
resource limits. States define resources and determine which resources 
are considered, e.g., whether both liquid and nonliquid resources must 
be considered and the dollar limit(s) for each type of resource. For 
example, many States have already eased restrictions that prevented 
AFDC recipients from owning cars. Some States are increasing the 
excluded value or discounting entirely the value of a motor vehicle in 
determining TANF eligibility. We agree that such actions can promote 
job preparation and work.
    Comment: A few commenters, including two advocacy groups, 
recommended that we establish a ceiling on the income standards used by 
a State to ensure that basic MOE expenditures are appropriately 
targeted to help families most in need.
    Response: The proposed rules were silent on this issue. However, we 
do not think it is appropriate for us to establish a ceiling in the 
final rule. TANF leaves this responsibility to the States. We hope that 
States will establish reasonable income standards to ensure that 
expenditures are targeted to families most in need.
    While Congress did not explicitly provide for an income cap under 
TANF, we believe that Congress was very interested in the ways States 
are targeting their resources to help families most in need find work 
and move toward self-sufficiency. For example, section 404(d)(3)(B) of 
the Act requires that TANF funds transferred to title XX programs must 
be used only for programs and services to children or their families 
whose income is less than 200 percent of the income official poverty 
line (as defined by the Office of Management and Budget) applicable to 
a family of the size involved. Thus, we re-emphasize our hope that 
States will target their resources in ways that help needy families and 
support the goals of the program.
    In Sec. 265.9(c), we discuss the required information on MOE 
programs that States must submit annually. For example, States must 
report the eligibility criteria for the families served under each MOE 
program/activity. This information will help us to know the scope of 
families served in the various MOE programs. At some future date, 
depending on how MOE programs evolve, we may want to look at addressing 
MOE-related issues through legislative or regulatory proposals.
    Comment: Two commenters asked what the applicable standard is for 
purposes of basic MOE calculations if a State applies different income 
standards to different forms of assistance.
    Response: For purposes of counting MOE expenditures, qualified 
expenditures under all State or local programs consist of expenditures 
claimed with respect to eligible families (or eligible family members) 
who met the financial criteria (income and resource requirements, when 
applicable) corresponding to the particular activity (i.e., service or 
assistance provided) as described in the State plan.
    It is also important to note that the TANF compliance supplement 
issued by OMB for auditors will include the basic MOE requirement. In 
addition, States may be subject to other audits or reviews from time to 
time. Therefore, States must be able to support their MOE expenditures 
with adequate documentation.
    Comment: One commenter recommended that we replace the term 
``eligible families'' with ``TANF-related families'' to give States 
flexibility to help families become self-sufficient. Another commenter 
recommended that we define ``eligible families'' to include persons 
eligible for any benefit that could be made to a family with TANF funds 
in the State program, i.e., any expenditure that could be made under 
section 404(a)(1) or (2) of the Act with respect to a family. Thus, a 
State could use its own funds to pay for benefits that it would 
otherwise have paid with Federal TANF grant funds.
    Response: ``Eligible families'' is the term used in the statute. 
Therefore, we believe this is the appropriate term to use in the rules. 
As we explained earlier, States are free to establish different income 
and resource (when applicable) criteria to match the scope of families 
it wishes to serve and type of services it wants to provide. In the 
TANF program and in separate State programs, States have the 
flexibility to offer a range of services that they think will help 
eligible families attain and maintain self-sufficiency. However, for 
basic MOE purposes, States cannot necessarily use their own funds in 
the same ways as Federal TANF funds. To count toward basic MOE, 
expenditures of State funds must be made with respect to eligible 
families. The expenditures, whether under or separate from the TANF 
program, must provide the family or family members with services that 
``qualify,'' i.e., fit any of the activities listed under section 
409(a)(7)(B)(i)(I) of the Act. This provision would not include 
expenditures under section 404(a)(2) of the Act. (We address 
expenditures under section 404(a)(2) later in this discussion.)
    Comment: A few commenters asked whether States needed to include 
the income and resource requirements in the State's TANF plan. One of 
the commenters recommended that State plans clearly define and 
delineate all their programs so that there is a clear understanding of 
who is eligible, what services and benefits are available, and the TANF 
requirements and other provisions that apply to recipients of 
assistance. In addition, States should notify recipients in TANF 
programs (funded with either Federal or State funds) regarding their 
options and responsibilities, and the consequences of their choices. 
They also believed we should require States to develop MOE plans in 
advance of making expenditures and that States should file such plans 
with HHS and publish them in the State.
    Response: We agree with the comments that it is appropriate for 
States to specify in their TANF plans the financial eligibility 
criteria (income and resources, when applicable) associated with all 
State or local programs for which MOE expenditures are claimed 
(including State funds that are commingled, segregated or separated 
from Federal TANF funds). Section 402(a)(1(A)(i) of the Act requires 
that the TANF plan outline how the State intends to provide assistance 
to needy families with (or expecting) children, and provide parents 
with job preparation, work, and support services to enable them to 
leave the program and become self-sufficient. Section 402(a)(1)(B)(iii) 
requires that the TANF plan indicate the objective criteria for 
delivery of benefits, the determination of eligibility, fair and 
equitable treatment, and opportunity for appeal of adverse actions. 
Neither section makes any distinction between Federal or State-funded 
assistance, service, or benefits. Since States can use either Federal 
or State funds to provide assistance, services, or benefits, we believe 
that the State's TANF plan is the appropriate place to indicate this 
information for both TANF and MOE expenditures.
    If there is more than one activity within a program and the 
financial eligibility criteria differ per activity, the State must also 
indicate each different set of criteria in the TANF plan. For example, 
a State uses State funds in its transitional services program that 
consists of transportation and child care benefits. If the financial 
eligibility criteria are different for the two benefits, the State must 
indicate the financial eligibility criteria for each benefit.

[[Page 17827]]

    In addition, although we do not require it, we believe that the 
plan is the most appropriate place for States to provide a brief 
description of each MOE program benefit provided to eligible families 
or eligible family members, as well as any other particular eligibility 
criteria tied to receiving the specific benefit (e.g., must be 
participating in the State's work experience component to receive a 
particular benefit). In Sec. 265.9(c), we discuss the required 
information that States must submit annually. One of the required items 
includes naming each of the State's MOE programs and describing the 
major activities provided to eligible families under each such MOE 
program. To the extent this information is in the State's TANF plan, 
the annual reporting requirement may be met by referencing the plan.
    In summary, the following information must be in the State's plan 
in order for us to deem the plan submission complete: (1) The financial 
eligibility criteria with respect to eligible families that are 
associated with the State's TANF program and all State or local MOE 
programs; and (2) a brief description of the corresponding program 
benefit provided to eligible families or eligible family members, if 
the State has used MOE funds (either commingled or segregated) to 
provide the benefit. It would also be helpful for States to include a 
brief description of the corresponding program benefit provided through 
separate State MOE funds. However, the information is not required in 
order to deem the State's plan submission complete.
    We maintain a copy of each State's TANF plan, as well as any 
updates to the plan. As the Balanced Budget Act clarified, States need 
to update their plans, as appropriate, to reflect new or revised 
financial or programmatic requirements as a result of changes in State 
law or State policies. The plan is an important vehicle for ensuring 
public awareness of the various ways States are helping eligible 
families attain and maintain self-sufficiency.
    Comment: A few commenters believed we should hold States 
accountable for complying with their plans for services and benefits 
under TANF (funded with either Federal or State funds) and penalize 
them if they fail to do so.
    Response: The basic MOE penalty applies if a State fails to meet 
the basic MOE annual spending requirement with respect to eligible 
families as provided in this subpart. However, neither that penalty nor 
any other penalty provides authority for us to penalize a State for 
failure to carry out any part of its TANF plan.
    We believe that States are committed to expending their funds in 
ways that best assist eligible families attain work and self-
sufficiency. States have a very real stake in the success of welfare 
reform. States also recognize that they are ultimately accountable for 
their expenditure claims. States are audited annually or biennially and 
compliance with the basic MOE provisions is part of the audit.
    Following publication of the rules, we will update the compliance 
supplement to give auditors detailed information about how to assess 
State reports on their MOE expenditures.
    As part of their review, we will refer them to the information 
supplied in the TANF Financial Report and the supplemental information 
on MOE programs and MOE expenditures provided annually under 
Sec. 265.9(c). This supplemental material provides information about 
the scope of eligible families served with MOE funds and the ways in 
which States expend their MOE funds to help eligible families.
    In the compliance supplement, we will suggest auditing procedures 
that include reviews of all the MOE reports and an examination of 
issues such as the following: (1) Were all MOE expenditures reported 
for the fiscal year actually made during that fiscal year; (2) has the 
State adequately documented that reported MOE expenditures went to 
eligible families; (3) were the methodologies the State used to 
estimate the portion of program expenditures going to eligible families 
sound; (4) were all the reported expenditures consistent with the 
purposes of TANF; (5) were any expenditures made in violation of the 
prohibitions in Sec. 263.6; (6) where applicable, did all expenditures 
meet the ``new spending test'' (e.g., for every such program, did the 
State properly identify whether the program existed in 1995 and only 
count expenditures above the total State expenditures in 1995); (7) 
were administrative costs within the 15-percent cap; and (8) were the 
expenditures consistent with the cost principles set forth in OMB 
Circular A-87.
    We will use the results of the audits, together with our own 
analysis of the TANF Financial Report and the annual report, to 
identify situations where a State might be liable for an MOE penalty. 
For example, the fourth quarter TANF Financial Report would identify 
any State that reported MOE expenditures below the minimum 80-percent 
(or 75-percent) standard for the year. Either the TANF Financial Report 
or the annual report might identify types of expenditures that could be 
inconsistent with one or more of the requirements for ``qualified State 
expenditures.'' We might also undertake additional State reviews based 
on complaints that arise or requests from Congress.
    Comment: A few commenters expressed concern regarding the 
eligibility determination process for different types of services or 
assistance. The commenters contend that the method of determining 
eligibility could vary depending on the service. For example, the 
method for determining a family's eligibility for diversion services 
may be more abbreviated than the process used to determine eligibility 
for ongoing TANF cash assistance. One commenter recommended that the 
regulations require an application for all State-funded benefits and 
verification that the family is actually eligible before any basic MOE 
expenditures may count.
    Response: States decide the method(s) for determining whether the 
family consists of at least one child living with a parent or other 
caretaker relative and is financially eligible according to the 
appropriate income and resource (when applicable) criteria established 
by the State. As we mentioned in the above response, section 
402(a)(1)(B)(ii) requires States to indicate in their plan the 
objective criteria for the delivery of benefits and the determination 
of eligibility. Nothing in this provision precludes a State from having 
different methods of determining eligibility for different types of 
services. However, we would note that 45 CFR 92.42 requires States to 
keep records to document claims and that States should, therefore, have 
and keep adequate records on eligibility.
    Nevertheless, we remind States to pay attention to the TANF 
provisions that apply with respect to State-funded TANF assistance 
(i.e., to the use of commingled or segregated funds). States risk 
potential penalties if they violate certain TANF provisions. For 
example, section 408(a)(4) imposes a penalty on a State if the State's 
TANF program fails to participate in the Income and Eligibility 
Verification System (IEVS). The IEVS provision helps to improve the 
accuracy of eligibility determinations for applicants and recipients of 
TANF assistance.
    States have an inherent interest in ensuring the integrity of their 
expenditures. Should a State learn of any material deficiency in its 
method for determining eligibility, we anticipate that the State would 
rectify it immediately, so that funds for services

[[Page 17828]]

are properly benefitting members of eligible families.
(c) Types of Activities
    Comment: Several commenters recommended rewording Sec. 273.2(d) of 
the proposed rule to avoid confusion regarding the applicability of 
``assistance'' as defined under Sec. 260.31 for basic MOE purposes. 
Commenters noted that States have the flexibility to count expenditures 
with respect to eligible families whether or not the expenditures meet 
the definition of assistance.
    Response: As we explained earlier in this discussion, we believe 
that States may help eligible family members through an array of 
services that fall within the broad categories of activities listed in 
section 409(a)(7(B)(i)(I), including services that would not fall 
within the definition of assistance at Sec. 260.31, such as 
nonrecurrent, short-term assistance. To clarify this point, we have 
reworded Sec. 263.2(d) of the final rule and included similar language 
at Sec. 260.31(c)(1).
(1) Cash Assistance
    Comment: A few commenters requested clarification of the amount of 
State Earned Income Tax Credit (EITC) that can count toward the basic 
MOE requirement. One commenter noted that a State's EITC expenditures 
should count toward the basic MOE requirement even if none of the 
credit was ``actually sent'' to an eligible family member. For example, 
some States have ``nonrefundable'' EITC programs. Under a 
``nonrefundable program,'' the EITC serves to reduce the family's State 
income tax bill. However, the State does not pay the family any EITC 
remaining if the credit amount is larger than a family's State income 
tax bill. Another commenter asked whether we intended the entire cash 
payment actually received by the eligible family to count toward basic 
MOE, even if a portion of the payment consists of a State income tax 
refund.
    Response: We have addressed this issue extensively in the preamble 
for the new Sec. 260.33. An EITC program can help to relieve the State 
income tax liability for working poor families by decreasing the 
family's State income tax liability. The family's tax liability is the 
amount of taxes owed prior to any adjustment for credits or payments. 
EITC can also supplement a family's income--if the credit amount 
exceeds the family's State income tax liability and the State pays the 
family the remainder (i.e., it refunds the credit amount remaining). 
Such a refund is equivalent to cash assistance and may count as a 
qualified expenditure because it is reasonably calculated to meet a 
purpose of the TANF program.
    State income taxes represent revenue to the State. Credits that 
offset a family's State income tax obligation provide tax relief to the 
family while reducing the State's revenue. A reduction in taxes, or 
revenue foregone, is not an expenditure. Therefore, only the EITC 
amount that exceeds a family's State income tax liability prior to 
application of the EITC is an expenditure. It may count for basic MOE 
purposes if the excess amount is actually paid out (refunded) to the 
eligible individual. Section 409(a)(7) of the Act stipulates that only 
``expenditures'' with respect to eligible families that provide a 
benefit or service that is reasonably calculated to meet a purpose of 
the TANF program count toward a State's basic MOE. Thus, if a State 
does not disburse or pay out any excess EITC remaining, there is no 
expenditure.
    States must determine the amount of any excess EITC paid to a 
family in a fiscal year by reconciling the family's State income tax 
obligation for the year against the total EITC amount for which the 
family qualifies. Any excess EITC amount actually paid to the family 
may count toward the State's basic MOE. In this regard, any EITC that a 
worker receives in advance through his or her paycheck may only serve 
to offset the family's tax liability. Advance EITC would have to be 
reconciled at the end of the year, in the same manner as the lump-sum 
EITC credit, to determine the portion, if any, that exceeded the tax 
liability.
    For example, a wage earner qualifies for a $200 earned income tax 
credit. His or her family has a $75 State income tax liability for the 
tax year. When reconciling at the end of the year, the first $75 of the 
credit is used to reduce the eligible family's State income tax 
liability to zero. This part of the calculation represents revenue 
foregone to the State and does not constitute an expenditure. If the 
State also elects to refund (pay out) the remaining $125 in EITC, then 
the $125 actually sent to the eligible family is a qualified 
expenditure and counts toward the State's basic MOE.
    The same principles apply in the case of a worker who is otherwise 
due a State income tax refund. For example, suppose the wage earner 
qualifies for an earned income tax credit of $200. Assume further that 
the family has a $75 State income tax liability. Yet, through 
withholding, the wage earner paid a total of $150 in State income taxes 
throughout the year. After reconciliation at the end of the income tax 
year, the State owes the worker $150 from withheld State income taxes 
and $125 in excess EITC. If the State pays out the EITC owed and sends 
it to the family as part of a refund check in the amount of $275, only 
the EITC portion, or $125, counts toward the State's basic MOE.
    Comment: One commenter asked to what extent other tax credits such 
as a dependent care credit, credit to purchase a car seat or health 
insurance, tax forgiveness credit, sales tax credit, and property tax 
credit count toward a State's basic MOE requirement. The commenter also 
asked to what extent, if any, other tax relief provisions such as 
personal or dependent exemptions or the standard or other forms of 
deductions count toward a State's basic MOE requirement.
    Response: Tax provisions that only serve to provide a family with 
relief from State taxes, such as income taxes, property taxes, or sales 
taxes, represent a loss of revenue to the State, not expenditures to 
provide a benefit or service to eligible families. For example, 
exemptions and deductions are generally subtracted from total taxable 
income, serving only to reduce the amount of income subject to income 
tax. Therefore, such exemptions and deductions would not constitute an 
expenditure for the purposes of section 409(a)(7) of the Act. 
Similarly, tax credits that rebate, refund, or return to a family a 
portion of the State's tax revenue (e.g., property, sales, or income 
taxes paid by families to the State) would not count toward the State's 
basic MOE requirement. Such credits serve only to offset a particular 
tax (e.g., a State property tax credit that refunds a portion of 
property taxes paid). A reduction in tax burden is not an expenditure. 
There has been no direct outlay of State funds to provide a service or 
benefit to eligible families.
    However, credits that go beyond tax relief and are paid to the 
eligible family would count toward a State's basic MOE requirement if 
the expenditure is reasonably calculated to meet a purpose of the TANF 
program. For example, like the earned income credit, a child care or 
dependent care credit is subtracted from the family's income tax 
obligation. The portion of the credit that exceeds the income tax 
liability and is paid to the family may count toward the State's basic 
MOE requirement. Should the family qualify for more than one refundable 
credit (e.g., an earned income credit and a dependent care credit), 
then the amount by which the total combined value of the allowable 
credits exceeds the family's State income tax liability may count for 
basic MOE purposes.

[[Page 17829]]

    It is important to note that while States may describe elements of 
their tax provisions, such as exemptions or deductions, as 
``expenditures,'' the provision may not actually be an expenditure. 
Similarly, States may differ in their methods of providing certain 
credits. For example, a sales tax or property tax credit may be claimed 
through the State's income tax system or through a separate process. 
Neither of these factors is material to determining whether some or all 
of the value of a credit, exemption, or deduction can count for basic 
MOE purposes. Accordingly, we urge States to carefully examine any tax 
initiative to determine whether it only serves to provide tax relief. 
If so, the money does not count for MOE purposes, even if a portion of 
the tax revenue is refunded or rebated to the eligible family as ``cash 
assistance.'' However, actual expenditures such as some refundable tax 
credits may count for MOE purposes if the portion of the credit that 
exceeds the family's income tax liability is sent to the eligible 
family and the refund is reasonably calculated to accomplish a purpose 
of the program. Should a State wish to consult with us on these 
matters, we are available for technical assistance.
    Comment: Several commenters noted that lack of transportation to 
training, job interviews, jobs, child care, or other services that 
accomplish the purpose of the program represents one of the most 
significant barriers to individuals attaining and maintaining 
employment. There are frequently no public or private transportation 
services in rural areas, so the traditional approach of tokens or 
vouchers is inadequate. Transportation is also problematic in urban 
areas due to the mismatch of job and transit destination sites and 
traditional commuter services times and routes.
    Commenters generally recommended that we give States sufficient 
flexibility to respond to individual travel needs by allowing a broad 
range of activities as MOE. Examples of suggested allowable 
transportation activities included brokerage and coordination pilot 
programs, initiation of services that increase access for TANF 
recipients to new development or redevelopment employment sites, 
subsidization of new transit services either directly or in combination 
with other Federal or State sources, sharing in the cost of extending 
existing public transportation services, and developing necessary 
transportation infrastructure. One commenter added that we should tie 
transportation development costs for basic MOE to coordination 
mechanisms among human services agencies, State departments of 
transportation, and private transportation providers.
    One national organization commented that, if public transit 
providers must use the cost allocation method, our rules would be 
unduly restrictive and could impede the ability of States to provide 
cost-effective services. The commenter suggested classifying such 
services as contracted services for TANF clients to be paid for by TANF 
agencies, with any non-TANF riders considered incidental. Another 
commenter recommended adding a section under this subpart to address 
when transportation-related expenditures count for basic MOE purposes.
    Two commenters referred to the WtW program by suggesting that 
qualified transportation expenditures for basic MOE purposes should 
include transportation services provided through the State's WtW 
program and by clarifying that States could use TANF funds to support 
transportation services consistent with the WtW block grant program.
    Response: We agree that transportation is a critical element in 
helping eligible individuals find and keep jobs. President Clinton 
recognized the importance of this issue in his 1998 State of the Union 
address. To help individuals on welfare get to work, he proposed an 
Access to Jobs initiative in the transportation reauthorization bill. 
Congress approved this proposal as the Job Access and Reverse Commute 
grant program in the Transportation Equity Act for the 21st Century 
(TEA-21), enacted in June 1998.
    On May 4, 1998, we issued written guidance jointly with the 
Departments of Transportation and Labor on some of the ways in which 
States could use TANF and WtW funds to break down the transportation 
barriers for eligible individuals (Temporary Assistance for Needy 
Families Program Policy Announcement TANF-ACF-PA-98-2). Most of the 
examples could also serve as examples for the use of basic MOE funds. 
We updated this guidance to incorporate the provisions of TEA-21 in 
TANF-ACF-PA-98-5, dated December 23, 1998. We anticipate issuing 
additional guidance on the use of funds shortly after publication.
    We do not think that it is necessary to add specific regulations to 
address transportation expenditures.
    Transportation expenditures with respect to eligible families count 
as basic MOE if they meet all the requirements under section 409(a)(7) 
of the Act and this subpart. For example, under section 
409(a)(7)(B)(i)(I)(aa) of the Act, transportation expenditures count if 
they are a form of cash assistance that is reasonably calculated to 
accomplish a purpose of the program (e.g., reimbursement for mileage, 
gas, public transit fare, auto repairs/insurance, or a basic cash 
allowance for transportation needs to go to or from work or training). 
Also, under section 409(a)(7)(B)(i)(I)(ee) of the Act, other types of 
transportation expenditures count if they reasonably accomplish a 
purpose of the TANF program, such as promoting job preparation and 
work. A broad range of transportation activities are possible within 
this category. We included some examples of such activities in the 
joint guidance cited above. However, we remind States that applicable 
TANF rules apply to State-funded transportation assistance (as defined 
in Sec. 260.31) provided under the TANF program. (We discussed the 
implications of State-funded assistance in an earlier response.)
    We also remind States that only qualified transportation 
expenditures with respect to eligible families count toward the basic 
MOE requirement. Congress clearly did not intend to include 
expenditures for the public at large. Thus, it is improper to claim as 
basic MOE general expenditures required to carry out other 
responsibilities of a State or local government and benefitting the 
public at large. However, a State could contract with a public or 
private transit agency for transportation services for eligible family 
members. Under such a contracting arrangement, a transit company could 
serve noneligible individuals so long as the State does not claim as 
State MOE the funds used to pay for, or subsidize, use by these 
noneligible individuals.
    A State could also claim as MOE those start-up, program, and 
administrative costs that are attributable to eligible family members 
under a State or local transportation initiative (e.g., to broker 
transportation services) that is consistent with TANF goals, but 
targeted to a larger low-income population or more broadly to a low-
income area.
    States must allocate costs when State or local programs or agencies 
share costs, e.g., the TANF agency shares the use of vans or buses with 
a senior citizen program or shares in the purchase of transportation 
services.
    We know that many States and locales have already made tremendous 
strides toward breaking down the transportation barriers faced by 
eligible family members. However, we also know that Federal TANF and 
State MOE funds are insufficient to overcome all transportation 
deficiencies. The recently

[[Page 17830]]

passed Job Access and Reverse Commute grant programs will give States 
additional flexibility in developing and providing transportation 
services.
    The Job Access program provides competitive grants to assist States 
and localities in developing flexible transportation services to 
connect welfare recipients and other low-income persons to jobs and 
other employment-related services. The Reverse Commute grant program is 
for projects that will provide transportation services to suburban 
employment centers from urban, rural, and other suburban locations for 
all populations. The Mass Transit Account of the Highway Trust Fund and 
the General Fund finance both programs. However, the amount of the 
Federal grant under either program may not exceed 50 percent of the 
total project's cost. The balance must be met locally. Thus, a 50/50 
Federal/local match is required under both programs.
    In this regard, we remind States of the prohibition under section 
409(a)(7)(B)(iv)(IV) of the Act and Sec. 263.6(c) of this subpart 
stipulating that any State funds expended as a condition of receiving 
Federal funds under other programs do not count toward the State's 
basic MOE. Thus, any State funds used to meet the cost-sharing 
requirements of the Job Access and Reverse Commute grants program do 
not count for basic MOE purposes. However, in this case, Federal TANF 
funds may be used to satisfy non-Federal match requirements of another 
program (within specified monetary limits).
    In addition, section 409(a)(7)(B)(iv)(III) of the Act and the 
regulatory text at Sec. 263.6(e) of this subpart expressly provide that 
State funds expended to meet the WtW matching requirements do not count 
toward a State's basic MOE. Thus, States may not double-count 
expenditures to provide transportation services for individuals 
participating in an allowable WtW employment activity.
    The statute is equally clear regarding expenditures for supportive 
services, such as transportation, to help eligible family members who 
are WtW participants. Section 403(a)(5)(C)(i)(VI) of the Act provides 
that a State may use WtW funds to provide supportive services to 
eligible participants only ``if such services are not otherwise 
available.'' A State could use basic MOE funds to provide 
transportation services consistent with the WtW block grant program 
because the WtW and TANF programs share the same purposes. But, as 
explained above, the expenditures do not count for basic MOE purposes 
if the State also used these expenditures toward the required WtW match 
under section 403(a)(5) of the Act.
(2) Any Other Use of Funds Allowable Under Section 404(a)(1)
    Comment: One commenter recommends that we allow States to claim 
expenditures toward basic MOE that were formerly allowable under a 
State's AFDC-EA program. Another commenter specifically asked whether 
services paid under a housing assistance program qualify for basic MOE 
purposes. The housing assistance component provides payment for rent, 
security deposit, and utilities to prevent and/or end homelessness or 
near homelessness. A third commenter asked whether expenditures for 
micro-entrepreneurship development services qualify for basic MOE 
purposes. The commenter believes this approach fosters employment 
opportunities in rural areas through self-employment options.
    Response: Section 409(a)(7)(B)(i)(I)(ee) of the Act permits any 
activity with respect to eligible families that is reasonably 
calculated to accomplish the purpose of the TANF program to count for 
basic MOE purposes. For example, one purpose of the program is to 
provide assistance to needy families so that children may be cared for 
in their own homes or in the homes of relatives. Thus, some (but not 
all) emergency assistance and services with respect to eligible 
families, which had been previously provided by a State under its AFDC-
EA program, would meet this purpose and could count for basic MOE 
purposes. We believe that emergency housing assistance services could 
meet this purpose as well. However, only the expenditures made with 
respect to eligible families count for basic MOE purposes. (Refer to 
Sec. 263.5 for discussion of the ``new spending'' limitation on certain 
MOE program expenditures.)
    Another purpose of the program is to end the dependence of needy 
parents on government by promoting job preparation, work, and marriage. 
Micro-entrepreneurship services promote job preparation and work. In 
this regard, a State may also deposit State funds into the eligible 
family member's Individual Development Account (IDA) to help with 
business capitalization. The funds count once toward the basic MOE 
requirement--in the fiscal year in which the State deposits the money 
into the eligible family member's IDA. The State could not use the IDA 
balance carried forward to the next fiscal year to meet the basic MOE 
requirement for the next fiscal year.
(3) Medical and Substance Abuse Services
    Comment: A number of commenters supported our clarification in the 
preamble to allow States to use State funds to provide drug and alcohol 
treatment services to eligible family members when these services 
assist in accomplishing a purpose of the program. Nearly all the 
commenters requested that we add the clarification to the final 
regulation.
    One commenter found the need to separate medical from nonmedical 
substance abuse treatment services problematic and unrealistic as both 
types of services are lacking in rural areas. The commenter also noted 
that child care and transportation costs related to these services 
should also count toward a State's basic MOE. Another commenter 
suggested that we provide guidance in the preamble to differentiate 
medical from nonmedical alcohol and drug treatment services.
    Two other commenters felt that medical services in connection with 
gaining and retaining unsubsidized employment (e.g., pre-employment 
services that include physical examinations) should count toward the 
basic MOE.
    Response: We agree that allowing expenditures with respect to an 
eligible family member for nonmedical substance abuse treatment is an 
important clarification and have added it to the final regulation.
    We did not intend to imply that substance abuse treatment must be 
exclusively nonmedical in nature for the nonmedical services to count 
for basic MOE purposes. We recognize that drug and alcohol abuse 
treatment services may include medical as well as nonmedical 
activities. However, if States wish to use commingled State TANF funds 
for substance abuse treatment services, they have the responsibility to 
develop policies that distinguish between expenditures for the 
provision of medical services and nonmedical services. The policies 
must reflect a reasonable interpretation of the statutory language.
    Section 408(a)(6) of the Act expressly excludes the use of Federal 
TANF funds to provide medical services except for pre-pregnancy family 
planning activities. The same prohibition applies to any commingled 
State funds expended to treat an eligible family member for drug and 
alcohol abuse. Commingled State funds used to provide nonmedical 
services, such as substance abuse services, to an eligible family 
member would count toward basic MOE if the service is reasonably

[[Page 17831]]

calculated to accomplish a purpose of the program, e.g., help the 
individual prepare for work, find, or keep a job.
    The prohibition on medical expenditures does not apply to 
segregated State TANF funds or separated State funds. Therefore, States 
may count medical expenditures with respect to eligible family members 
toward the basic MOE provided these expenditures are consistent with 
the purposes of the program and are not matched by the Medicaid program 
or otherwise prohibited under section 409(a)(7)(B)(iv) of the Act or 
Sec. 263.6(b) and (c) of this subpart.
    We again remind States that the drug and alcohol abuse treatment 
services with respect to eligible families must be consistent with the 
purposes of the program to count toward the State's basic MOE 
requirement. If so, then by extension, expenditures for other 
supportive services such as transportation and child care that 
facilitate the eligible family member's ability to access and complete 
substance abuse treatment may also count for basic MOE purposes, if the 
MOE requirements are met. (Refer to Sec. 263.3 for discussion of the 
limitation on certain child care expenditures.)
    We agree that pre-employment services is an example of a qualified 
activity because it accomplishes a purpose of the program. Therefore, 
by extension, the associated medical expenditures would count toward 
basic MOE if the State uses segregated or separated funds to pay for 
the services.
(4) Juvenile Justice
    Comment: We received several comments regarding our discussion of 
juvenile justice expenditures. Most of the commenters opposed our 
conclusion that juvenile justice expenditures do not count for basic 
MOE purposes because the expenditures do not meet any of the purposes 
of the TANF program. However, the commenters did not specifically 
explain how the purposes are met.
    Response: As we explained in detail earlier in our discussion, 
juvenile justice expenditures do not count for basic MOE purposes. The 
principal purpose of a child's placement in the juvenile justice system 
is to protect society because of the child's behavior, not to care for 
the child in his or her own home (purpose 1). Since the focus is to 
address the child's needs, expenditures to care for the child in these 
living situations does not serve to end the dependence of needy parents 
on government benefits by promoting job preparation, work and marriage 
(purpose 2). The remaining two purposes do not even remotely relate to 
this situation. Thus, it is not an allowable use of funds under section 
404(a)(1) of the Act.
    In some States, Federal TANF funds may support juvenile justice 
programs pursuant to section 404(a)(2) of the Act. However, the basic 
MOE requirement under section 409(a)(7) of the Act expressly does not 
count expenditures for services or activities that only fall under 
section 404(a)(2). Thus, it does not cover benefits and services for a 
child removed from his or her home and receiving care in a correctional 
facility or juvenile residential facility. States that were previously 
authorized to cover the costs of children in the juvenile justice 
system under their formerly approved AFDC-Emergency Assistance plans 
would need to use Federal TANF funds for this purpose.
    Clearly, expenditures on eligible families for services that are 
reasonably calculated to accomplish the purpose of the program do 
qualify for basic MOE purposes. For example, a State may wish to 
provide family preservation services so that an eligible child family 
member may be cared for in his or her own home (purpose 1). Such 
assistance could include family or individual counseling services or 
parenting training to improve family functioning, referrals to outside 
service providers who could help an ``at risk'' child or family 
function better, and associated assessment and case management 
activities.
(5) State ``Rainy Day'' Funds
    Comment: One commenter noted that States have a long history of 
creating rainy day funds or special reserves to cover contingency 
needs. States recognize the need to be fiscally prudent in the 
anticipation of caseload increases, natural disasters, economic 
declines, and increasing participation rates. But the commenter 
believed the language in the proposed rule limits State flexibility to 
use State funds for this purpose.
    Response: Section 409(a)(7)(A) and (B) of the Act stipulate that 
only qualified expenditures made with respect to eligible families 
count toward a State's basic MOE. Placing funds in a reserve or rainy 
day fund does not represent an expenditure. While we agree that it may 
be fiscally prudent to create a rainy day fund or a reserve, the money 
in the fund does not count for basic MOE purposes until the fiscal year 
in which the State actually expends funds on behalf of eligible 
families in ways that meet the requirements of section 409(a)(7) of the 
Act and this subpart.
(6) Administrative Costs
    Comment: Several commenters raised questions about how the 
administrative cost cap was applied to MOE and separate State programs. 
A few did not want a cap on the administrative costs of separate State 
programs, believing that the PRWORA does not authorize us to cap those 
administrative costs. Three commenters took exception to the 
application of the 15-percent administrative cost cap to separate State 
programs. The three commenters believe that such ``separate State 
programs'' should be excluded from coverage of the definition.
    Response: We believe these comments are a result of confusion about 
the proposed regulatory language. The MOE administrative cost cap is 
not a limit on the administrative costs of separate State programs. 
Rather, it is a limit on the amount of administrative costs that can 
count as MOE. Section 409(a)(7)(B)(i)(I)(dd) clearly limits the amount 
of administrative costs that can count as basic MOE. We have revised 
the regulatory language at Sec. 263.2(a)(5) to clarify the distinction.
    We also noted an error in the proposed TANF reporting form and the 
accompanying instructions that may have added to the confusion. The 
instructions provided separate columns for reporting of expenditures 
from MOE funds, one for State TANF expenditures and one for separate 
State programs. It then indicated how administrative costs would be 
determined ``for each of these columns.'' This language suggested that 
there were two separate caps, when that is not the case. We have 
corrected the instructions for the form.
    Comment: Two commenters indicated that administrative spending for 
the TANF program would probably never involve a specific payment to, or 
on behalf of, a specific eligible family. Yet this is a qualified 
expenditure. Therefore, the commenter thought all types of spending 
should qualify toward the basic MOE.
    Response: The different treatment of administrative costs is based 
on statutory distinctions. According to section 409(a)(7)(B)(i)(I)(dd) 
of the Act, administrative expenses under all programs means 
``[A]dministrative costs in connection with the matters described in 
items (aa), (bb), (cc), and (ee).'' Therefore, the statute includes as 
MOE, administrative expenses if the expenditure relates to carrying out 
another qualified activity that helps eligible families.
    Comment: One commenter observed that the definition of 
administrative costs under Sec. 273.0(b) of the proposed

[[Page 17832]]

regulation applies to State MOE expenditures since the use of State MOE 
funds have the same administrative cost cap as Federal TANF funds.
    Response: The commenter correctly noted that the definition of 
administrative costs applies whether State funds or Federal TANF funds 
are used to pay these costs.
    Comment: Two commenters supported our proposal to exempt State 
expenditures used toward information technology and computerization 
needed for tracking or monitoring as required by title IV-A. One 
commenter noted that while section 409(a)(7)(B)(i)(I)(dd) of the Act 
does not clearly state that this exemption applies, nevertheless, 
States are facing massive systems needs as a result of welfare reform. 
In addition, the exception for technology and computerization should 
include costs for contracts to develop new programs; staff needed to 
install and maintain additional systems; staff collating, in-putting 
and analyzing required tracking and monitoring data; training costs for 
new hardware and software; and preparing the reports and other 
documents related to the tracking and monitoring mandates.
    Response: We have retained our proposal that the same exception 
given under section 404(b)(2) with respect to costs related to 
information technology and computerization needed for tracking and 
monitoring apply to State-funded administrative costs in connection 
with qualified expenditures.
    We addressed the treatment of computer-related costs in the 
discussion of the definition of administrative costs at Sec. 263.0. 
Refer to that section for a full discussion of issues raised regarding 
information technology and computerization needed for tracking or 
monitoring. Basically, this discussion affirms that certain systems 
costs may be excluded in determining whether a State is within or 
exceeded the 15-percent limitation placed on administrative 
expenditures. It also provides guidance about the scope of that 
exclusion.
    Comment: One commenter said that the cap on administrative costs 
does not apply to additional State dollars that a State must expend if 
assessed a penalty.
    Response: The commenter is correct. Section 409(a)(12) of the Act 
requires a State to expend additional State funds under its TANF 
program to replace any loss of Federal grant funds due to a penalty. 
The 15-percent limit under section 404(b) applies only to Federal TANF 
funds, and, thus, does not apply to the State replacement funds under 
section 409(a)(12). Further, as the statute precludes the use of 
replacement funds to meet the MOE requirement, they are not subject to 
the MOE rules, including the MOE cap on administrative expenditures. 
However, they must otherwise be allowable expenditures under the 
State's TANF program.

Section 263.3--When Do Child Care Expenditures Count? (Sec. 273.3 of 
the NPRM)

Overview
    In the NPRM preamble we explained that there were certain 
restrictions on the child care expenditures that could count for basic 
MOE purposes. First, only child care expenditures used to assist 
eligible families under the State's TANF criteria count toward the 
State's basic MOE. Under Sec. 263.2 (formerly Sec. 273.2), we indicated 
that eligible families mean families that have a child living with a 
parent or other adult caretaker relative (or consisting of a pregnant 
woman) and are financially needy per the appropriate TANF income and 
resource standards (when applicable) established by the State under its 
TANF plan. Thus, not all State expenditures to provide child care 
services would necessarily qualify for basic MOE purposes, particularly 
if the eligibility criteria for the child care services are broader 
than the State's TANF criteria, e.g., under the Child Care Development 
Fund (CCDF).
    Second, section 409(a)(7)(B)(iv) of the Act establishes four 
general restrictions on State expenditures. (These restrictions are 
listed in Sec. 263.6.) Two of the restrictions, at subsections 
409(a)(7)(B)(iv)(IV) and 409(a)(7)(B)(iv)(I), apply to child care 
expenditures.
    Subsection 409(a)(7)(B)(iv)(IV) generally excludes any State funds 
expended as a condition of receiving Federal funds under other Federal 
programs from counting toward a State's basic MOE. Thus, Congress 
prohibited ``double-counting.'' However, this subsection also provides 
an exception to this restriction for child care expenditures (i.e., the 
State's CCDF MOE and the State's share of matching funds). State child 
care expenditures used to meet the child care MOE requirement or to 
receive Federal matching funds under the CCDF may also count toward 
meeting the State's basic MOE requirement if the expenditures are made 
on behalf of members of an eligible family.
    The amount of State child care expenditures that may count for 
basic MOE purposes is limited to the State's share of expenditures in 
FY 1994 or FY 1995, whichever is greater, for the former title IV-A 
child care programs, i.e., the AFDC/JOBS child care, transitional child 
care, and At-Risk Child Care programs. This capped amount is the same 
amount as the State's child care MOE amount, for purposes of qualifying 
for child care matching funds.
    If a State has additional State child care expenditures, i.e., 
expenditures that have not been used toward meeting the child care MOE 
requirement or to receive Federal matching funds under CCDF, these 
expenditures may count toward the State's basic MOE, provided the 
expenditures meet all other requirements and limitations set forth in 
subpart A of this part. Subsection IV does not limit the amount of such 
additional child care expenditures that may count for basic MOE 
purposes.
    Subsection 409(a)(7)(B)(iv)(I) excludes any expenditures that come 
from amounts made available by the Federal government. Therefore, 
Federal TANF funds transferred from the TANF program to the Child Care 
and Development Block Grant (also known as the Discretionary Fund of 
the CCDF) would not count toward MOE. Neither would Federal TANF funds 
directly received under CCDF (or any other program that allows for 
child care).
Comments and Responses
    We received a number of comments on this section. Some commenters 
found the information regarding expenditures that could count helpful, 
especially since States are making significant investments in child 
care. Others thought that the preamble was confusing because it did not 
clearly distinguish between child care expenditures that are subject to 
a dollar limit (and therefore would not count in the entirety toward 
the basic MOE) and those that can count without limit. A few commenters 
recommended that the final regulations at Sec. 263.3(a) (formerly 
Sec. 273.3(a)) clearly explain which child care expenditures count 
rather than merely cross-referencing the statutory provision.
    Several commenters expressed concern that the definition of 
``eligible family'' deters States from counting child care expenditures 
under the State's child care program for transitional and at-risk 
families. We address this and other comments in the discussion below.
    Comment: Some commenters noted that the wording in this section 
does not clearly explain which expenditures do and do not count toward 
the State's basic MOE requirement. The commenters thought that we 
should add a clarification to the final regulations.

[[Page 17833]]

    Response: States may receive an allocated amount of Federal 
matching funds under the matching fund component of the CCDF. To 
receive its share of these matching funds, the State must meet a 
maintenance-of-effort (MOE) requirement. The child care MOE requirement 
is a specific dollar amount that we calculated for each State based on 
their FY 1994 or FY 1995 State child care expenditures under the title 
IV-A child programs. Thus, under the CCDF matching fund, States must 
expend State-only dollars that equal their child care MOE level and may 
claim Federal matching funds (up to the allocated amount) for State 
funds expended beyond the child care MOE level to provide CCDF-funded 
child care services. A State may also count these State-funded child 
care expenditures toward the State's basic (TANF) MOE as long as the 
expenditures also meet the requirements under section 409(a)(7) of the 
Act and this subpart. However, the amount that may be counted for basic 
MOE purposes is limited to State's child care MOE amount. States should 
note that while the basic MOE limit for double-counting child care 
expenditures is the same amount as the child care MOE amount, this does 
not mean that the State may use only child care MOE expenditures. For 
example, if a State's annual child care MOE requirement is $5 million, 
then the State may only count up to $5 million of its CCDF matching 
fund expenditures toward its annual basic MOE requirement. The State 
could claim the $5 million in child care expenditures from either 
expenditures used to meet the State's child care MOE requirement or 
expenditures used to receive CCDF Federal matching funds.
    It is not unusual for a State to expend in excess of the funds 
needed to draw down CCDF funds to provide child care services. There is 
no dollar limit on counting toward basic MOE State expenditures to 
provide child care assistance that have not been used to meet the CCDF 
matching fund requirements. We have clarified this policy in the 
regulatory text. At the same time, we remind States of the ``new 
spending'' provision at Sec. 263.5 that limits the amount of basic MOE 
expenditures that may count in certain pre-existing basic MOE programs, 
including certain child care programs.
    For pre-existing child care programs (current State or local 
programs also operating in FY 1995) that were not AFDC-related 
programs, States may only claim ``new spending'' toward the basic MOE 
requirement--namely, qualified State expenditures in the current year 
with respect to eligible families that exceed what the State spent on 
that program in FY 1995. The AFDC-related child care programs included 
the AFDC, At-Risk, and transitional child care programs. The ``new 
spending'' provision does not apply to expenditures for child care 
services that would have been an allowable expenditure under these 
former title IV-A child care programs.
    Hence, in terms of a child care program subject to the ``new 
spending'' provision, three requirements apply for the expenditure to 
count as basic MOE. First, only the ``new'' expenditures, those in 
excess of the FY 1995 program expenditures, potentially count. Second, 
if the expenditures have been used to meet the child care MOE 
requirement or to receive CCDF matching funds, the maximum amount of 
excess expenditures that can be double-counted is limited to the 
State's child care MOE amount. For those expenditures that have not 
been used to meet the child care MOE requirement or to receive CCDF 
matching funds, the excess may count as basic MOE, up to the actual 
amount of expenditures made outside of the CCDF matching fund 
requirement. Finally, if none of the expenditures in the child care 
program have been used to meet the child care MOE requirement or to 
receive CCDF matching funds, the total amount of the excess can be 
counted toward basic MOE.
    Comment: Several commenters expressed concern that State 
expenditures to provide child care services to families transitioning 
off TANF assistance or at risk of becoming dependent on TANF assistance 
do not count for basic MOE purposes because of the restricted 
definition of eligible families. One commenter suggested that we amend 
the regulation to recognize State programs geared to enabling low-
income families to maintain their jobs through the provision of child 
care. The commenters contend that we should consider any family who is 
financially needy according to the State's child care eligibility 
criteria an eligible family for basic MOE purposes. Therefore, any 
State spending on its child care program would count toward a State's 
basic MOE requirement.
    Several other commenters concurred, writing that all of the State's 
child care expenditures under the now repealed title IV-A child care 
programs, which included expenditures for working families to 
transition off the TANF assistance program or at risk of needing TANF 
assistance, should count toward the basic MOE requirement, up to each 
State's child care MOE amount. They noted that there is no statutory 
requirement that an eligible family must actually receive TANF cash 
assistance for child care expenditures to count for basic MOE purposes.
    Response: We refer you to the extensive discussion regarding the 
definition of eligible family under Sec. 263.2 of this subpart. There, 
we reaffirm that an eligible family must consist of child living with 
his or her parent or other caretaker relative (or consist of a pregnant 
woman). The family must also be financially needy according to the 
appropriate income and resource (when applicable) criteria established 
by the State and contained in its TANF plan. However, we also mention 
that we never intended that States be locked into a single income and 
resource standard, such as the one a State uses to determine whether a 
family is financially eligible to receive TANF cash assistance. States 
are free to establish different income and resource (when applicable) 
criteria based on the range of families that it wishes to serve or type 
of services it wants to provide. We also recognize that eligible family 
members do not necessarily have to receive TANF cash assistance or any 
other benefit or services through the TANF program.
    Thus, the rules would not preclude States from providing child care 
benefits to help families who are transitioning off of TANF assistance 
or at risk of needing TANF assistance or other low-income families. Nor 
would they prevent a State from using the financial eligibility limits 
for child care services and activities applicable to the use of CCDF 
funds or the financial eligibility criteria applicable to a State's own 
separately funded child care program.
    Comment: One commenter noted that the NPRM gives the impression 
that we consider child care important for children up to the age of 
six, but not for children age six or older. The commenter recommends 
rulemaking on this issue.
    Response: We believe the commenter was referring to the proposed 
rule at Sec. 271.15, which provided that a State could not reduce or 
terminate assistance to a single custodial parent caring for a child 
under age six for refusing to engage in required work, if the parent 
demonstrates an inability to obtain needed child care. This provision, 
found in Sec. 261.15 of the final rule, reflects the statutory 
provision at 407(e)(2), which expressly limits the sanction exception 
to a single custodial parent caring for a child under age six.
    This provision does not represent our perspective regarding the 
importance of child care for children age six and over. We recognize 
that child care is a critical

[[Page 17834]]

supportive service for families moving from welfare to work. However, 
our authority to regulate in this area is limited to the State penalty 
provision associated with this child care exception at Sec. 261.51 of 
the final rule.
    Comment: One commenter indicated that the State agency may not know 
if it needs to utilize any child care MOE expenditures to satisfy the 
basic MOE requirement until the final quarter of the fiscal year.
    Response: The commenter may be reacting to the requirement to 
report expenditures quarterly. Although the report is quarterly, the 
expenditures reported are cumulative. The basic MOE spending 
requirement is an annual requirement. Thus, the reported expenditures 
could have occurred in the quarter represented by the report or any 
prior quarter in the fiscal year.
    A State may choose to apply the child care expenditures that it 
made to meet the CCDF matching fund requirement toward satisfying its 
basic MOE requirement (up to the dollar limit). It is not a 
requirement. The State may apply such expenditures toward its basic MOE 
requirement anytime during the fiscal year.
    The commenter may also be pointing out a potential issue for States 
that depend upon expenditures in other State and local programs for 
meeting the basic MOE requirement. To the extent such other programs 
are not under the control of the TANF agency, the TANF agency will need 
to maintain strong communications with the other agencies operating 
these programs in order to track and report expenditures, as well as to 
ensure that the State will be in compliance with the basic MOE 
requirement at the end of the year.

Section 263.4--When Do Educational Expenditures Count? (Sec. 273.4 of 
the NPRM)

Overview
    Only expenditures on educational services or activities that a 
State targets to eligible families to increase self-sufficiency, job 
training, and work may count toward a State's MOE. The statute excludes 
educational services or activities that are generally available, 
including through the public education system. As the conferees 
explained in H.R. Rep. No. 725, 104th Cong., 2d sess., p. 277, States 
may not count as MOE ``any expenditure for public education in the 
State other than expenditures for services or assistance to a member of 
an eligible family that is not generally available to other persons.''
    Expenditures on special services that are targeted to ``eligible 
families'' and are not generally available to other residents of the 
State may count. These could include contracted educational services or 
activities that provide special classes or expand the capacity of 
existing programs, for example, to provide: targeted services for teen 
parents in high schools or other settings; training in English as a 
second language for eligible immigrants; remedial education to achieve 
basic literacy; courses for high school equivalency (GED) certificates; 
or pre-employment or job-readiness activities.
    We also note that expenditures on supportive services, such as 
transportation, to assist a member of an eligible family in accessing 
educational activities may also count toward a State's MOE, either as 
cash assistance or another type of benefit or service consistent with 
the purposes of the Act. (See Secs. 263.5 and 263.6 for other general 
restrictions on these expenditures.)
Comments and Responses
    We did not receive many comments on this section. The comments that 
we did receive focused on two areas: the requirement that the education 
activities must not be generally available to other residents of the 
State, and the use of the term ``targeted.'' We address these concerns 
and others below.
    Comment: Two commenters thought the term ``targeted'' was 
misleading and needed clarification. As written, qualified educational 
expenditures could be ``targeted'' to eligible families, yet the 
recipients of the services may be persons who are not members of 
eligible families.
    Response: We agree. The statute clearly stipulates that only 
services with respect to eligible families count toward the State's 
basic MOE requirement. We have therefore reworded the regulation to say 
that the services must be ``provided to'' eligible families.
    Comment: A number of commenters voiced concerns regarding the 
meaning and operation of the exclusion of expenditures for educational 
services that are generally available to other residents of the State. 
One commenter noted there is no specific definition of services that 
are generally available to the public. Some of the commenters believed 
that States could be discouraged from using State MOE funds for 
education. Providing educational services that are generally not 
available to the public could result in operating segregated classes 
for eligible families in order to have the expenditures count for basic 
MOE purposes. In fact, the commenters noted that the examples of 
educational activities for eligible families given in the NPRM are no 
different than those provided by the public education system. Thus, the 
provision essentially eliminates a State's ability to count educational 
activities or services toward the basic MOE requirement whenever the 
services are made available to other residents of the State. As one 
commenter put it, ``[W]ho pays for the assistance is irrelevant, as is 
whether anyone from the general public also has access. The proposed 
rule limits States' ability to maximize its resources.''
    One commenter also raised concerns regarding the potential impact 
that expenditures for educational services for eligible families will 
have on current public education programs funded by the State. The 
educational activities for basic MOE purposes may come at the expense 
of similar education services and activities provided by the 
traditional public education system.
    Another commenter asked whether the restriction applies to post-
secondary public institutions.
    Response: We modified the regulatory text to provide a little more 
guidance. The modified language incorporates language from a similar 
provision under title XX at section 2005(a)(6) of the Act. More 
specifically, the title XX provision excludes expenditures for the 
provision of any educational service that the State makes generally 
available to its residents without cost and without regard to their 
income. We thought this additional language was helpful and have added 
it to the regulatory text. Under TANF and title XX, we believe Congress 
intended to prohibit States from substituting program funds for 
existing expenditures from general funds on the traditional, free 
public education system. Thus, general fund expenditures for 
traditional, free public education do not count toward the State's 
basic MOE requirement.
    Accordingly, we do not think that the exclusion would cover post-
secondary educational or vocational programs in the State unless all 
residents of the State may attend the post-secondary institution 
without cost and without regard to their income.
    We do not think it is appropriate for us to define activities that 
are not generally available to persons who are not members of an 
eligible family. We defer to the States to decide appropriate 
educational activities for MOE purposes, i.e., to increase job 
training, self-sufficiency, and work.
    Basically, a State may use MOE funds to expand existing educational 
services by contracting for additional services for eligible family 
members or by funding brand new activities. States do not need to 
segregate the activities, services, or

[[Page 17835]]

classes. They may even use the physical facilities of the public 
education system. Other residents of the State may participate in the 
funded activities so long as the State does not count, as MOE, funds 
used to subsidize or pay for persons who are not members of an eligible 
family. States may also count, as MOE, funds used to provide a service 
for eligible families in a part of the State or locale where the 
service does not exist.
    Similarly, States may count as MOE funds used to contract for, or 
share in, the costs of providing educational activities on job sites 
(e.g., ESL classes). In this particular situation, other employees at 
the site who are not members of eligible families could attend the 
classes. However, as previously mentioned, a State may not count, as 
MOE, any funds used to subsidize or pay for persons who are not members 
of an eligible family.
    In summary, a State may count, as MOE, funds used to pay costs 
(e.g., fees or tuition) to enable an eligible family member to attend a 
class or participate in an educational activity. Nonexcluded 
educational expenditures with respect to eligible families count for 
basic MOE purposes if the activities are designed to increase self-
sufficiency, job training, and work.
    We remind States to allocate costs that are associated with more 
than one State or local program or agency properly.
    Comment: One commenter recommended that the State substantiate its 
basic MOE expenditures by providing overall budget information on its 
education services and programs, not just those provided to eligible 
families. The State should also provide a comprehensive budget picture 
of support for education activities and services for the entire 
education agency responsible for TANF-related education services--thus, 
reflecting any shifts in funds between the traditional, free education 
programs in public schools and the TANF-related education services.
    Response: We do not believe it is necessary for the State to 
regularly submit such information. However, States are subject to 
audits annually or biennially pursuant to the Single Audit Act. The 
audit includes a review of a State's compliance with MOE requirements. 
Under 45 CFR 92.42, States are responsible to have a process designed 
to achieve reliability of financial reporting and compliance with 
applicable laws and regulations, including retention of background 
documentation that validates such reports. The audit findings include 
any questioned costs. We are informed of all audit findings.
    Other studies, or reviews by OIG or GAO, may be conducted. Such 
reviews could cover processes, such as a State's budgetary process, 
that are generally beyond the scope of an audit. Further, if 
appropriate, for example, audits may also be conducted as a result of 
requests by Congress or in response to complaints from individuals or 
organizations.
    Finally, we have made changes to the reporting on MOE programs at 
Sec. 265.9(c) that should provide a clearer picture of educational 
activities being funded by MOE.
    Comment: One commenter indicated that using State funds to enhance 
access to education for low-income families is an important way of 
helping families out of poverty. At the same time, States are concerned 
with the risk for penalties if they use separate State funding to 
provide financial aid for low-income families. The commenter was 
concerned that while the State may view education as an effective means 
of advancing work rather than avoiding the work participation 
requirement, we might view it as an inappropriate diversion.
    Another commenter questioned whether State-funded expenditures to 
permit a member of an eligible family to obtain no more than the first 
baccalaureate degree or one vocational education program certificate as 
part of ``job skills training directly related to employment'' counts 
for basic MOE purposes. These educational activities are only available 
to students who meet other strict criteria established under State law 
(which include a recent work history; enrollment in an accredited or 
approved State university, community college, or other vocational 
school or training program; and maintaining a cumulative grade point 
average of at least a ``C'').
    Response: The inherent effect of any separate State program is that 
the TANF requirements do not apply. In the NPRM, we expressed concern 
that States might use separate programs to avoid the work requirements 
or to avoid returning a share of their child support collections to the 
Federal government. As a result, we proposed several measures to 
counteract this possibility, including denying certain penalty relief 
to States. In the final rule, we decided to eliminate the proposed link 
between a State's decision to operate separate State programs and its 
eligibility for penalty relief. However, we still intend to gather 
information that will enable us to monitor the nature and scope of such 
programs. Refer to the preamble, section entitled ``Separate State 
Programs'' for a full discussion of this issue.
    We have been persuaded that States are using both separate State 
programs and the TANF program to serve a variety of policy purposes 
that do not seem to be designed to avoid TANF requirements. For 
example, States are working to increase the economic viability of 
families by providing financial aid for post-secondary education and 
supporting other education and training activities on a selective 
basis. Unless excluded, educational expenditures with respect to 
eligible families count for basic MOE purposes if the activities are 
designed to increase self-sufficiency, job training, and work. These 
activities may be under the TANF program or apart from the TANF 
program. In either case, we hope that State and local officials are 
working with educators, post-secondary institutions, and the business 
community to design appropriate opportunities for families consistent 
with the goals of TANF.
    As a point of clarification, the list of work activities in section 
407 of the Act (and Sec. 261.30 of these rules) determine what is 
countable for the purpose of the State's work participation rates. 
However, they do not limit the nature or type of educational or 
training services the State may provide with Federal TANF or State MOE 
funds.

Section 263.5--When Do Expenditures in State-Funded Programs Count? 
(Sec. 273.5 of the NPRM)

Overview
    We explained in the NPRM that section 409(a)(7)(B)(i)(II) 
establishes limits on the amount of expenditures that may count when 
the MOE expenditures are for activities under separate State or local 
programs. The heading for the provisions under this section indicates 
that ``transfers from other State and local programs'' cannot count 
toward a State's MOE. In the months following enactment, we received 
numerous questions about this language.
    We do not believe that the language intended to convey a literal or 
physical transfer of funds. Instead, we believe that Congress wanted to 
prevent States from substituting existing expenditures in any pre-
existing outside programs for cash welfare and related assistance to 
needy families and to prevent States from claiming such existing 
expenditures as expenditures for MOE purposes.
    Therefore, section 409(a)(7)(B)(i)(II)(aa) provides that the money 
spent under State or local

[[Page 17836]]

programs may count as MOE only to the extent that the expenditures 
exceed the amount expended under such programs in the fiscal year most 
recently ending before the date of enactment (August 22, 1996). Thus, 
States may count only additional or ``new'' expenditures, i.e., 
expenditures above FY 1995 levels. Like some commenters, we call this 
the ``new spending'' provision.
    Section 409(a)(7)(B)(i)(II)(bb) provides an alternative limitation. 
We believe that this provision was intended as an exception to the 
``new spending'' provision under (aa). Under provision (bb), State 
expenditures under any State or local program during a fiscal year may 
count toward a State's MOE to the extent that the State is entitled to 
a payment under former section 403 as in effect before the date of 
enactment with respect to the expenditures. We interpret this to mean 
that State funds expended under State or local programs that had been 
previously authorized and allowable under the former AFDC, EA, and JOBS 
programs in effect as of August 21, 1996, may have all such 
expenditures count toward the State's MOE. In other words, the limit 
under (aa) does not apply to what would have formerly been expenditures 
under the title IV-A program; there is no requirement that these 
expenditures be additional or new expenditures, above FY 1995 levels.
Comments and Responses
    We did not receive many comments on this section. But some of the 
comments that we did receive raised some important issues regarding the 
concept of ``separate'' State or local programs, as well as the meaning 
of the exception to the ``new spending'' provision. One commenter also 
questioned the calculation process for determining any ``new spending'' 
for programs in which the ``new spending'' provision applies. A couple 
of commenters also felt the proposed rule needed to be clarified. As a 
result of some of these comments, we have made some clarifications in 
the final rule, including revisions to reflect the statutory language 
more directly regarding the treatment of current fiscal year 
expenditures in any State or local program that also existed in FY 
1995.
    Comment: One commenter observed that this section indicates that 
expenditures made under separate State programs that had not previously 
been authorized under the former AFDC/EA/JOBS programs cannot now count 
toward maintenance of effort. The commenter objected to this provision. 
For example, the AFDC-UP program has been repealed. Therefore, families 
who previously received general assistance because a parent could not 
meet the criteria under the AFDC-UP program, now become ``part of the 
service equation.'' Therefore, the commenter suggested that all funds 
now spent to support these families should count for basic MOE purposes 
without limitation.
    Response: The example given clearly falls under the statutory 
exception at section 409(a)(7)(B)(i)(II)(aa) of the Act. For programs 
that were operating in 1995 and were not former AFDC-related programs, 
States may only claim qualified expenditures with respect to eligible 
families if their expenditures are in excess of what they spent on that 
program in 1995. General assistance programs are not AFDC-related 
programs. AFDC-related programs include the AFDC, EA, and JOBS 
programs, as well as the IV-A child care programs (AFDC, At-Risk, and 
transitional child care programs). Qualified expenditures during a 
fiscal year to provide AFDC-related services (e.g., At-Risk Child Care 
services) to eligible families may count without limitation.
    Comment: One commenter noted that for pre-existing programs (State 
or local programs operating in FY 1995) that were not AFDC-related 
programs, the State may only claim qualified State expenditures in the 
current fiscal year that exceed what the State spent on that program in 
FY 1995. Thus, State spending for State or local programs that are not 
AFDC-related must be ``new spending.'' However, in many cases, States 
will use both State MOE resources and Federal TANF funds to fund a 
number of different programs. The ``new spending'' provision could 
apply for these situations as well.
    Response: We agree with this observation. Section 409(a)(7)(B)(II) 
of the Act excludes expenditures under ``any State or local program 
during a fiscal year'' that do not exceed the amount expended under the 
State or local program in FY 1995. Thus, the statute does not specify 
that the ``new spending'' provision on qualified State expenditures 
only applies to State programs that are currently separate from TANF. 
Instead, the provision applies to ``any'' State or local program 
existing in FY 1995 that did not have allowable expenditures under the 
former AFDC, EA, JOBS, and IV-A child care programs (AFDC, At-Risk and 
transitional child care programs). For example, a State or local 
program that is now included under the TANF program or receiving TANF 
and MOE resources could have existed separately from the State's former 
AFDC-related programs in FY 1995. Therefore, we have decided to amend 
the annual report to require that States report the information 
proposed under Sec. 273.7(b) for all their State-funded MOE programs. 
We refer you to Sec. 265.9 for a full discussion of all the comments 
regarding the proposed annual addendum and the changes we have made in 
the final rule.
    Comment: One commenter noted that State spending in a State At-Risk 
Child Care program is an example of spending that was previously 
authorized and allowable under former section 403. Therefore, the ``new 
spending'' provision does not apply. Another commenter wondered whether 
expenditures for which a State could not have received Federal matching 
payments due to the At-Risk cap would also be exempt from the ``new 
spending'' provision. For example, take the case of a State that has 
run an At-Risk Child Care program for the working poor since FY 1995. 
The State did not receive matching funds for all of its expenditures 
for child care services under this program. Are the potentially 
qualified expenditures above the former cap subject to the ``new 
spending'' provision or exempt from this provision?
    Response: If the State's child care program for the working poor 
was authorized and allowable under former section 402(i) under the Act, 
then we believe the ``new spending'' provision would not apply to 
qualified expenditures with respect to eligible families during a 
fiscal year, for the reasons given below.
    Former section 402(i)(5) of the Act specified that amounts expended 
by the State to provide child care to any at-risk low income family 
would be matched. However, section 403(n) limited the amount of the 
matching payments a State could receive. The issue is whether a State 
can count all of its qualified expenditures with respect to eligible 
families during a fiscal year, without limitation, because the 
expenditures in FY 1995 were allowable, notwithstanding the cap.
    Section 409(a)(7(B)(II)(bb) of the Act uses the phrase ``is 
entitled to a payment'' under former section 403 to indicate when the 
``new spending'' provision does not apply. After considerable 
deliberation on this issue, we concluded that Congress intended States 
to be able to claim the State's portion of title IV-A welfare spending 
toward basic MOE, based on the idea that MOE is a substitute for the 
former matching arrangement. To carry out this intent, Congress needed 
to define the former title IV-A welfare spending. They did this by 
referring to

[[Page 17837]]

expenditures for which the State would be entitled to payment under 
former 403 of the Act. This section authorized Federal matching 
payments for allowable welfare expenditures. Thus, we believe that 
Congress was looking for allowable welfare expenditures, not actual 
payments to the States. This concept would include allowable 
expenditures that were more than the State could receive in the form of 
a matched payment. Therefore, we conclude that the new spending 
provision does not apply to child care expenditures made by a State to 
augment the Federal and State matching funds available in its At-Risk 
Child Care program.
    However, we remind States of the dollar limitation discussed under 
Sec. 263.3 of this subpart. Qualified child care expenditures used to 
meet the requirements of the CCDF matching fund (i.e., as matching and 
MOE amounts) may also count as basic MOE expenditures only up to the 
State's child care MOE amount.
    Comment: One commenter raised questions about the appropriate 
calculation for determining the amount of new spending for programs 
subject to this provision. The commenter noted that it is not clear 
from the statute if the intent of this provision is for States to only 
count toward the MOE requirement additional spending that represents an 
increase over FY 1995 spending levels on eligible families. If this is 
the statutory intent, then the commenter recommends that we require a 
State to document whether its spending above FY 1995 levels has served 
eligible families and to report spending on eligible families in FY 
1995. In cases where the State does not know the precise level of FY 
1995 spending on eligible families, the regulations should permit 
States to use a reasonable estimating methodology. If the State is 
unable to determine or to estimate the amount of spending on eligible 
families in FY 1995, then it would need to otherwise demonstrate that 
it has targeted all of the increase in spending (relative to FY 1995 
funding levels) toward eligible families.
    In addition, the commenter recommends that we require total FY 1995 
State expenditures for all State or local programs subject to the new 
spending provision, not just separate State programs as we proposed. 
Thus, the commenter believed that we should require this information 
for State or local programs funded with both TANF, as well as MOE 
resources. We should also require total State spending in the same 
State or local program for the current fiscal year. Otherwise, we will 
be unable to determine whether claimed MOE expenditures meet the new 
spending provision.
    Response: Although the commenter was responding to our proposal 
under Sec. 273.7(b) to collect supplementary information on separate 
State programs, we believe that this is the best place to address the 
commenter's points because they speak to the calculation of additional 
or new spending claimed for MOE purposes. However, we also refer you to 
Sec. 265.9 for a fuller discussion of all the comments regarding the 
proposed annual addendum and the changes we have made in the final rule 
to the information States must report annually.
    We do not agree that it is either necessary or required in the 
statute for a State to document or to report to us what it spent during 
FY 1995 on eligible families in programs that are now subject to the 
``new spending'' provision. The ``new spending'' provision under 
section 409(a)(7)(B)(II)(aa) of the Act references current fiscal year 
expenditures under any State or local program to the extent that ``the 
expenditures exceed the amount expended under the State or local 
program'' in FY 1995.
    This provision does not refer to eligible families in defining 
``the amount expended'' in FY 1995; rather it refers generally to 
expenditures. However, it does refer to eligible families in defining 
qualified expenditures for the current fiscal year. As a result, we 
conclude that States must calculate ``new'' or additional spending 
under each State or local program subject to the ``new spending'' 
provision by comparing total qualified State expenditures with respect 
to eligible families for the current fiscal year with total State 
expenditures for the program in FY 1995. If total qualified State 
expenditures with respect to eligible families for the current fiscal 
year exceed total State expenditures in FY 1995 under the program, the 
State may claim the excess for basic MOE purposes because the State 
spent all those funds on eligible families. If total qualified State 
expenditures with respect to eligible families for the current fiscal 
year do not exceed total State expenditures in FY 1995 under the 
program, the State may not claim any current fiscal year qualified 
expenditures toward its basic MOE requirement.
    We agree with the commenter's suggestion that a State should report 
total FY 1995 expenditures for each State or local MOE programs subject 
to the ``new spending'' provision. We are also requiring total current 
fiscal year expenditures for all State or local MOE programs. This 
includes State or local MOE programs that are currently separate from 
the State's TANF program, as well as MOE programs funded under TANF. We 
are requiring this information because it will help provide context for 
the reported expenditures on eligible families and give some indication 
of their plausibility.

Section 263.6--What Kinds of Expenditures Do Not Count? (Sec. 273.6 of 
the NPRM)

Overview
    As we previously discussed, expenditures under State programs (TANF 
and separate State programs) do not count as MOE if they are not made 
on behalf of eligible families.
    The statute also provides several general restrictions on MOE 
expenditures. Pursuant to section 409(a)(7)(B)(iv), the following types 
of expenditures do not count: (1) expenditures of funds that originated 
with the Federal government; (2) State funds expended for the Medicaid 
program under title XIX of the Act; (3) any State funds used to match 
Federal WtW funds provided under section 403(a)(5) of the Act, as 
amended by sections 5001(a) (1) and (2) of Pub. L. 105-33; and (4) 
expenditures that States make as a condition of receiving Federal funds 
under other programs. See discussion of Sec. 263.3 for additional 
information.
    Section 5506(c) of Pub. L. 105-33 amended section 409(a)(7)(B)(i) 
by adding another restriction under section 409(a)(7)(B)(i)(III). 
Pursuant to section 409(a)(12), States must expend State funds equal to 
the total reduction in the State's SFAG due to any penalties incurred. 
Section 409(a)(7)(B)(i)(III) provides that such expenditures may not 
count toward a State's basic MOE. (See Sec. 264.50.)
    TANF funds transferred to the Social Service Block Grant Program, 
under title XX of the Act, or transferred to the Child Care and 
Development Block Grant program (also known as the Discretionary Fund 
within the Child Care and Development Fund), do not count toward 
meeting a State's MOE requirement because of the first restriction 
under 409(a)(7)(b)(iv), which prohibits funds that originated from the 
Federal government from being used for MOE purposes.
    Finally, it is important to note that only State expenditures made 
in the fiscal year for which TANF funds are awarded count toward 
meeting the MOE requirement for that year. For example,

[[Page 17838]]

expenditures made in prior fiscal years or, in the case of FY 1997, 
expenditures made prior to the date the State started its TANF program 
do not count as basic MOE.
Comments and Responses
    We received few comments on this section, including a comment 
concurring that this section accurately tracks statutory requirements. 
Although no changes need to be made to the final rule as a result of 
these comments, we are clarifying Sec. 263.6(b) of the final rule so 
that the regulatory language aligns more closely with the statutory 
prohibitions at section 409(a)(7), as amended.
    Specifically, the proposed rule at Sec. 273.6(b) provided that 
State funds used to match Federal funds (or expenditures of State funds 
that support claims for Federal matching funds), including State 
expenditures under the Medicaid program, do not count toward a State's 
basic MOE requirement. We have kept the part of this provision that 
prohibits State funds expended for the Medicaid program under title XIX 
from counting toward a State's basic MOE requirement. The rest of this 
provision is included in Sec. 263.6(c).
    If it had remained part of paragraph (b), then it would have been 
misleading and would have contradicted the exception under 
Sec. 263.6(c). That exception permits State funds expended to meet the 
requirements of the CCDF Matching fund to count (up to the State's 
child care MOE level) toward the State's basic MOE requirement, 
provided the State has met all other requirements of this subpart. The 
requirements of the CCDF Matching Fund include an MOE requirement plus 
additional State expenditures that would be matched with Federal funds, 
up to the State's allocation. Based on the proposed wording under 
paragraph (b) of this section, the additional child care expenditures 
made by the State for purposes of receiving matching funds would not 
have counted toward the State's basic MOE. Yet, we stated clearly under 
paragraph (c) of this section and in the proposed Sec. 273.3(a) that 
such child care expenditures could count (up to the amount of the 
State's child care MOE level).
    We believe that the prohibition under revised Sec. 263.6(c) takes 
in all requirements that a State must meet to receive Federal TANF 
funds, whether it is an MOE requirement, expenditures to receive 
Federal matching funds, or both. In addition, the Balanced Budget 
Amendments (Pub. L. 105-33) amended section 409(a)(7)(B)(iv) by 
replacing the prohibition under (III) ``any State funds which are used 
to match Federal funds'' with the prohibition related to the receipt of 
WtW funds--namely, ``any State funds which are used to match federal 
funds provided under section 403(a)(5).'' We had not reflected this 
change in the language at Sec. 273.6(b).
    We conclude that the language at section 409(a)(7)(B)(iv)(IV) of 
the Act also prohibits the counting for basic MOE purposes of any State 
funds expended to match Federal funds under other programs (or 
expenditures of State funds that support claims for Federal matching 
funds). Therefore, this language did not need to appear in 
Sec. 263.6(b) because the regulatory provision at Sec. 263.6(c) 
incorporates this prohibition. When we deleted the language from 
Sec. 263.6(b), we also removed the apparent contradiction between 
Sec. 263.6 (b) and (c) regarding State child care expenditures used to 
meet the CCDF matching fund requirements.
    Comment: One commenter recommended allowing encumbrances as of 
September 30th of a fiscal year, but paid in a subsequent period, to 
count toward the State's basic MOE requirement.
    Response: We disagree with this recommendation. By statute, only 
expenditures count toward a State's basic MOE requirement. An 
obligation, or encumbrance, is not an expenditure until actually paid. 
An expenditure counts toward the State's annual basic MOE requirement 
for the fiscal year in which it is actually paid.
    Comment: One commenter believes that any expenditures made to 
replace reductions in the SFAG as a result of penalties should count 
toward the State's basic MOE requirement.
    Response: The statute at 409(a)(7)(B)(i)(III) expressly excludes 
these additional State expenditures from counting toward the State's 
basic MOE requirement.
    Comment: One commenter was concerned that States may infer that the 
prohibition on counting any State funds used as a condition of 
receiving Federal funds under another Federal program means that States 
may not purchase bus passes for program participants or otherwise help 
pay for their public transportation because, then, TANF resources are 
going to public transit providers who use the money as a match for 
their own Federal grants.
    Response: Section 409(a)(7)(B)(iv)(IV) of the Act and Sec. 263.6(c) 
of the regulatory text prohibit counting for basic MOE purposes any 
State funds that are expended as a condition of receiving Federal funds 
from other programs (unless specifically authorized, e.g., the State 
child care expenditures under the CCDF matching fund). For example, 
this prohibition would apply to State funds expended to meet the cost-
sharing requirement of the recently passed Jobs Access transportation 
grants program.
    However, the purchase of bus passes, in the context described by 
the commenter, does not constitute an example of State funds spent in 
order to receive other Federal funds. Rather, it represents an 
alternative form of providing a transportation benefit for a TANF-
eligible family. As previously discussed, State funds used to purchase 
bus passes that help an eligible family member go to or from work or 
training would be an appropriate use of State MOE funds because this 
activity promotes job preparation and work, a purpose of the TANF 
program.

Section 273.7 of the NPRM

    Note: We moved the provisions that appeared in Sec. 273.7 of the 
NPRM and have not issued a new Sec. 263.7. The information proposed 
in Sec. 273.7(a) and the comments on this section appear under 
Sec. 265.3. The information proposed in Sec. 273.7(b) and the 
comments on this section appear under Sec. 265.9.

Section 263.8--What Happens If a State Fails To Meet the Basic MOE 
Requirement? (Sec. 273.8 of the NPRM)

Overview
    Under section 409(a)(7)(A), if a State does not meet the basic MOE 
requirement, we will reduce the amount of the SFAG payable for the 
following fiscal year on a dollar-for-dollar basis.
    Section 5001(g) of Pub. L. 105-33 added another penalty to section 
409(a) for a State that receives a WtW formula grant pursuant to 
section 403(a)(5)(A) of the Act, but fails to meet the basic MOE 
requirement for the fiscal year. Under section 409(a)(13) of the Act, 
we must reduce the amount of the State's SFAG for the following fiscal 
year by the amount of the WtW formula grant paid to the State if the 
State fails to meet the basic MOE requirement.
Comments and Responses
    We received three comments on this section. One commenter observed 
that this section tracks the statutory requirement. Two others 
commented on the severity of the penalty amounts. We have made no 
changes to this section.
    Comment: Two commenters felt that the penalties are too severe. One 
commenter recommended deleting the provision that requires reducing the 
State's SFAG by the amount of a State's WtW grant if the State fails to 
meet its

[[Page 17839]]

basic MOE requirement for the fiscal year.
    Response: Although we agree that the penalties are very 
significant, as we mentioned in the above discussion, the statute 
expressly requires both reductions.

Section 263.9--May a State Avoid a Penalty for Failing To Meet the 
Basic MOE Requirement Through Reasonable Cause or Corrective 
Compliance? (Sec. 273.9 of the NPRM)

Overview
    Under section 409(b)(2), a State may not avoid a penalty for 
failure to meet its basic MOE requirement based on reasonable cause. In 
addition, section 5506(m) of Pub. L. 105-33 amended section 409(c)(4) 
to provide that a State may not avoid the penalty through a corrective 
compliance plan.
    Congress' decision not to provide for a reasonable cause exception 
or corrective compliance in basic MOE penalty cases indicates that 
Congress considered the MOE requirement crucial to meeting the work and 
other objectives of the Act.
Comments and Responses
    We received three comments on this section. One commenter agreed 
that this section tracked the statute. The other commenters basically 
questioned the lack of reasonable cause and corrective compliance. We 
have made no changes to this section.
    Comment: Two commenters thought that reasonable cause and the 
corrective compliance process should be available to a State that 
failed to meet its basic MOE requirement. One of the commenters 
expressed concern that the regulations are silent with respect to an 
appeal process.
    Response: As we mentioned in the above discussion, the statute 
under sections 409(b)(2) and 409(c)(4) of the Act expressly provides 
that reasonable cause and corrective compliance do not apply to the 
basic MOE penalty provision. The State may appeal our decision to 
impose a reduction on the SFAG payable to the Departmental Appeals 
Board, in accordance with section 410 of the Act. Hence, the appeal 
process described in Sec. 262.7 applies even if reasonable cause and 
corrective compliance do not apply.

Subpart B--What Rules Apply to the Use of Federal TANF Funds?

Section 263.10--What Actions Would We Take Against a State if It Uses 
Federal TANF Funds in Violation of the Act? (Sec. 273.10 of the NPRM)

Overview
    Section 409(a)(1) contains two penalties related to use of Federal 
TANF funds (i.e., all Federal TANF funds under section 403) in 
violation of TANF program requirements. The first is a penalty in the 
amount of funds that a State uses improperly, as found under the Single 
Audit Act. We would reduce the SFAG payable to the State for the 
immediately succeeding fiscal year quarter by the amount misused.
    In addition, we would take a second penalty, equal to five percent 
of the adjusted SFAG, if we find that a State has intentionally misused 
funds. You can find criteria for ``intentional misuse'' at Sec. 263.12.
    For both of these penalties, States may request that we grant 
reasonable cause and submit a corrective compliance plan for correcting 
the violation.
    We received no comments on this section. However, we did revise the 
regulatory text because we noticed that it did not closely track the 
statutory language. The final rule language is clearer that the five-
percent penalty for intentional misuse of funds is in addition to the 
misuse-of-funds penalty. Also, like the statute (at section 
409(a)(1)(B)), the final rule puts the burden of proof regarding intent 
on the State.

Section 263.11--What Uses of Federal TANF Funds Are Improper? 
(Sec. 273.11 of the NPRM)

Overview
    The statute contains many prohibitions and restrictions on the use 
of Federal TANF funds. In determining if funds have been used ``in 
violation of this part,'' States should particularly note the 
prohibitions in section 408 of the Act and section 115 of PRWORA. In 
summary, these sections provide that States must not use Federal TANF 
funds to provide assistance to:
     A family with an adult who is a head-of-household or a 
spouse of a head-of-household or with a minor head-of-household who has 
received assistance funded with Federal TANF funds for more than 60 
months (except for a family included in the 20-percent hardship 
exemption);
     A family without a minor child living with a parent or 
adult caretaker relative (or a pregnant individual);
     A family not assigning support rights;
     An unmarried parent under 18, without a high school 
diploma, who does not attend high school or equivalent training;
     An unmarried parent under 18 not living in an adult-
supervised setting (unless covered by a statutory exception);
     A fugitive felon and probation and parole violator;
     A minor child absent from the home 45 days (or at State 
option, 30-180 days);
     For ten years, a person found to have fraudulently 
misrepresented residence to obtain assistance; and
     An individual convicted of certain drug-related offenses 
unless the State has enacted a law to exempt such individuals from the 
prohibition (refer to section 115 of PRWORA).
    Also, States must not use Federal TANF funds for medical services, 
except for pre-pregnancy family planning services. (This prohibition 
raised a number of concerns among States and advocates that are 
discussed below.)
    Section 404 also limits the use of Federal TANF funds. More 
specifically, section 404(a)(1) provides that TANF funds may only be 
used ``* * * in any manner that is reasonably calculated to accomplish 
the purpose of this part, including to provide low income households 
with assistance in meeting home heating and cooling costs. * * *'' 
Thus, TANF funds cannot be used in a manner not reasonably calculated 
to serve the purposes of the program.
    In determining if an activity may be funded with TANF funds under 
this provision, you should refer to the purposes described in section 
401 of the Act and reiterated at Sec. 260.20. Also, you should be aware 
that the specific prohibitions or restrictions in the statute (e.g., 
the prohibitions in section 408) apply even if an activity seems 
otherwise consistent with the purposes in section 404(a)(1).
    In addition, section 404(a)(2), as amended by section 5503 of Pub. 
L. 105-33, permits Federal TANF funds to be used ``in any manner that 
the State was authorized to use amounts received under part A or F, as 
such parts were in effect on September 30, 1995 or (at the option of 
the State) August 21, 1996.'' We interpret this provision to cover 
activities that are not permissible under section 404(a)(1), but were 
included in a State's approved State AFDC plan, JOBS plan, or 
Supportive Services Plan as of September 30, 1995, or, at State option, 
August 21, 1996. Examples of such activities are juvenile

[[Page 17840]]

justice and foster care activities that were included in many State 
plans. Under this provision, only those States whose approved AFDC 
State plans included juvenile justice activities as of September 30, 
1995, or, at State option, August 21, 1996, may use Federal TANF funds 
for those activities.
    Because of the detailed and specific legislative history associated 
with the language at section 404(a)(2), indicating Congress's clear 
intent to grandfather in juvenile justice costs as an allowable use of 
Federal TANF funds, we would allow such use, notwithstanding the 
specific prohibitions in section 408 of the Act (e.g., prohibiting the 
expenditure of Federal TANF funds on assistance if a child is not 
living with an adult relative).
    States should also note that if they exceed the 15-percent limit on 
administrative costs under section 404(b), we will consider any amount 
of funds exceeding that limit to be a misuse of funds. In the final 
rule, we have modified the language in Secs. 263.11 and 263.13 to 
clarify this position.
    Likewise, we would consider unauthorized or inappropriate transfers 
of TANF funds to be a misuse of funds. We would consider any of the 
following transfers to be inappropriate or unauthorized: transfers to 
any program except the Child Care and Development Block Grant (also 
known as the Discretionary Fund within the Child Care and Development 
Fund) or the Social Services and Block Grant Program under title XX of 
the Social Security Act; transfers to those two programs in excess of 
the 30-percent cap; and transfers to SSBG in excess of the 10-percent 
cap (or, beginning in FY 2001, in excess of the 4.25-percent cap). TANF 
expenditures used to match Job Access funds are not considered 
transfers.
    OMB Circulars A-102 and A-87 also include restrictions and 
prohibitions that limit the use of Federal TANF funds.
    The Department previously promulgated A-102 (the common rule) in 
its regulations at part 92 of title 45, ``Uniform Administrative 
Requirements for Grants and Cooperative Agreements to State and Local 
Governments.'' All provisions in part 92 are applicable to the TANF 
program. TANF is not one of the Block Grant programs exempt from the 
requirements of part 92, as OMB has not taken action to exempt it. 
Rather, OMB has determined that TANF should be subject to part 92. 
Section 417 was not meant to invalidate other general requirements that 
Congress and Federal agencies, primarily OMB, have put in place to 
assure that Federal grant funds are properly administered or to inhibit 
Federal agencies from fulfilling their financial management 
responsibilities in managing their programs. We believe that Congress 
understood that TANF, like other Federal grant programs, was subject to 
existing appropriations, statutory, and regulatory requirements 
regarding the general administration of grants, notwithstanding section 
417.
    By reference, part 92 also includes A-87, the ``Cost Principles for 
State, Local and Indian Tribal Governments,'' the basic guidelines for 
Federal awards. These guidelines provide, in part, that an allowable 
cost must be necessary and reasonable for the proper and efficient 
administration of a Federal grant program, and authorized or not 
prohibited under State or local laws or regulations.
    A-87 also includes some specific prohibitions on the use of Federal 
funds generally that apply to Federal TANF funds. For example, A-87 
prohibits the use of Federal funds for alcoholic beverages, bad debts, 
and the salaries and expenses of the Office of the Governor.
(a) Clarifications of Use of Federal TANF Funds--Substance Abuse 
Services
    In our pre-NPRM consultations, we received several inquiries 
regarding the use of Federal TANF funds for substance abuse treatment, 
i.e., treatment for alcohol and drug abuse. In light of the prohibition 
on the use of Federal TANF funds for ``medical services, except for 
pre-pregnancy family planning activities,'' we held discussions with 
other Federal agencies and learned that in many, but not all instances, 
the treatment of alcohol and drug abuse involves not just ``medical 
services,'' but other kinds of social and support services as well.
    Allowing States to use Federal TANF funds for substance abuse 
treatment is programmatically sound and reasonably calculated to 
achieve TANF goals since it may help clients make successful 
transitions to work and provide for a stable home environment for TANF 
children. Accordingly, our rules permit States to use Federal TANF 
funds for drug and alcohol abuse treatment services to the extent that 
such services are not medical. States will have to look at the range of 
services offered and differentiate between those that are medical and 
those that are not. In short, States may not use Federal TANF funds for 
services that the State identifies as medical; they may only use 
Federal TANF funds for services that are nonmedical.
(b) Clarification of the Use of Federal TANF Funds for Construction and 
Purchase of Facilities
    The Comptroller General of the United States has prohibited the use 
of Federal funds for the construction or purchase of facilities or 
buildings unless there is explicit statutory authority permitting 
Federal grant funds to be used for this purpose. Since the statute is 
silent on this matter, States must not use Federal TANF funds for 
construction or the purchase of facilities or buildings.
(c) Clarification of the Use of Federal TANF Funds as State Match for 
Other Federal Grant Programs
    States may use Federal TANF funds under section 403(a) to match 
other Federal grant programs only if authorized under the statute of 
the grant program. Further, any funds so authorized are still subject 
to the TANF program requirements and must be used in accordance with 
the purposes of the TANF program and with these regulations.
(d) Clarification of the Use of Federal TANF Funds To Add to Program 
Income
    We have received a number of inquiries about whether or not TANF 
funds may be used to generate program income. An example of program 
income is the income that a State earns if it sells another State a 
training curricula that it has developed, in whole or mostly, with 
Federal TANF funds.
    States may generate program income to defray costs of the program. 
Under 45 CFR 92.25, there are several options for how to treat this 
program income. To give States flexibility in their use of TANF funds, 
States may add, to their TANF grant, program income that has been 
earned by the State. States must use such program income for the 
purposes of the TANF program and for allowable TANF activities. We will 
not require States to report on the amount of program income earned, 
but they must keep on file financial records on any program income 
earned and the purposes for which it is used, in the event of an audit 
or review.
(e) Clarification of the Use of Federal TANF Funds--Amounts Reserved 
for Subsequent Years
    Section 404(e) of the Act, entitled ``Authority to Reserve Certain 
Amounts for Assistance,'' allows States to reserve Federal TANF funds 
that they receive ``for any fiscal year for the purpose of providing, 
without fiscal year limitation, assistance under the State program 
funded under this part.'' In the

[[Page 17841]]

NPRM preamble, we did not include a specific discussion of this 
provision. However, we have added a preamble discussion in the final 
rule because: (1) we have subsequently received questions about its 
interpretation; (2) the penalty on misuse of Federal funds encompasses 
this provision; and (3) the definition of assistance at Sec. 260.31 has 
implications that States need to understand.
    After a careful reading of section 404(e), we have determined that 
the statute limits a State's ability to spend reserved money in a 
couple of very important ways. First, a State may expend reserved money 
only on benefits that meet the definition of assistance at Sec. 260.31 
or on the administrative costs directly associated with providing such 
assistance. It may not expend reserved funds on benefits specifically 
excluded from the definition of assistance or on activities generally 
directed at serving the goals of the program, but outside the scope of 
the definition of assistance. Secondly, a State may spend its reserved 
funds only on assistance provided within its TANF program (i.e., ``the 
State program funded under this part''). This latter limitation 
precludes the State from transferring reserved funds to either the SSBG 
or the Discretionary Fund of the CCDF. We believe the effect of these 
limitations will not be too serious because States are still spending 
such large portions of their funds on benefits that meet the definition 
of assistance. However, to ensure themselves the maximum flexibility in 
the use of their funds, States could spend down their reserved funds on 
any expenditures on assistance and leave current-year funds available 
to cover transfers and other activities.
Comments and Responses
    We received several comments on this section. A couple of 
commenters expressed concerns about a State's ability to correct 
information in their Financial Report, avoid penalties for minor 
reporting errors, and present a case that they should not be penalized; 
you can find a discussion of the issues in the preamble for Sec. 265.8. 
A detailed discussion of the other comments on this section and our 
responses follows. These comments resulted in a couple of minor changes 
to the proposed policy.
    Comment: Most comments received on this section addressed the 
prohibitions and restrictions on the use of Federal TANF funds. We 
received some general support for our proposals and clarifications 
(e.g., allowing for program income and clarifying that States could 
expend Federal TANF fund on nonmedical substance abuse services). We 
also received a number of individual comments seeking additional 
clarification or more detail in the regulation about the allowability 
of certain expenditures. Areas of concern to individual commenters were 
medical costs, substance abuse, transportation, and juvenile justice 
services.
    Response: We think it is very important that we lay out for States 
our view of what would constitute a misuse of funds so that they will 
be in the best possible position to avoid this penalty. Basically, 
section 404(a)(1) provides that Federal TANF funds may be used ``* * * 
in any manner reasonably calculated to accomplish the purpose of this 
part. * * *'' However, section 408 of the Act and section 115 of PRWORA 
provide that States must not use Federal TANF funds in specified 
circumstances. In addition, section 404 limits the use of Federal TANF 
funds. The prohibitions in sections 408 of the Act and 115(a)(1) of 
PRWORA and the limitations in section 404 of the Act apply, even if an 
activity seems otherwise consistent with the purpose of this section.
    Section 404(a)(2), as amended by section 5503 of Pub. L. 105-33, 
permits Federal TANF funds to be used ``in any manner that the State 
was authorized to use amounts received under part A or F, as such parts 
were in effect on September 30, 1995 or (at the option of the State) 
August 21, 1996.''
    Activities authorized under this subsection must have been in an 
approved plan under part A or F to be an allowable expenditure of 
Federal TANF funds.
    In response to commenters' concerns, we have added references to 
sections 404 and 408 of the Act to the regulatory text. These are the 
two most significant statutory references for TANF requirements that 
were not specified in the proposed regulatory text.
    In general, we believe it is sufficient for our rules to provide 
broad references to the statutory, regulatory, and policy provisions 
that will apply under this penalty. In certain policy areas--including 
administrative costs, the applicability of general grant administration 
standards, and the allowability of previously authorized expenditures--
we believe that some clarification was needed, and our preamble and 
regulations reflect that judgment. However, other statutory provisions 
(e.g., much of section 408 of the Act and section 115(a)(1) of PRWORA) 
are relatively straightforward, and we are not aware of significant 
issues of interpretation that necessitate further regulation of these 
provisions.
    In response to some of the specific concerns raised by commenters, 
we point out the following:
    (1) The allowability of juvenile justice services depends upon what 
was previously authorized under a State's plan. A Federal definition 
would not be appropriate.
    (2) Because of the statutory prohibition on use of Federal TANF 
funds for medical expenditures (except for pre-pregnancy planning), we 
could not authorize employment-related medical expenditures or medical 
services for substance abuse treatment under regulation.
    However, we have decided not to provide a definition of medical 
services (and other key terms) in order to give States the maximum 
flexibility to provide services needed by recipients--within the 
constraints of the statute.
    (3) To the extent that we have not addressed a provision in this 
final regulation, States may expend their Federal TANF funds under 
their own reasonable interpretations of the statutory language, and 
that is the standard that will apply in determining penalty liability.
    (4) In several respects, States have more flexibility in the use of 
Federal TANF funds than State MOE funds. Two of these are: (1) on 
benefits that were previously authorized; and (2) in certain 
circumstances, on benefits that serve the goals of the program, but are 
not attributable to individual needy (or eligible) families. For 
example, if the expenditures are reasonably related to the purposes of 
TANF (at Sec. 260.20) and do not constitute expenditures for 
``assistance'' (and are otherwise allowable), a State could use Federal 
TANF funds for transportation investments that reduce the dependence 
and support the employment of needy parents, even if it cannot 
associate all such expenditures with individual needy families. 
Likewise, States may use Federal TANF funds for expenditures associated 
with the third and fourth TANF goals (i.e., related to the formation 
and maintenance of two-parent families and the prevention of out-of-
wedlock pregnancies) without associating such expenditures to 
individual needy families. Thus, the statute and rules both provide 
States with some of the spending flexibility that commenters were 
seeking, with respect to transportation expenses, in particular, and 
other types of activities.
    Comment: We received a few comments concerning our reference to 
activities carried out under AFDC or JOBS. Commenters objected to our 
conception that section 404(a)(2) covered only those prior program

[[Page 17842]]

expenditures that were included in a State's AFDC or JOBS plans. Also, 
a couple of commenters wanted broad authority to spend funds on 
emergency services for children, such as juvenile justice, even when 
their State plans did not include specific references to such services.
    Response: Section 404(a)(2) provides that a State may use its 
Federal TANF funds ``in any manner that the State was authorized to use 
amounts received under part A or F * * *'' Although more than one 
interpretation of this phrase is possible, we believe our 
interpretation is the best for a number of legal and policy reasons. 
First, the reference to ``the State'' in the statutory language is 
consistent with looking at each State individually based on what was 
specifically authorized for that State. Also, under prior law, costs 
were authorized based on approved State plans. Second, our 
interpretation is consistent with the view that section 404(a)(2) was 
designed to ``grandfather in'' States whose prior programs allowed such 
expenditures. Third, there were some questionable funding practices by 
States under prior law, and we believe the best policy is to limit the 
extent to which they are perpetuated.
    Thus, in order for a State to expend Federal TANF funds under the 
authority of section 404(a)(2), the expenditures at issue must have 
been specifically authorized under that State's AFDC or JOBS plan. 
Section 404(a)(2) does not broadly authorize continued expenditures on 
vaguely defined, or undefined, programs; it merely authorizes the use 
of the TANF ``in a manner'' in which the State previously had the 
authority to expend AFDC and JOBS funds. States only had authority to 
expend AFDC and JOBS funds consistent with approved plans.
    Comment: We received several comments challenging the applicability 
of 45 CFR part 92 and OMB Circulars A-87 and A-102 to the TANF program 
and a few comments challenging the reference to section 115 of PRWORA. 
Commenters cited section 417 of the Act and the reference in section 
409(a)(1) to violations ``of this part'' as the basis for not applying 
these provisions to the TANF program.
    Response: We disagree with these comments. With respect to the OMB 
requirements, we believe that TANF, like other Federal grant programs, 
is subject to Departmental grants administration regulations and OMB 
circulars. The only time Federal grant programs would not be subject to 
grant administration regulations or OMB circulars is when OMB exempts 
them. OMB has not exempted the TANF program from these requirements; 
thus, they apply to the TANF program.
    Section 417 does not prevent us from applying the part 92 
regulations to TANF because the referenced requirements are not 
developed to enforce substantive provisions under this part. Thus, our 
approach to this issue is consistent with the approach taken in 
Sec. 260.35 and discussed in the preamble section entitled ``Recipient 
and Workplace Protections''; i.e., section 417 of the Act does not 
limit the applicability of other Federal laws and rules.
    With respect to violations of section 115 of PRWORA, first, we are 
clarifying that our intent is to cover only violations of section 
115(a)(1) under the misuse penalty. Thus, we would focus on whether 
States were expending Federal TANF funds on individuals who are 
ineligible for such assistance under Federal law. We would not monitor 
compliance with other provisions under section 115. To make this point 
clear, we have changed the regulatory reference from ``section 115'' to 
``section 115(a)(1).'' Secondly, we would point out that section 417 
does not limit our ability to hold States accountable for complying 
with section 115 of PRWORA. While we could, in theory, set up a 
different enforcement mechanism, such as a disallowance system, to 
cover violations of this provision, that would seem to be an 
unnecessary administrative complication; the misuse penalty would have 
a comparable financial effect and provides States with ample 
opportunity to appeal.
    Comment: One commenter suggested a change in language to conform 
more closely to what the statute reads. The change would substitute the 
language of this section from ``reasonably related to the purposes of 
TANF'' with ``reasonably calculated to accomplish the purposes of 
TANF.''
    Response: We agree with the comment and have made the change.

Section 263.12--How Will We Determine if a State Intentionally Misused 
Federal TANF Funds? (Sec. 273.12 of the NPRM)

Overview
    As we discussed in the proposed rule, in determining if a State has 
intentionally misused funds, we will apply a ``reasonable person'' 
test; i.e., a State must demonstrate to our satisfaction that it spent 
its TANF funds for purposes that a reasonable person would consider to 
be within the purposes of the TANF program. We will also consider funds 
to be intentionally misused if there is documentation, such as Federal 
guidance or policy instructions, that precludes the use of funds for 
such purposes, or if the State misuses the funds after receiving 
notification from us that such use is not allowable.
Comments and Responses
    We received a few comments on this section. These comments resulted 
in a minor change to the proposed rule as discussed below. We also made 
some minor editorial changes to the regulatory text.
    Comment: We received a number of comments about the procedures that 
applied to this penalty. Some commenters wanted the regulation to 
mention explicitly that the corrective compliance and appeal processes 
applied to the intentional misuse penalty. A few of these commenters 
also stated that we should give States an opportunity to submit a 
corrected financial report. One commenter further mentioned that States 
need a reasonable period of time to act upon a notification of misuse.
    Response: Under the provisions of Secs. 262.4, 262.5, 262.6, and 
262.7 of the final rules, States have the opportunity to appeal a 
penalty based on the misuse or intentional misuse of funds. States have 
60 days to submit a written response to our notification that we have 
determined it is subject to a penalty. We believe that 60 days is a 
reasonable period for a State to respond to a notification of misuse, 
as it is the amount of time the statute gives for submitting a 
corrective compliance plan and, under the audit process, a State should 
receive advance warning that the notification is coming. During this 
60-day period, the State has the opportunity to demonstrate that our 
determination was incorrect or based on insufficient information. For 
example, a State could argue that the action at issue occurred prior to 
the effective date of final rules and was based on a reasonable 
interpretation of the statute. A State could also submit a corrected 
TANF Financial Report that helps demonstrate that all of its TANF 
expenditures were appropriate and allowable. In addition, as 
Sec. 263.10 indicates, a State could demonstrate that it had reasonable 
cause for the misuse or intentional misuse of funds or provide us with 
a corrective compliance plan.
    Comment: One commenter said that the misuse penalty should not 
apply while the State is pursuing legal remedies.
    Response: We will not take an adverse action (i.e., reduce the 
adjusted SFAG)

[[Page 17843]]

prior to completion of any administrative review by the Departmental 
Grant Appeals Board (GAB). However, if the GAB sustains our penalty 
decision, the State will owe interest from the date of our final 
notification of an adverse action.
    Comment: One commenter objected to the presumption in the NPRM that 
a State has misused funds until the State proves otherwise. The 
commenter argued that the proposed rule shifts the burden of proof to 
the States in proving a negative.
    Response: We disagree with the comment. A State will normally 
receive notification that it has misused funds based on documented 
findings of audits performed under the Single Audit Act. As States know 
from prior experience, these audits utilize a variety of tools to 
evaluate expenditures, including the statute and regulations and a 
compliance supplement issued by OMB that focuses on certain areas of 
concern. In addition, the audit findings reflect reliable information 
taken from various sources, such as samples of case records and 
operational assessments. We believe that these audits will give us an 
objective appraisal of whether a misuse of funds has occurred.
    Thus, we believe that the initial ``burden'' of establishing misuse 
of funds rests with the auditors rather than the State. Then, States 
will have the opportunity both to review, analyze, and rebut the 
findings via the standard audit resolution procedures and to seek 
penalty relief through the reasonable cause and corrective compliance 
processes.
    Comment: A few commenters raised issues pertaining to misuse due to 
a failure to follow Federal guidance. One commenter mentioned that 
Federal guidance must be in accordance with the TANF statute before 
such guidance can be used to substantiate a claim of misuse. A second 
commenter recognized that legitimate issues may arise over a difference 
in interpretation of the statute. A third commenter argued that posting 
Federal guidance to a web page does not constitute notice and that 
States should be given adequate time to implement any changes 
necessitated by the guidance.
    Response: We agree that Federal guidance must adhere to the 
statute. Currently, all guidance that we issue is based on a careful 
review of the statutory language and legislative history. We will 
continue to follow this practice when preparing future guidance.
    We further recognize that a difference in the interpretation of a 
statutory provision is possible. We do not intend to penalize States 
pending resolution of such a difference. Under Sec. 262.4, a State has 
the opportunity to demonstrate that our determination that the State is 
subject to a penalty was incorrect. In short, a State may present 
alternative interpretations of a statutory provision during the penalty 
resolution process. Because we could withdraw a determination of misuse 
based upon such a State presentation, we have changed Sec. 263.12(b) 
and (c) to say that we ``may'' (rather than ``will'') consider funds to 
be misused if: (1) there is Federal guidance or policy indicating that 
TANF funds could not be used for a particular purpose; or (2) if the 
State continues to use the funds in the same or similarly improper 
manner after receiving notification of improper use.
    Regarding the comment about notice of Federal guidance, we intend 
to rely on different methods for transmitting guidance to the States 
and other interested parties. We presently post Federal guidance to our 
web page and also mail it to all State TANF agencies and other 
appropriate parties. We plan to continue this dual issuance process so 
long as some State TANF agencies have limited Internet capabilities. 
However, in the interest of reducing costs associated with the printing 
and mailing of guidance materials, we intend to increase our reliance 
on electronic modes of communication as State capabilities increase. 
Also, we are sensitive to operational issues and, where possible, will 
include implementation time frames in our guidance.
    Comment: A couple of commenters urged us to hold States accountable 
for complying with their plans for services and benefits under TANF and 
penalize States when they fail to do so.
    Response: We do not believe that we have the authority under the 
statute to penalize States in these circumstances. The misuse of funds 
penalty refers to violations ``of this part.'' It does not reference 
expenditures made in violation of State plan provisions. Section 417 of 
the Act limits our ability to enforce TANF. Therefore, we have not 
included this recommendation in the final rule.

Section 263.13--Is There a Limit on the Amount of Federal TANF Funds a 
State May Spend on Administrative Costs? (Sec. 273.13 of the NPRM)

Overview
    In the preamble for Sec. 263.0, we discuss most of the comments we 
received on the administrative cost provisions in the rule. We decided 
to consolidate the discussion in one place since most of the comments 
related to both the Federal and the MOE cap. Therefore, we refer you to 
that section for a discussion of a host of issues related to the 
Federal cap.
    This section of the rule speaks specifically to how the Federal 
administrative cost cap is determined. However, in reviewing the 
comments, we realized that the proposed rule had not directly presented 
the cap provision. To address this deficiency, we changed the title for 
this section and added a new paragraph (a) to explain the Federal cap 
provision. Paragraph (b) contains language from the NPRM on the 
exclusion for systems costs, modified as discussed below.
    In paragraph (a), we also have added regulatory language advising 
States that we would consider a violation of the Federal cap to be a 
misuse of funds.
    In reviewing the comments on the systems exclusion, we noted that 
proposed regulatory language in this section was not completely 
consistent with the statutory language (i.e., the proposed regulation 
said that the specified systems costs ``are not administrative costs 
for this purpose''). In the final rule, we have revised the language to 
conform more closely to the statute. Under the revised language, we 
track the statutory language and provide that the Federal 
administrative cost cap does not apply to ``Federal TANF expenditures 
on information technology and computerization needed for tracking or 
monitoring required by or under title IV-A of the Act.''
    The revised regulatory language also provides clarification of one 
issue that was not directly addressed in the written comments, but 
which has come up in the context of the WtW regulation and the proposed 
rule on the bonus for reduction of out-of-wedlock births. By statute, 
the Federal administrative cap applies to any grant made to the State 
under section 403. It thus applies to WtW funds, out-of-wedlock 
bonuses, high performance bonuses, supplemental grants, high 
performance bonuses, and contingency funds.
    The WtW regulations address the cap as it pertains to any WtW funds 
received by the State under section 403(a)(5). This final rule 
addresses any other funds provided under section 403.
    The new language provides for a consolidated cap for all TANF funds 
(i.e., funds provided under section 403 other than WtW funds under 
section 403(a)(5)). Thus, it would limit the total amount of 
expenditures that a State could spend on administrative costs from all 
these separate funding provisions. We would not require that

[[Page 17844]]

the State meet a 15-percent cap for each of these multiple sources of 
funds.
    While the statutory language would allow an alternative 
interpretation of separate funding caps, there is no evidence that 
Congress intended to create all these separate administrative cost 
caps. Also, we do not think creation of a consolidated cap would 
undermine the purpose of the provision, of limiting administrative 
costs, and we do not believe the potential benefit of separate caps 
would justify the additional administrative burden that States would 
incur.

Subpart C--What Rules Apply to Individual Development Accounts?

Section 263.20--What Definitions Apply to Individual Development 
Accounts (IDAs)? (Sec. 273.20 of the NPRM)

Overview
    Individual Development Accounts (IDAs) are similar to savings 
accounts and enable recipients to save for ``big ticket'' items, such 
as a home, or a college education or start a business. Money in an IDA 
account would not affect a recipient's eligibility for TANF assistance.
    States may use IDAs as an incentive for recipients to find jobs and 
to use their earned income to save for the future.
    Recipients can use IDAs as long-term investments, without losing 
eligibility for TANF assistance in the early stages of becoming self-
sufficient.
    The NPRM defined an IDA as an account established by, or for, an 
individual who is eligible for TANF assistance to allow the individual 
to accumulate funds for specific purposes. It also defined a number of 
other terms used applicable to IDAs.
Comments and Responses
    We received a few comments on the provisions in this section and 
made some minor changes to the proposed regulations, as discussed 
below.
    Comment: Several commenters said that we should clarify whether 
individuals eligible for TANF assistance through segregated State funds 
could be beneficiaries of the IDA program.
    Response: Under the definition in the NPRM, individuals who were 
eligible for TANF assistance could participate in IDAs.
    The statute at section 404(h)(2)(A) provides that under a State 
program, an IDA may be established by or for an ``individual eligible 
for assistance under the State program operated under this part.'' This 
latter phrase means that IDAs can cover individuals who are eligible 
under the TANF program, regardless of the funding source. We have 
revised the regulatory language at Sec. 263.20 so that it refers to 
eligibility for the TANF program. Under the definitions at Sec. 260.30, 
the TANF program includes all activities under the State program, 
regardless of funding source.
    Comment: One commenter stated that Federal regulations ought to 
expressly state that, under PRWORA, funds in an IDA are to be 
disregarded for purposes of determining eligibility for, or amount of, 
assistance under Federal means-tested programs (other than under the 
Internal Revenue Code).
    Response: We agree that the regulations should clarify that States 
must disregard IDA funds in determining eligibility and amount of 
assistance for such Federal means-tested programs. Section 404(h)(4) 
explicitly states that there should be no reduction in benefits. We 
have revised the regulatory language at Sec. 263.20 to clarify this 
point.
    Comment: One commenter explained how one State defined its IDA 
programs under its welfare reform waiver more broadly than the NPRM and 
suggested that we revise the regulation to allow for a broader range of 
IDA strategies.
    Response: The statute is very specific in terms of how IDA funds 
may be used. Accordingly, we have not changed the position taken in the 
proposed rule. However, under section 415 of the Act, until a State's 
welfare reform waivers expire, the State has latitude to continue its 
waiver policies and operate its program more broadly than the statute 
permits.

Section 263.21--May a State Use the TANF Grant To Fund IDAs? 
(Sec. 273.21 of the NPRM)

Overview
    PRWORA gives States the option to fund an Individual Development 
Account Program. Thus, States have the option to fund IDAs with TANF 
funds for individuals who are eligible for TANF assistance.
    We received one comment on the provisions in this section and made 
some minor changes to the proposed regulation, as discussed below.
Comment and Response
    Comment: One commenter said that the NPRM does not clearly express 
that IDA is an optional program that the States may choose to implement 
within limits permitted by Federal law.
    Response: We agree that the IDA provision is an optional program, 
which is subject to State rules within the limits permitted by Federal 
regulations and statute. We have revised the regulatory language at 
Sec. 263.2 to clarify this point. Also, consistent with the statutory 
language at section 403(a)(5)(C)(v), we have specified that WtW funds 
may also be used to fund these IDAs.

Section 263.22--Are There Any Restrictions on IDA Funds? (Sec. 273.22 
of the NPRM)

Overview
    IDAs are similar to savings accounts and enable recipients to save 
earned income for certain specified, significant items. IDAs contain 
special restrictions on who can match recipient contributions.
    The NPRM required that: (1) a recipient deposit only earned income 
into an IDA; (2) recipient's contributions to an IDA may be matched by 
a qualified entity; and (3) recipients may spend IDA funds only to 
purchase a home, pay for a college education, or start a business.
Comments and Responses
    We received a few comments on the provisions in this section and 
made some minor changes to the proposed regulation, as discussed below.
    Comment: Several commenters expressed that the NPRM was more 
restrictive than the statutory language on the source of matching funds 
and thereby unduly limited possible matching funds to an IDA account.
    Response: The language in the proposed rule was inadvertently 
narrower than the statutory provision. We have changed the regulation 
at Sec. 263.22 so it now comports with the statutory language. Under 
the final rule, ``matching funds may be provided by or through a 
qualified entity.''
    Comment: One commenter stated that we should allow TANF recipients 
to withdraw money from IDAs for training expenses, as well as for post-
secondary purposes.
    Response: The statute is very specific in terms of how IDA funds 
may be used. Only post-secondary education expenses at an eligible 
institution are permissible. While expenses for certain vocational 
education or training activities would be allowable, expenses for job 
training that is not at the post-secondary level or at an eligible 
institution would not be. Accordingly, we have not changed the proposed 
rule.

[[Page 17845]]

Section 263.23--How Does a State Prevent a Recipient From Using the IDA 
Account for Unqualified Purposes? (Sec. 273.23 of the NPRM)

Overview
    Money in an IDA account does not affect a recipient's eligibility 
for TANF assistance. Withdrawals from the IDA must be paid directly to 
a college or university, a bank, savings and loan institution, an 
individual selling a home, or a special account (if the recipient is 
starting a business).
    Section 404(h)(2)(D) authorizes the Secretary to establish 
regulations to ensure that individuals do not withdraw funds held in an 
IDA except for one or more of the above qualified purposes.
    In our research, we found that several States had established IDAs 
under their welfare reform demonstration projects and subsequently 
transferred those provisions to their TANF programs. Each State had 
designed its own procedures for preventing withdrawals or penalizing 
recipients who withdrew funds from their IDAs for unauthorized 
purposes. For example, several States count a withdrawal for a 
nonqualified purpose as earned income in the month of withdrawal unless 
the funds were already counted as earned income. Other States count 
such withdrawals against a family's resource limit. Still another State 
calculates a period of ineligibility using a complex formula.
    With this in mind, we did not feel that it was necessary to be 
overly prescriptive in mandating how States would ensure that 
individuals do not make unauthorized withdrawals from IDA accounts. 
Thus, we give States broad flexibility to establish procedures that 
ensure that only qualified withdrawals are made.
    In addition, section 404(h)(5)(D) gives the Secretary the authority 
to determine whether or not a business contravenes law or public 
policy. We have decided that we should base our determination on the 
business's compliance with State law or policies. Thus, our rules give 
States maximum flexibility in setting up these programs, while assuring 
that a business established by a needy family meets State requirements.
Comments and Responses
    We received a few comments in support of the provisions in this 
section, as discussed below. These comments did not result in any 
change to the proposed policy or rule.
    Comment: A few commenters supported the entire section on IDAs, 
noting that the Secretary exercised her discretion to give States 
maximum flexibility in designing and administering these programs.
    Response: We appreciate the commenters' support for our approach. 
The intent of the proposed rule was to allow States the latitude that 
they needed to administer an effective IDA program and develop 
innovative approaches for moving recipients from dependency to self-
sufficiency.

IX. Part 264--Other Accountability Provisions (Part 274 of the 
NPRM)

    Note: We have moved the content of Sec. 274.20 of the NPRM, 
entitled ``What happens if a State sanctions a single parent of a 
child under six who cannot get needed child care?'' to part 261. You 
can find a discussion of the comments related to this provision at 
Secs. 261.15, 261.56 and 261.57.

Section 264.0--What Definitions Apply to This Part? (Sec. 274.0 of the 
NPRM)

    This section cross-references the general TANF regulatory 
definitions established under part 260.
    We received no comments on this section. However, we decided to add 
definitions for ``countable State expenditures,'' ``Food Stamp 
trigger'' and ``unemployment trigger,'' which relate to the discussion 
of the Contingency Fund in subpart B, in order to make subpart B easier 
to understand. We also added a definition of ``FAG,'' which is used in 
the discussion of the spending levels of the Territories in subpart C. 
Finally, we moved this section out of subpart A, as it was in the NPRM, 
so that it is clear that the definitions apply to this entire part.

Subpart A--What Specific Rules Apply for Other Program Penalties?

Section 264.1--What Restrictions Apply to the Length of Time Federal 
TANF Assistance May Be Provided? (Sec. 274.1 of the NPRM)

    Under the former AFDC program, families could receive assistance as 
long as necessary, if they continued to meet program eligibility rules. 
Under the TANF program, Congress established a maximum length of time 
for which a family may receive assistance funded by Federal TANF funds.
    Section 408(a)(7) stipulates that States may not use Federal TANF 
funds to provide assistance to a family that includes an adult who has 
received assistance for more than five years. We will calculate the 
five-year limit on Federal funding as a cumulative total of 60 months.
    The legislative history for PRWORA clarifies the meaning of adult 
in section 408(a)(7)(A). States are to count only months for which an 
adult received assistance as the head-of-household or as the spouse of 
the head-of-household. (H.R. Rep. No. 725, 104th Cong., 2d sess., p. 
288.) Generally, when a parent or other adult caretaker relative of a 
minor child applies for and receives federally funded assistance under 
the State's TANF program on behalf of himself or herself and his or her 
family, Federal funding of that assistance may not last longer than 
five years. States must disregard any months when an adult receives 
assistance when he or she is not the head-of-household or is not the 
spouse of the head-of-household.
    Any month when a pregnant minor or minor parent received assistance 
as the head-of-household or married to the head-of-household counts 
toward the five-year limit. However, section 408(a)(7)(B) clarifies 
that the State must disregard any month for which assistance has been 
provided to an individual who is a minor child who is not the head of a 
household or married to the head of a household.
    The five-year limitation on Federal funding also disregards any 
months that an adult receives assistance while living in Indian country 
(as defined by section 1151 of title 18, United States Code) or in an 
Alaska Native Village where at least 50 percent of the adults are not 
employed (see Sec. 264.1(b)(1)(ii)).
    Subsection 408(a)(7)(G) provides for special treatment of 
assistance provided to a family with Welfare-to-Work grant funds 
(formula or competitive) under the time-limit provision. First, months 
for which a family receives cash assistance funded with Welfare-to-Work 
grant funds (under section 403(a)(5) of the Act) do count towards the 
five-year limit; however, months for which a family receives only WtW 
noncash assistance do not count towards the five-year limit.
    Second, families may receive assistance (cash or noncash) funded 
with WtW grant funds even though they are precluded from receiving 
other TANF assistance because of the five-year limit.
    Some families may receive assistance from Federal TANF funds for 
more than five years based on hardship or if the family includes an 
individual who has been battered or subjected to extreme cruelty as 
defined in section 408(a)(7)(C)(iii).
    Under section 408(a)(7)(C), the average monthly number of such 
families may not exceed 20 percent of the State's average monthly 
caseload during either that fiscal year or the immediately preceding 
fiscal year, whichever the State elects. We will not make a 
determination of whether a State has exceeded the cap until any 
families in the TANF program have received at

[[Page 17846]]

least 60 cumulative months of federally funded assistance.
    Since the purpose of the provision is to provide an extension to 
the 60-month limit, it applies after that limit is reached. We believe 
that this approach is the most straightforward and comports with 
Congressional intent that TANF assistance be provided on a temporary 
basis while a family becomes self-sufficient. Thus, Federal support 
would cease once a head-of-household or spouse of the head-of-household 
in the family has been assisted for 60 total months with Federal TANF 
funds unless the State chooses at that time to include the family in 
its 20-percent exception. However, the State may elect to use State 
funds to continue paying eligible families.
    The five-year time limit applies to Federal funding; it does not 
set an upper bound on the amount of time a State could provide 
assistance to an individual family with State funds. Further, States 
are free to impose shorter time limits on the receipt of assistance 
under their programs. They are also free to allow receipt for longer 
periods if the assistance is paid from State funds or if the family 
meets the criteria the State has chosen for extension and fits with the 
20-percent limit.
    In the NPRM preamble to this section, we clarified the relationship 
between domestic violence waivers of the time limit permitted under the 
Family Violence Option at section 402(a)(7) and the limit on the 
exceptions to the Federal time limit at section 408(a)(7)(C)(ii). The 
key issue was whether the 20-percent limit on hardship exceptions 
included families of domestic violence victims.
    Section 402(a)(7)(B) expressly refers to section 408(a)(7)(C)(iii) 
in applying the meaning of the term ``domestic violence'' to the Family 
Violence Option at section 402(a)(7)(A). Section 408(a)(7)(C)(iii) 
defines ``battered'' or ``subjected to extreme cruelty'' for purposes 
of describing families who may qualify for a hardship exemption at 
section 408(a)(7)(C)(i), and section 408(a)(7)(C)(ii) specifies a 20-
percent limit on the exceptions to the time limit due to hardship. 
Based on the statutory language, we concluded that the number of 
families waived from the five-year time limit per section 402(a)(7) 
fell within the 20-percent ceiling established under section 
408(a)(7)(C)(ii). However, we allowed a State to claim ``reasonable 
cause'' when its failure to meet the five-year limit could be 
attributed to its provision of federally recognized good cause domestic 
violence waivers. In the final rule, we have moved the provisions on 
domestic violence to a new subpart B of part 260. You can find our 
preamble discussion of these provisions and the comments on our 
proposed rules in the earlier discussion entitled ``Treatment of 
Domestic Violence Victims.''
    As previously discussed, section 408(a)(7)(D) provides an exemption 
to the time limit on receipt of federally funded TANF assistance for 
families living in Indian country or in an Alaskan Native village. The 
months that a family, which includes an adult, lives in Indian country 
or in an Alaskan Native village, where at least 50 percent of the 
adults are not employed, do not count when determining whether the 
adult has received federally funded assistance for 60 cumulative 
months. In accordance with section 408(a)(7)(D), the percentage of 
adults who are not employed in a month will be determined by the State 
using the most reliable data available for the month, or for a period 
including the month.
    In the earlier preamble discussion entitled ``Waivers,'' we discuss 
the impact of waivers granted under section 1115 of the Act on the 
five-year time limit. You will find the regulatory provisions in a new 
subpart C of part 260.
    We received a number of comments on this section. We made some 
revisions to the regulations as noted in our responses to the comments 
below. We also amended the regulations to reflect the position that 
only months for which an adult received assistance as the head-of-
household or as the spouse of the head-of-household count toward the 
five-year time limit.
    Comment: A couple of commenters expressed their opposition to all 
time limits, and one commenter stated that the time limits will cause 
families to suffer.
    Response: The time limit is an important aspect of welfare reform. 
It is meant to ensure that States and recipients place a clear priority 
on work, responsibility, and self-sufficiency. However, in a time-
limited program, States must make sure that they offer adequate 
services so that families can successfully move from welfare to work.
    Comment: A commenter asked whether the State should count towards 
the time limit any months when the adult is ineligible, but the rest of 
the family receives assistance.
    Response: The only months that count toward the time limit are 
months when a family member who is the head-of-household or the spouse 
of the head-of-household receives assistance. Thus, for example, if the 
family is comprised of a mother and her infant, and the mother is not 
receiving TANF assistance because she is receiving SSI or because she 
is an ineligible alien, the months when only her child receives TANF 
assistance do not count toward the time limit.
    Comment: Some commenters asked how the time limit applies when 
children receive assistance, but the caretaker relative does not.
    Response: Assuming that, in this situation, the head-of-household 
and the spouse of the head-of-household are not receiving TANF 
assistance, the months when the children receive assistance do not 
count toward the time limit.
    Comment: A few commenters asked whether months count toward the 
time limit when a family is subject to a full-family sanction.
    Response: Any months when the State imposes a full-family sanction, 
and no one in the family is receiving TANF assistance, do not count 
towards the Federal time limit. Only months for which an adult or minor 
head-of-household or spouse of the head-of-household receive assistance 
count. However, if it wishes to, a State may count such months towards 
its State time limit.
    Comment: Another commenter asked whether months count toward the 
time limit when one member of a family is sanctioned.
    Response: If an adult is sanctioned, and no one who is the head-of-
household or the spouse of the head-of-household is receiving TANF 
assistance, the Federal time limit does not apply. However, if the 
head-of-household or the spouse of the head-of-household continues to 
receive assistance while another individual is being sanctioned or the 
effect of the sanction is to reduce benefits to the family as a whole 
without denying assistance to any individual member of the family, the 
Federal time limit does apply.
    If the State wishes to count the months when a sanction applies to 
a family, it may count such months toward its State time limit even if 
it cannot count them towards the Federal time limit.
    Comment: A commenter asked how the time limit applies when a family 
begins to receive assistance mid-month or if the State provides 
assistance semi-monthly.
    Response: Whenever a family receives any TANF assistance for a 
month, whether it covers a whole month's worth of assistance or is a 
partial payment, that month counts toward the Federal time limit unless 
the exceptions in Sec. 264.1(b) apply.
    Comment: Another commenter stated that we should inform a State if 
its

[[Page 17847]]

policies are improper or will lead to a penalty.
    Response: When a State submits its TANF State plan, we review it to 
determine whether the plan is complete. We also identify potential 
problem areas and share our comments with the State. Thus, the more 
detail a State submits in its plan, the more feedback the State will 
receive on its policies and procedures. At the same time, we advise the 
State that our finding that the TANF plan is complete does not 
constitute our endorsement of State policies.
    Comment: A commenter asked whether receipt of TANF assistance by a 
noncustodial parent would affect the custodial parent and the children.
    Response: In order for an individual to receive TANF assistance as 
a noncustodial parent, a State must consider that parent to be a member 
of the family. Only the months for which a parent receives TANF 
assistance as the head-of-household or the spouse of the head-of-
household count toward the time limit. As defined at Sec. 260.30, a 
noncustodial parent cannot be the head-of-household, since he or she 
does not live in the same household as the child. Therefore, the months 
a noncustodial parent receives assistance would not count unless he or 
she is the spouse of the head of the household.
    We note that an individual can have more than one status and the 
above answer applies only to an individual receiving assistance as a 
noncustodial parent. An individual who is the noncustodial parent of 
one TANF child, could also be the custodial parent of another TANF 
child or the head-of-household for another TANF case; if he or she 
receives assistance as part of such a second family, it would count 
towards that second family's time limit.
    Comment: A commenter asked us to clarify when receipt of TANF 
assistance by a pregnant teen or a teen parent would count toward the 
five-year time limit.
    Response: The months count when a pregnant teen or teen parent 
receives TANF assistance while he or she is the head-of-household or 
the spouse of the head-of-household.
    Comment: Another commenter argued that the statute does not provide 
the authority for us to impose time limits on a minor head-of-household 
or minor spouse of a head-of-household who is not pregnant and is not a 
parent.
    Response: The commenter is correct. The months for which a minor 
head-of-household or minor spouse of a head-of-household who is not 
pregnant and is not a parent receives TANF assistance do not count 
toward the time limit.
    Comment: Commenters asked us to clarify when assistance provided 
under the Welfare-to-Work program counts toward the Federal time limit. 
One commenter expressed the opinion that WtW should not count. Another 
commenter asked us to define WtW cash and noncash assistance.
    Response: Under the statute, noncash assistance provided under WtW 
never counts toward the Federal 60-month time limit. Months for which 
WtW cash assistance is received do count if the assistance is received 
by a member of the TANF family who is the head-of-household or the 
spouse of the head-of-household. However, individuals who have received 
60 months of assistance may continue to receive WtW assistance and 
other benefits.
    Because of the interest in this issue, we have included a 
definition of WtW cash assistance at a new Sec. 260.31. See the 
preamble for that section for additional discussion of that definition.
    As previously discussed, the policies on counting WtW and TANF 
assistance apply to noncustodial parents. Receipt of WtW cash 
assistance or TANF assistance by a noncustodial parent, in his or her 
status as a noncustodial parent, does not count against the time limit 
unless he or she is the spouse of the head-of-household. If the 
noncustodial parent is the spouse of the head-of-household and is 
included by the State in its definition of a TANF family, such parent's 
receipt of WtW cash assistance or TANF assistance does count against 
the time limit. However, if the noncustodial parent is not included in 
the State's definition of a TANF family (e.g., he is receiving 
assistance as part of another family), his receipt of WtW cash 
assistance does not count towards the Federal TANF time limit for the 
family composed of the custodial parent and their children in common.
    Comment: A commenter asked whether months when assistance is 
received under a Tribal TANF program count toward the Federal five-year 
time limit.
    Response: Months for which a family received assistance under an 
approved Tribal Family Assistance Plan count toward the five-year time 
limit under both State and Tribal TANF programs. Under the provisions 
of section 408(a)(7), the five-year limit applies to TANF assistance 
provided with Federal TANF funds under part A of title IV of the Act. 
This includes assistance provided by Tribal TANF programs. However, 
there is an exception under Sec. 264.1(b)(1)(ii) for months when an 
adult lived in Indian country or Native Alaskan Village with high 
unemployment.
    Comment: A commenter asked whether the clock stops while an 
individual is in drug treatment so that she will be job ready.
    Response: The clock does not stop. The clock stops only because of 
the factors listed in Sec. 264.1(b).
    Comment: Another commenter asked whether a State can exempt from 
the time limit a family with old or disabled parents or caretakers.
    Response: A family cannot be exempted from the time limit on this 
basis. Months when a family receives assistance can be disregarded only 
according to the factors listed in Sec. 264.1(b). However, once the 
family has received assistance for 60 months, the State can continue to 
provide assistance on the basis of hardship. The State can also choose 
to provide assistance with State-only funds.
    Comment: A number of commenters were opposed to our provisions that 
attempted to restrict a State from excluding families from the time 
limit by including child-only cases in its definition of family and 
diverting families to separate State programs. The commenters also 
opposed our proposal to require States to report on the number of 
families excluded.
    Response: We agree that we should not limit a State's ability to 
determine which families they will serve under TANF and that we should 
not assume that a State is attempting to circumvent the statute. 
Accordingly, we have removed these provisions from the final rules. We 
also removed the requirement for separate reporting of child-only 
cases. You can find additional discussion on this issue in the earlier 
preamble discussion entitled ``Child-Only Cases.''
    Comment: While one commenter agreed with our position in the NPRM, 
a number of commenters argued that States should be able to stop the 
clock for hardship or domestic violence, or because individuals in the 
family are unable to participate in work activities before the family 
has received assistance for 60 months.
    Response: We do not believe that the statute envisions stopping the 
clock for hardship or for any reasons other than those listed in 
Sec. 264.1(b). Section 408(a)(7)(C) of the Act exempts families from 
being terminated from TANF assistance once they reach the 60-month 
limit; it does not exempt them from accruing months toward the limit. 
The statute permits States to continue to provide assistance to 
families beyond the 60-month limit based on hardship or because a 
family member has been

[[Page 17848]]

subjected to battery or extreme cruelty. However, as we discussed in 
the preamble section entitled ``Treatment of Domestic Violence 
Victims,'' we have revised the final rules to recognize a broader array 
of good cause domestic violence waivers to extend the time limit in 
determining whether a State that exceeds the 20-percent limitation will 
receive penalty relief. Accordingly, States may be able to extend the 
time limits for additional families, including victims of domestic 
violence.
    Comment: A commenter asked how the 20-percent hardship extension 
applies when a State has a shorter time limit than 60 months.
    Response: A State with a shorter time limit can establish its own 
policies for extending assistance under its State time limit. The State 
can extend assistance beyond its (shorter) time limit based on hardship 
or for other reasons. However, if a State extends its time limit and 
continues to provide assistance to a family, the additional months 
count toward the Federal time limit as they ordinarily would.
    Comment: Some commenters expressed the view that our provisions for 
how States' section 1115 waivers affect the time limit are confusing 
and improper.
    Response: We have made some minor adjustments to these provisions. 
Please refer to subpart C of part 260 and the earlier preamble 
discussion entitled ``Waivers.''

Section 264.2--What Happens if a State Does Not Comply with the Five-
Year Limit? (Sec. 274.2 of the NPRM)

    Congress created the penalty under section 409(a)(9) to ensure that 
States comply with the five-year restriction on the receipt of 
federally funded TANF assistance. If we determine that a State has not 
complied with the five-year time limit during a fiscal year, then we 
will reduce the SFAG payable for the immediately succeeding fiscal year 
by five percent of the adjusted SFAG.
    Five years is the maximum period of time permitted under the 
statute for families to receive federally funded TANF assistance. 
Therefore, the penalty under this section does not apply if the State 
exceeds any shorter time limits on the receipt of federally funded 
assistance that it may choose to impose. It also does not apply to any 
time limits on receipt of State-funded assistance or the receipt of 
noncash WtW assistance.
    In defining the requirement, section 409(a)(9) refers to section 
408(a)(7). This latter section identifies the circumstances under which 
assistance may be provided for longer than five years. It provides 
exceptions to the time-limit requirement for minors, hardship, or 
families living in Indian country or in an Alaskan Native village with 
adult unemployment above 50 percent. Therefore, we will take into 
account the exceptions described under paragraphs (B), (C), or (D) of 
section 408(a)(7) when deciding whether the State complied with the 
five-year time limitation. We will use the information required to be 
reported in part 265 to learn whether a State is complying with the 
five-year time restriction on the receipt of federally funded 
assistance.
    We do not intend to hold States immediately accountable for knowing 
about and verifying all months of assistance received in other States, 
since we are aware that, in general, States' data processing systems 
are not currently capable of accomplishing interstate tracking of the 
number of months an individual has received TANF assistance.
    We received a few comments on this section, as discussed below. We 
made only one minor editorial change to the regulations. This change 
clarifies that, if a State failed to comply with the time-limit 
requirements, in order to avoid a penalty, it must demonstrate to our 
satisfaction that it had reasonable cause, or it must correct or 
discontinue the violation under the provisions of an approved 
corrective compliance plan.
    Comment: A couple of commenters asked for guidance on how States 
should count months when a family received assistance in another State. 
Other commenters asked us to regulate that States will not be held 
accountable for knowing about a family's receipt of TANF assistance in 
another State.
    Response: Each State must keep track of the number of months it 
provides TANF assistance that count towards the Federal time limit. As 
part of its application process, a State should ask a family whether it 
has lived in any other States. If the family has, the new State should 
contact the other State(s) to find out whether the family received 
assistance that counts toward the Federal time limit. We expect a State 
to do its best to gather this information, but will not hold the State 
accountable if its information about what happened in another State is 
not accurate, as long as the State has made a good faith effort to 
gather complete and accurate information. We have decided not to 
include this specific guidance in the regulations because our 
expectations for State accountability will change over time as 
technology improves and the State's ability to do interstate tracking 
of families increases.
    Comment: A commenter asked whether a State with a State time limit 
that is shorter than the Federal time limit would be penalized if it 
fails to meet the requirements of its State time limit.
    Response: The penalty at Sec. 262.1(a)(9) only applies if the State 
fails to meet the Federal five-year time limit.

Section 264.3--How Can a State Avoid a Penalty for Failure to Comply 
With the Five-Year Limit? (Sec. 274.3 of the NPRM)

    In Sec. 262.5, we include general circumstances under which we may 
find reasonable cause to waive potential penalties. We also will 
consider an additional factor in determining whether there is 
reasonable cause for failure to meet the five-year limit. The 
additional factor relates to a State's implementation of the Family 
Violence Option and its provision of temporary waivers of time limits, 
when necessary, for victims of domestic violence.
    We will grant a State reasonable cause for failing to meet the 60-
month time limit, if it adequately demonstrates that it has exceeded 
the 20-percent limitation on exceptions because it granted individuals 
federally recognized good cause domestic violence waivers pursuant to 
subpart B of part 260. To qualify for reasonable cause based on this 
factor, a State would have to show that, if families with such waivers 
were disregarded, the number of families that received assistance did 
not exceed 20 percent. A State must substantiate its case for all 
claims of reasonable cause.
    You can find additional discussion of our domestic violence 
policies in the preamble section entitled ``Treatment of Domestic 
Violence Victims.''
    We received a number of comments on this section and made changes 
to the regulations, as discussed below.
    Comment: Several commenters asked us to permit States to claim 
reasonable cause based on additional factors, such as the State's good 
faith effort to comply with the time limit, a hard-to-serve population, 
high unemployment or other adverse economic conditions, and other 
factors that are beyond the control of the State.
    Response: As we discussed in the preamble to Sec. 262.5, we believe 
it is sounder policy to encourage a State to correct problems and find 
solutions than to excuse a State's inability to meet the statutory 
requirements. Accordingly, we are not adding reasonable cause factors 
that we will consider if a State fails to meet the time-limit 
requirement of the statute. (However, we have revised the language at 
Sec. 262.5 to allow more discretion to grant reasonable cause when a 
State faces special, unforeseen circumstances.)

[[Page 17849]]

    Comment: A number of commenters also argued that we should not link 
the reasonable cause factor for federally recognized good cause 
domestic violence waivers to the victim's ability to work and that 
other changes should be made to the provision.
    Response: We have addressed these comments in subpart B of part 260 
and the preamble discussion entitled ``Treatment of Domestic Violence 
Victims.''

Section 264.10--Must States Do Computer Matching of Data Records Under 
IEVS To Verify Recipient Information? (Sec. 274.10 of the NPRM)

    Congress originally established the Income and Eligibility 
Verification System (IEVS) in 1984 under section 1137 of the Act. 
PRWORA created a penalty at section 409(a)(4), requiring the reduction 
of a State's SFAG for the immediately succeeding fiscal year by up to 
two percent if a State is not participating in IEVS.
    The IEVS provision was intended to improve the accuracy of 
eligibility determinations and grant computations for the public 
assistance programs (AFDC, Medicaid, Food Stamp and SSI). It achieves 
this goal by expanding access to, and exchanges of, available computer 
files to verify client-reported earned and unearned income. 
Specifically, it makes the following files available to the State 
public assistance agencies: (1) IRS unearned income; (2) State Wage 
Information Collection Agencies (SWICA) employer quarterly reports of 
income and unemployment insurance benefit payments; (3) IRS earned 
income maintained by the Social Security Administration (SSA); and (4) 
with the passage of the Immigration Control and Reform Act of 1986, 
immigration status information maintained by the Immigration and 
Naturalization Service (INS).
    Currently, regulations at Secs. 205.51 through 205.62 and the 
statute at section 1137(d) describe what is meant by ``participating * 
* * in the income and eligibility verification system required by 
section 1137.'' The regulation at Sec. 205.60(a) requires each State to 
maintain statistics on its use of IEVS. In general, ``participation'' 
means that a State agency submits electronic requests to IRS, SWICA, 
SSA and INS for information listed in the preceding paragraph, for all 
TANF applicants and recipients. IRS, SWICA, SSA and INS provide the 
State agencies with an electronic response regarding the information 
requested. The frequency of the request and the timeliness of the 
response is a function of the data processing systems design of the 
responding agency. The State agency worker compares the information in 
the response to determine the accuracy of client reporting of case 
circumstances.
    We received comments from two parties, which did not result in any 
changes to the regulation. However, we did make a change based on our 
internal review. INS has stated its view that Federal departments are 
no longer authorized to grant waivers to States to exempt certain 
programs from verifying alien eligibility through the SAVE system. (See 
63 FR 41662, August 4, 1998.) Therefore, we removed the parenthetical 
in the proposed rule at paragraph (a)(4) referencing such waivers.
    One of the commenters expressed the view that the proposed rule is 
consistent with the TANF statutory provisions. We discuss the other 
comments and our responses below.
    Comment: A commenter argued that requiring data matches for all 
TANF applicants and recipients is not cost effective and should not be 
performed.
    Response: The statute at section 1137 and the implementing 
regulations at Secs. 205.51 through 205.62 provide that the State must 
request data matches for the entire TANF caseload.
    Comment: The commenter asked whether we would permit targeting 
procedures for data matches based on cost effectiveness.
    Response: States may use targeting procedures that govern the use 
of data matches. Paragraph 1137(a)(4)(C) of the Act states, ``The use 
of such information shall be targeted to those uses that are most 
likely to be productive in identifying and preventing ineligibility and 
incorrect payments, and no State shall be required to use such 
information to verify the eligibility for all recipients.'' The 
implementing regulation at Sec. 205.56(a)(1) continues to permit States 
to exclude categories of information from a follow-up review. States 
perform reviews after the data matches and compare information obtained 
from the match with the case record to determine if it affects an 
applicant's or recipient's eligibility or the amount of payment.
    Comment: The commenter also expressed disagreement with the 
definition of participation for ``all TANF applicants and recipients'' 
(e.g., naturalized citizens do not require a match with INS).
    Response: We recognize that States are not required to perform a 
data match with the Immigration and Naturalization Service (INS) for 
naturalized citizens. The data match with INS is only required for 
alien applicants and recipients.

Section 264.11--How Much Is the Penalty for Not Participating in IEVS? 
(Sec. 274.11 of the NPRM)

    Since IEVS has been in existence for more than 12 years, we believe 
that States have had sufficient time to become full participants in 
IEVS. Therefore, we will impose the maximum two-percent penalty upon 
all findings that a State is not participating in IEVS.
    We will use an audit pursuant to the Single Audit Act as the 
primary means of monitoring a State's IEVS participation. We will also 
use statistics maintained by the State, as required by Sec. 205.60(a), 
as another source of information and may conduct additional Federal 
reviews or audits as needed.
    We received few comments on this section. We discuss the comments 
and our responses below. We made no changes to the regulations.
    Comment: A few commenters expressed concern that we were not clear 
in the proposed rule about how we will determine a State's 
nonparticipation in IEVS and the amount of the penalty. Another 
commenter argued that the amount of the penalty in proposed regulation 
needs to be amended to comport with the provisions of the Act.
    Response: We will determine a State's nonparticipation in IEVS by 
an audit pursuant to the Single Audit Act. Specific auditing procedures 
for evaluating participation in IEVS are included in the Compliance 
Supplement to OMB Circular A-133. Anyone interested in the auditing 
procedures should review the Compliance Supplement for further 
information.
    Since the statute allows us to regulate a penalty of ``not more 
than 2 percent,'' we could establish a penalty of less than two 
percent. However, we feel that a penalty of two percent is appropriate 
given that IEVS has been in effect for over 12 years and States have 
had ample time to come into compliance.
    Comment: Some commenters suggested that we should impose a reduced 
penalty of less than two percent if the failure to operate IEVS was 
inadvertent, isolated, or of a technical nature. A few commenters 
indicated that the proposed rule is consistent with the TANF statutory 
requirements.
    Response: If a State fails to meet the IEVS requirements, it may 
claim reasonable cause and/or submit a corrective compliance plan under 
part 262. Under these provisions, a State might be able to demonstrate 
that we should forgive or reduce its penalty under the types of 
situations mentioned by the commenters.

[[Page 17850]]

Section 264.30--What Procedures Exist to Ensure Cooperation With Child 
Support Enforcement Requirements? (Sec. 274.30 of the NPRM)

    One of TANF's purposes is to provide assistance to needy families 
so that children may be cared for in their own homes or the homes of 
relatives. Another is to end the dependence of needy parents on 
government benefits by promoting job preparation, work, marriage, and 
parental responsibility. A third is to prevent and reduce the incidence 
of out-of-wedlock pregnancies and to encourage the formation and 
maintenance of two-parent families. Child support enforcement provides 
an important means of achieving all of these goals.
    The law has long recognized that paternity establishment is an 
important first step toward self-sufficiency in cases where a child is 
born out of wedlock. The earlier paternity is established, the sooner 
the child may have a relationship with the father and access to child 
support, the father's medical benefits, information on his medical 
history, and other benefits resulting from paternity establishment. 
Establishment of paternity may also help establish entitlement to other 
financial benefits, including Social Security benefits, pension 
benefits, veterans' benefits, and rights of inheritance. Accordingly, 
establishing paternity and obtaining child support from the 
noncustodial parent are critical components of achieving independence.
    To ensure that a legal relationship protecting the interests of the 
children is established quickly and in accordance with State law, the 
TANF (IV-A) agency must refer all appropriate individuals in the family 
to the Child Support Enforcement (IV-D) agency for paternity 
establishment and/or services needed to establish, modify, and enforce 
a child support order. Referred individuals must cooperate in 
establishing paternity and in establishing, modifying or enforcing a 
support order for a child.
    The IV-D agency determines whether the individual is cooperating 
with the State as required. If the IV-D agency determines that an 
individual has not cooperated, and the individual does not qualify for 
any good cause or other exception established by the State, the IV-D 
agency will notify the IV-A agency promptly. The IV-A agency must then 
take appropriate action.
    In cases of noncooperation, the IV-A agency must either deduct from 
the assistance an amount no less than 25 percent of the amount of the 
assistance that otherwise would be provided or deny the family 
assistance under the TANF program.
    We received a few comments on the provisions in this section and 
made some modest changes to the regulations, as discussed below.
    Comment: Several commenters suggested that we clarify agency 
responsibilities for making the good cause determination. They stated 
that the proposed preamble and regulation did not make it clear that 
the statute provides States with a choice about whether the TANF (IV-A) 
or IV-D agency determines good cause. One State recommended that the 
final regulations allow for IV-D agencies to negotiate with IV-A TANF 
agencies to determine good cause for noncompliance.
    Response: We agree that States have discretion in this area. As 
provided in section 454(29)(A) of the Act, the title IV-A, IV-D or XIX 
(Medicaid) agency may determine whether the individual has good cause 
for not cooperating in establishing paternity or fulfilling any other 
cooperation requirement. The selection of the responsible agency is at 
the option of the State IV-D agency. We have revised the regulatory 
language at Sec. 264.30(b) to clarify this point. We have also revised 
the language in Sec. 264.30(b) to explicitly recognize that victims of 
domestic violence could receive waivers of child support cooperation 
requirements if a State has adopted the Family Violence Option.
    Comment: Many commenters expressed concern that the use of the term 
``appropriate individual,'' used to indicate who must cooperate, 
suggests that Federal law requires cooperation by nonparents. They 
suggested that we modify the provision to clarify that Federal law 
mandates cooperation only with respect to parents who apply for TANF 
assistance for their own children.
    Response: We agree with the commenters that Federal law does not 
require cooperation by other individuals. However, the language in the 
proposed rule recognized that it might be appropriate to require 
cooperation by other caretakers who have access to information that 
could be used to establish paternity or obtain child support on behalf 
of the child. Since we believe States should have some discretion to 
require cooperation in these cases, we have chosen to leave the term 
``appropriate individuals'' in the regulation. At the same time, we 
would point out that other individuals would not ordinarily have the 
same level of information about the absent parent as a parent would. 
Thus, we would expect States to develop procedures that recognize this 
difference and apply a different standard in determining cooperation by 
nonparents.
    Comment: One commenter suggested that it was unnecessary to include 
the language ``for whom paternity has not been established'' in either 
the preamble or the regulation since even if paternity was previously 
established, the IV-D agency must carry out child support enforcement 
activities, such as enforcing and modifying child support orders for 
children whose paternity has already been established.
    Response: We disagree. Section 409(a)(5) specifically mentions 
cooperation in establishing paternity. We would note that the language 
in Sec. 264.30(a) covers the other situations mentioned by the 
commenter, especially where it says ``* * * or for whom a child support 
order needs to be established, modified or enforced. * * *''
    Comment: Several commenters recommended that we mandate a set of 
notice and procedural requirements for cooperation that States would 
need to include in their systems. One commenter suggested that we 
should not allow a State to impose sanctions unless there is 
verification that the agency has met its duty of notifying recipients. 
Others felt that: (1) The notices should inform TANF applicants and 
recipients about the cooperation requirement and the good cause and 
other exceptions; (2) there should be a mechanism by which an 
individual who has been referred to the IV-D agency for child support 
services can make a claim for an exemption from the cooperation 
requirement if it appears that one is needed; (3) there should be an 
interface between the IV-A and IV-D agencies when the State has set up 
a system in which the IV-A agency makes the ``good cause'' 
determinations and the IV-D agency makes cooperation decisions; and (4) 
an individual should be informed about a noncooperation decision and 
how to appeal such a decision.
    Response: The statute does not give us the authority to require 
specific notice and procedural criteria from States. However, as the 
cooperation requirement is not new, States already have administrative 
processes in place that support fair and equitable treatment of 
individuals, including notices of certain requirements under this 
section. States are required to submit State plans that describe 
individual State program operations and requirements. Child Support is 
one of the plans required.

[[Page 17851]]

Section 264.31--What Happens if a State Does Not Comply With the IV-D 
Sanction Requirement? (Sec. 274.31 of the NPRM)

    In accordance with section 409(a)(5), we will impose a penalty of 
up to five percent of the adjusted SFAG if the IV-A agency fails to 
enforce penalties requested by the IV-D agency against individuals who 
fail to cooperate without good cause. We will monitor State adherence 
to this requirement primarily through the single audit process.
    Although States had been required to establish paternity and 
enforce other child support provisions for several years, and States 
already had systems and procedures in place for dealing with these 
requirements, the division of responsibility between the IV-A and IV-D 
agencies changed slightly under PRWORA.
    We decided to increase the amount of the penalty gradually in order 
to give States the opportunity to make procedural adjustments before 
they are subject to the impact of the maximum penalty. We will impose a 
penalty of one percent for the first violation and two percent for the 
second. However, since this is not an entirely new requirement, we will 
apply the maximum penalty of five percent for the State's third, and 
any subsequent, violation of this provision.
    We received two comments specifically addressing the provisions in 
this section. As a result, we made some minor changes to the 
regulations, as discussed below.
    Comment: One commenter suggested that individuals who receive 
waivers from the child support cooperation requirements pursuant to the 
Family Violence Option (FVO) should also be exempt from sanction and 
should not be considered in determining the need for a penalty under 
this subsection.
    Response: Although a separate section of the Act authorizes waivers 
under the FVO for victims of domestic violence, the purpose of these 
waivers and the regular good cause exceptions from child support 
cooperation are similar, i.e., to protect families that face special 
risks from inappropriate requirements and sanctions. We encourage 
States to establish an administratively efficient process to coordinate 
these two determinations. Coordinating them should help States minimize 
duplication of effort, avoid confusion and jurisdictional problems, and 
treat families in similar circumstances consistently. (See Sec. 260.57 
for additional discussion of FVO waivers and sanction policies.)
    Comment: One commenter suggested we add a further criterion to 
specify that we will not penalize a State if the violations were de 
minimus.
    Response: We believe that the reasonable cause criterion at 
Sec. 262.5(a)(3) adequately covers such situations.

Section 264.40--What Happens if a State Does Not Repay a Federal Loan? 
(Sec. 274.40 of the NPRM)

    Section 406 permits States to borrow funds to operate their TANF 
programs. In general, States must use these loan funds for the same 
purposes as other Federal TANF funds. However, the statute also 
specifically provides that States may use such loans for welfare anti-
fraud activities and for the provision of assistance to Indian families 
that have moved from the service area of an Indian Tribe operating a 
Tribal TANF program.
    States have three years to repay loans and must pay interest on any 
loans received. Our Office of Administration has issued an Action 
Transmittal, OFA-TANF-98-2, dated February 3, 1998, notifying States of 
the application process and the information needed for the application.
    Section 409(a)(6) establishes a penalty for States that do not 
repay loans provided under section 406. If the State fails to repay its 
loan in accordance with its agreement with ACF, we will reduce the 
adjusted SFAG for the immediately succeeding fiscal year by the 
outstanding loan amount, plus any interest owed.
    Sections 409(b)(2) and 409(c)(3) provide that States cannot avoid 
this penalty either through reasonable cause or corrective compliance.
    We received no comments on the provisions in this section. 
Therefore, the final rule incorporates the proposed policy.

Section 264.50--What Happens if, in a Fiscal Year, a State Does Not 
Expend, With Its Own Funds, an Amount Equal to the Reduction to the 
Adjusted SFAG Resulting From a Penalty? (Sec. 274.50 of the NPRM)

    Section 409(a)(12) requires States to expend, under the TANF 
program, an amount equal to the reduction made to its adjusted SFAG as 
a result of one or more of the TANF penalties. Thus, States must 
maintain a level of TANF spending that is equivalent to the funding 
provided through the SFAG, even if we reduced their Federal funding as 
a result of penalties. If a State fails to expend its own funds to pay 
for State TANF expenditures in an amount equal to the reduction made to 
its adjusted SFAG for a penalty under Sec. 262.1, we will reduce the 
State's SFAG for the next fiscal year by an amount equal to not more 
than two percent of its adjusted SFAG, plus the amount that the State 
should have expended (reduced for any portion of the required amount 
actually expended by the State in the fiscal year).
    As discussed in Sec. 262.3, we will monitor closely a State's 
efforts to replace the reduced SFAG with its own expenditures. A State 
must not diminish its investment in its TANF program as a result of 
actions violative of the TANF requirements. Therefore, if a State fails 
to make any expenditures in the TANF program to compensate for penalty 
reductions, we will penalize the State in the maximum amount, i.e., two 
percent of the adjusted SFAG plus the amount it was required to expend. 
We will reduce the penalty based on the percentage of any expenditures 
that the State does make.
    For example, a State was required to replace an SFAG reduction of 
$1,000,000, but its increase in expenditures equalled only $400,000. 
Since it failed to repay $600,000, its penalty would be equal to two 
percent of the adjusted SFAG times 60 percent (because $600,000 is 60 
percent of $1,000,000), plus the $600,000 that it failed to expend as 
required.
    States should note that if they do not expend State-only funds as 
required, the effect will be that the amounts to be deducted from the 
SFAG will compound yearly, as the penalty for failure to replace SFAG 
funds with State expenditures also applies to the penalty at 
Sec. 262.1(a)(12). We believe that this is appropriate because full 
resources must be available to ensure that the goals of the TANF 
program are met.
    Pursuant to section 409(a)(12), State expenditures that are used to 
replace reductions to the SFAG as the result of TANF penalties must be 
expenditures made under the State TANF program, not under ``separate 
State programs.'' Further, as noted in Sec. 263.6, regarding the limits 
on MOE expenditures, State expenditures made to replace reductions to 
the SFAG as a result of penalties do not count as basic MOE 
expenditures.
    In addition, the statute provides that the reasonable cause and 
corrective compliance plan provisions do not apply to the penalty for 
failure to replace SFAG reductions.
    We received a few comments on this section. These comments resulted 
in changes, as discussed below.
    Comment: A commenter asked if a State's replacement of funds must 
occur in the quarter following the imposition

[[Page 17852]]

of the penalty or in the next fiscal year. The commenter preferred 
replacement during the next fiscal year because of differences in State 
appropriation cycles. Another commenter suggested that the proposed 
rule did not comport with the language of the statute.
    Response: We agree with the comments. We have revised the 
regulatory language at Sec. 264.50 to reflect the sequence of penalty 
actions as contained in the statute at section 409(a)(12). When we 
withhold Federal TANF funds during a fiscal year, the State must 
replace them with State funds during the subsequent fiscal year. If the 
State fails to replace the funds during the subsequent year, then we 
can withhold an additional penalty during the year that follows the 
subsequent year. The starting point for this sequence of actions is the 
fiscal year in which we impose a penalty by reducing the adjusted SFAG.
    Comment: A commenter recommended that we allow reasonable cause and 
corrective compliance when a State fails to expend its own funds to 
replace a reduction in the adjusted SFAG caused by other penalties.
    Response: The statute prohibits reasonable cause or corrective 
compliance when a State fails to replace the reduction to its SFAG due 
to the imposition of other penalties.
    Comment: One commenter suggested that we should allow States to 
expend the replacement funds on State-only programs that serve the TANF 
population.
    Response: Section 409(a)(12) explicitly refers to ``the State 
programs funded under this part,'' which means the TANF program 
established under title IV-A of the Act. Separate State programs, 
funded exclusively with State funds, are not part of the State TANF 
program funded under title IV-A of the Act.

Subpart B--What Are the Requirements for the Contingency Fund?

    In addition to the TANF funding they receive under section 403(a) 
of the Act, States may receive funding from the Contingency Fund under 
section 403(b). This fund was created in response to concerns related 
to the use of block grant funding for TANF and the end of entitlement 
and open-ended Federal funding of welfare assistance that existed under 
the AFDC program. The purpose of the Contingency Fund is to make 
additional Federal TANF funds available to States, at their request, 
for periods when unfavorable economic conditions threaten their ability 
to operate their TANF programs. The Fund was established to create a 
pool of Federal TANF funds that could be provided to needy States with 
economic problems.
    We received several comments on the Contingency Fund sections of 
the NPRM. Most of the commenters asked us to make the preamble and 
regulations more consistent and less confusing, and to provide further 
clarification of the provisions. As a result, we have revised all of 
subpart B, restructured the sections, and amended our discussion of the 
provisions. Also, we have changed many of the section headings to make 
them clearer and to eliminate duplication. Whenever possible, we 
reference the sections that we used in the NPRM to make it easier for 
the reader. We hope that we have succeeded in making improvements and 
that the Contingency Fund provisions are now easier to understand. 
However, we have not made substantive changes to the underlying 
policies or procedures of this subpart because the proposed regulatory 
provisions closely followed the statute.
    In addition to the changes we made in response to comments, we 
eliminated a discussion on ``Meeting FY 1997 MOE Requirements'' that 
was included at the end of the preamble to subpart B of part 274 of the 
NPRM. We believe that it is no longer necessary to include this 
specific discussion about the handling of the Contingency Fund in FY 
1997.
    This final rule also differs from the NPRM in that we added 
information about the overall adjustment of the Contingency Fund, and 
the additional remittances of contingency funds that will be due from 
States, that are required by the Adoption and Safe Families Act of 
1997, which was enacted just as the NPRM was about to be published.

Section 264.70--What Makes a State Eligible To Receive a Provisional 
Payment of Contingency Funds? (New Section)

    As noted in the definitions at Sec. 260.30, the term ``Contingency 
Fund'' refers to the Federal TANF funds that a State may receive under 
section 403(b). It does not refer to any required State expenditures.
    To receive a provisional payment of contingency funds, a State must 
qualify as a needy State for one or more months in a fiscal year. A 
needy State may request contingency funds in accord with the process 
delineated in program instruction TANF-ACF-PI-97-8, dated October 27, 
1997. This program instruction provides guidance to States on the 
requirements for receiving contingency funds and instructions for 
applying for these funds.
    A State is a ``needy State'' if it meets either the ``unemployment 
trigger'' or the ``Food Stamp trigger'' for an ``eligible month.''
    To be eligible for contingency funds under the unemployment 
trigger, the State's average unemployment rate for the most recent 
three-month period must be at least 6.5 percent and at least equal to 
110 percent of the State's unemployment rate for the corresponding 
three-month period in either of the two preceding calendar years.
    To be eligible for contingency funds under the Food Stamp trigger, 
a State's monthly average of individuals participating in the Food 
Stamp program (as of the last day of each month) for the most recent 
three-month period must exceed its monthly average of individuals in 
the corresponding three-month period in the Food Stamp caseload for FY 
1994 or FY 1995 by at least ten percent, assuming that the immigrant 
provisions under title IV and the Food Stamp provisions under title 
VIII of PRWORA had been in effect in those years.
    The statute defines an eligible month as a month in a two-month 
period that begins with any month for which the State is determined to 
be a needy State. Once a State becomes a needy State for any given 
month (by meeting either the unemployment or Food Stamp triggers) and 
elects to receive contingency funds, it will receive a provisional 
payment for a two-month period. Based on the statutory definition of an 
eligible month, a determination that a State is a needy State for a 
month makes that State eligible to receive a provisional payment of 
contingency funds for two consecutive months, at the State's option.
    Territories and Tribal TANF grantees are not eligible to 
participate in the Contingency Fund. Section 403(a)(7) provides that 
only the 50 States and the District of Columbia are eligible.

Section 264.71--What Determines the Amount of the Provisional Payment 
of Contingency Funds That Will Be Made to a State? (New Section)

    The amount of contingency funds paid to a State is considered to be 
provisional because the actual amount that the State is eligible to 
receive is not determined when the payment is made, but, rather, after 
the fiscal year ends. As we discuss in Sec. 264.73, a State that 
received contingency funds must complete an annual reconciliation to 
determine whether it must remit some or all of the contingency funds it 
received.

[[Page 17853]]

    For each month of the fiscal year that it meets the eligibility 
criteria in Sec. 264.70, a State may receive up to \1/12\th of 20 
percent of its annual SFAG allocation. The actual amount of funds that 
a State may realize from the Contingency Fund will vary, depending on 
the level of State expenditures, the number of months that it is 
eligible, and the total number of States receiving contingency funds. 
States eligible in one month may automatically receive a payment for 
the following month.
    We will provide contingency funds to each State that requests them, 
in the order in which we receive the requests, until the available 
appropriated funds are exhausted.

Section 264.72--What Requirements Are Imposed on a State if It Receives 
Contingency Funds? (New Section)

    In order to be eligible for contingency funds, a State must make 
expenditures in its TANF program, from State funds, at the required 
Contingency Fund MOE level. The required Contingency Fund MOE level is 
100 percent of the State's historic State expenditures for FY 1994.
    To keep any of the contingency funds it received, a State must 
exceed the Contingency Fund MOE level requirement. A State may keep 
only the amount of contingency funds that match, at the applicable 
Federal Medical Assistance Percentage (FMAP) rate, countable State 
expenditures, as defined in Sec. 264.0, that are in excess of the 
required Contingency Fund MOE level, reduced by the proportionate 
remittance required by the Adoption and Safe Families Act of 1997. 
Because of the reconciliation formula, it is possible that a State may 
not be able to keep any of the contingency funds it received. Please 
refer to the discussion of Sec. 264.73 on the annual reconciliation for 
more information.
    You should note that the Contingency Fund MOE requirement is 
different from the basic MOE requirement. An obvious difference is that 
the basic MOE requirement is 80 percent (or 75 percent if a State meets 
its participation rates) of historic State expenditures, while the 
Contingency Fund MOE requirement is 100 percent of historic State 
expenditures. Another difference is that, in determining the 
Contingency Fund MOE level, expenditures for child care must be 
excluded. Finally, expenditures in separate State programs also must be 
excluded in determining countable expenditures.
    This means that States cannot meet the Contingency Fund MOE 
requirement merely by increasing State expenditures by 20 (or 25) 
percent. The calculations for determining compliance with the basic MOE 
requirements and for determining eligibility for the Contingency Fund 
are different. For example, Contingency Fund MOE expenditures must be 
expenditures within TANF. Expenditures made under separate State 
programs do not count for this purpose. However, most MOE expenditures 
that a State makes within its TANF program for eligible families may 
count as both Contingency Fund MOE expenditures and as basic MOE 
expenditures.
    As we discuss in Sec. 264.73, each State that receives contingency 
funds is required to complete an annual reconciliation to determine 
what portion of the contingency funds it may retain and what portion it 
must remit.
    The statute provides that a State need not remit contingency funds 
until one year after it has failed to meet either the Food Stamp 
trigger or the unemployment trigger for three consecutive months. Thus, 
a State may retain these funds for at least 14 months after it receives 
them. (However, the period of time between the annual reconciliation 
and the remittance date may be shorter.)
    For example, if a State fails to meet either trigger for the months 
of July, August, and September, 1997, it has until September 30, 1998, 
to remit the funds. The State must include its annual reconciliation 
for contingency funds received in FY 1997 in its fourth quarter 
Financial Report for FY 1997, due November 14, 1997.
    In general, contingency funds may be used for the same purposes as 
other Federal TANF funds. However, contingency funds are available only 
for qualifying expenditures made in the fiscal year in which the State 
receives the funds. States may not use funds received in a given fiscal 
year for expenditures made in either the subsequent fiscal year or a 
prior fiscal year. Unlike TANF funds under section 403(a), contingency 
funds are not available until expended.
    Since contingency funds are Federal TANF funds, they are generally 
subject to the same requirements as other Federal TANF funds. For 
example, a State cannot use contingency funds to pay a family if the 
family has already received Federal assistance for 60 months, unless 
the family has received an exception under Sec. 264.1. (See the 
discussion in Sec. 263.21 on ``Misuse of Federal TANF Funds'' for 
additional information.)
    However, unlike the TANF funds that they receive under section 
403(a), States cannot transfer contingency funds (provided under 
section 403(b)) to the Child Care and Development Block Grant Program 
(also known as the Discretionary Fund of the Child Care and Development 
Fund) and/or the Social Services Block Grant Program under title XX of 
the Act. Section 404(d) of the Act permits the transfer of funds 
received pursuant to section 403(a) only.

Section 264.73--What Is an Annual Reconciliation? (New Section)

    The purpose of the annual reconciliation is to determine the amount 
of contingency funds that a State is permitted to retain for a fiscal 
year. The annual reconciliation involves computing the amount by which 
the State's countable State expenditures exceeds the State's required 
Contingency Fund MOE level, as contingency funds match only these 
excess expenditures. If the countable expenditures exceed the required 
Contingency Fund MOE level, then the State may be entitled to all or a 
portion of the contingency funds paid to it. However, even if its 
countable expenditures exceed its required Contingency Fund MOE level, 
it is possible that the provisions of the Adoption and Safe Families 
Act of 1997, amending section 403(b)(6), will have a major impact on 
the amount of contingency funds that a State is permitted to retain. In 
fact, it may prevent a State from retaining any contingency funds.
    Each State that received contingency funds is required to perform 
certain calculations to accomplish the annual reconciliation. First, it 
must determine whether it met its required Contingency Fund MOE level. 
If it did not, it must remit all of the contingency funds it received.
    If it met its Contingency Fund MOE requirement, the State must also 
perform the following steps to determine how much of the contingency 
funds it is permitted to retain:
    (1) Calculate the sum of the amount of the qualifying State 
expenditures plus the amount of contingency funds that the State 
expended, minus its required Contingency Fund MOE level.
    (2) Multiply the amount arrived at in step (1) by the State's FMAP 
rate applicable for the fiscal year in which contingency funds were 
awarded.
    (3) Multiply the amount arrived at in step (2) by 1/12 times the 
number of months during the fiscal year for which the State received 
contingency funds.
    (4) Compare the amount arrived at in step (3) with the amount of 
contingency funds paid to the State during the fiscal year, and 
determine the lesser amount.
    (5) From the amount arrived at in step (4), subtract the State's 
proportionate

[[Page 17854]]

remittance for the overall adjustment of the Contingency Fund, as 
required by the Adoption and Safe Families Act of 1997.
    The Adoption and Safe Families Act of 1997 reduced the Contingency 
Fund appropriation over the four-year period from FY 1998 through FY 
2001. All States receiving contingency funds in these years must remit 
additional funds in order to share in the adjustment proportionately. 
The remittance amounts of all States drawing from the Contingency Fund 
will be increased by proportional shares totaling $2 million in FY 
1998, $9 million in FY 1999, $16 million in FY 2000, and $13 million in 
FY 2001. Thus, the fewer the number of States receiving contingency 
funds, the higher each proportionate share of the adjustment will be, 
and the more each State will have to remit. ACF will determine the 
amount of each State's proportionate remittance and will provide this 
information to the State for it to use in its annual reconciliation 
calculations.
    A State should also note that if it was eligible for, and received, 
contingency funds for fewer than 12 months during the fiscal year, the 
effective Federal matching rate for contingency funds will be less than 
its FMAP rate for the fiscal year. The effective rate is lower because 
the statute creates a reconciliation step that reduces the total 
Federal matching by 1/12 times the number of eligible months in the 
year.
    Below we provide an example for FY 1998 that requires the 
remittance of funds. Assume the following information:
    A State received a provisional payment of $2.5 million in 
contingency funds for six months of eligibility in the fiscal year. Its 
qualifying State expenditures were $102.5 million, its expenditure of 
contingency funds was $2.5 million, and its child care expenditures 
were $2 million. The required expenditure of State funds to meet the 
100-percent MOE level is $95 million ($100 million minus $5 million for 
historic child care expenditures). The State's FMAP is 50 percent. This 
is the only State that received contingency funds in fiscal year 1998.
    Based on the information provided, we see that the State met its 
required Contingency Fund MOE level.
    To continue with the annual reconciliation, we use the steps 
outlined above.
    (1) $102.5 million, plus $2.5 million, minus $2 million, minus $95 
million, equals $8 million. (The State's qualifying State expenditures, 
plus its expenditure of contingency funds, minus its child care 
expenditures, minus its required Contingency Fund MOE level.)
    (2) $8 million, times 50 percent, equals $4 million. (The result of 
step (1) multiplied by the State's FMAP rate.)
    (3) $4 million, times \1/12\, times 6, equals $2 million. (The 
result of step (2) multiplied by \1/12\ times the number of months the 
State received funding for the Contingency Fund.)
    (4) The lesser amount of $2 million, compared to $2.5 million, is 
$2 million. (The lesser of the result of step (3) compared to the 
amount of contingency funds the State received.)
    Were it not for the requirements of the Adoption and Safe Families 
Act of 1997, the State would have been eligible to retain $2 million in 
contingency funds and would have been required to remit $500,000. 
However, we are required to increase the amount the State must remit, 
which we accomplish in step (5).
    (5) $2 million, minus $2 million, equals zero. (The overall 
adjustment required from all States that received contingency funds for 
FY 1998 is $2 million. Since only one State received contingency funds, 
its proportionate offset is 100 percent of $2 million. Thus, the 
State's remittance is increased by $2 million, and the State can retain 
no contingency funds. Under the assumptions we presented, the State is 
required to remit its entire $2.5 million provisional payment of 
contingency funds.)
    The example above illustrates a case where the State had to remit 
the entire amount of the $2.5 million provisional payment of 
contingency funds it received even though it made expenditures above 
the required Contingency Fund MOE level. If additional States had drawn 
contingency funds for the fiscal year, this State's proportional 
remittance would have been smaller, and the State would have been able 
to retain some of the contingency funds it received.
    We will not consider a State's use of contingency funds, which 
later must be returned under the reconciliation formula, to be an 
improper use of funds, and, if the State meets its Contingency Fund MOE 
requirement, we will not assess that penalty.

Section 264.74--How Will We Determine the Contingency Fund MOE Level 
for the Annual Reconciliation? (Sec. 274.71 of the NPRM)

    For the Contingency Fund, historic State expenditures for FY 1994, 
the base MOE level, include the State's share of AFDC benefit payments, 
administration, FAMIS, EA, and JOBS expenditures. They do not include 
the State's share of AFDC/JOBS, Transitional and At-Risk child care 
expenditures. States must meet 100 percent of this MOE level.
    We said we would use the same data sources and date, i.e., April 
28, 1995, to determine each State's historic State exependitures as we 
used to determine the basic MOE requirement. However, we would exclude 
the State share of child care expenditures for FY 1994.
    We will reduce the required MOE level for the Contingency Fund if a 
Tribe within the State receives a Tribal Family Assistance Grant under 
section 412. The last paragraph of section 409(a)(7)(B)(iii) provides 
for this reduction. For the basic MOE requirement, we will reduce the 
State's basic MOE level by the same percentage as we reduce a State's 
annual SFAG allocation for Tribal Family Assistance Grants in the State 
for a fiscal year. For example, if a State's SFAG amount is $1,000 and 
Tribes receive $100 of that amount, we would reduce the State's basic 
MOE requirement by ten percent. If the same State also receives 
contingency funds in that fiscal year, we would also reduce the 
Contingency Fund MOE level by ten percent.

Section 264.75--For the Annual Reconciliation, What Are Qualifying 
State Expenditures? (Sec. 274.72 of the NPRM)

    Section 403(b)(6)(B)(ii)(I) provides that State expenditures 
counted toward the Contingency Fund MOE may only include expenditures 
made under the State program funded under this part. Thus, the State 
expenditures that the State makes to meet the required Contingency Fund 
MOE level include the expenditure of State funds within TANF only; they 
do not include expenditures made under separate State programs. In 
addition, under this section of the statute a State may not use 
expenditures for child care to meet the Contingency Fund MOE 
requirement or to qualify the State to retain any of the contingency 
funds it received. Thus, we have noted the exception for child care in 
item 3 below. (This exception appears in paragraph (b) of the 
regulatory text.)
    In the NPRM, we referred to sections of part 273 to define 
qualifying State expenditures for the Contingency Fund. In these final 
regulations, we have eliminated references to the basic MOE sections; 
we believe they were confusing because there were a number of 
differences in the expenditures that are permitted to be included in 
calculating the basic MOE and the Contingency Fund MOE.
    Nevertheless, we retain some of the proposed policies. More 
specifically, qualifying State expenditures, for

[[Page 17855]]

Contingency Fund MOE purposes, are expenditures, with respect to 
eligible families, of State funds made in the State TANF program for 
the following:
    (1) Cash assistance, including assigned child support collected by 
the State, distributed to the family, and disregarded in determining 
eligibility for, and amount of the TANF assistance payment;
    (2) Educational activities designed to increase self-sufficiency, 
job training, and work, excluding any expenditure for public education 
in the State except expenditures involving the provision of services or 
assistance to an eligible family that are not generally available to 
persons who are not members of an eligible family;
    (3) Any other services allowable under section 404(a)(1) of the Act 
and consistent with the goals at Sec. 260.20 of this chapter (except 
child care); and
    (4) Administrative costs in connection with the provision of the 
benefits and services listed in paragraphs (a)(1) through (a)(3), but 
only to the extent consistent with the administrative cost cap for MOE 
expenditures at Sec. 263.2(a)(5).
    Further, in Sec. 260.31(c)(1), we have added a reference to this 
subpart. This revised language clarifies that, like basic MOE, 
Contingency Fund MOE may be expended on benefits and services that do 
not meet the definition of assistance.
    In item 4 above, regarding the limits on administrative costs, we 
have modified the preamble and regulatory language to avoid the 
creation of a third administrative cost cap. Under the statute and the 
rules, we already provide for a 15-percent cap on the portion of 
Federal grant funds and State basic MOE expenditures that go to 
administrative costs. If we said that Contingency Fund MOE expenditures 
were subject to a similar administrative cost cap, States and we would 
then have three administrative cost caps to track.
    In general, we believe the basic MOE requirements should apply to 
Contingency Fund MOE expenditures. However, in our minds, this view did 
not justify the creation of a third administrative cost cap, especially 
because of the substantial overlap between the Contingency Fund MOE 
expenditures and basic MOE expenditures. Rather, under these rules, we 
require that State expenditures on administrative costs, for 
Contingency Fund MOE purposes, must be consistent with the basic MOE 
administrative cost cap. In other words, in making MOE expenditures for 
Contingency Fund purposes, States must take care not to spend excess 
amounts on administrative costs. Their expenditures on administrative 
costs must be at a level that enables their compliance with the 
existing 15-percent cap in the basic MOE provisions.

Section 264.76--What Action Will We Take if a State Fails To Remit 
Funds After Failing To Meet Its Required Contingency Fund MOE Level? 
(Sec. 274.75 of the NPRM)

    PRWORA established a penalty at section 409(a)(10) that provides 
that, if a State does not meet the Contingency Fund MOE requirement and 
remit funds as required, we must reduce the State's SFAG payable for 
the next fiscal year by the amount of funds that the State has not 
remitted. The statute prohibits us from waiving or reducing this 
penalty based on reasonable cause or corrective compliance. However, 
the State may appeal our decision to reduce the State's SFAG pursuant 
to the regulations at Sec. 262.7.

Section 264.77--How Will We Determine if a State Has Met Its 
Contingency Fund Expenditure Requirements? (Sec. 274.76 of the NPRM)

    ACF has created a TANF Financial Report, the ACF-196. States will 
use the ACF-196 to report their use of Federal TANF funds, including 
contingency funds. We will use this report to verify the State's annual 
reconciliation after the end of the fiscal year. We will review it to 
ensure that expenditures reported are consistent with the statute and 
these rules. Please see the discussion of part 265 for additional 
information.

Subpart C--What Rules Pertain Specifically to the Spending Levels of 
the Territories?

    In the preamble to the NPRM, we noted that section 103(b) of PRWORA 
amended section 1108. Section 1108 establishes a funding ceiling for 
Guam, the Virgin Islands, American Samoa and Puerto Rico. Prior to 
PRWORA, the following programs authorized in the Act were subject to 
this ceiling: AFDC and EA under title IV-A; Transitional and At-Risk 
Child Care programs under title IV-A; the adult assistance programs 
under titles I, X, XIV, and XVI; and the Foster Care, Adoption 
Assistance, and Independent Living programs under title IV-E. The 
ceiling excluded funding for the JOBS program, which also covered AFDC/
JOBS child care.
    Under the amendments in PRWORA, the funding ceiling at section 1108 
applies to the TANF program under title IV-A, the adult programs, and 
title IV-E programs. Section 1108(b) provides a separate appropriation 
for a Matching Grant, which is also subject to a ceiling. The Matching 
Grant is not a new program; rather it is a new funding mechanism that 
Territories can use for expenditures under the TANF and title IV-E 
programs.
    Prior to PRWORA we had not regulated the provisions of section 
1108. However, in light of this new MOE requirement within section 
1108, we thought that we needed to regulate to clarify the requirements 
and the consequences if a Territory failed to meet the new section 1108 
requirements. We have authority to issue rules on this provision under 
section 1102, which permits us to regulate where necessary for the 
proper and efficient administration of the program, but not 
inconsistent with the Act. (The limit at section 417 does not apply to 
this section of the Act.) In addition, we prepared a program 
instruction for the Territories to provide additional guidance on 
receiving funds under section 1108.
    In February 1997, we provided to the Territories: (1) Their FAG 
annual allocations; (2) their basic MOE levels under section 409(a)(7); 
(3) their Matching Grant MOE levels; (4) their section 1108(e) MOE 
levels (which were created by PRWORA and were subsequently eliminated 
by Pub. L. 105-33); and (5) a detailed explanation of the methodology 
and expenditures we used to determine each of these amounts.

Section 264.80--If a Territory Receives a Matching Grant, What Funds 
Must It Expend? (Sec. 274.80 of the NPRM)

    Section 1108(b) provides that Matching Grant funds are available: 
(1) To cover 75 percent of a Territory's expenditures for the TANF 
program and the Foster Care, Adoption Assistance and Independent Living 
programs under title IV-E of the Act; and (2) for transfer to the 
Social Services Block Grant program under title XX of the Act or the 
Child Care and Development Grant (CCDBG) program (also known as the 
Discretionary Fund of the Child Care and Development Fund) pursuant to 
section 404(d) of the Act, as amended by PRWORA and Pub. L. 105-33. 
However, Matching Grant funds used for these purposes must exceed the 
sum of: (1) The amount of the FAG without regard to the penalties at 
section 409; and (2) the total amount expended by the Territories 
during FY 1995 pursuant to parts A and F of title IV (as so in effect), 
other than for child care.
    Under the first requirement, the Territory must spend an amount up 
to its Family Assistance Grant annual allocation using Federal TANF or 
Federal title IV-E funds or funds of its own for TANF or title IV-E 
programs.

[[Page 17856]]

    The second requirement establishes an MOE requirement at 100 
percent of historic expenditures, based on the Territory's FY 1995 
expenditures. This second requirement is separate from the basic MOE 
requirement and is applicable only if a Territory requests and receives 
a Matching Grant. Historic expenditures include 100 percent of State 
expenditures made for the AFDC program (including administrative costs 
and FAMIS), EA, and the JOBS program. Territorial expenditures made to 
meet this requirement include Territorial, not Federal, expenditures 
made under the TANF program or title IV-E programs.
    Territorial expenditures can only be counted once to meet the FAG 
amount requirement, the MOE requirement, or the matching requirement. 
In other words, any given expenditure cannot be counted more than once 
to meet these three different expenditure requirements. We believe this 
policy is appropriate because our interpretation of the statute is that 
Congress intended that the provisions on spending up to the FAG amount, 
meeting the MOE requirement, and meeting the matching requirement be 
separate requirements.
    Comment: One commenter pointed out that this section of the rule 
would more closely correspond to section 1108(b)(1)(B)(i) of the Act if 
we added the phrase ``without regard to any penalties applied in 
accordance with section 409'' to the regulation. Another commenter 
suggested that we needed to clarify what the historic expenditures were 
for the Territories.
    Response: As suggested, we have added the phrase about disregarding 
penalties to the regulations. We also have added an explanation to the 
preamble that the historic expenditures for the Territories are the 
amounts spent above their Federal funding for the AFDC and EA programs 
up to, but not exceeding, the 25-percent Territorial match, plus the 
amount of matching funds spent for the JOBS program.

Section 264.81--What Expenditures Qualify for Territories To Meet the 
Matching Grant MOE Requirement? (Sec. 274.81 of the NPRM)

    As stated in the NPRM, for the basic MOE, section 409(a)(7) 
includes specific provisions on what States and Territories may count 
as ``qualified State expenditures'' (i.e., expenditures that may count 
towards the basic MOE requirement).
    However, the statute provides little guidance on what expenditures 
a Territory may count toward its Matching Grant MOE for IV-A 
expenditures. Because the Matching Grant is intended to be used for the 
TANF program, we decided to apply many of the basic MOE requirements in 
part 263, subpart A, to the Matching Grant MOE. These sections are: 
Sec. 263.2 (What kinds of State expenditures count toward meeting a 
State's annual spending requirement?); Sec. 263.3 (When do child care 
expenditures count?); Sec. 263.4 (When do educational expenditures 
count?); and Sec. 263.6 (What kinds of expenditures do not count?). 
Section 263.5 (When do expenditures in separate State programs count?) 
does not apply because section 1108(b)(1)(B)(ii) requires that the 
matching Grant MOE expenditures must be expenditures under the TANF 
program. Thus, expenditures to meet the Matching Grant MOE requirement 
may not be expenditures made under separate State programs. (Because 
Territories do not receive Matching Child Care funds, the limit on 
child care expenditures in Sec. 263.3 does not apply.)
    Also, Territorial expenditures made in accordance with Federal IV-E 
program requirements may count toward this MOE requirement. These 
include the State share of IV-E expenditures and expenditures funded 
with the State's own funds that meet Federal title IV-E program 
requirements.
    The Territories may count expenditures made pursuant to the 
regulations at 45 CFR parts 1355 and 1356 for the Foster Care and 
Adoption Assistance programs and section 477 of the Act for the 
Independent Living program.
    Territories may also count toward their Matching Grant MOE 
requirement expenditures made under the TANF program that meet the 
basic MOE requirement.
    We received no comments on this section and made no changes to the 
regulation.

Section 264.82--What Expenditures Qualify for Meeting the Matching 
Grant FAG Amount Requirement? (Sec. 274.82 of the NPRM)

    The statute intends that expenditures made to meet this requirement 
must be TANF or title IV-E expenditures. For TANF expenditures, the 
Territories may count allowable expenditures of Federal TANF funds to 
meet this requirement. They may count amounts that they have 
transferred from TANF to title XX and the Discretionary Fund in 
accordance with section 404(d). (See Sec. 263.11, which describes the 
proper uses of Federal TANF funds.) Also, a Territory may count its own 
expenditures under the TANF program, for this purpose. Because IV-A 
expenditures made with the Territories' own funds must be for the TANF 
program, it is reasonable that we apply the MOE requirements applicable 
for the Matching Grant to this FAG amount requirement.
    For IV-E expenditures, as with the Matching Grant MOE, expenditures 
made in accordance with Federal IV-E program requirements may count 
toward this MOE requirement. These include the Federal share and the 
Territories' share of IV-E expenditures and expenditures funded with 
the Territories' own funds that meet Federal IV-E program requirements.
    We received no comments on this section and made no changes to the 
regulation.

Section 264.83--How Will We Know if a Territory Failed To Meet the 
Matching Grant Funding Requirements at Sec. 264.80? (Sec. 274.83 of the 
NPRM)

    We are developing a separate Territorial Financial Report for the 
Territories. We will require this report to be filed quarterly and to 
cover all programs subject to the section 1108 caps. This report will 
cover basic MOE and Matching Grant MOE requirements. For the Matching 
Grant, Territories must report expenditures claimed under title IV-E 
and IV-A and the total expenditures (including Federal) they make to 
meet the requirement that they spend up to their Family Assistance 
Grant annual allocations.
    We would not require Territories to file the TANF Financial Report; 
however, they must report comparable information on the Territorial 
Financial Report. Furthermore, if one of the Territories fails to file 
the Territorial Financial Report or to include certain information in 
that report, we would treat it like a State that fails to file its TANF 
Financial Report and make it subject to the penalty for failure to 
report at Sec. 262.1(a)(3).
    We received no comments on this section and made no changes to the 
regulation.

Section 264.84--What Will We Do if a Territory Fails To Meet the 
Matching Grant Funding Requirements at Sec. 264.80? (Sec. 274.84 of the 
NPRM)

    The statute does not address the consequences for a Territory if it 
fails to meet the Matching Grant MOE and the FAG amount requirements. 
The proposed and final rules provide that we would disallow the entire 
amount of a fiscal year's Matching Grant if the Territory fails to meet 
either requirement. This is because the statute provides that the 
Matching Grant funds are only allowable if a Territory meets both 
requirements. Thus, if a Territory does not meet either one or both of 
the requirements, it must return the funds

[[Page 17857]]

to us. We will get the funds back by taking a disallowance action.
    A disallowance represents a debt to the Federal government. 
Therefore, we will apply our existing regulations at 45 CFR part 30. 
Once we issue a disallowance notice, we can require a Territory to pay 
interest on the unpaid amount.
    We received no comments on this section and made no changes to the 
regulation.

Section 264.85--What Rights of Appeal Are Available to the Territories? 
(Sec. 274.85 of the NPRM)

    The Territory may appeal a disallowance decision in accordance with 
45 CFR part 16. As these are not penalties, the reasonable cause and 
corrective compliance provisions of section 409 do not apply. Section 
410, covering the appeals process in TANF, also does not apply.
    We received no comments on this section and made no changes to the 
regulation.

X. Part 265--Data Collection and Reporting Requirements (Part 275 
of the NPRM)

A. Background

    The TANF block grant legislation reflects a new emphasis on program 
information, measurement, and performance. This final rule specifies 
the data collection and reporting requirements that serve as the major 
mechanism to measure State accomplishment and performance.
    We received many comments in response to the NPRM concerning the 
nature and scope of the data collection and reporting requirements.
    In the preamble to the NPRM, we addressed two major purposes of 
data collection: to determine the success of the TANF program in 
meeting the purposes of the Act and to assure accountability under the 
Act. We also emphasized that it was critical to collect data that were 
comparable across States and over time and that would enable us to 
calculate participation rates.
    We based the proposed reporting requirements primarily on section 
411 of the Act (Data Collection and Reporting). We proposed quarterly 
reporting of both disaggregated and aggregated data on TANF recipients 
and some others in the household. We proposed similar reports of data 
on closed cases and on participants in separate State programs. We also 
proposed a quarterly financial report (with an annual addendum) and an 
annual program and performance report. Also included in this section of 
the NPRM were proposed provisions on reporting penalties, due dates, 
sampling, and electronic filing.
    To enable the public to comment with full understanding of the 
reporting requirements, the NPRM included eleven appendices that 
contained the specific data elements, instructions for filing the 
information, sampling specifications, and the statutory reference for 
each data element. In the preamble, we also called readers' attention 
to the proposed data elements that were not specified in the statute, 
including break-outs of statutory requirements.

B. Overall Summary of Comments

    While most commenters agreed on the need for data collection and 
reporting, States (including Governors, State legislators, State 
executive branch agencies, and national agencies representing State 
interests) expressed strong views that the proposed TANF data 
collection requirements were excessive. Other commenters did not 
generally share this view.
    There was broader agreement among all commenters, however, that the 
proposed reporting requirements on separate State programs were 
excessive.
    Several national, legal, and local advocacy organizations; private 
individuals; and Federal agencies strongly supported the data 
collection proposals as appropriate for tracking the effects of welfare 
reform and made recommendations for additional elements that they 
believed should be added. Likewise, other national organizations, 
States, and local public and private entities offered alternative 
recommendations. These recommendations included additional MOE 
expenditure data; expanded and more specific case closure data; 
information on applications approved, denied, and voluntarily 
withdrawn; and data to track longer term outcomes of recipients.
    Many commenters provided detailed analysis and review of the NPRM, 
including the regulatory text, the preamble language, and the specific 
content of the Appendices.
    The overwhelming majority of States objected to the increase in the 
number of data elements (in comparison to the number of elements in the 
Emergency TANF Data Report); claimed that we had underestimated the 
administrative burden and cost of collecting and reporting these data; 
and asserted that we lacked statutory authority for these expanded 
reporting requirements. They particularly objected to reporting on 
participants in separate State programs, the information on closed 
cases, and the annual program and performance report. (As discussed 
later, we believe that the objections to the case closure data were due 
largely to a misunderstanding of our expectations. In the final rule, 
we clarify that we are only requiring data for the month of closure, 
not longer tracking of former recipients.)
    Almost all comments on the reporting requirements for the separate 
State programs found them to be excessively burdensome, contrary to the 
intent of the legislation, and inappropriate for some types of MOE 
programs. Commenters believed that such reporting requirements would 
limit the involvement of community-based organizations in the delivery 
of program services and have a chilling effect on State flexibility and 
the development of future innovative programs.
    States were also concerned about sample sizes, sampling 
requirements, and the standards for ``complete and accurate'' reports 
that we proposed to apply in relation to the reporting penalty. A very 
few States reported an inability to report many of the specific data 
elements proposed in the NPRM based on long-standing problems in 
developing their information systems (although all States are reporting 
the data required in the Emergency TANF Data Report). Also, some States 
reported continuing problems in submitting standardized reports due to 
the autonomy of local jurisdictions.

C. Summary of Departmental Response

    We continue to be committed to gathering information that is 
critically important in measuring the success of the TANF program and 
meeting the statutory requirements for program accountability.
    We have seriously considered all comments and concerns of 
commenters in making changes to this rule. We appreciate the 
partnership approach many commenters demonstrated in developing their 
comments and the careful analysis evident in the extensive and detailed 
comments we received. These comments led to numerous refinements in the 
requirements that should help reduce burden, while maintaining the 
integrity and value of critical data.
    In preparing this final rule, we have worked to ensure that our 
rules support the creativity and commitment that States and communities 
have shown in supporting families and moving them to work. As a result, 
we have accepted many of the recommendations to eliminate or reduce the 
burden of reporting, and we have made several substantive changes in 
this part. We

[[Page 17858]]

have also modified or expanded a very limited number of data elements.
    We address the specific changes in detail in the section-by-section 
discussion below. Briefly, however, we have:
    (1) Provided a phase-in period for the implementation of the data 
collection and other requirements; in the interim, the Emergency TANF 
Data Report (ETDR) will remain in effect (Sec. 260.40);
    (2) Reduced the total number of data elements in the TANF Data 
Report from 178 to 124 and in the SSP-MOE Data Report from 160 to 108.
    (3) Retained the definition of ``family'' for reporting on the TANF 
and the separate State programs, but made reporting of some data 
elements optional for certain members of the family (Secs. 265.2 and 
265.3(e));
    (4) In section one of the TANF Data Report, reduced the number of 
and modified some data elements (disaggregated data on TANF recipients, 
Appendix A) (Sec. 265.3(b));
    (5) In section two of the TANF Data Report, reduced the number of 
data elements; to address a misreading of the NPRM, clarified that we 
do not expect States to track closed cases, but only to report data on 
the last month of assistance; and modified the data element on reasons 
for case closure to include additional break-out items (disaggregated 
data on closed cases, Appendix B) (Sec. 265.3(b));
    (6) In section three of the TANF Data Report, reduced the number of 
data elements (aggregate data, Appendix C) (Sec. 265.3(b));
    (7) Changed the name of the TANF-MOE Data Report to the SSP-MOE 
Data Report to reflect the specific focus of the data collection in 
this report and reduced the number of data elements to be reported 
(Appendices E through G). Also, as the result of the revised definition 
of assistance, reduced the types of separate State programs covered by 
the SSP-MOE Data Report (265.3(d));
    (8) In the TANF Financial Report, significantly revised the ACF-196 
(the financial reporting form) by adding several categories of 
expenditures to reflect our new definition of assistance and modified 
the instructions to clarify reporting on expenditure data.
    (9) Dropped the provision that required disaggregated and 
aggregated reporting on separate State programs as a condition for 
penalty reduction (Sec. 265.3(d));
    (10) Clarified that States have considerable flexibility in 
designing their sampling plans (Sec. 265.5);
    (11) Consolidated the annual reporting requirements on program 
definitions and State MOE program(s), as proposed in the Addendum to 
the fourth quarter TANF Financial Report, in a new Annual Report and 
added a number of new reporting requirements on State activities under 
the Family Violence Option, State diversion programs, and other program 
characteristics (Sec. 265.9);
    (12) Eliminated, as separate reports, the annual program and 
performance report, intended to gather additional information for the 
Secretary's report to Congress and the fourth quarter Addendum to the 
TANF Financial Report; and
    (13) Clarified our policies on issues such as reporting on 
noncustodial parents and penalty relief for less than perfect 
(``complete and accurate'') reporting (Secs. 265.3(f), 265.7, and 
265.8).

D. Section-by-Section Summary of and Response to Comments

Cross-Cutting Issues
    Before we discuss the comments associated with specific sections of 
the regulatory text or the Appendices, we want to respond to three 
cross-cutting issues.
(a) Phase-in/Transition Period
    Comment: More than 36 States and other commenters recommended a 
phase-in period to meet the reporting requirements. Commenters cited 
the administrative burden and the time needed to carry out the complex 
processes involved, e.g., making changes to State information systems, 
training staff, and synthesizing and reporting data with acceptable 
levels of confidence. States also saw this task made more difficult in 
the context of the need to make their systems Year 2000 (Y2K) 
compliant.
    Response: We agree with the need for a phase-in period and have 
made the effective date of these and other requirements October 1, 
1999. We believe this date gives States an adequate time period for 
implementation, in view of the reduced reporting burden and reduced 
number of data elements in the final rule, our positive experience with 
States in resolving initial data layout and transmission problems, and 
the fact that the States have 90 days after the end of the quarter to 
submit the data without risk of a penalty.
    Regarding the Y2K compliance issues, we have taken a number of 
actions to raise awareness of the problem and respond to questions from 
human service providers. For example, we have established an Internet 
e-mail address and phone line and a Y2K web page. We have also 
distributed information packages to more than 7,000 human service 
providers and representative organizations, and we have added a 
reasonable cause criterion related to Y2K compliance. This new 
criterion provides penalty relief to a State if it can clearly 
demonstrate that addressing Y2K issues prevented it from meeting the 
reporting requirements for the first two quarters and it reports the 
first two quarters of data by June 30, 2000.
    In addition, we encourage States to consider the use of sampling as 
a viable option while resolving such issues. There are advantages and 
disadvantages to sampling, as detailed in our response to comments 
later in this discussion.
    In the interim, the Emergency TANF Data Report (ETDR) will remain 
in effect. The last ETDR will be due November 14, 1999. States will 
begin reporting data under this final rule beginning with the first 
quarter of FY 2000. The first TANF Data and Financial Reports under 
these new requirements are due February 14, 2000. See further 
discussion regarding the effective date of these rules in the preamble 
section relating to Sec. 260.40.
(b) Extent of Reporting Requirements
    As we developed the reporting requirements for the NPRM, we were 
conscious of the importance of data for program management purposes as 
well as for meeting statutory requirements. At the same time, we also 
were conscious of our direct authority to regulate on data collection 
and of those sections of the Act that provided the legal basis for the 
NPRM.
    Section 417 provides that the Federal government may not ``regulate 
the conduct of the States under this part, or enforce any provision of 
this part, except to the extent expressly provided in this part.'' We 
believed at that time, and still believe, that this language provides 
authority to regulate what States must report in light of section 
411(a)(7) of the Act. This section provides that,

the Secretary shall prescribe such regulations as may be necessary 
to define the data elements with respect to which reports are 
required by this subsection * * *

    We believed at that time, and continue to believe, that section 
411(a)(7) clearly gives the Department authority to create and define 
data elements to administer the law.
    We were conscious of other responsibilities as well. Not only must 
we collect the information specified in section 411 of the Act, but the 
information must be comparable and reliable in order to make decisions 
implementing other provisions of the

[[Page 17859]]

law, e.g., calculating the work participation rates, implementing 
penalties, ranking States, and reporting to Congress. We cannot perform 
these functions without adequate information. Unless the reported data 
meet certain standards, we cannot adequately meet our responsibilities 
under the law. Since States are the primary repository and only 
realistic source of this information, we must rely on them to supply 
the information we need.
    Comment: Despite the inclusion in the NPRM of the Statutory 
Reference Tables, which provided the specific statutory citation or 
basis for each data element, and our explicit preamble discussion of, 
and rationale for, the few data elements not in the statute, there were 
a number of comments alleging that we lacked statutory authority to 
impose data collection requirements, even for the TANF recipient 
population. As evidence of their position, commenters pointed to the 
number of data elements in the ETDR (68) compared to the number of 
elements in Appendices A-C of the NPRM (178). They variously asserted 
that:
    (1) We had statutory authority to collect only the 16 to 18 data 
elements in section 411(a)(1)(A);
    (2) We had authority to collect only the data elements in the ETDR;
    (3) We had no authority to add, define, or further specify or 
break-out the data elements in section 411(a)(1)(A); and
    (4) It was not within our authority to collect data based on 
sections 409 (penalties), 413 (annual rankings of States), or 411(b) 
(reports to Congress).
    Many commenters urged us to limit our data collection to the 
elements in the ETDR.
    Some commenters did not identify the specific data elements of 
concern or the basis for their objection. Also, some did not 
distinguish between those data to which the reporting penalty applied 
and other data.
    Some commenters rejected collection of any data that would be used 
for research and evaluation purposes and argued that the increased 
reporting requirements were due to the collection of information the 
Department thought it would be ``interesting to know.'' As an 
alternative, a few commenters recommended that we develop all reporting 
requirements using a collaborative approach that would identify outcome 
measures and performance indicators from which the data elements would 
then be derived.
    Regarding the proposed annual program and performance report, many 
commenters stated that we had merely shifted to States the 
responsibility for preparing reports to Congress. They suggested that 
we obtain data needed for these reports by means of a national sample 
or other mechanism.
    A number of commenters presented objections to the proposed data 
collection based on specific administrative and/or programmatic 
concerns. The data collection that raised the most concerns was the 
proposed reporting of data on closed cases and on participants in 
separate State MOE programs. Commenters said that the proposals on MOE 
reporting illustrated the distrust that States found throughout the 
NPRM and viewed it as an attempt to control State programs.
    Response: We generally disagree with the comments indicating we 
lack authority to impose the proposed data collection requirements. The 
statute authorizes the Secretary to define the data elements and to 
specify the data elements needed to determine work participation rates. 
It also specifies that these definitions and data elements be 
established under regulations. Therefore, we were not able to include 
them in the ETDR. The additional data elements that go beyond the ETDR 
reflect our explicit rulemaking authority under section 411(a)(7) of 
the Act and the authority implicit in sections 409, 411(b), and 413 of 
the Act. We continue to believe that States are the primary source of 
the data needed for the report to Congress.
    The ETDR collects only that information that was clearly specified 
in the statute. By necessity, it contains a streamlines list of data 
elements that we can use in the interim period until final regulations 
are in effect. It is not sufficient as a long-term data collection 
instrument. For example, it does not provide clear uniform definitions 
of data elements and does not include some critical elements, e.g., the 
social security number.
    In developing the final rule, we have re-doubled our efforts to 
reduce unnecessary reporting burdens on the States and have carefully 
reviewed the justification for, and value of, each data element that we 
had proposed. Based on that review, and in response to the comments we 
received, we have eliminated or streamlined many data elements in the 
Appendices published with this final rule. See the chart below and a 
further description of the changes we have made in the section-by-
section discussion of Sec. 265.3. We believe this reduced set of data 
represents a reasonable balance between the requirements for data, our 
statutory authority, and the burden placed on States in providing this 
information.

                                   Total Number of Data Elements--Data Reports
----------------------------------------------------------------------------------------------------------------
                              Type of report                                   ETDR         NPRM      Final rule
----------------------------------------------------------------------------------------------------------------
TANF Data Report: Disaggregated data on TANF recipients..................           55          106           76
TANF Data Report: Disaggregated data on closed cases.....................            6           53           30
TANF Data Report: Aggregated data........................................            7           19           18
                                                                          --------------------------------------
    Subtotal.............................................................           68          178          124
----------------------------------------------------------------------------------------------------------------
SSP-MOE Data Report: Disaggregated data on recipients....................  ...........           96           69
SSP-MOE Data Report: Disaggregated data on closed cases..................  ...........           49           27
SSP-MOE Data Report: Aggregated data.....................................  ...........           15           12
                                                                          --------------------------------------
    Subtotal.............................................................  ...........          160          108
                                                                          --------------------------------------
        Total............................................................           68          338          232
----------------------------------------------------------------------------------------------------------------
Note: States must report on these data elements for all persons receiving assistance. Some data elements are
  optional for other persons in the family.


[[Page 17860]]

(c) Publishing the Appendices As a Part of the Rule
    Comment: We received two types of comments on this issue. A few 
commenters urged us to publish the specific data elements as a part of 
the final rule and to codify them as a part of the Code of Federal 
Regulations (CFR). This approach, they believed, would help ensure that 
States would not only have early access to the requirements but, once 
they were codified, the requirements would be less subject to change, 
given the time it takes to revise Federal rules.
    Other commenters urged us to publish the data elements in the 
Federal Register at the same time we published the final rule for the 
purpose of advance notice to the States of the specific data 
requirements, but they did not recommend that they be a part of the 
final rule in the CFR.
    Response: We agree with the importance of giving States early 
access to the specific data elements and have published seven 
appendices, including all data elements and instructions, in today's 
Federal Register along with the final rule.
    It was never our intention, however, that these data collection 
requirements become a part of the rule itself or be codified in the 
CFR. We believe data collection needs may change over time, in part 
because the program is a dynamic one and because Congress may modify 
the reporting requirements. Therefore, we would want to be able to 
respond to those changes as quickly as possible. Since changes in 
reporting requirements require Paperwork Reduction Act (PRA) approval, 
the public is guaranteed an opportunity to comment on any future 
changes to the TANF Data and Financial Reports as a part of the PRA 
review process.
Section-by-Section Discussion

Section 265.1--What Does This Part Cover? (Sec. 275.1 of the NPRM)

    This section of the NPRM provided a summary of the contents of this 
part. We received no substantive comments on this section apart from 
the general objection to the scope and content of the data collection 
requirements as a whole.
    However, we have made two changes in this section. First, we have 
deleted paragraph (b)(4) of this section to reflect the elimination of 
the annual program and performance report. Second, to prevent a 
misunderstanding that a major purpose of these data collection 
requirements is research, we have deleted the word ``research'' in 
paragraph (a) from the term ``section 413 (research and rankings).'' We 
had included it in the NPRM to fully describe the content of section 
413 of the Act. However, we believe it is misleading to reference 
``research'' in this context because our research agenda relies, for 
the most part, on other sources of information.

Section 265.2--What Definitions Apply to This Part? (Sec. 275.2 of the 
NPRM)

    This section of the NPRM proposed a definition of ``TANF family'' 
for reporting purposes only and made the definition applicable to both 
TANF and MOE programs. Our rationale for proposing a definition for 
reporting purposes was the critical importance of developing comparable 
data across States, given the fact that, under the TANF statute, a 
State may develop and use its own definition of ``eligible family'' for 
program purposes.
    In the NPRM, we proposed that information be collected and reported 
on all persons receiving TANF assistance plus, for any minor child 
receiving assistance, information on any parent(s) or caretaker 
relative(s) and minor siblings in the household. We also proposed that 
information be reported on any person whose income and resources would 
be counted in determining eligibility for, or the amount of, 
assistance.
    In the preamble to the NPRM, we explained the importance of 
information on these persons in understanding the effects of TANF on 
families, the variability among State caseloads, the circumstances that 
exist in no-parent families, and the paths by which families avoid 
dependence.
    Comments: Two national advocacy organizations supported this 
proposal. One commented that ``HHS has appropriately defined ``family'' 
for purposes of data collection requirements to ensure that differences 
in States' definitions of the assistance unit do not make cross-state 
comparisons difficult.'' Although commenting on the overall TANF 
reporting requirements, another national organization found them 
reasonable and within our authority; it urged that they not be 
``watered down.''
    On the other hand, many commenters objected to this definition. 
Commenters expressed particular objection to our proposal to collect 
information on persons outside the assistance unit or persons not 
affected by work participation or time-limit requirements. Some 
commenters asserted that the definition exceeded our statutory 
authority; others found it intrusive and in conflict with a State's 
prerogative to define the TANF family. Some States questioned their own 
legal authority to collect data on nonrecipients and were concerned 
about possible ethical considerations. Others objected on the grounds 
of administrative burden, i.e., that such data were not now being 
collected on these persons, and it would be both costly and burdensome 
to set up ``a duplicate reporting system'' or require a ``massive 
modification'' to their present reporting system. One State commented 
that it appeared this proposal was for evaluation purposes only and 
claimed that States should not be required to use scarce resources for 
this purpose.
    Some commenters made specific recommendations that conflicted with 
those of other commenters, as follows:
    (1) Allow States to report data based on each State's definition of 
TANF family;
    (2) Limit reporting to persons for whom assistance is provided;
    (3) Limit reporting to persons receiving assistance, parents, 
caretaker relatives and minor siblings, but do not collect data on 
persons whose income or resources are considered in determining 
eligibility;
    (4) Collect information on persons receiving assistance and persons 
whose income or resources are counted in determining eligibility, but 
do not collect information on parents, caretaker relatives, or minor 
siblings; or
    (5) Collect only very limited information on persons not receiving 
assistance, e.g., information on their relation to the TANF recipient, 
but no personal data.
    Response: We considered these comments carefully in attempting to 
see how to reduce the reporting burden on States while ensuring that we 
obtain the necessary and comparable data to meet the requirements of 
the Act. We have taken the following actions in response to commenter 
objections:
    First, we retain the definition of ``family'' as proposed in the 
NPRM. For editorial purposes, we have dropped the word ``TANF'' from 
the proposed term ``TANF family'' in this definition as the term 
``family'' is applicable to both the TANF and the separate State 
programs. However, we are continuing to use the terms ``TANF family'' 
and ``State MOE family'' in the respective Data Reports, for clarity.
    We responded earlier in this section of the preamble to comments 
that we exceeded our statutory authority in proposing these data 
collection requirements, including the definition of ``family'' used 
for reporting purposes. We do not agree that, in creating this 
definition, we have interfered with a State's prerogative to define 
``family'' for program purposes. As we explained in

[[Page 17861]]

the preamble to the NPRM, the statute uses various terms to define 
persons receiving benefits and services under the TANF program, e.g., 
eligible families, families receiving assistance, and recipients. 
Unlike the AFDC program, there are no persons who must be served under 
TANF. Therefore, each State will establish its own definition of 
``eligible family.'' These definitions will not be comparable across 
States, however, and comparable data are necessary to carry out the 
accountability provisions and other objectives of the Act, e.g., 
calculating work participation rates.
    Second, within the definition of family, we retain all the 
categories of persons for which we proposed to collect information in 
the NPRM. However, in response to the various recommendations for 
elimination or reduction in data collection for these categories of 
individuals, we have reduced the overall number of data elements and 
made the reporting of some data elements for certain categories of 
persons optional. (The State must report all data elements on all 
persons receiving assistance.) In addition, with the change in the 
definition of assistance, the burden associated with this reporting may 
be reduced because it will not generally apply to programs that have 
traditionally fallen outside the welfare reporting system.
    Again, as we explained in the preamble to the NPRM, we believe that 
information on these additional categories of persons is critical to 
understanding the effects of TANF on families. For example, we need 
information on the parents and caretaker relatives (i.e., any adult 
relatives living in the household and caring for minor children, but 
not themselves receiving assistance) to understand the circumstances 
that exist in child-only cases. We need information on minor siblings 
to understand the impact of ``family cap'' provisions. We also need 
information on other persons whose income or resources are considered 
in order to understand the paths by which families avoid dependency. We 
believe that we have addressed commenters' recommendations for reduced 
reporting by making many of the data elements optional for these 
categories of families.
    We have added paragraph (e) to Sec. 265.3 to reflect this decision 
on reporting for other individuals. The Instructions to each Data 
Report indicate which data elements are optional for which category of 
person(s).
    Comment: In the NPRM, we had proposed that information on the 
noncustodial parent (NCP) be reported as a part of a family receiving 
TANF assistance since, under the statute, States may serve NCPs only on 
that basis. We received a number of comments objecting to, or 
requesting clarification of, these reporting requirements.
    Some States agreed that data should be collected on NCPs; others 
argued that we lacked statutory authority for this proposal. Some 
commenters objected to considering NCPs as a part of an assistance unit 
on the grounds that it complicates both data collection and the State's 
definition of ``eligible family.''
    They asked for clarification of whether reporting information on 
the NCP meant that the NCP was a member of the TANF-eligible family and 
if the reporting requirements meant that the family then became a two-
parent family. They also asked for clarification of how reporting on 
NCPs would affect the family for the purpose of meeting work 
participation or time-limit requirements.
    Some States recommended that information on the NCP be reported 
separately (not as a part of a TANF family); others recommended that we 
require only an annual aggregated report, e.g., a report containing the 
number of NCPs who received assistance and the amount of funds expended 
annually on their assistance.
    Response: We believe some clarification of this proposal is needed.
    First, regarding the matter of our legal authority, our 
interpretation of the statute is that TANF ``assistance'' may be 
provided only to ``eligible families.'' Therefore, States may provide 
assistance to NCPs only when they are a member of an eligible family. 
In other words, in order to receive assistance or MOE funded services, 
the NCP must be associated with an eligible family. We also have the 
authority to define ``family'' for reporting purposes pursuant to 
section 411(a)(7) of the Act.
    Second, we have added a definition of a NCP in Sec. 260.30. This 
definition clarifies that the NCP is a parent of a minor child 
receiving assistance who lives in the State and who does not live in 
the same household as the child. We adopted this definition based on 
section 411(a)(4) of the Act, which requires reporting on NCPs ``living 
in the State'' and to distinguish the NCP from a parent who is living 
in the household.
    If an NCP is related to children in more than one TANF family, the 
State may decide for which ``eligible family'' the NCP data will be 
reported. A State should not report information on the NCP in relation 
to more than one family.
    Third, we have provided further clarification regarding NCPs by 
adding a new paragraph (f) in Sec. 265.3 to specify the three 
circumstances when a State must report information on a NCP:
     If the NCP is receiving assistance as defined in 
Sec. 260.31;
     If the NCP is participating in work activities as defined 
in section 407(d) of the Act; or
     If the NCP has been designated by the State as a member of 
a family receiving TANF assistance.
    See Sec. 265.3 for further discussion of this provision.
    Finally, we discuss the questions regarding how the NCP is counted 
for work participation rate and time-limit requirements in Secs. 261.24 
(work participation) and 264.1 (time limits).

Section 265.3--What Reports Must the State File on a Quarterly Basis? 
(Sec. 275.3 of the NPRM)

    In the NPRM, we proposed the specific data collection and reporting 
requirements for the TANF program and, under certain circumstances, the 
TANF-MOE (separate State MOE) programs. We proposed a quarterly TANF 
Data Report, a quarterly TANF-MOE Data Report, and a quarterly TANF 
Financial Report, or, as applicable, a Territorial Financial Report. We 
also proposed an annual addendum to the fourth quarter TANF Financial 
Report that would collect information on the TANF program, such as the 
State's definition of work activities, and descriptive information on 
the State's MOE program(s) (by cross-reference to Sec. 273.7).
    The NPRM included 11 data-related Appendices. Six of the Appendices 
contained all of the proposed disaggregated and aggregated data 
elements and the instructions for filing these data. The proposed 
reporting requirements applied to families receiving State-funded 
assistance and families no longer receiving such assistance in both 
TANF and separate State programs. The other Appendices contained the 
TANF Financial Report and instructions, sampling specifications, and 
three statutory reference tables.
    As noted in the earlier discussion of comments on the extent of the 
reporting requirements, we received a mixed reaction to the proposed 
data collection requirements. A number of commenters supported our 
general approach and recommended the addition of new data elements, 
including, for example, requiring States to match participant data with 
Unemployment Insurance (UI) data in order to obtain better information 
on persons no longer receiving assistance. Many States and commenters 
representing State interests,

[[Page 17862]]

however, objected to a large number of the proposed requirements.
    Commenters frequently provided extensive and detailed comments, 
including charts and tables as attachments to their letters commenting, 
in a parallel manner, on each of the data elements in the Appendices. 
We found these comments, particularly those raising programmatic or 
administrative concerns, very helpful.
Summary of Changes Made in This Section of the Final Rule
    We have made several substantive changes in this section of rule 
and in the data elements in the appropriate Appendices. In making our 
decisions, we followed the general principles noted earlier, i.e., to 
collect the information required by statute; to carry out our 
responsibilities under the statute to assure accountability and measure 
success; and to obtain data that are comparable across States and over 
time.
    First, we carefully considered each data element in each data 
collection instrument. Where possible, we have eliminated, reduced the 
number of, or simplified the data elements or the break-outs within the 
data elements. In a few instances, we have modified the data collection 
instrument to expand a data element. (See the revised TANF Data Report 
and the SSP-MOE Data Report in Appendices A through C and E through G.) 
We discuss some of the specific changes and deletions below.
    Second, we eliminated the requirement for an Addendum to the fourth 
quarter TANF Financial Report, but moved the content of the proposed 
Addendum, in paragraph (c)(2) and (c)(3), to Sec. 265.9--the annual 
reporting requirements.
    Third, we accepted commenters' recommendations to revise our 
approach to and reduce the burden of the TANF-MOE (now the SSP-MOE) 
Data Report. We have:
     Reduced the types of separate State programs covered by 
that report (This was an indirect effect of the changes to the 
definition of assistance, at Sec. 260.31);
     Retained the requirement for reporting both disaggregated 
and aggregate data on recipients of assistance under separate State 
programs under certain circumstances, but have reduced the number of 
data elements that must be reported;
     Deleted the provision that would have denied a State 
consideration for a reduction in the penalty for failing to meet the 
work participation requirements unless data on separate State programs 
was submitted; and
     Reduced the SSP-MOE data a State must file if it wishes to 
receive a high performance bonus (by eliminating the requirement to 
submit section two of the SSP-MOE Data Report, on closed cases). See 
Sec. 265.3(d)(1).
    Fourth, based on the general principles above, we have determined 
that a State has the option to NOT report some data elements for some 
individuals in the family. We specify these optional data elements in 
the instructions to the TANF Data Report and the SSP-MOE Data Report. 
We have added a new paragraph (e) to Sec. 265.3 to reflect this 
provision.
    Fifth, we added new paragraph (f) to specify the three 
circumstances when a State must report on a NCP. The three 
circumstances are:
     When the NCP receives assistance as defined in 
Sec. 260.31;
     When the NCP participates in work activities, as defined 
in section 407(d) of the Act, that are funded with Federal TANF funds 
or State MOE funds; this would include work activities that fall under 
the definition of ``assistance'' and those that do not; or
     When the State has designated the NCP as a member of a 
family receiving assistance.
    This latter circumstance addresses those States that wish to 
consider the NCP a member of a family receiving assistance in order to 
assist the NCP by providing services or other activities that do not 
meet the definition of assistance in Sec. 260.31 or the definition of 
work activities in Sec. 261.30. We have included a requirement for 
reporting on these NCPs in order to obtain data for policy, oversight, 
and other purposes.
    Where a State counts the NCP in calculating the work participation 
rate, it should reflect its treatment of the family in its coding of 
three data elements: ``Type of Family for Work Participation Rate 
Purposes, Work Participation Status, and Work Activities.'' We have 
added an element in the data instrument to capture such information 
about NCPs.
Specific Changes Made in the Data Reports
    The following changes are subject to review and approval under the 
Paperwork Reduction Act.
    (a) TANF Data Report--Section One--Disaggregated Data on Families 
Receiving Assistance (Appendix A)
    (1) We reduced the number of data elements that must be reported 
from 106 in the NPRM to 76 in the final rule. Some of the deleted data 
elements include:
     Four data elements related to child care--Amount of Child 
Care Disregard, Type of Child Care, Total Monthly Cost of Child Care, 
and Total Monthly Hours of Child Care Provided During the Reporting 
Month; and
     Five types of Assistance Provided--Education, Employment 
Services, Work Subsidies, Other Supportive Services, and Contributions 
to an Individual Development Account.
    Regarding the deleted data elements on child care, in the NPRM, we 
proposed to collect information required by the Child Care and 
Development Block Grant Program (CCDBG). Upon further analysis of that 
statute, we find that the data that must be collected and reported are 
aggregate data on the number of child care disregards funded by type of 
child care service provider. Thus, we have made the revised collection 
of this information a part of the annual report in Sec. 265.9(b)(4).
    (2) We further reduced the reporting burden by revising several 
data elements. For example, in the data element on Sanctions, we 
deleted the proposed requirement for expenditure data and, in the final 
rule, ask for a yes/no response. We also collapsed data elements such 
as the Number of Months Countable Toward Federal Time Limits.
    (3) We clarified the definition of ``new applicant'' and clarified 
reporting on waivers and noncustodial parents.
    (4) We provided flexibility in permitting States to report some 
data elements based either on the reporting month or on the budget 
month. However, we require the State to be consistent in reporting 
these data.
    In developing the NPRM, we proposed that all data elements be 
reported based on the ``reporting month.''
    However, based on a considerable number of comments and a review of 
the variation in State practice and State data collection and 
processing systems, we concluded that, in some cases, information on 
the budget month would be a good proxy for information on the reporting 
month. Therefore, the final rule provides that States may report 
information on five data elements based on either the reporting month 
or the budget month.
    We made this change for data elements that are relatively stable, 
e.g., amount of Food Stamp assistance and that otherwise might not be 
reflected in the State data systems. We believe that, as long as States 
report these data consistently over time, this flexibility in reporting 
will not compromise the usefulness of the information. We are 
continuing to require that seven data elements (e.g., amount of 
assistance) be reported based on the reporting month

[[Page 17863]]

because States will have these data elements on that basis.
    (5) We simplified or modified certain data elements, e.g., Received 
Subsidized Housing, Received Food Stamps, Received Subsidized Child 
Care, Reasons for and Amount of Assistance, Highest Level of Education 
Attained and Highest Degree, and Citizenship/Alienage.
    (6) We revised the data element on Race to comport with the OMB 
standard for coding multiple race and ethnic information.
    (7) We added a new data element to identify families converted to 
``child-only'' cases and a new data element to identify a family in 
which the State provides for the needs of a pregnant woman.
    (8) We made technical and editorial changes, e.g., adding coding 
for some data elements to allow for unknown Social Security Numbers, 
birth dates, citizenship status, or educational levels; and revised 
other data elements such as changing the data element on ``Teen 
Parent'' to ``Parent'' in order to more accurately calculate the two-
parent work participation rate.
    (9) As noted in our discussion of Sec. 265.2, the instructions also 
give States the option to not report certain data elements for one or 
more groups of individuals.
(b) TANF Data Report--Section Two--Disaggregated Data on Closed Cases 
(Appendix B)
    (1) We reduced the number of data elements from 53 in the NPRM to 
30 in the final rule, in part by combining several data elements.
    (2) We made the same clarifications, modifications, and 
simplifications in the data elements in this Appendix as we made for 
the corresponding data elements in Appendix A.
    (3) We clarified that States are not expected to track closed cases 
in order to collect information on families after the family is no 
longer receiving assistance. States should report the case-record 
information as of the last month of assistance.
    (4) We re-configured the data element on Reasons for Case Closure 
to add a few break-out categories, partly in response to strong 
recommendations from commenters. We believe the refinement of these 
codes will provide better data and significantly increase our 
understanding of the circumstances of recipients who leave assistance, 
without increasing the data collection burden.
    We understand that many States already collect detailed reasons for 
case closure, although the information varies across States. Some 
States are also participating in studies of persons leaving TANF (i.e., 
``leavers' '' studies) which will provide information on the 
circumstances of families after they leave TANF.
    In addition, we want to respond more specifically to some 
commenters' objections to reporting data based on section 411(b) of the 
Act. (We explained in the NPRM that most of the data elements in 
Appendix B were based on section 411(b) (annual report to Congress).)
    Section 411(b) is specific in requiring information on ``* * * the 
demographic and financial characteristics of families applying for 
assistance, families receiving assistance, and families that become 
ineligible to receive assistance * * *.''
    As we said earlier in the preamble discussion to this section, we 
believe that we have authority to collect data based on section 411(b), 
and have designed a data collection procedure for closed cases that 
places minimal burden on States by drawing on the information they have 
as of the last month the family received assistance. We believe that we 
have also responded to commenters' concerns by reviewing each data 
element and reducing by almost one-half the number of data elements in 
this section of the TANF Data Report.
(c) TANF Data Report--Section Three--Aggregated Data (Appendix C)
    We eliminated one data element in this section of the TANF Data 
Report: Total Number of Minor Child Head-of-Households.
(d) SSP-MOE Data Report--Sections One, Two, and Three--Disaggregated 
and Aggregated Data (Appendices E, F, and G)
    (1) We reduced the total number of data elements in this report 
from 160 in the NPRM to 108 in the final rule.
    (2) Because the data elements in the SSP-MOE Data Report are 
similar to the data elements in the TANF Data Report, we incorporated 
into this Report the same clarifications, simplifications, and 
modifications that we made in the TANF Data Report.
    (3) We deleted the proposed requirement that a State must report 
SSP data if it wants to be considered for a reduction in the penalty 
for failure to meet work participation requirements.
    (4) The final rule narrows the types of separate State MOE programs 
on which States must report disaggregated and aggregated data. If the 
State opts to report data on separate State programs, it must report:
     Only on separate State programs for which MOE expenditures 
are claimed;
     Only on those persons served by separate State programs 
whose expenditures are claimed as MOE expenditures; and
     Only on separate State programs that provide assistance. 
(The narrowed definition of assistance at Sec. 260.31 reduces the types 
of programs subject to reporting.)
    (5) We reduced the reporting burden in Sec. 265.3(d)(1)(i) by 
specifying that, if a State wishes to receive a high performance bonus, 
it must file only sections one and three of the SSP-MOE Data Report.
Changes Made in the TANF Financial Report (Appendix D)
    In the NPRM, we proposed to collect TANF expenditure data in the 
ACF-196 TANF Financial Report. This reporting form and instructions 
were in Appendix D. We also proposed an annual addendum to the fourth 
quarter TANF Financial Report.
    As a result of comments received and to clarify some of our 
policies, we have made several changes in Sec. 265.3(c) and to the ACF-
196. One substantive change that we made in response to comments was to 
delete the requirement that States submit program information as an 
annual addendum to the TANF Financial Report. These requirements now 
appear in the annual report described at Sec. 265.9.
    We outline the other changes to the ACF-196 TANF Financial Report 
below:
    (1) We have modified the instructions to reflect our clarification 
about allowable expenditures of carry-over funds and to note the change 
in SSBG transfer authority (reducing the maximum transfer of 10 percent 
to 4.25 percent, beginning in FY 2001). This latter change was made by 
the Transportation Equity Act for the 21st Century, Pub. L. 105-178.
    (2) We have added several categories of expenditures on which 
States must separately report--including transportation (Job Access and 
other), refundable earned income tax credits, other refundable State 
and local credits, activities related to purposes three and four of 
TANF, IDA's, and assistance authorized only on the basis of section 
404(a)(2) of the Act. For Other Expenditures (Lines 5d, 6e, and 7), we 
have asked States to submit footnotes describing what activities are 
funded under this category.
    Also, we have shifted work subsidies from the assistance section of 
the report to the nonassistance section to reflect our decision to 
revise the definition of assistance. We include child care and

[[Page 17864]]

other supportive services in both sections, and we provide for separate 
aggregate reporting on transitional services. We have also revised the 
instructions substantially so that they more clearly identify how 
States would report particular types of expenditures and they provide 
some additional guidance on allowable Federal and MOE expenditures.
    In general, the additional reporting is designed to give us better 
information on where States are focusing their resources. We will use 
this information as part of our strategy to monitor whether 
expenditures of Federal and States funds are consistent with the 
purposes of the program and to help identify any policy areas or States 
that might need further attention. We will also use the data to tell us 
more about the nature and scope of both TANF programs and separate 
State programs. State plans and the annual reporting will provide some 
characteristics information, but the expenditure data are critical for 
determining where States are focusing their resources. Thus, the data 
on State spending patterns provide valuable supplemental information 
about what is happening under welfare reform, and we intend to include 
summary information from these reports as part of our discussion of 
State program characteristics in the annual report to Congress.
    (3) For State expenditures reported as Administrative Costs in 
columns (B) and (C), we have changed the language to clarify that the 
15-percent administrative cap applies to the cumulative total of (B) 
and (C) rather than separately to MOE and Separate State Programs.
    (4) We have added a statement that States must determine the 
administrative costs of contract and subcontracts based on the nature 
or function of the contract.
    (5) We have added language to provide that the systems exclusion 
for tracking and monitoring purposes applies to MOE expenditures as 
well as the TANF grant. (See prior discussion regarding MOE in the 
preamble discussion relating to Sec. 263.2.)
    The Territorial Financial Report is under development. We are 
sharing a preliminary version of this Report with the Territories and 
will be considering their comments before issuing it in final.

Section 265.4--When Are Quarterly Reports Due? (Sec. 275.4 of the NPRM)

    In the NPRM, the language in paragraph (a) of this section 
reflected the statutory requirement that quarterly data reports are due 
45 days after the end of each quarter.
    In paragraph (b) of the NPRM, we proposed to give States two 
options in the timing of the submittal of their TANF-MOE (now SSP-MOE) 
Data Report.
    Paragraph (c) of the NPRM proposed the due dates for the State's 
initial TANF reports. (Because these are no longer applicable, we have 
deleted the content of this paragraph from the final rule.)
    Comment: Two commenters found it confusing to have ``two due dates 
for reporting'' in the NPRM. The second due date they referred to was 
in Sec. 275.8(d). There, we had proposed that we would not impose a 
penalty for late reporting if a State filed its complete and accurate 
quarterly report by the end of the quarter immediately following the 
quarter for which the data were due. (This is a statutory provision 
found in section 409(a)(2)(B) of the Act.)
    Response: For clarity, we have revised the language in paragraphs 
(a) and (b). With the new language, it is clearer that the statutory 
due date for the penalty is 45 days after the end of the reporting 
quarter, but States will not actually incur any penalty liability as 
long as they submit their reports by the end of the quarter following 
the reporting quarter.
    Although States will incur penalties only if they fail to file 
their data by the end of the succeeding quarter, we strongly encourage 
States to submit their reports on the due date. This will provide an 
opportunity to identify and correct any potential problems or omissions 
that could otherwise result in a State penalty.
    We have made two other changes in this section. First, as noted 
above, we deleted paragraph (c), as the due dates for the State's 
initial TANF reports are no longer applicable. Second, we made minor 
editorial changes in paragraph (b) of the NPRM (regarding timing 
options for States to submit the SSP-MOE Report) and re-designated it 
as a new paragraph (c).

Section 265.5--May States Use Sampling? (Sec. 275.5 of the NPRM)

    Most of the comments on this section of the NPRM raised questions 
about the sampling specifications found in Appendix H of the NPRM.
    The statute, in section 411(a)(1)(B)(i), gives States the option of 
using scientifically acceptable sampling methods to comply with the 
data collection and reporting requirements of section 411(a). Under 
section 411(a)(1)(B)(ii), the Secretary must provide the States with 
case-record sampling specifications and data collection procedures 
necessary to produce statistically valid estimates of the performance 
of State TANF programs.
    The NPRM at Sec. 275.5(a) specified the option that States have to 
report data based on sampling or to report data on the entire 
population (universe) of recipients. In paragraph (a), we also stated 
that States could use samples to report only disaggregated, not 
aggregated data. In paragraph (b), we proposed a definition of 
``scientifically acceptable sampling method.''
    The majority of comments (from more than 25 States and national 
State-based organizations) urged us to consider greater flexibility in 
the sampling specifications. In general, they recommended that we:
    (1) Eliminate the monthly sample size requirements because they 
would restrict the State's flexibility provided under the statute;
    (2) Allow smaller sample sizes, particularly for smaller States;
    (3) Permit States to file some information using sampling and other 
information using universe reporting; and
    (4) Allow States to use alternative sampling methodologies when 
they can demonstrate that other methods produce equally valid samples.
    We disagree with the recommendations to eliminate the monthly 
sample size requirement but, as discussed below, we have clarified the 
flexibility States have in designing their sampling plans. We discuss 
these and other recommendations in the response to comments below.
    Comment: Two commenters asked us to confirm that a State can submit 
universe data if a State does not have enough cases to meet the sample 
size requirements, e.g., the State does not have 600 two-parent 
families in its caseload (This was explicitly stated in the 
instructions to the ETDR, but was not included in the NPRM.)
    Response: In the NPRM, we proposed an annual sample size of 600 
two-parent families, i.e., an average monthly sample size of 50 two-
parent families. We confirm that, if a State has less than 50 two-
parent families for a month, the State must report data on all such 
families.
    Comment: In recommending changes to sample sizes, several 
commenters (i.e., about 10 States) stated that the sample sizes 
proposed in the NPRM (3,000 annual cases for active cases and 800 
annual cases for closed cases for both the TANF and separate State 
programs) were far in excess of the sample size of 1200 cases that we 
allowed many States to use under the AFDC-Quality Control (QC) system. 
The

[[Page 17865]]

proposed sample sizes, they believed, would result in a dramatic 
increase in State data collection workload. For some States, the sample 
size would equal or exceed the entire caseload.
    Commenters also questioned the significance of using the same 
sample size for large States as for smaller States. Some commenters 
also objected to the two-parent sample size (600 cases) because two-
parent families were a very small percentage of their caseload.
    Commenters recommended an overall reduction in sample sizes and/or 
the use of a finite correction factor that would take into account the 
size of the caseload in smaller States.
    Response: First, in response to the question of the smaller sample 
size permitted for the AFDC-QC data collection, we believe the 
differences in these two programs dictate larger sample sizes. The 
nature of the programs are different and the purpose for which the data 
are collected is also different.
    Under the AFDC program, States had much less flexibility; the major 
purpose of data collection was focused on determining payment accuracy 
and charting national trends. Under the TANF program, States have 
greatly increased flexibility, and data collection is critically 
important for monitoring and measuring program accountability and 
program performance.
    Second, we agree that a finite population correction factor may be 
useful, particularly to States with small TANF populations. Thus, we 
will incorporate this provision in the TANF Sampling Manual.
    Third, the recommendations to reduce sample sizes raised more 
difficult and serious issues. We considered all comments very carefully 
in evaluating the possible effects of various sample size options. On 
balance, we are retaining the sample sizes proposed in the NPRM for the 
reasons discussed below.
    In the NPRM (Appendix H, Sampling Specifications), we proposed the 
following annual minimum required sample sizes:
    (1) For families receiving TANF assistance, 3000 families, of which 
600 (approximately 25 percent) must be newly approved applicants.
    (2) Of the 2400 families that have been receiving TANF assistance, 
600 (approximately 25 percent) must be two-parent families.
    (3) For families no longer receiving TANF assistance (closed 
cases), the minimum required sample size is 800 families.
    (4) The same sample sizes apply to families receiving assistance 
and families no longer receiving assistance under separate State 
programs.
    Clearly, reduced sample sizes would increase State flexibility and 
reduce reporting burden; on the other hand, reduced sample sizes will 
also reduce the precision of and provide less reliable data for 
computing State work participation rates.
    As we stated in the NPRM, these sample sizes will provide 
reasonably precise estimates for the overall (i.e., the all-family) and 
the two-parent work participation rates. The overall rate has a 
precision of about plus or minus two percentage points at a 95-percent 
confidence level. The two-parent rate has a precision of about 2.3 
percentage points at a 95-percent confidence level. (We could have 
improved the precision of the two-parent rate to plus or minus two 
percentage points with an annual sample size of 800 families.) We 
believe this precision is important to States as the basis for the 
computation of reliable work participation rates.
    In addition, we believe the larger sample sizes are needed to 
monitor State TANF programs and to enable us to answer key questions of 
concern to both the Administration and Congress. As we discussed in an 
earlier section of the preamble, the Secretary is responsible for 
discerning what is happening at the State level to sub-groups for which 
we have monitoring responsibility or a major interest, such as child-
only cases, sanctioned cases, and immigrants. For example, under a 
reduced sample size, we would not be able to detect an increase in the 
percentage of child-only cases until the increase is quite substantial. 
States could attribute smaller increases to sampling variation.
    Furthermore, a smaller sample size hampers our ability to explore 
the underlying causes of any detected trends. For example, in addition 
to tracking child-only cases, we might wish to investigate changes in 
the number of such cases with sanctioned adults in the household. Under 
the sample sizes proposed in the NPRM, we might be able to study about 
150 such families. Using smaller sample sizes, we would be less 
confident in drawing conclusions based on correspondingly smaller 
numbers.
    We believe that the specific burden and cost of reporting will be 
different for each State depending on multiple factors. Initial 
decisions a State must make concern whether to enter the TANF and the 
SSP-MOE data elements into the State's automated management information 
system, whether to report these data on a sampling basis, or whether to 
use a combination of both mechanisms.
    For some States, it may be more efficient to automate all data 
reporting, particularly those States that choose to report universe 
data. (Currently, 30 States report universe data in their ETDR.) 
Clearly, as States move to an automated data collection system, the 
cost and burden of data collection will decline.
    For other States, sampling will be the most practicable, efficient, 
and feasible method. For example, under the sampling specifications in 
the sampling manual to be issued, the State would select one/twelfth of 
the minimum annual required sample each month, i.e., approximately 250 
cases. (One-twelfth of 3000 is 250.)
    Comment: Several commenters also expressed concern that the scope 
of the proposed data collection was particularly burdensome in light of 
the changes needed to make State information systems Y2K compliant. 
They contended that, since States had limited system personnel 
resources, they could not effectively manage Y2K efforts and major 
modifications of their systems as a result of final TANF data 
collection rules at the same time.
    Response: Where Y2K problems exist, we suggest that States consider 
the sampling option in reporting TANF data. (The TANF statute at 
section 411 provides States with the option of furnishing the 
disaggregated TANF data via sample. The NPRM provided sampling 
specifications, and we will be issuing a sampling manual providing 
States with detailed options.)
    With respect to Y2K issues, in general, sampling offers both 
advantages and disadvantages. On the one hand, the use of samples 
provides better data (i.e., data that are more readily verified) and 
uses fewer State and Federal resources. On the other hand, sampled data 
does not allow States or the Department to track individuals over time. 
It also does not provide the same precise information on population 
subgroups within a State, such as child-only cases, or allow matching 
of TANF recipient data with WtW recipient data. If States use a sample, 
along with the pc-based software we provide for the creation of their 
transmission files, they will not need to make major system changes 
while they work on Y2K problems. In this instance, the use of samples 
has a number of advantages for a State:
    (1) It can devote different personnel resources to conducting 
samples than to working on the Y2K effort.
    (2) It can limit its data collection efforts to the cases or 
individuals in the sample; it would not have to collect new

[[Page 17866]]

information from the entire caseload that it may not find useful or 
relevant.
    (3) Sample information may be more current.
    (4) Using a sample, it could extract required information that is 
already in its computer files and manually collect additional 
information.
    (5) After solving its Y2K problems, a State could reassess whether 
reporting on a sample basis is still in its best interest.
    Even though sampling might make it easier for States to implement 
the new reporting requirements, we recognize that: (1) the effective 
date of new reporting requirements comes at a particularly inopportune 
time for States that have not fully resolved their Y2K issues; and (2) 
the first responsibility of States is to ensure that their automated 
systems are capable of maintaining benefits to their neediest citizens. 
Thus, we have added an additional criterion for reasonable cause at 
Sec. 262.5(b)(1) related to this issue. Under this new provision, 
States that miss the deadlines for submitting complete and accurate 
data for the first two quarters of FY 2000 will receive reasonable 
cause if: (1) they can clearly demonstrate that their failure was 
attributable to Y2K compliance activities; and (2) they submit the 
required data by July 1, 2000.
    Comment: Several commenters recommended that States be permitted to 
report some data based on sampling and other data based on universe 
data. One State described its TANF program as made up of sub-programs; 
it wanted the option of reporting sample data on some sub-programs and 
universe data on others.
    However, two States said that we should not allow States to ``mix 
sample and universe reporting.'' They believed that, in order for data 
to be meaningful for evaluating policy or performance, States had to 
use a single method of reporting.
    Response: We have decided not to allow a State to submit some 
disaggregated data based on universe reporting and other data based on 
sampled information because we do not believe it would be feasible. Not 
only would it be difficult to analyze such data at the Federal level, 
it would also be impossible to set up a systematic procedure for 
estimating totals, proportions, averages, etc., across States. 
Depending on how fractured the State's reporting is, such mixed 
reporting might even make within-State estimates impossible. Each data 
element could have its own weight rather than a weight being associated 
at the case level.
    In addition, States were not in agreement as to what data would be 
reported on a sample basis and what data would be reported on a 100-
percent basis.
    Comment: Two States asked us to clarify whether a State could 
propose the use of an alternate sampling plan as long as it met 
precision requirements. One State asked for directions on how we will 
approve the State's sampling methodology.
    A few commenters recommended that we allow alternative sampling 
methodologies when a State could demonstrate that other methods produce 
equally valid samples. One State, for example, described and 
recommended approval of a longitudinal sampling design and a rolling-
panel design currently in use in its State.
    Response: In Appendix H of the NPRM, ``Sampling Specifications,'' 
we proposed to give States a substantial amount of flexibility in 
designing sampling plans. In general, we proposed that monthly cross-
sectional probability samples be used. Within this broad class of 
sampling designs, States would have considerable flexibility to 
formulate their plans. We also suggested that simple random sampling or 
systematic random sampling design would be easier to implement. 
However, we did not propose to require that States use one of these 
designs. We will issue a sampling manual that will incorporate Appendix 
H, reflect the other decisions in the final rule, and describe, in more 
detail, the sampling specifications and requirements for States that 
opt to report based on samples of TANF families and families in 
separate State programs. Under this TANF Sampling Manual, States will 
be free to propose other designs for our consideration, as long as 
their designs reflect cross-sectional monthly probability sampling. We 
need such samples to calculate monthly work participation rates. We 
will publish the Sampling Manual in the Federal Register and submit it 
for approval under the Paperwork Reduction Act.
    We have added a new paragraph (c) to this section to advise States 
that they will find the sampling specifications and procedures that 
they must use in the TANF Sampling Manual.
    We reject the specific proposal that we allow longitudinal or 
rolling-panel designs, primarily because these designs are 
inappropriate for measuring the work participation rate. These types of 
study designs predict or reveal the composition of future samples. 
Thus, a State would know its sample cases for future months and could 
concentrate on boosting the participation rates of sample cases. In 
this instance, the sample would no longer be representative of the 
caseload as a whole and a bias in the resulting estimates would occur. 
As noted earlier in this discussion, States will be free to propose 
other sample designs as long as the designs meet cross-sectional 
monthly probability sampling criteria.
    Comment: One commenter recommended that we count sample cases as 
long as States have sufficient data to satisfy core elements for work 
participation calculations and make other responses optional.
    Response: If a State opts to collect and report data for a sample 
of families receiving TANF assistance, it must report all section 
411(a) data on all families selected into the sample. When samples are 
used to make estimates about the universe from which the sample was 
selected, each sample unit has valuable information to contribute to 
the estimate.
    Comment: Two commenters objected to item #4 in the sampling 
specifications, which proposed that States must submit a monthly list 
of selected sample cases within 10 days of selection. They stated that 
this requirement was not in the statute, and it was burdensome on 
States. They recommended that each State keep a record of the cases 
pulled and provide a reason for dropping cases, if this occurs.
    Response: We need the list of selected cases to ensure that we 
receive data for all selected cases for each reporting month (i.e., 
that there are no missing cases). Furthermore, States need such a list 
for control of their sample. This reporting is not a new requirement; 
States previously provided such a listing under the AFDC-QC system.
    Comment: Two commenters questioned a provision in Sec. 272.3(b)(2) 
of the NPRM, dealing with ``How will we determine if a State is subject 
to a penalty?'' This paragraph proposed to prohibit a State from 
revising its sampling frames or program designations for cases 
retroactively.
    Response: In constructing the sample frame for the reporting month, 
States must include all families that received assistance for the 
reporting month through the end of the month. Once the State constructs 
its frame and selects its sample cases, it would be improper to allow 
it to redesignate a TANF case as a SSP-MOE case, for example. However, 
if a family in a sample did not receive assistance for the reporting 
month, the State would use code (2)--``Listed in error'' under the 
Disposition data element.
    Comment: One State commented on sampling and stratification 
concerns

[[Page 17867]]

and recommended that States be allowed different sampling schemes based 
on local conditions, e.g., different sample sizes for the different 
monthly strata. It claimed that the proposed sampling specifications 
effectively created a de facto stratification by month. However, it 
believed that States gained no advantage by the stratification. Its 
recommendation, it believed, would be especially helpful for States 
using monthly samples and would help with work flow and data processing 
issues.
    Response: States have considerable flexibility in designing their 
sampling plans, including designing strata to accommodate local 
conditions. Within that flexibility, however, the sampling 
specifications require that a State select about one-twelfth of the 
minimum annual sample size each month in the fiscal year. (One-twelfth 
of 3000 is about 250 families.) This minimum size is important in order 
to ensure an adequate number of families for calculating a monthly work 
participation rate, as required by statute.
    Comment: One commenter stated that there is no reason, in theory or 
logic, to assume that systemic random sampling is as good or better 
than simple random sampling. (The sampling specifications in the NPRM 
suggested that the former was the preferred approach.)
    Response: We had suggested systematic random sampling in the NPRM 
because most States had used that method in selecting samples for the 
AFDC-QC program. However, we agree that simple random sampling is an 
acceptable method for selecting the State's TANF and MOE samples. There 
are a wide variety of methods that could be used to select monthly 
samples. These methods include both simple random sampling and 
stratified random sampling.
    Comment: One State suggested that we work with States to develop a 
more workable approach to sampling. For example, they suggested that it 
might be useful to permit States to oversample in the first two months 
of the quarter and undersample in the third month, given the strict 
requirements for the submission of timely data.
    Response: Annual participation rates are based on monthly work 
participation rate samples. To assure a reliable annual work 
participation rate, we believe that the samples for each month need to 
be sufficiently large to calculate a reasonably precise monthly 
estimate. Therefore, we believe it is reasonable to require States to 
select \1/12\th of its sample each month. Months in which a sample is 
relatively small (i.e., less than \1/12\th the annual required sample 
size), adversely impact the calculation of the annual work 
participation rate.
    Comment: Two commenters appeared to believe (although we had not 
specified this in the NPRM) that it was permissible to report aggregate 
data by sampling, and one commenter recommended that we permit this.
    Response: The statute at section 411(a)(1)(B) refers to sampling 
for disaggregated case-record information. It does not provide specific 
authority to sample aggregate data. Based on the comments, however, we 
have determined that it would be appropriate to allow sampling for some 
aggregate nonexpenditure data elements. (Expenditure data is never 
reported based on sampling.) We have amended paragraph (a) of this 
section to reflect this option. We also indicate in the instructions to 
section three of the TANF Data Report (Appendix C) and section three of 
the SSP-MOE Data Report (Appendix G) those data elements that may be 
reported based on sampling.

Section 265.6--Must States File Reports Electronically? (Sec. 275.6 of 
the NPRM)

    The NPRM proposed to require that States file all quarterly reports 
electronically, based on format specifications that we would provide.
    Comment: We received comments from States and national 
organizations on this provision.
    Several commenters expressed general support for the proposed 
requirement (e.g., saying ``the law does not expressly require 
electronic reporting, but it will greatly facilitate the analysis of 
data.''), and most States that commented believed that they had the 
capacity to report electronically.
    However, some expressed concern that circumstances might occur that 
would prevent a State from reporting electronically in a timely manner 
or would prevent electronic reporting of some, but not all, data. They 
recommended that the final rule allow alternative reporting methods and 
give States the flexibility to report data in whatever format is 
feasible for them, given the varying levels of automation. In addition, 
a few States commented that they had problems with the current 
electronic reporting process and software.
    Response: As we said in the NPRM, State representatives supported 
electronic submission of both recipient and financial data in our pre-
NPRM external consultation meetings, and we believe all States have 
electronic reporting capability (as evidenced by their use of 
electronic reporting under previous programs). We continue to believe 
that electronic submission of reports will reduce paperwork and 
administrative costs, be less expensive and time consuming, and be more 
efficient for both the States and the Federal government.
    We would take into account any catastrophic events or one-time-only 
circumstances that prevented a State from filing its reports 
electronically, on a timely basis, but we see no reason to change the 
final rule or give States general authority to submit reports in a 
variety of formats.
    If a State has initial problems in using the reporting processes 
and software that we will make available, we are committed to working 
with the State to resolve these problems.
    Comment: A few States pointed out that there was no basis in the 
statute for the electronic reporting requirement. One State recommended 
that we delete the provision from the rule and issue instructional 
material separate from the regulations.
    Response: We agree that this requirement does not appear in the 
statute. However, for the reasons stated above, we believe that it will 
not be an onerous administrative requirement, is programmatically 
justified, and is within our authority to regulate. Therefore, we have 
made no change in Sec. 265.6.
    Comment: One commenter asked what efforts are underway to ensure 
compatibility of the proposed software with the many different systems 
States are using.
    Response: As a part of the ETDR, we provided States with a data 
reporting system, including file layout and transmission 
specifications. States with a variety of systems and file structures 
were able to provide the specified data in the format required. We plan 
to modify this system to capture the data required in the final rule. 
States will be able to enter data and create transmission files using 
our pc-based software. It incorporates a free-form capability to help 
prevent any future system incompatibility problems.

Section 265.7--How Will We Determine If the State Is Meeting the 
Quarterly Reporting Requirements? (Sec. 275.7 of the NPRM)

          and

Section 265.8--Under What Circumstances Will We Take Action To Impose a 
Reporting Penalty for Failure To Submit Quarterly and Annual Reports? 
(Sec. 275.8 of the NPRM)

    We are discussing these two sections together because, as the 
commenters

[[Page 17868]]

pointed out, the proposed penalty provisions in Sec. 275.8 were tied, 
in part, to the definition of a ``complete and accurate report'' in 
Sec. 275.7 of the NPRM.
    Section 409(a)(2)(A) of the Act provides that the grant of any 
State that fails to report data under section 411(a) of the Act within 
45 days following the end of the fiscal quarter shall be reduced by 
four percent. However, in accordance with section 409(a)(2)(B), we 
would not apply this penalty if the State submits the report by the end 
of the quarter following the quarter for which the data were due. The 
statute does not specifically address ``complete and accurate.'' We 
have used these terms to clarify for States what is required in order 
for a State to be considered to have filed the report required by 
section 411(a) of the Act.
How Will We Determine if the State Is Meeting a Reporting Requirement? 
(Sec. 275.7 of the NPRM)
    In this section of the NPRM, we proposed definitions of what would 
constitute a ``complete and accurate report'' for disaggregated data 
reports, aggregated data reports, and financial reports, i.e., the TANF 
Data Report, the TANF-MOE Data Report (now known as the SSP-MOE Data 
Report), and the TANF Financial Report (and, as applicable, the 
Territorial Financial Report). We also proposed to review State data to 
determine if the data met these standards and to use audits and reviews 
to verify the accuracy of the data filed. We reminded States of the 
need to maintain records to support all reports filed.
    The proposed definition of ``complete and accurate'' was a 
stringent one. In simple terms, it meant that States must report all 
elements for all families (or all sample families) with no arithmetical 
errors or inconsistencies. We proposed to use this definition as a 
standard against which we would determine if the State was subject to a 
reporting penalty. For example, we proposed that the data reported to 
us must accurately reflect the information available to the State; be 
free from computational errors and internally consistent; be reported 
for all elements (e.g., no missing data); be provided for all families 
(universe data) or for all families selected as a part of the sample; 
and, where estimates are necessary, reflect reasonable methods used by 
the State to develop its estimates.
    We based these proposals on the critical importance of the data and 
the multiple purposes that the data would serve--the most important of 
which is meeting the accountability requirements of the statute. We 
also referred to problems in obtaining complete and accurate data under 
previous programs and specifically requested additional comments and 
suggestions on ways to help assure better data, without creating an 
undue burden on States.
    Most of the comments on this issue came from States and national 
advocacy organizations. Many said that the definition of ``complete and 
accurate'' was too restrictive; it would be difficult for States to 
meet both the ``timely'' and the ``complete and accurate'' 
requirements; 100 percent error-free reporting was unfair (in view of 
the severe penalty provision) and unrealistic (based on past 
experience); and the final rule should allow States both a reasonable 
margin of error and an opportunity to correct or revise their data in 
appropriate circumstances.
Under What Conditions Will a State Be Subject to a Reporting Penalty 
for Failure To Submit Quarterly Reports? (Sec. 275.8 of the NPRM)
    In this section of the NPRM, we described the circumstances and 
conditions under which we would impose a reporting penalty.
    We proposed that we would impose the penalty if a State did not 
file the reports on a timely basis (a statutory requirement) and if the 
data in the TANF Data Reports and the TANF Financial Reports were not 
complete and accurate. We specified, however, that the penalty would 
not apply in several situations:
    (1) It would not apply to the TANF-MOE (now the SSP-MOE) Data 
Report or to the annual program and performance report; and
    (2) It would not apply to all data elements.
    For example, for disaggregated data on TANF recipients, it would 
apply only to the data elements in section 411(a) (other than section 
411(a)(1)(A)(xii)) and to the nine data elements necessary to carry out 
a data collection system. For aggregated data, it would apply only to 
the data elements in section 411(a), the data elements necessary to 
carry out a data collection system, and those elements necessary to 
verify and validate the disaggregated data.
    We did not specify each step of the penalty process but referred 
readers to Secs. 272.4 through 272.6 of this chapter (now Secs. 262.4 
through 262.6 of this chapter).
    Many commenters appeared to believe that all data elements in all 
data and financial reports were subject to a penalty and that one 
missing data element in any one of these reports would trigger an 
automatic penalty. Others questioned the Secretary's authority to 
``penalize States for data not required in the statute.'' Still others 
appeared to be unaware of the penalty process, e.g., consideration of 
reasonable cause, submittal of a State's corrective compliance plan, 
and reduction or recision of the penalty under certain circumstances.
    We agree that the language of the NPRM did not provide for 
flexibility or exceptions. Our intent in proposing these two sections 
was to define a performance standard for all reports. In addition to 
the statutory requirement for a timely report, the definition of 
``complete and accurate'' would constitute the standard against which 
we would review the reports submitted; work with States to resolve 
problems; and, if necessary, move through the steps of the penalty 
process.
    We envision several steps in an implementation process that would 
lead to full compliance with the data collection and reporting 
requirements.
    (a) Step one: Initial implementation.
    In the final rule, we have reduced the overall reporting 
requirements, including the number of data elements, and we have 
delayed the effective date of the rule to give States additional time 
to adjust to these reporting requirements. Once States begin to 
transmit the data specified in the final rule, we anticipate a 
temporary transition period to work out any problems, but we would hold 
States to the complete and accurate standard. For example, if States 
report their data within 45 days of the end of the quarter, as the 
statute requires, we could have the opportunity to resolve any data 
problems before the end of the quarter. Thus, submittal by the 45-day 
deadline could reduce the risk of penalty action against the State.
    We would continue the same partnership approach with States that is 
currently in place to resolve problems that have occurred in the 
transmission of the ETDR data. We are referring here to nonrecurring 
and nonsystemic problems such as inadvertent errors, missing data 
elements, occasional technical glitches, and isolated or unintentional 
errors.
    In addition, we would not prohibit a State from re-transmitting 
corrected elements in their Data or Financial reports, both during or 
after a reporting period, as long as retransmission does not become a 
habitual practice.
    (b) Step two: On-going operation.
    In this step, all States are able to transmit successfully, and 
most are able to transmit the data generally without errors. We would 
continue to hold to the complete and accurate standard and

[[Page 17869]]

work with States if any problem arises. However, if a State has not 
filed a complete and accurate TANF Data Report or Financial Report by 
the end of the quarter, we would give the State an opportunity to 
dispute our determination that it had failed to file a complete and 
accurate report and to provide a ``reasonable cause'' explanation. We 
would also take into consideration the extent of the incompleteness or 
unreliability of the data. See Sec. 262.5, ``Under what general 
circumstances will we determine that a State has reasonable cause?''.
    (c) Step three: Penalty liability.
    We would provide notice to the chief executive officer of the State 
if the State has not met the complete, accurate, and timely reporting 
requirements without reasonable cause. We would take this action, for 
example, following a pattern of serious omissions, chronic delays, 
failure to respond, or disregard of requirements. See Sec. 262.6, 
``What if a State does not demonstrate reasonable cause?''. The State 
may accept the penalty or enter into a corrective compliance plan.
    We do acknowledge, however, that it is inevitable that there will 
be occasional missing data elements and nonsystemic reporting errors in 
any stage of a data reporting system, regardless of how long the system 
has been in operation, whether the State reports universe or sampled 
data, or how sophisticated or well-operated the system is. We want to 
emphasize that it is not our intent to penalize a State for these kinds 
of occasional errors.
Changes Made in the Final Rule
    We have made two changes in Sec. 265.7 of the final rule. First, in 
paragraph (b)(4)(ii), we have deleted the words ``* * * selected in a 
sample that meets the minimum sample size requirements * * *'' and 
inserted the words ``* * * meets the specifications and procedures in 
the TANF Sampling Manual * * *.'' This language clarifies that a State 
must meet the sampling requirements as specified in the TANF Sampling 
Manual as a part of the definition of a ``complete and accurate'' data 
report, not just the minimum sample size requirements.
    Second, we have deleted the word ``its'' from the sentences ``The 
reported data accurately reflects information available to the State in 
its case-records, financial records, and automated data systems'' in 
paragraphs (b)(1), (c)(1), and (d)(1). In deleting this word, we intend 
to emphasize and clarify that we hold the State accountable for the 
correctness of the data reported to us, not just the data that may be 
available at the State-level. Some commenters seemed to believe that 
States should not be held accountable for data that originated from 
local jurisdictions or from other agencies. Our purpose in making this 
change is to convey that, regardless of the source, the State is 
responsible for reporting complete and accurate data.
    We have made several changes in Sec. 265.8 of the final rule. 
First, we have revised the title to better comport with the content of 
this section. The new title of Sec. 265.8 is ``Under what conditions 
will we take action to impose a reporting penalty for failing to submit 
quarterly and annual reports?''
    Second, in response to commenters' concerns, we have specified in 
paragraph (a) of this section the data that are subject to the penalty.
    Third, in paragraph (a)(1), in response to requests for greater 
clarity and specificity, we have deleted the words ``on a timely 
basis'' and inserted the words of the statute ``within 45 days of the 
end of the quarter.'' This responds to commenters who were confused by 
what they described as ``two due dates'' for these reports.
    Finally, we have made editorial changes in paragraph (a)(3) for 
clarity; in paragraph (a)(5) to delete references to the annual program 
and performance report (which we have eliminated from part 265) and to 
reflect the changes made in the annual report under Sec. 265.9; in 
paragraph (d) to clarify that we will not impose the reporting penalty 
if the State files the quarterly reports or the annual report by the 
end of the quarter that immediately succeeds the fiscal quarter for 
which the reports were required; and in paragraph (f) to add a 
conditional phrase in relation to the application of the penalty.
    We did not agree with commenters who recommended that we:
    (1) Delete the definition of ``complete and accurate'' in its 
entirety;
    (2) Delete the proposed definition of ``complete and accurate'' and 
enter into discussions with States to develop standards for complete 
and accurate reports;
    (3) Apply penalties only for the data elements pertaining to the 
work participation rates;
    (4) Accept the State's best effort to meet reporting requirements 
on a temporary basis and apply no penalty;
    (5) Automatically assume all reporting errors are in good faith and 
forgive them; and
    (6) Waive the penalties when a State is in ``substantial 
compliance'' even though not all data elements are reported. (It was 
not clear what the commenter meant by ``substantial compliance.'' 
However, if the missing data elements met the limited conditions for 
reasonable cause, as specified in Sec. 262.5, the State may provide a 
``reasonable cause'' explanation.)
    It is important to reiterate that, as we discussed in the preamble 
for Secs. 260.40, 262.5, and 265.5, we have added a reasonable cause 
criterion at Sec. 262.5(b)(1) that will provide some penalty relief to 
States that cannot report their first two quarters of TANF data on time 
due to Y2K compliance activities.
    Comment: Several commenters asked for clarification of the penalty 
provision. They stated it was unclear in the NPRM whether the penalty 
was four percent per year or four percent per quarter.
    Response: Our interpretation of section 409(a)(2) is that the 
Secretary is to reduce the grant payable to a State by four percent for 
each quarter that the State does not submit quarterly reports within 45 
days of the end of the quarter. The Secretary is to rescind the penalty 
if a State submits the data by the end of the quarter.
    However, there are other provisions of law that also are applicable 
and that must be applied. Under section 409(c) of the Act, the 
Secretary may not impose a penalty until after the State has had an 
opportunity to correct its noncompliance. If a State submits a 
corrective compliance plan, carries it out, and achieves compliance, 
the State is not subject to the penalty. If it submits a corrective 
compliance plan and fails to carry it out or fails to achieve 
compliance, the Secretary shall assess some or all of the penalty. 
Therefore, the State has the opportunity to correct its reporting 
problems, and the Secretary has the flexibility to reduce the potential 
impact of a penalty, based on progress achieved.
    If, for example, a State failed to correct its quarterly reporting 
noncompliance for a particular quarter, the Secretary could take into 
account the State's reporting compliance in other quarters and make an 
appropriate reduction of the penalty. On the other hand, if the State 
did not make good faith efforts to comply, the Secretary could impose 
the full four percent penalty. We have revised paragraph (f) to reflect 
this process.

Secton 265.9--What Information Must the State File Annually? 
(Sec. 275.9 of the NPRM)

    This section of the NPRM proposed two annual reports: one annual 
report as an addendum to the fourth quarter TANF Financial Report (or 
Territorial Financial Report) and one annual program and performance 
report.

[[Page 17870]]

    Paragraphs (a) and (b) of the NPRM proposed the information that 
States must submit in the annual addendum. Paragraph (a) proposed four 
items of information on the TANF program. Paragraph (b) proposed eight 
items of information on separate State programs by cross-reference to 
Sec. 273.7. Appendix D of the NPRM also contained the proposed content 
of the annual addendum.
    Paragraph (c) proposed that States submit an annual program and 
performance report containing information on the characteristics and 
achievements of each State's TANF program, including unique features 
and innovations, for the Secretary's report to Congress.
Summary of Comments on This Section
    A number of States and national organizations provided a variety of 
both general and specific comments and recommendations on the proposed 
annual addendum and the annual program and performance report. 
Generally, commenters objected to reporting these data, because, as 
some believed, we could find most of the TANF program information in 
the State TANF plan, and this constituted a duplicate reporting burden. 
Others believed there was no statutory basis for requiring these data, 
particularly the data on separate State programs. One national 
organization representing State interests supported reporting the 
information on separate State programs in paragraph (b) as a substitute 
for reporting the disaggregated and aggregated data on separate State 
programs in the SSP-MOE Data Report. In addition, one State suggested 
that we should gather information on separate State programs not from 
States but from other sources, as there ``is a wealth of information on 
separate State programs from private and academic studies.''
    We have made several changes in this section of the final rule, 
primarily in response to comments. We have eliminated the proposed 
annual program and performance report in paragraph (c) of the NPRM. 
(See the detailed discussion of this provision following our discussion 
of the annual reporting requirements as they appear in the final rule.) 
We summarize the major changes related to the Annual Report and discuss 
these and other recommendations in greater detail below.
    (1) We no longer require the annual report to be submitted as an 
addendum to the TANF Financial Report, and we dropped the term 
``addendum'' to refer to the annual report.
    (2) For clarity, we consolidated the annual reporting requirements 
in this section. This section now includes all but one of the items of 
information on the TANF program proposed in paragraph (a) of the NPRM 
and the items of information on the State's MOE program(s) proposed in 
paragraph (b) of the NPRM by cross-reference to Sec. 273.7.
    (3) We deleted one TANF reporting requirement related to child-only 
cases in paragraph (a)(1) of the NPRM.
    (4) We moved the proposed requirement for information on TANF child 
care disregards from the quarterly TANF Data Report to the Annual 
Report. (See comments and responses below for further discussion.)
    (5) As discussed elsewhere in the preamble, we added new 
requirements in paragraphs (b)(5) and (b)(6) for reporting on State 
strategies and procedures for serving victims of domestic violence and 
on the nature of nonrecurrent, short term benefits provided under the 
State's TANF program.
    (6) We added an annual reporting requirement for information on 
State displacement procedures in paragraph (b)(7); on State programs 
and activities directed at the third and fourth purposes of the TANF 
program in paragraph (b)(8); and, if available, ``the number of 
individuals who participated in subsidized employment under 
Sec. 261.30(b) or (c)'' in paragraph (b) (9).
    (7) We revised paragraph (c) to clarify that the annual MOE 
reporting requirements apply to all State programs for which MOE 
expenditures are claimed, i.e., both those in TANF and in separate 
State programs.
    (8) We added one data element in paragraph (c)(4) to obtain 
information on State expenditures claimed as MOE under these programs. 
(See comments and responses below for further discussion.)
    (9) We added a new paragraph (d) to specify the two circumstances 
when we would not require the re-submission of data in the annual 
report.
    (10) We added a new paragraph (e) to provide that, if a State makes 
a substantive change in certain data elements in paragraphs (b) and 
(c), it must file a copy of the changed information with the next 
quarterly data report or as an amendment to its State Plan. The State 
must also indicate the effective date of the change.
    (11) We made editorial changes for clarity.
    Comment: Several commenters urged that we not require States to 
submit the annual addendum as a part of the fourth quarter Financial 
Report. They stated that this provision made the State Comptroller 
accountable for program data that were outside his or her financial 
expertise. They were also concerned that a program addendum might 
interfere with a timely filing of the Financial Report, and thus 
subject the State to a penalty.
    As an alternative, almost all commenters on this section 
recommended that the information in the annual report be included in 
the TANF State Plan (if it was not already there) or be submitted as a 
free-standing report. They based this recommendation on the 
programmatic nature of the information, its similarity to other State 
Plan information, and the fact that most of the information was 
relatively stable over time. They also recommended that, because it was 
relatively stable, we should require that States submit this 
information on a one-time only basis and allow States to amend it only 
if the information changed, rather than requiring its re-submittal 
every year.
    Response: We agree with these recommendations. First, we defer to 
State concerns about the role and responsibility of the State's 
Comptroller or Chief Financial Officer and have specified in paragraph 
(a) that a State may submit the annual report either as a free-standing 
report or as an addendum to the fourth quarter TANF Data Report.
    Second, we have specified in paragraph (d) that if the State has 
submitted the information required in paragraphs (b) and (c) in the 
State Plan, it may meet the annual reporting requirements by reference 
in lieu of re-submission.
    Third, in paragraph (d), we further provide that if the information 
has not changed since the previous annual report, the State may 
reference this information in lieu of re-submission.
    We would point out, however, that not all information in the annual 
report is relatively stable. At a minimum, for example, States will 
need to develop annual information on child care disregards required 
under paragraph (b)(4), on the annual total number of families served 
for which MOE expenditures are claimed in paragraph (c)(5), and on 
State and MOE expenditures in each TANF-MOE and SSP-MOE program in 
paragraph (c)(4). The annual report is due at the same time as the 
fourth quarter TANF Data Report, i.e., November 15 of each year.
    Comment: Several commenters urged that we assure that the 
information in the annual report is current. They were concerned that 
changes could occur in State definitions of services or program 
eligibility--information that was important to them for monitoring

[[Page 17871]]

purposes--that would not be known until the following annual report, 
perhaps as much as eleven months later.
    Response: We agree and have added new paragraph (e) to this section 
to require that, if a State makes a substantive change in certain 
information required as a part of its annual report, it must file a 
copy of the change with the next quarterly Data Report or as an 
amendment to its State Plan. The State must also indicate the effective 
date of the change. This requirement is applicable only to the 
information in paragraphs (b)(1), (b)(2), (b)(3), (c)(1), (c)(2), 
(c)(3), (c)(6), (c)(7), and (c)(8).
    Comment: As we discussed in the earlier preamble section entitled, 
``Child-only Cases,'' a number of commenters objected to reporting the 
information on certain families excluded from the State's definition of 
families receiving assistance as proposed in Sec. 275.9(a)(1), i.e., 
the number of cases excluded from the calculations of the overall 
participation rate, the two-parent work participation rate, and the 
time-limit calculations. They believed we had created a time-consuming, 
costly reporting burden ``to prevent something that HHS has no 
indication that is actually occurring.'' They also cited a number of 
legitimate reasons for child-only cases.
    Response: We have deleted this provision. However, we will be 
collecting case-record information on families receiving assistance 
that will help inform us about the number and nature of child-only 
cases, as well as new conversions to child-only cases.
    Comment: Commenters strongly objected to four items of 
disaggregated data in the NPRM on child care services.
    Response: Our explanation in the NPRM was that this was a 
requirement of the Child Care and Development Block Grant (CCDBG) 
statute and that TANF reporting provided the most cost-effective way to 
collect these data.
    However, we reviewed the CCDBG statute and determined that this was 
not a disaggregated data collection requirement, but an annual 
aggregate reporting requirement. Therefore, we have removed these data 
elements from the TANF Data Report and have added this reporting 
requirement in paragraph (b)(4), to more closely follow the specific 
provisions of the CCDBG statute. The information in paragraph (b)(4) 
that States will report parallels the annual information that the State 
Child Care agency will report in ACF-800, State-level Data Standards, 
CCIS Technical Bulletin #1, revised January 23, 1998.
    Comment: We received many comments on Sec. 273.7 of the NPRM, ``How 
will we determine State expenditures?'' Because we have moved the 
annual reporting requirements on State MOE program(s), proposed in 
Sec. 273.7 to Sec. 265.9(c) of the final rule, we are addressing these 
comments here.
    Some commenters generally supported the collection of these data. 
Other commenters strongly urged that we require additional data, 
particularly on expenditures. Others objected to the proposed data 
collection on the grounds that MOE expenditures are a financial 
commitment on the part of a State, not a program commitment. They 
alleged that the program information we proposed to collect went beyond 
the requirements in the statute. Alternatively, they recommended that 
only financial information on MOE programs be collected. Still other 
commenters objected to the reporting burden of specific provisions in 
Sec. 273.7.
    Response: In Sec. 273.7 of the NPRM, we proposed that the State 
must submit eight items of information on its separate State MOE 
program(s). This information included descriptive program information, 
a definition of work activities under separate State programs, 
eligibility criteria, certain expenditure information, and a 
certification that families served under separate State programs met 
the State's criteria for ``eligible families.''
    The preamble to the NPRM explained that these data, in addition to 
the data in the TANF Financial Report, were necessary to our ability to 
monitor whether State expenditures met the definition of ``qualified 
expenditures.'' In addition, Congress recognized that State 
contributions would play an important role in making welfare reform a 
success. The NPRM and this final rule reflect widespread public 
interest in learning about the ways in which States help move families 
toward economic self-support and self-sufficiency. Given this interest, 
we intend to publish information on our web site regarding State MOE 
programs.
    We disagree that the MOE requirements represent only a financial 
commitment. We continue to believe that minimal program and expenditure 
information on State MOE programs is necessary for assessment and 
monitoring purposes.
    Comment: Several commenters requested that we clarify whether the 
annual reporting requirements on MOE programs apply to only those under 
the TANF program, to separate State programs, or to both.
    Response: We have revised the language in paragraph (c) to clarify 
that the annual reporting requirements in paragraph (c) apply to any 
MOE program for which the State claims MOE expenditures.
    We also want to clarify that the State must report the information 
in paragraph (c) only to the extent that the information is applicable 
to expenditures claimed as MOE. For example, the State need not report 
on the total number of persons served under an MOE program; only on the 
number of persons served for whom MOE expenditures are claimed. We 
believe we have made this clear throughout paragraph (c).
    Comment: Two commenters provided detailed analysis and 
recommendations for additional MOE expenditure data. They believed 
that, unless the Department obtained these data, we would not be able 
to determine whether States met MOE requirements, including whether 
State expenditures claimed for MOE purposes met the ``new spending'' 
requirement in section 409(a)(7)(B)(II) of the Act. (These provisions 
limit countable expenditures for certain State or local programs to 
spending above FY 1995 levels.)
    They recommended that States be required to report:
    (1) Expenditure data on MOE programs under both the TANF program 
and separate State programs;
    (2) Total State expenditures and total expenditures claimed as MOE 
under each program for the current year;
    (3) Total 1995 expenditures for all programs in which State 
spending is claimed toward the MOE requirement;
    (4) 1995 State spending on eligible families; and
    (5) 1995 State expenditures used to draw down Federal AFDC-related 
matching funds.
    Response: We reviewed these recommendations, and we have accepted 
two of the recommendations as follows:
    (1) As noted above, we have revised paragraph (c) to clarify that 
the annual report requirements apply to both MOE programs under TANF 
and separate State programs.
    (2) We have added a new paragraph (c)(4) to require, for each MOE 
program, both the total annual State expenditures and total annual 
State expenditures claimed as MOE.
    We agree, in part, with the third recommendation. The NPRM proposed 
to collect FY 1995 expenditures for each program/activity not 
authorized and allowable (under title IV-A) as of August 21, 1996. We 
have retained this provision in paragraph (c)(8). We intend that this 
provision collect expenditure data on all MOE programs not

[[Page 17872]]

previously authorized and allowable under section 403 of prior law and 
have added that language to paragraph (c)(8).
    We disagree, however, with the recommendation to collect FY 1995 
expenditure data on all FY 1995 programs. FY 1995 data on programs 
funded under section 403 are only needed to the extent that the 
expenditures in the program are claimed for MOE and the ``new 
spending'' requirements apply.
    We also did not accept recommendations four and five. For a full 
discussion of the issues raised by these recommendations, please refer 
to the preamble discussion related to Sec. 263.5.
    While not accepting all of these recommendations, we have 
significantly strengthened the reporting on MOE programs under this 
final rule. The MOE requirements in TANF are central to the success of 
welfare reform. Under the final rule, we believe that we will be in a 
good position to ensure that States maintain the investments in needy 
families that Congress intended.
    Comment: One commenter recommended that we allow States to report 
either the average monthly number or the total number of persons served 
under State MOE program(s), given the variation in how States collect 
such information.
    Response: We agree and have amended paragraph (c)(5) to reflect 
this option. The commenter was also concerned that the numbers reported 
would not be an unduplicated count of persons served. We believe that a 
requirement for an unduplicated count of persons served for purposes of 
this report would be unduly burdensome on States and have chosen not to 
require it.
    Comment: Several commenters questioned the need for the 
certification proposed in Sec. 273.7(b)(8) on the grounds that it was 
either unnecessary or inappropriate. The NPRM required a certification 
that the families served under MOE programs met the State's criteria 
for eligible families.
    Response: We disagree that a certification is unnecessary. Under 
many Federal programs, it is standard procedure to require such a 
certification, particularly for critical program information needed for 
accountability and for expenditure data.
    We agree, however, that the certification as proposed in paragraph 
(b)(8) was not intended to apply to all families served under MOE 
programs but only to those families for which the State is claiming MOE 
expenditures. We have made this change in paragraph (c)(9) of this 
section.
    We have also accepted the following suggestions for editorial 
clarity recommended by commenters:
     The description of work activities in paragraph (c)(3) 
must be reported only if applicable to a State's MOE programs. (Some 
commenters appeared to believe that this reporting requirement meant 
that the State must offer work activities as a part of their MOE 
programs.)
    Please note that paragraph (c)(3) is the only requirement in 
Sec. 265.9(c) that applies only to separate State MOE programs. That is 
because we ask for a description of the work activities under the MOE 
program(s) in TANF in paragraph (b)(1).
     We deleted paragraph (a) as it appeared in Sec. 273.7 of 
the NPRM. Paragraph (a) duplicated the requirement that States submit a 
quarterly TANF Financial Report in Sec. 265.3(c).
Specific Comments on the Proposed Annual Program and Performance Report
    Under section 411(b) of the Act, the Secretary is required to 
submit an annual report to Congress six months after the end of fiscal 
year 1997 and every year thereafter. The report is to describe whether 
the States are meeting the work participation rates; the objectives of 
increasing employment and earnings of needy families as increasing 
child support collections and decreasing out-of-wedlock pregnancies and 
child poverty; the demographic and financial characteristics of 
families applying for assistance, families receiving assistance, and 
families that became ineligible to receive assistance; the 
characteristics of each State program funded under this part; and the 
trends in employment and earnings of needy families with minor children 
living at home.
    In the NPRM, we proposed that States supplement the information 
that we would obtain through the TANF Data Reports and TANF Financial 
Reports by providing information in an annual program and performance 
report. We would include that information in the Department's annual 
report to Congress on the TANF program.
    We proposed that States would describe the characteristics and 
achievements of each State program; the design and operation of the 
program; the services, benefits, and assistance provided; and the 
extent to which the State has met its goals and objectives for the 
program. We also proposed that States could include additional 
materials on unique features of their programs, accomplishments and 
innovations they wished to highlight, or other information appropriate 
to the report to Congress.
    Comment: Without exception, all who commented on this section 
strongly objected to this requirement. They alleged that we lacked 
statutory authority for the proposed report and inappropriately shifted 
the burden of the Secretary's report to States. States also believed 
that they were also providing much of this information in State plans 
or that we could obtain it by more efficient and less costly means, 
e.g., we could conduct national sampling studies in cooperation with 
the States.
    Response: In preparing the NPRM, we were cognizant of the data that 
we would obtain from the TANF Data and Financial Reports, as well as 
other sources. We found that State plans varied in the amount of 
information they contained, and we did not believe we could rely on 
them as a source of information for the annual report to Congress. We 
believed that other State and national research and evaluation studies 
might provide some, but not all, of the information specified in the 
statute.
    We have accepted the recommendation to delete this provision. We 
will also continue to consider and evaluate multiple sources of data in 
preparing the report to Congress; for example, we expect to compile 
information on program characteristics from State plans. If we identify 
substantive weaknesses in the data we have available through this 
approach, we will assess our options. We appreciate the offer from 
States to work together to collect this information in the most 
efficient way possible.
Additional Reporting Requirements
    The discussion above relates to the information now included in the 
annual report based on the provisions of the NPRM. Following our review 
of comments and consideration of policy issues that arose in the 
development of the final rule, we have added five new reporting 
requirements in Sec. 265.9. While we dropped our proposal for a 
separate annual program and performance report, we still need 
information on key aspects of State programs in order to prepare the 
annual report to Congress. To the maximum extent possible, we will draw 
upon data available through the State plans and other reports submitted 
by States.
(1) Family Violence Option
    If a State has adopted the Family Violence Option and wants Federal 
recognition of its good cause domestic

[[Page 17873]]

violence waivers under subpart B of part 260 of this chapter, the State 
must provide: (1) A description of the strategies and procedures in 
place to ensure that victims of domestic violence receive appropriate 
alternative services, and (2) an aggregate figure for the total number 
of good cause waivers granted.
    This new reporting requirement in paragraph (b)(5) of this section 
will tell us and other interested parties about the activities States 
are carrying out to ensure that individuals granted waivers receive 
appropriate attention from TANF staff, access to services, and 
appropriate consideration of their safety issues. In addition, at 
Secs. 260.54, 260.58, and 260.59, we have specified that a State may 
receive special penalty consideration under these regulatory provisions 
if it submits this information.
(2) Nature of Nonrecurrent, Short-Term Benefits
    In paragraph (b)(6) of this section, we are asking States to 
provide a description of the nonrecurrent, short-term benefits they are 
providing, including:
     The eligibility criteria for these benefits (together with 
any restrictions on the amount, duration, or frequency of payments);
     Any policies they have instituted that limit such payments 
to families eligible for assistance or that have the effect of delaying 
or suspending eligibility for assistance; and
     Any procedures or activities developed under the TANF 
program to ensure that individuals diverted from TANF assistance 
receive appropriate information about, referrals to, and access to 
Medicaid, food stamps, and other programs that provide benefits that 
could help them successfully transition to work.
    To the extent that a State provides the required information, 
either in the State plan or in the annual report, it would not have to 
duplicate this information.
    As discussed earlier in the preamble, we strongly believe that 
effective procedures to ensure that diverted individuals access 
Medicaid, food stamps, or other programs are critical to the success of 
TANF programs in achieving lasting employment for the families they 
serve. In addition, such procedures might help States avoid compliance 
and legal problems in other programs. Given the importance of this 
issue, the additional information on State practices that we are 
requiring in the annual report will be extremely helpful in assuring 
the role TANF agencies are playing with individuals receiving diversion 
benefits.
    For more detailed information, see our discussion on 
``Nonrecurrent, short-term benefits'' at Sec. 260.31.
(3) Displacement Procedures
    We have added a new reporting requirement in paragraph (b)(7) of 
this section. Under this provision, each State must include a 
description of the grievance procedures that are in place in the State 
to resolve complaints that it receives about displacement.
    Each State must create displacement procedures under section 407(f) 
of the Act. This provision and the related provision at section 
403(a)(5)(J) of the Act (which applies to the WtW program) reflects 
longstanding concern among unions, labor groups, and others about the 
possibility that welfare recipients being placed at work sites could 
displace other workers from their jobs. States are also concerned about 
displacement because of its potential negative effect on their labor 
force and the long-term success of their TANF programs. Given these 
multiple concerns, we believe it is important that we monitor State 
activity in this area. For further discussion, see the preamble 
discussion on ``Recipient and Workplace Protections.''
(4) Activities Directed at Other Purposes of the Act
    It is clear from the statement of findings in section 101 of 
PRWORA, the stated TANF goals at Sec. 260.20, the preamble discussions 
on allowable uses of Federal and MOE funds, and activities underway 
outside the scope of these rules that the TANF legislation recognizes 
out-of-wedlock pregnancy prevention and family formation as critical 
components of welfare reform; and, subject to some general 
restrictions, State may spend Federal TANF and State MOE dollars on 
such efforts.
    Because of the significance of this issue, in paragraph (b)(8), we 
are asking States to include a description of the activities that they 
provide under their TANF program to address both these purposes. (We 
are also asking States annually to provide a break-out of their 
expenditures on these activities in the TANF Financial Report.)
(5) Number of Individuals in Subsidized Employment
    Given our more narrow definition of assistance, we will not be 
collecting disaggregated information from States on the number of 
individuals who have participated in subsidized employment under 
Sec. 261.30(b) or (c). In paragraph (b)(9), we are asking States to 
estimate this information as an annual aggregate number. We believe 
this information is highly relevant to understanding the efforts State 
are making to move individuals, particularly hard-to-place individuals, 
into employment and accomplishing the second goal of the TANF program.

Section 265.10--When Are Annual Reports Due? (Sec. 275.10 of the NPRM)

    This section of the NPRM proposed due dates for the annual addendum 
and the annual program and performance report. We received no 
substantive comments on this section.
    In light of the decision to delete the annual program and 
performance report in Sec. 265,9, we have deleted paragraph (b) of this 
section as it appeared in the NPRM. We have revised the language of 
this section to specify that the annual report is due at the same time 
as the fourth quarter TANF Data Report, i e., November 15 of each year.

XI. Regulatory Impact Analyses

A. Executive Order 12866

    Executive Order 12866 requires that regulations be drafted to 
ensure that they are consistent with the priorities and principles set 
forth in the Executive Order. The Department has determined that this 
rule is consistent with these priorities and principles. This 
rulemaking implements statutory authority based on broad consultation 
and coordination. It reflects our response to comments received both on 
the burden estimates for the proposed data collection and on the NPRM 
that we issued on November 20, 1997.
    The Executive Order encourages agencies, as appropriate, to provide 
the public with meaningful participation in the regulatory process. As 
described elsewhere in the preamble, ACF consulted with State and local 
officials and their representative organizations as well as a broad 
range of advocacy groups, researchers and others to obtain their views 
prior to the publication of the NPRM.
    We also considered comments received in response to the NPRM and 
had a small number of meetings with major national organizations that 
asked for the opportunity to present their comments in person. We 
respond to the comments that we received in the Supplementary 
Information section of the preamble and in the discussions of 
individual regulatory provisions.
    To a considerable degree, these rules reflect the comments that we 
received in response to the NPRM. They also reflect the intent of 
PRWORA to achieve a balance between granting States the flexibility 
they need to develop and operate effective and responsive

[[Page 17874]]

programs and ensuring that they meet the objectives of the statute. 
Under the new law, State flexibility is achieved by converting the 
welfare program into a block grant and limiting Federal rules; ensuring 
that program goals are accomplished is achieved through a number of 
penalty and bonus provisions and detailed data collection. The limited 
scope of this regulation is also consistent with Administration policy, 
as articulated in Executive Order 12866 and its Regulatory Reinvention 
initiatives. At the same time, we have created a sufficient regulatory 
structure to enable enforcement of key statutory requirements.
    We support State flexibility in numerous ways--such as by 
exercising regulatory restraint; giving States the ability to define 
key program terms; and clarifying that States have the ability to 
continue their welfare reform demonstrations, serve victims of domestic 
violence and noncustodial parents, use State funds to provide 
assistance to certain nonqualified immigrants, provide supports to 
working families, and operate separate State programs that are not 
subject to all the TANF requirements.
    We support the achievement of program goals by ensuring that we 
capture key information on what is happening under the State TANF 
programs and maintaining the integrity of the work and other penalty 
provisions. We take care, in provisions such as the MOE penalty 
provisions, sanction penalty provisions, and caseload reduction factor 
approval process, to protect against negative impacts on needy 
families.
    One of our key goals in developing the penalty rules was to ensure 
State performance in all key areas provided under statute, including 
work participation, time limits, State maintenance-of-effort, proper 
use of Federal TANF funds, and data reporting. The law specified that 
we should enforce State actions in these areas and also specified the 
penalty for each failure. Through the ``reasonable cause'' and 
``corrective compliance'' provisions in the rules we give some 
consideration to special circumstances within a State to help ensure 
that neither the State nor needy families within the State will be 
unfairly penalized for circumstances beyond their control.
    In the work and penalty areas, this rulemaking provides information 
to the States that will help them understand our specific expectations 
and take the steps necessary to avoid penalties. These rules may 
ultimately affect the number and size of penalties that are imposed on 
States, but the basic expectations on States are statutory.
    The financial impacts of these rules should be minimal because of 
the fixed level of funding provided through the block grant. A State's 
Federal grant could be affected by the penalty decisions made under the 
law and these rules, and State expenditures on needy families could be 
affected indirectly by the rules on caseload reduction. (That is, as 
the result of caseload reduction, a State might meet the required 
participation rates and expend State funds at the 75-percent MOE level 
rather than the 80-percent level.) Otherwise, we do not believe that 
the rulemaking will affect the overall level of funding or 
expenditures. However, it could have minor impacts on the nature and 
distribution of such expenditures.
    In the area of data collection, the statutory requirements are 
specific--especially with respect to case-record or disaggregated data. 
These rules also include data reporting with respect to program 
expenditures and characteristics and, under certain circumstances, 
disaggregated and aggregated case-record information on SSP cases. 
These data collection requirements help ensure that States continue to 
contribute meaningful amounts of State dollars to programs that assist 
needy families, monies go for the intended purposes, and the financial 
integrity of the program is maintained.
    We have retained SSP-MOE data collection in order to assess the 
overall impact of the program and enable us to determine whether the 
creation of separate State programs could undermine the objectives of 
the Act. However, consistent with some of the programmatic changes we 
have made, we have reduced the amount of case-record data we include in 
this SSP-MOE data collection and (in changing the definition of 
assistance) have narrowed the types of separate State programs for 
which States must provide case-record reporting.
    The impacts of these rules on needy individuals and families will 
depend on the choices that a State makes in implementing the new law. 
Our data collection should enable tracking of these effects over time 
and across States. Overall, our assessment of these rules indicates 
that they represent the least burdensome approach consistent with the 
regulatory objectives.
    Based on the comments that we received both on the data collection 
burden and the NPRM, we reassessed some of our proposed policies. We 
have identified an approach to certain issues that is less burdensome 
than we initially proposed, but that is still consistent with our 
regulatory objectives.
    This is a significant regulatory action under section (3)(f)(1) of 
Executive Order 12866 and, therefore, these final rules have been 
reviewed by the Office of Management and Budget in accordance with that 
Order. This rule also has been determined to be a major rule under the 
Small Business Regulatory Enforcement Fairness Act of 1996.
    We have estimated the annualized Paperwork Reduction Act costs to 
be approximately $30 million, as indicated in section D below, and the 
penalty costs to be approximately $50 million, beginning in FY 2001, as 
reflected in the Administration's budget.
    These final rules implement the new welfare reform block grant 
program, the Temporary Assistance for Needy Families program. The 
legislation and these rules reflect new Federal, State, and Tribal 
relationships in the administration of welfare programs; a new focus on 
moving recipients into work; and a new emphasis on program information, 
measurement, and performance. These rules also strengthen State efforts 
to develop creative and diverse responses to help recipients become 
self-sufficient; provide recipients with child care, transportation, 
and other supportive services they need as they move from welfare to 
work; and address the many factors that contribute to poverty and 
dependency.
    We believe these objectives are reflected in these final rules and 
that the benefits to families and children, as well as to States, far 
outweigh the costs, as reflected in the preamble sections that address 
the substantive provisions of this rule.
    In assessing the potential costs and benefits--both quantitative 
and qualitative--of these final regulations, the Secretary has 
determined that the benefits of these regulations justify the costs. 
The Secretary has also determined that this regulatory action does not 
unduly interfere with State, local, and Tribal governments in the 
exercise of their governmental functions.

B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. Ch. 6) requires the 
Federal government to anticipate and reduce the impact of rules and 
paperwork requirements on small businesses and other small entities. 
Small entities are defined in the Act to include small businesses, 
small nonprofit organizations, and small governmental entities. This 
rule will affect primarily the 50 States, the District of Columbia,

[[Page 17875]]

and certain Territories. Therefore, the Secretary certifies that this 
rule will not have a significant impact on small entities.

C. Assessment of the Impact on Family Well-Being

    We certify that we have made an assessment of this rule's impact on 
the well-being of families, as required under section 654 of The 
Treasury and General Government Appropriations Act of 1999. The purpose 
of the TANF program is to strengthen the economic and social stability 
of families, in part by supporting the formation and maintenance of 
two-parent families and reducing out-of-wedlock child-bearing. As 
required by statute, this rule gives flexibility to States to design 
programs that can best serve this purpose.

D. Paperwork Reduction Act

    This rule contains information collection requirements that have 
been submitted to the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995 (PRA). Under this Act, no persons are 
required to respond to a collection of information unless it displays a 
valid OMB control number. If you have any comments on these information 
collection requirements, please submit them to OMB within 30 days. The 
address is: Office of Management and Budget, Paperwork Reduction 
Project, 725 17th Street N.W., Washington, D.C. 20503, Attn: ACF/DHHS 
Desk Officer. The public will have an opportunity to provide comments 
before OMB makes a final decision.
    This final rule incorporates our response to comments regarding the 
reporting burden that we received in response to the NPRM and the 
Paperwork Notice we published November 27, 1997. It requires States to 
submit three quarterly reports and one annual report. In addition, 
States must provide documentation in support of or related to caseload 
reduction credit, the reasonable cause/corrective compliance process, 
the Governor's certification on State waiver programs, and the domestic 
violence good cause waiver redetermination process.
    We are publishing in this issue of the Federal Register the 
quarterly data reports and instructions (including the specific data 
elements); the quarterly financial report and instructions; and two 
reporting forms: the Annual Report on State Maintenance-of-Effort 
Programs and instructions (a part of the annual report information 
specified in Sec. 265.9(c)) and the Caseload Reduction Report and 
instructions. We discussed the burden of the content of the latter two 
reporting forms in the NPRM, but we are publishing the report forms 
themselves to facilitate compliance.
Quarterly Data and Financial Reports
    The three quarterly reports required are the TANF Data Report 
(Appendices A through C), the SSP-MOE Data Report (Appendices E through 
G), and the TANF Financial Report (Appendix D) (or, as applicable, the 
Territorial Financial Report). The TANF Data Report and SSP-MOE Data 
Report consist of three sections each. Two of the three sections of 
each Data Report contain disaggregated data elements, and one section 
of each Data Report contains aggregated data elements.
    We need this information collection to meet the requirements of 
section 411(a) and to implement other sections of the Act, including 
sections 407 (work participation requirements), 409 (penalties), and 
413 (annual rankings).
    In the final rule, we have significantly reduced the burden on 
States of collecting case-record information on current recipients and 
closed cases. As discussed in the preamble section regarding part 265, 
we accepted many of the commenters' recommendations to reduce or 
eliminate burden. For example, we reduced the number of data elements 
in each Data Report; clarified that States are not required to track 
closed cases but report only data from the month of closure; and 
reduced the type of SSP-MOE programs subject to case-record reporting 
under the revised definition of assistance. At the same time, we also 
modified, revised, or expanded a very few data elements for clarity or 
specificity, e.g., adding break-out items on case closure. In deciding 
which changes to make, we focused on the statutory requirements and the 
importance of the data in informing us about what was happening to 
needy families under TANF.
    States are required to report MOE expenditure data on the TANF 
Financial Report; case-record reporting in the SSP-MOE Data Report is 
optional. However, if a State claims MOE expenditures under a separate 
State program and wishes to receive a high performance bonus or qualify 
for caseload reduction credit, it must file disaggregated and 
aggregated information on a separate State program(s) that is similar 
to the data reported for the TANF program.
    In response to comments and as a consequence of our more narrow 
definition of ``assistance,'' we have reduced the number of data 
elements in the SSP-MOE Data Report and the number of TANF and separate 
State programs that are covered by the SSP-MOE Data Report. (See 
Appendices E through G for the data elements.)
    The TANF Financial Report consists of one form. (See Appendix D.) 
We need this report to meet the requirements of sections 405(c)(2), 
411(a)(2), 411(a)(3), and 411(a)(5) and to carry out our other 
financial management and oversight responsibilities. These 
responsibilities include providing information that could be used in 
determining whether States are subject to penalties under section 
409(a)(1), 409(a)(3), 409(a)(7), 409(a)(9), or 409(a)(14); tracking 
expenditures under our definition of ``assistance''; learning the 
extent to which recipients of benefits and services are covered by 
program requirements, and helping to validate the disaggregated data we 
receive on TANF and SSP cases.
Annual Report
    Based on comments, we eliminated the proposed Annual Program and 
Performance Report (Sec. 275.9(c) of the NPRM) and the Addendum to the 
Fourth Quarter Financial Report (Sec. 275.9(a) and (b) of the NPRM). 
However, the content of the proposed Addendum is now contained in and 
required to be reported as a part of the Annual Report in Sec. 265.9. 
In addition, Sec. 265.9 requires States to report more detailed 
information on the State's MOE program(s), strategies to implement the 
Family Violence Option, State diversion programs, and other program 
characteristics. (We have developed a form for reporting the 
information on State MOE programs; see Appendix I.)
Other Information Collection Requirements
    There are four other circumstances in this rulemaking that will 
create a reporting burden. The first circumstance concerns instances in 
which a State wants to qualify for caseload reduction credit. The 
second addresses a situation in which a State is subject to a penalty 
under section 409 and wishes to avoid the penalty or receive a reduced 
penalty. The third is the Governor's certification with respect to 
waivers, and the fourth is the domestic violence good cause waiver 
redetermination process.
     If a State elects to request a pro-rata reduction in the 
minimum participation rates, based on caseload reduction, Sec. 261.41 
requires that it must file certain data. We have developed a form for 
States to report these data at Appendix H.
     If a State wishes to dispute a penalty determination or 
wants to be considered for a waiver of a penalty based on ``reasonable 
cause'' or

[[Page 17876]]

corrective compliance, Sec. 262.4 requires that the State provide us 
with certain information. A State must use a similar process if it is 
seeking a reduced penalty for failure to meet the work participation 
rates, as discussed at Sec. 261.51.
     If a State is claiming a waiver inconsistency for work 
requirements or time limits, the Governor must provide a certification 
(and documentation) to the Secretary on the nature and scope of the 
waiver and the inconsistency. See Sec. 260.75.
     If a State wants recognition of good cause domestic 
violence waivers it issues under the Family Violence Option (subpart B 
of Sec. 260), it must conduct a redetermination of the need for any 
waivers extending beyond six months. (We estimate that 45 States will 
conduct between 500 and 600 redeterminations annually. Only a portion 
of cases receiving waivers will need redeterminations. We estimate that 
each determination and redetermination will take approximately one 
hour.)
Changes in the Estimate of Burden
    In the NPRM, the respondents for the TANF Financial Report were 
listed as the 50 States of the United States and the District of 
Columbia. (We proposed that the Territories would report expenditure 
data on the Territorial Financial Report.) The respondents for the 
remaining reporting requirements, i.e., the TANF Data Report, the SSP-
MOE Data Report, the annual program and performance report, the 
Caseload Reduction Credit documentation process, and the Reasonable 
Cause/Corrective Compliance documentation process, were listed as the 
50 States of the United States, the District of Columbia, Guam, Puerto 
Rico, and the United States Virgin Islands. (American Samoa is eligible 
for the TANF program and could use funds that it receives under section 
1108 to operate the TANF program. However, it did not elect to operate 
a TANF program, and we did not include this jurisdiction in our 
calculation of State burden.)
    In the final rule, we have generally assumed the same number of 
respondents for most of the quarterly Data Reports, the quarterly 
Financial Report, and the new Annual Report. However, because we 
reduced the scope of the SSP-MOE reporting, we also reduced the number 
of respondents to the SSP-MOE Data Report from 54 to 17. This is the 
current number of States that we believe will have programs that meet 
the definition of ``assistance.''
    In addition, we have estimated 32 States as possible respondents to 
the Governor's certification on waivers because there are 32 States 
that currently operate programs under approved waivers.
    We have estimated that 45 States will be respondents under the 
domestic violence good cause waiver redetermination process because the 
majority of States have implemented the Family Violence Option, and 
many others are taking the legislative or administrative steps 
necessary to implement this provision.
    While the statute requires Tribal organizations with TANF programs 
to submit some of the same data as States, we have not calculated the 
burden for the Tribal organizations in this rule. The reporting burden 
of Tribal organizations is addressed in the Tribal Work and TANF NPRM 
published July 22, 1998 (63 FR 39366).
Burden Estimates
    In estimating the reporting burden in the NPRM, we pointed out that 
some of the reporting burden that used to exist in the AFDC program had 
disappeared. We also pointed out that most of the data elements 
required under the TANF Data Report were similar to previous data 
elements required in the AFDC or JOBS program and built upon the data 
elements in the Emergency TANF Data Report. However, States alleged 
that our assumptions in this area were not totally valid.
    In addition, we assumed that most States would collect the data by 
means of a review sample. In the NPRM, we used as a starting point the 
OMB-inventoried QC burden hours as a standard for estimating the TANF 
burden. We also assumed that when a State provided us the information 
for their entire caseload, there would be a one-time burden and cost of 
developing or modifying its automated system.
    These assumptions were based on a belief that the proposed 
information was currently being collected and could be extracted from 
State automated data systems. State commenters challenged both of these 
assumptions and the burden estimates we derived from them. They 
asserted that a significant amount of the proposed information was not 
available and would require manual collection from TANF recipients. (We 
note that 30 States are currently reporting data on their entire 
caseload in the quarterly Emergency TANF Data Report.)
    We considered these comments and recalculated what the burden 
estimate would have been assuming that we had the same number of data 
elements and respondents as originally proposed in the NPRM. Based on 
these assumptions, the overall burden estimate would have increased 
from 241,128 hours (the total burden estimate in the NPRM) to 1,153,944 
hours. However, this increase has been offset significantly by the 
changes we have made in the final rule, e.g., the decrease in the total 
number of data elements and the substantial reduction in the number of 
SSP-MOE respondents. These reductions were in large part the result of 
our response to comments on the NPRM. The estimated total annual burden 
hours have been reduced to 583,912.
    The annual burden estimates include any time involved pulling 
records from files, abstracting information, returning records to 
files, assembling any other material necessary to provide the requested 
information, and transmitting the information.
    Table A contains our burden estimates for the final rule and 
revised estimates for the NPRM. The columns entitled ``Final'' 
incorporate the estimates of the burden associated with the 
requirements in the final rule. These estimates reflect both the 
revised assumptions and the overall reductions in burden. The columns 
entitled ``NPRM As Revised'' provide revised estimates of the burden 
associated with the requirements in the NPRM, i.e., assuming we 
retained all the data elements proposed in the NPRM. All numbers have 
been rounded where indicated.

A. Recalculated Burden Estimates for the Final Rule

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Number of respondents                Average burden hours per     Total burden hours
                                                              --------------------------                      response         -------------------------
                  Instrument or requirement                                                 Yearly   --------------------------
                                                                 NPRM as       Final      submittals    NPRM as                   NPRM as       Final
                                                               revised \1\                            revised \1\     Final     revised \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
TANF Data Report--Sec.  265.3(b).............................       \2\ 54       \2\ 54            4        3,185        2,183      687,960      471,528
SSP--MOE Data Report--Sec.  265.3(d).........................       \3\ 54       \3\ 17            4        2,041          664      440,856       45,152
TANF Financial Report--Sec.  265.3(c)........................       \4\ 51       \4\ 51            4           12           30        2,448        6,120

[[Page 17877]]

 
Annual Report--Sec.  265.9(b)-(c)6...........................       \5\ NA       \2\ 54            1       \5\ NA          128       \5\ NA        6,912
Caseload Reduction Documentation Process--Sec.  261.41 & Sec.       \2\ 54       \2\ 54            1          100          160        5,400        8,640
  261.44.....................................................
Reasonable Cause/Corrective Compliance Documentation Process--      \1\ 54       \1\ 54            2          160          160       17,280       17,280
 Secs.  262.4, 262.6, & 262.7; Sec.  261.51..................
Governor's Waiver Certification Process--Sec.  260.75........       \5\ NA           32            1       \5\ NA           40       \5\ NA        1,280
Domestic Violence Good Cause Waiver Redetermination Process--       \5\ NA           45          600       \5\ NA            1       \5\ NA       27,000
 Sec.  260.55................................................
                                                              ------------------------------------------------------------------------------------------
      Estimated Total Annual Burden Hours: \7\...............  ...........  ...........  ...........  ...........  ...........    1,153,944     583,912
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ This column reflects what the burden estimate would have been assuming we retained all data elements proposed in the NPRM.
\2\ The 50 States, the District of Columbia, Guam, Puerto Rico, and the United States Virgin Islands will be respondents.
\3\ We estimate that 17 States will be respondents based on the number of States that currently have SSP-MOE programs.
\4\ The 50 States and the District of Columbia will be respondents.
\5\ Not applicable. These reporting requirements did not appear in the NPRM.
\6\ In the NPRM, the annual report referred to the Annual Program and Performance Report, now eliminated.
\7\ The total burden estimate for the NPRM (using the original assumptions) was 241,128.

    Therefore, while the burden estimate would have increased by 
approximately 140 percent (based on the provisions in the NPRM), the 
actual burden decreased by approximately 50 percent.
    We did not consider the burden for the Territorial Financial Report 
because it has fewer than ten respondents and, therefore, is not 
covered by the PRA. Also, we no longer require an annual addendum to 
the fourth quarter TANF Financial Report (the burden for the addendum 
was estimated in the NPRM as a part of the financial report). We now 
include the content and burden of the Addendum as a part of the Annual 
Report requirement.
    Finally, in the NPRM, we proposed a caseload reduction process 
requiring 40 annual burden hours per respondent. In response to 
comments on the caseload reduction process and the revisions we have 
made, we increased the estimated annual burden to 160 hours per 
respondent and developed a form for reporting this information. (See 
Appendix H.)
Cost Estimates
    Many commenters expressed the opinion that we had greatly 
underestimated the costs associated with significant systems overhaul 
and redesign that would require substantial investment in staff and 
resources, as well as the costly ongoing operations and reporting 
efforts.
    We have reconsidered the costs in light of these comments and have 
revised our estimates accordingly. Specifically, we have increased the 
estimate of the annualized cost of the hour burden from $3,520,469 to 
$17,050,230. This figure is based on an estimated average hourly wage 
of $29.20 (including fringe benefits, overhead, and general and 
administrative costs) for the State staff performing the work 
multiplied by 583,912 burden hours. (If we had not reduced the actual 
burden by approximately 50 percent, the estimated cost of the hour 
burden would have been $33,695,164 ($29.20 times 1,153,944 burden 
hours).)
    We had originally estimated average annualized capital/start-up and 
operational and maintenance costs (CSO&M) to be $2,700,000 across all 
States, or $50,000 per respondent. Many States expressed the opinion 
that the data collection will require costly systems overhaul and 
redesign and that the overall burden should be anywhere from 5 to 20 
times our original estimate.
    As indicated above, we have made a substantial upward adjustment in 
the annualized cost of the hour burden. In addition, we have calculated 
a substantial increase of 500 percent in the annualized CSO&M based on 
the assertions of the States. Therefore, we have estimated annualized 
CSO&M cost to be $13,500,000. When added to the $17,050,230 estimate of 
the annualized cost of the hour burden, it yields a total estimated 
annualized cost of $30,550,230, or an average of $565,745 per 
respondent. Without the actual reduction in burden, the cost would have 
been $47,195,164, or an average of $873,985 per respondent.
    We considered comments by the public on these collections of 
information in:
     Evaluating whether the collections are necessary for the 
proper performance of our functions, including whether the information 
will have practical utility;
     Evaluating the accuracy of our estimate of the burden of 
the collections of information, including the validity of the 
methodology and assumptions used, and the frequency of collection;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technology, e.g., the 
electronic submission of responses.

E. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 (Unfunded 
Mandates Act) requires that a covered agency prepare a budgetary impact 
statement before promulgating a rule that includes any Federal mandate 
that may result in the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year.
    If a covered agency must prepare a budgetary impact statement, 
section 205 further requires that it select the most cost-effective and 
least burdensome alternative that achieves the objectives of the rule 
and is consistent with the statutory requirements. In addition, section 
203 requires a plan for informing and advising any small government 
that may be significantly or uniquely impacted by the rule.
    We have determined that the rules will not result in the 
expenditure by State, local, and Tribal governments, in

[[Page 17878]]

the aggregate, or by the private sector, of more than $100 million in 
any one year. Accordingly, we have not prepared a budgetary impact 
statement, specifically addressed the regulatory alternatives 
considered, or prepared a plan for informing and advising any 
significantly or uniquely impacted small government.

List of Subjects in 45 CFR Parts 260 Through 265

    Administrative practice and procedure, Day care, Employment, Grant 
programs--social programs, Loan programs--social programs, Manpower 
training programs, Penalties, Public assistance programs, Reporting and 
recordkeeping requirements, Vocational education.

(Catalogue of Federal Domestic Assistance Programs: 93.558 TANF 
programs--State Family Assistance Grants, Assistance grants to 
Territories, Matching grants to Territories, Supplemental Grants for 
Population Increases and Contingency Fund; 93.559--Loan Fund; 
93.595--Welfare Reform Research, Evaluations and National Studies)

    Dated: March 26, 1999.
Olivia A. Golden,
Assistant Secretary for Children and Families.

    Approved: March 29, 1999.
Donna E. Shalala,
Secretary, Department of Health and Human Services.

    For the reasons set forth in the preamble, we are amending 45 CFR 
chapter II by adding parts 260 through 265 to read as follows:

PART 260--GENERAL TEMPORARY ASSISTANCE FOR NEEDY FAMILIES (TANF) 
PROVISIONS

Subpart A--What Provisions Generally Apply to the TANF Program?

Sec.
260.10  What does this part cover?
260.20  What is the purpose of the TANF program?
260.30  What definitions apply under the TANF regulations?
260.31  What does the term ``assistance'' mean?
260.32  What does the term ``WtW cash assistance'' mean?
260.33  When are expenditures on State or local tax credits 
allowable expenditures for TANF-related purposes?
260.35  What other Federal laws apply to TANF?
260.40  When are these provisions in effect?

Subpart B--What Special Provisions Apply to Victims of Domestic 
Violence?

260.50  What is the purpose of this subpart?
260.51  What definitions apply to this subpart?
260.52  What are the basic provisions of the Family Violence Option 
(FVO)?
260.54  Do States have flexibility to grant good cause domestic 
violence waivers?
260.55  What are the additional requirements for Federal recognition 
of good cause domestic violence waivers?
260.58  What penalty relief is available to a State whose failure to 
meet the work participation rates is attributable to providing 
federally recognized good cause domestic violence waivers?
260.59  What penalty relief is available to a State that failed to 
comply with the five-year limit on Federal assistance because it 
provided federally recognized good cause domestic violence waivers?

Subpart C--What Special Provisions Apply to States That Were Operating 
Programs Under Approved Waivers?

260.70  What is the purpose of this subpart?
260.71  What definitions apply to this subpart?
260.72  What basic requirements must State demonstration components 
meet for the purpose of determining if inconsistencies exist with 
respect to work requirements or time limits?
260.73  How do existing welfare reform waivers affect the 
participation rates and work rules?
260.74  How do existing welfare reform waivers affect the 
application of the Federal time-limit provisions?
260.75  If a State is claiming a waiver inconsistency for work 
requirements or time limits, what must the Governor certify?
260.76  What special rules apply to States that are continuing 
evaluations of their waiver demonstrations?

    Authority: 42 U.S.C. 601, 601 note, 603, 604, 606, 607, 608, 
609, 610, 611, 619, and 1308.

Subpart A--What Rules Generally Apply to the TANF Program?


Sec. 260.10  What does this part cover?

    This part includes regulatory provisions that generally apply to 
the Temporary Assistance for Needy Families (TANF) program.


Sec. 260.20  What is the purpose of the TANF program?

    The TANF program has the following four purposes:
    (a) Provide assistance to needy families so that children may be 
cared for in their own homes or in the homes of relatives;
    (b) End the dependence of needy parents on government benefits by 
promoting job preparation, work, and marriage;
    (c) Prevent and reduce the incidence of out-of-wedlock pregnancies 
and establish annual numerical goals for preventing and reducing the 
incidence of these pregnancies; and
    (d) Encourage the formation and maintenance of two-parent families.


Sec. 260.30  What definitions apply under the TANF regulations?

    The following definitions apply under parts 260 through 265 of this 
chapter:
    ACF means the Administration for Children and Families.
    Act means Social Security Act, unless otherwise specified.
    Adjusted State Family Assistance Grant, or adjusted SFAG, means the 
SFAG amount, minus any reductions for Tribal Family Assistance Grants 
paid to Tribal grantees on behalf of Indian families residing in the 
State and any transfers to the Social Services Block Grant or the Child 
Care and Development Block Grant.
    Administrative costs has the meaning specified at Sec. 263.0(b) of 
this chapter.
    Adult means an individual who is not a ``minor child,'' as defined 
elsewhere in this section.
    AFDC means Aid to Families with Dependent Children.
    Aid to Families with Dependent Children means the welfare program 
in effect under title IV-A of prior law.
    Assistance has the meaning specified at Sec. 260.31.
    Basic MOE means the expenditure of State funds that must be made in 
order to meet the MOE requirement at section 409(a)(7) of the Act.
    Cash assistance, when provided to participants in the Welfare-to-
Work program (WtW), has the meaning specified at Sec. 260.32.
    CCDBG means the Child Care and Development Block Grant Act of 1990, 
as amended, 42 U.S.C. 9858 et seq.
    CCDF means the Child Care and Development Fund, or those child care 
programs and services funded either under section 418(a) of the Act or 
CCDBG.
    Commingled State TANF expenditures means expenditures of State 
funds that are made within the TANF program and commingled with Federal 
TANF funds.
    Contingency fund means Federal TANF funds available under section 
403(b) of the Act, and contingency funds means the Federal monies made 
available to States under that section. Neither term includes any State 
funds expended pursuant to section 403(b).
    Contingency fund MOE means the MOE expenditures that a State must 
make in order to meet the MOE requirements at sections 403(b)(6) and 
409(a)(10) of the Act and subpart B of part 264 of this chapter and 
retain contingency funds made available to the State. The only 
expenditures that qualify for Contingency Fund MOE are State TANF 
expenditures.
    Control group is a term relevant to continuation of a ``waiver'' 
and has the meaning specified at Sec. 260.71.

[[Page 17879]]

    Countable State expenditures has the meaning specified at 
Sec. 264.0 of this chapter.
    Discretionary fund of the CCDF refers to child care funds 
appropriated under the CCDBG.
    EA means Emergency Assistance.
    Eligible State means a State that, during the 27-month period 
ending with the close of the first quarter of the fiscal year, has 
submitted a TANF plan that we have determined is complete.
    Emergency assistance means the program option available to States 
under sections 403(a)(5) and 406(e) of prior law to provide short-term 
assistance to needy families with children.
    Expenditure means any amount of Federal TANF or State MOE funds 
that a State expends, spends, pays out, or disburses consistent with 
the requirements of parts 260 through 265 of this chapter. It may 
include expenditures on the refundable portions of State or local tax 
credits, if they are consistent with the provisions at Sec. 260.33. It 
does not include any amounts that merely represent avoided costs or 
foregone revenue. Avoided costs include such items as contractor 
penalty payments for poor performance and purchase price discounts, 
rebates, and credits that a State receives. Foregone revenue includes 
State tax provisions--such as waivers, deductions, exemptions, or 
nonrefundable tax credits--that reduce a State's tax revenue.
    Experimental group is a term relevant to continuation of a 
``waiver'' and has the meaning specified at Sec. 260.71.
    FAG has the meaning specified at Sec. 264.0(b) of this chapter.
    Family Violence Option (or FVO) has the meaning specified at 
Sec. 260.51.
    FAMIS means the automated statewide management information system 
under sections 402(a)(30), 402(e), and 403 of prior law.
    Federal expenditures means expenditures by a State of Federal TANF 
funds.
    Federal TANF funds means all funds provided to the State under 
section 403 of the Act except WtW funds awarded under section 
403(a)(5), including the SFAG, any bonuses, supplemental grants, or 
contingency funds.
    Federally recognized good cause domestic violence waiver has the 
meaning specified at Sec. 260.51.
    Fiscal year means the 12-month period beginning on October 1 of the 
preceding calendar year and ending on September 30.
    FY means fiscal year.
    Good cause domestic violence waiver has the meaning specified at 
Sec. 260.51.
    Governor means the Chief Executive Officer of the State. It thus 
includes the Governor of each of the 50 States and the Territories and 
the Mayor of the District of Columbia.
    IEVS means the Income and Eligibility Verification System operated 
pursuant to the provisions in section 1137 of the Act.
    Inconsistent is a term relevant to continuation of a ``waiver'' and 
has the meaning specified at Sec. 260.71.
    Indian, Indian Tribe and Tribal Organization have the meaning given 
such terms by section 4 of the Indian Self-Determination and Education 
Assistance Act (25 U.S.C. 450b), except that the term ``Indian tribe'' 
means, with respect to the State of Alaska, only the Metlakatla Indian 
Community of the Annette Islands Reserve and the following Alaska 
Native regional nonprofit corporations:
    (1) Arctic Slope Native Association;
    (2) Kawerak, Inc.;
    (3) Maniilaq Association;
    (4) Association of Village Council Presidents;
    (5) Tanana Chiefs Council;
    (6) Cook Inlet Tribal Council;
    (7) Bristol Bay Native Association;
    (8) Aleutian and Pribilof Island Association;
    (9) Chugachmuit;
    (10) Tlingit Haida Central Council;
    (11) Kodiak Area Native Association; and
    (12) Copper River Native Association.
    Individual Development Account, or IDA, has the meaning specified 
at Sec. 263.20 of this chapter.
    Job Opportunities and Basic Skills Training Program means the 
program under title IV-F of prior law to provide education, training 
and employment services to welfare recipients.
    JOBS means the Job Opportunities and Basic Skills Training Program.
    Minor child means an individual who:
    (1) Has not attained 18 years of age; or
    (2) Has not attained 19 years of age and is a full-time student in 
a secondary school (or in the equivalent level of vocational or 
technical training).
    MOE means maintenance-of-effort.
    Needy State is a term that pertains to the provisions on the 
Contingency Fund and the penalty for failure to meet participation 
rates. It means, for a month, a State where:
    (1)(i) The average rate of total unemployment (seasonally adjusted) 
for the most recent 3-month period for which data are published for all 
States equals or exceeds 6.5 percent; and
    (ii) The average rate of total unemployment (seasonally adjusted) 
for such 3-month period equals or exceeds 110 percent of the average 
rate for either (or both) of the corresponding 3-month periods in the 
two preceding calendar years; or
    (2) The Secretary of Agriculture has determined that the average 
number of individuals participating in the Food Stamp program in the 
State has grown at least 10 percent in the most recent 3-month period 
for which data are available.
    Noncustodial parent means a parent of a minor child receiving 
assistance who:
    (1) Lives in the State; and
    (2) Does not live in the same household as the child.
    Prior law means the provisions of title IV-A and IV-F of the Act in 
effect as of August 21, 1996. They include provisions related to Aid to 
Families with Dependent Children (or AFDC), Emergency Assistance (or 
EA), Job Opportunities and Basic Skills Training (or JOBS), and FAMIS.
    PRWORA means the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, or Pub. L. 104-193, 42 U.S.C. 1305 note.
    Qualified Aliens has the meaning prescribed under section 431 of 
PRWORA, as amended, 8 U.S.C. 1641.
    Qualified State Expenditures means the total amount of State funds 
expended during the fiscal year that count for basic MOE purposes. It 
includes expenditures, under any State program, for any of the 
following with respect to eligible families:
    (1) Cash assistance;
    (2) Child care assistance;
    (3) Educational activities designed to increase self-sufficiency, 
job training, and work, excluding any expenditure for public education 
in the State except expenditures involving the provision of services or 
assistance of an eligible family that is not generally available to 
persons who are not members of an eligible family;
    (4) Any other use of funds allowable under subpart A of part 263 of 
this chapter; and
    (5) Administrative costs in connection with the matters described 
in paragraphs (1), (2), (3) and (4) of this definition, but only to the 
extent that such costs do not exceed 15 percent of the total amount of 
qualified State expenditures for the fiscal year.
    Secretary means Secretary of the Department of Health and Human 
Services or any other Department official duly authorized to act on the 
Secretary's behalf.
    Segregated State TANF expenditures means expenditures of State 
funds within the TANF program that are not commingled with Federal TANF 
funds.
    Separate State program, or SSP, means a program operated outside of

[[Page 17880]]

TANF in which the expenditures of State funds may count for basic MOE 
purposes.
    SFAG means State family assistance grant, as defined in this 
section.
    SFAG payable means the SFAG amount, reduced, as appropriate, for 
any Tribal Family Assistance Grants made on behalf of Indian families 
residing in the State and any penalties imposed on a State under this 
chapter.
    Single audit means an audit or supplementary review conducted under 
the authority of the Single Audit Act at 31 U.S.C. chapter 75.
    Social Services Block Grant means the social services program 
operated under title XX of the Act, pursuant to 42 U.S.C. 1397.
    SSBG means the Social Services Block Grant.
    State means the 50 States of the United States, the District of 
Columbia, the Commonwealth of Puerto Rico, the United States Virgin 
Islands, Guam, and American Samoa, unless otherwise specified.
    State agency means the agency that the Governor certifies as the 
administering and supervising agency for the TANF program, pursuant to 
section 402(a)(4) of the Act.
    State family assistance grant means the amount of the basic block 
grant allocated to each eligible State under the formula at section 
403(a)(1) of the Act.
    State MOE expenditures means the expenditure of State funds that 
may count for purposes of the basic MOE requirements at section 
409(a)(7) of the Act and the Contingency Fund MOE requirements at 
sections 403(b)(4) and 409(a)(10) of the Act.
    State TANF expenditures means the expenditure of State funds within 
the TANF program.
    TANF means The Temporary Assistance for Needy Families Program.
    TANF program means a State program of family assistance operated by 
an eligible State under its State TANF plan.
    Territories means the Commonwealth of Puerto Rico, the United 
States Virgin Islands, Guam, and American Samoa.
    Title IV-A refers to the title and part of the Act that now 
includes TANF, but previously included AFDC and EA. For the purpose of 
the TANF program regulations, this term does not include child care 
programs authorized and funded under section 418 of the Act, or their 
predecessors, unless we specify otherwise.
    Tribal family assistance grant means a grant paid to a Tribe that 
has an approved Tribal family assistance plan under section 412(a)(1) 
of the Act.
    Tribal grantee means a Tribe that receives Federal TANF funds to 
operate a Tribal TANF program under section 412(a) of the Act.
    Tribal TANF program means a TANF program developed by an eligible 
Tribe, Tribal organization, or consortium and approved by us under 
section 412 of the Act.
    Tribe means Indian Tribe or Tribal organization, as defined 
elsewhere in this section. The definition may include Tribal consortia 
(i.e., groups of federally recognized Tribes or Alaska Native entities 
that have banded together in a formal arrangement to develop and 
administer a Tribal TANF program).
    Victim of domestic violence has the meaning specified at 
Sec. 260.51.
    Waiver, when used in subpart C of this part, has the meaning 
specified at Sec. 260.71.
    We (and any other first person plural pronouns) means the Secretary 
of Health and Human Services or any of the following individuals or 
organizations acting in an official capacity on the Secretary's behalf: 
the Assistant Secretary for Children and Families, the Regional 
Administrators for Children and Families, the Department of Health and 
Human Services, and the Administration for Children and Families.
    Welfare-to-Work means the new program for funding work activities 
at section 403(a)(5) of the Act.
    WtW means Welfare-to-Work.
    WtW cash assistance has the meaning specified at Sec. 260.32.


Sec. 260.31  What does the term ``assistance'' mean?

    (a)(1) The term ``assistance'' includes cash, payments, vouchers, 
and other forms of benefits designed to meet a family's ongoing basic 
needs (i.e., for food, clothing, shelter, utilities, household goods, 
personal care items, and general incidental expenses).
    (2) It includes such benefits even when they are:
    (i) Provided in the form of payments by a TANF agency, or other 
agency on its behalf, to individual recipients; and
    (ii) Conditioned on participation in work experience or community 
service (or any other work activity under Sec. 261.30 of this chapter).
    (3) Except where excluded under paragraph (b) of this section, it 
also includes supportive services such as transportation and child care 
provided to families who are not employed.
    (b) It excludes:
    (1) Nonrecurrent, short-term benefits that:
    (i) Are designed to deal with a specific crisis situation or 
episode of need;
    (ii) Are not intended to meet recurrent or ongoing needs; and
    (iii) Will not extend beyond four months.
    (2) Work subsidies (i.e., payments to employers or third parties to 
help cover the costs of employee wages, benefits, supervision, and 
training);
    (3) Supportive services such as child care and transportation 
provided to families who are employed;
    (4) Refundable earned income tax credits;
    (5) Contributions to, and distributions from, Individual 
Development Accounts;
    (6) Services such as counseling, case management, peer support, 
child care information and referral, transitional services, job 
retention, job advancement, and other employment-related services that 
do not provide basic income support; and
    (7) Transportation benefits provided under a Job Access or Reverse 
Commute project, pursuant to section 404(k) of the Act, to an 
individual who is not otherwise receiving assistance.
    (c) The definition of the term assistance specified in paragraphs 
(a) and (b) of this section:
    (1) Does not apply to the use of the term assistance at part 263, 
subpart A, or at part 264, subpart B, of this chapter; and
    (2) Does not preclude a State from providing other types of 
benefits and services in support of the TANF goal at Sec. 260.20(a).


Sec. 260.32  What does the term ``WtW cash assistance'' mean?

    (a) For the purpose of Sec. 264.1(b)(1)(iii) of this chapter, WtW 
cash assistance only includes benefits that:
    (1) Meet the definition of assistance at Sec. 260.31; and
    (2) Are directed at basic needs.
    (b) Thus, it includes benefits described in paragraphs (a)(1) and 
(a)(2) of Sec. 260.31, but excludes benefits described in paragraph 
(a)(3) of Sec. 260.31.
    (c) It only includes benefits identified in paragraphs (a) and (b) 
of this section when they are provided in the form of cash payments, 
checks, reimbursements, electronic funds transfers, or any other form 
that can legally be converted to currency.


Sec. 260.33  When are expenditures on State or local tax credits 
allowable expenditures for TANF-related purposes?

    (a) To be an allowable expenditure for TANF-related purposes, any 
tax credit program must be reasonably calculated to accomplish one of 
the purposes of the TANF program, as specified at Sec. 260.20.
    (b)(1) In addition, pursuant to the definition of expenditure at 
Sec. 260.30, we

[[Page 17881]]

would only consider the refundable portion of a State or local tax 
credit to be an allowable expenditure.
    (2) Under a State Earned Income Tax Credit (EITC) program, the 
refundable portion that may count as an expenditure is the amount that 
exceeds a family's State income tax liability prior to application of 
the EITC. (The family's tax liability is the amount owed prior to any 
adjustments for credits or payments.) In other words, we would count 
only the portion of a State EITC that the State refunds to a family and 
that is above the amount of EITC used as credit towards the family's 
State income tax liability.
    (3) For other refundable (and allowable) State and local tax 
credits, such as refundable dependent care credits, the refundable 
portion that would count as an expenditure is the amount of the credit 
that exceeds the taxpayer's tax liability prior to the application of 
the credit. (The taxpayer's liability is the amount owed prior to any 
adjustments for credits or payments.) In other words, we would count 
only the portion of the credit that the State refunds to the taxpayer 
and that is above the amount of the credit applied against the 
taxpayer's tax bill.


Sec. 260.35  What other Federal laws apply to TANF?

    (a) Under section 408(d) of the Act, the following provisions of 
law apply to any program or activity funded with Federal TANF funds:
    (1) The Age Discrimination Act of 1975;
    (2) Section 504 of the Rehabilitation Act of 1973;
    (3) The Americans with Disabilities Act of 1990; and
    (4) Title VI of the Civil Rights Act of 1964.
    (b) The limitation on Federal regulatory and enforcement authority 
at section 417 of the Act does not limit the effect of other Federal 
laws, including Federal employment laws (such as the Fair Labor 
Standards Act (FLSA), the Occupational Safety and Health Act (OSHA) and 
unemployment insurance (UI)) and nondiscrimination laws. These laws 
apply to TANF beneficiaries in the same manner as they apply to other 
workers.


Sec. 260.40  When are these provisions in effect?

    (a) In determining whether a State is subject to a penalty under 
parts 261 through 265 of this chapter, we will not apply the regulatory 
provisions in parts 260 through 265 of this chapter retroactively. We 
will judge State actions that occurred prior to the effective date of 
these rules and expenditures of funds received prior to the effective 
date only against a reasonable interpretation of the statutory 
provisions in title IV-A of the Act.
    (b) The effective date of these rules is October 1, 1999.

Subpart B--What Special Provisions Apply to Victims of Domestic 
Violence?


Sec. 260.50  What is the purpose of this subpart?

    Under section 402(a)(7) of the Act, under its TANF plan, a State 
may elect to implement a special program to serve victims of domestic 
violence and to waive program requirements for such individuals. This 
subpart explains how adoption of these provisions affects the penalty 
determinations applicable if a State fails to meet its work 
participation rate or comply with the five-year limit on Federal 
assistance.


Sec. 260.51  What definitions apply to this subpart?

    Family Violence Option (or FVO) means the provision at section 
402(a)(7) of the Act under which a State certifies in its State plan if 
it has elected the option to implement comprehensive strategies for 
identifying and serving victims of domestic violence.
    Federally recognized good cause domestic violence waiver means a 
good cause domestic violence waiver that meets the requirements at 
Secs. 260.52(c) and 260.55.
    Good cause domestic violence waiver means a waiver of one or more 
program requirements granted by a State to a victim of domestic 
violence under the FVO, as described at Sec. 260.52(c).
    Victim of domestic violence means an individual who is battered or 
subject to extreme cruelty under the definition at section 
408(a)(7)(C)(iii) of the Act.


Sec. 260.52  What are the basic provisions of the Family Violence 
Option (FVO)?

    Section 402(a)(7) of the Act provides that States electing the FVO 
certify that they have established and are enforcing standards and 
procedures to:
    (a) Screen and identify individuals receiving TANF and MOE 
assistance with a history of domestic violence, while maintaining the 
confidentiality of such individuals;
    (b) Refer such individuals to counseling and supportive services; 
and
    (c) Provide waivers, pursuant to a determination of good cause, of 
normal program requirements to such individuals for so long as 
necessary in cases where compliance would make it more difficult for 
such individuals to escape domestic violence or unfairly penalize those 
who are or have been victimized by such violence or who are at risk of 
further domestic violence.


Sec. 260.54  Do States have flexibility to grant good cause domestic 
violence waivers?

    (a) Yes; States have broad flexibility to grant these waivers to 
victims of domestic violence. For example, they may determine which 
program requirements to waive and decide how long each waiver might be 
necessary.
    (b) However, if a State wants us to take the waivers that it grants 
into account in deciding if it has reasonable cause for failing to meet 
its work participation rates or comply with the five-year limit on 
Federal assistance, has achieved compliance or made significant 
progress towards achieving compliance with such requirements during a 
corrective compliance period, or qualifies for a reduction in its work 
penalty under Sec. 261.51 of this chapter, the waivers must be 
federally recognized good cause domestic violence waivers, within the 
meaning of Secs. 260.52(c) and 260.55, and the State must submit the 
information specified at Sec. 265.9(b)(5) of this chapter on its 
strategies and procedures for serving victims of domestic violence and 
the number of waivers granted.


Sec. 260.55  What are the additional requirements for Federal 
recognition of good cause domestic violence waivers?

    To be federally recognized, good cause domestic violence waivers 
must:
    (a) Identify the specific program requirements that are being 
waived;
    (b) Be granted appropriately based on need, as determined by an 
individualized assessment by a person trained in domestic violence and 
redeterminations no less often than every six months;
    (c) Be accompanied by an appropriate services plan that:
    (1) Is developed by a person trained in domestic violence;
    (2) Reflects the individualized assessment and any revisions 
indicated by the redetermination; and
    (3) To the extent consistent with Sec. 260.52(c), is designed to 
lead to work.


Sec. 260.58  What penalty relief is available to a State whose failure 
to meet the work participation rates is attributable to providing 
federally recognized good cause domestic violence waivers?

    (a)(1) We will determine that a State has reasonable cause if its 
failure to meet the work participation rates was attributable to 
federally recognized good cause domestic violence waivers granted to 
victims of domestic violence.

[[Page 17882]]

    (2) To receive reasonable cause under the provisions of 
Sec. 262.5(b) of this chapter, the State must provide evidence that it 
achieved the applicable rates, except with respect to any individuals 
who received a federally recognized good cause domestic violence waiver 
of work participation requirements. In other words, it must demonstrate 
that it met the applicable rates when such waiver cases are removed 
from the calculations at Secs. 261.22(b) and 261.24(b) of this chapter.
    (b)(1) We will reduce a State's penalty based on the degree of 
noncompliance to the extent that its failure to meet the work 
participation rates was attributable to federally recognized good cause 
domestic violence waivers.
    (2) To receive a reduction based on degree of noncompliance under 
the provisions of Sec. 261.51 of this chapter, a State granting 
federally recognized good cause domestic violence waivers of work 
participation requirements must demonstrate that it achieved 
participation rates above the threshold at Sec. 261.51(b)(3) of this 
chapter, when such waiver cases are removed from the calculations at 
Secs. 261.22(b) and 261.24(b) of this chapter.
    (c) We may take federally recognized good cause domestic violence 
waivers of work requirements into consideration in deciding whether a 
State has achieved compliance or made significant progress towards 
achieving compliance in meeting the work participation rates during a 
corrective compliance period.
    (d) To receive the penalty relief specified in paragraphs (a), (b), 
and (c) of this section, the State must submit the information 
specified at Sec. 265.9(b)(5) of this chapter.

Section 260.59--What Penalty Relief is Available to a State That Failed 
To Comply With the Five-Year Limit on Federal Assistance Because It 
Provided Federally Recognized Good Cause Domestic Violence Waivers?

    (a)(1) We will determine that a State has reasonable cause if it 
failed to comply with the five-year limit on Federal assistance because 
of federally recognized good cause domestic violence waivers granted to 
victims of domestic violence.
    (2) More specifically, to receive reasonable cause under the 
provisions at Sec. 264.3(b) of this chapter, a State must demonstrate 
that:
    (i) It granted federally recognized good cause domestic violence 
waivers to extend time limits based on the need for continued 
assistance due to current or past domestic violence or the risk of 
further domestic violence; and
    (ii) When individuals and their families are excluded from the 
calculation, the percentage of families receiving federally funded 
assistance for more than 60 months did not exceed 20 percent of the 
total.
    (b) We may take federally recognized good cause domestic violence 
waivers to extend time limits into consideration in deciding whether a 
State has achieved compliance or made significant progress towards 
achieving compliance in meeting the five-year limit on Federal 
assistance during a corrective compliance period.
    (c) To receive the penalty relief specified in paragraphs (a) and 
(b) of this section, the State must submit the information specified at 
Sec. 265.9(b)(5) of this chapter.

Subpart C--What Special Provisions Apply to States that Were 
Operating Programs Under Approved Waivers?


Sec. 260.70  What is the purpose of this subpart?

    (a) Under section 415 of the Act, if a State was granted a waiver 
under section 1115 of the Act and that waiver was in effect on August 
22, 1996, the amendments made by PRWORA do not apply for the period of 
the waiver, to the extent that they are inconsistent with the waiver 
and the State elects to continue its waiver.
    (b) Identification of waiver inconsistencies is relevant for the 
determination of penalties in three areas:
    (1) Under Sec. 261.50 of this chapter for failing to meet the work 
participation rates at part 261 of this chapter;
    (2) Under Sec. 264.2 of this chapter for failing to comply with the 
five-year limit on Federal assistance at subpart A of part 264 of this 
chapter; and
    (3) Under Sec. 261.54 of this chapter for failing to impose 
sanctions on individuals who fail to work.
    (c) This subpart explains how we will determine waiver 
inconsistencies and apply them in the penalty determination process for 
these penalties.


Sec. 260.71  What definitions apply to this subpart?

    (a) Inconsistent means that complying with the TANF work 
participation or sanction requirements at section 407 of the Act or the 
time-limit requirement at section 408(a)(7) of the Act would 
necessitate that a State change a policy reflected in an approved 
waiver.
    (b) Waiver consists of the work participation or time-limit 
component of the State's demonstration project under section 1115 of 
the Act. The component includes the revised AFDC requirements indicated 
in the State's waiver list, as approved by the Secretary under the 
authority of section 1115, and the associated AFDC provisions that did 
not need to be waived.
    (c) Control group and experimental group have the meanings 
specified in the terms and conditions of the State's demonstration.


Sec. 260.72  What basic requirements must State demonstration 
components meet for the purpose of determining if inconsistencies exist 
with respect to work requirements or time limits?

    (a) The policies must be consistent with the requirements of 
section 415 of the Act and the requirements of this subpart.
    (b) The policies must be within the scope of the approved waivers 
both in terms of geographical coverage and the coverage of the types of 
cases specified in the waiver approval package.
    (c) The State must have applied its waiver policies on a continuous 
basis from the date that it implemented its TANF program, except that 
it may have adopted modifications that have the effect of making its 
policies more consistent with the provisions of PRWORA.
    (d) An inconsistency may not apply beyond the earlier of the 
following dates:
    (1) The expiration of waiver authority as determined in accordance 
with the demonstration terms and conditions; or
    (2) For any specific inconsistency, the date upon which the State 
discontinued the applicable waiver policy.
    (e) The State must submit the Governor's certification specified in 
Sec. 260.75.
    (f) In general, the policies in this subpart do not have the effect 
of delaying the date when a State might be subject to the work or time-
limit penalties at Secs. 261.50, 261.54, and 264.1 of this chapter or 
the data collection requirements at part 265 of this chapter.


Sec. 260.73  How do existing welfare reform waivers affect the 
participation rates and work rules?

    (a) If a State is implementing a work participation component under 
a waiver, in accordance with this subpart, the provisions of section 
407 of the Act will not apply in determining if a penalty should be 
imposed, to the extent that the provision is inconsistent with the 
waiver.
    (b) For the purpose of determining if the State's demonstration has 
a work participation component, the waiver list for the demonstration 
must include one or more specific provisions that directly correspond 
to the work policies in section 407 of the Act (i.e., change

[[Page 17883]]

allowable JOBS activities, exemptions from JOBS participation, hours of 
required JOBS participation, or sanctions for noncompliance with JOBS 
participation).
    (c) Corresponding to the inconsistencies certified by the Governor 
under Sec. 260.75:
    (1) We will calculate the State's work participation rates, by:
    (i) Excluding cases exempted from participation under the 
demonstration component and, if applicable, experimental and control 
cases not otherwise exempted, in calculating the rate;
    (ii) Defining work activities as defined in the demonstration 
component in determining the numerator; and
    (iii) Including cases meeting the required number of hours of 
participation in work activities in accordance with demonstration 
component policy, in determining the numerator.
    (2) We will determine whether a State is taking appropriate 
sanctions when an individual refuses to work based on the State's 
certified waiver policies.
    (d) We will use the data submitted by States pursuant to Sec. 265.3 
of this chapter to calculate and make public a State's work 
participation rates under both the TANF requirements and the State's 
alternative waiver requirements.


Sec. 260.74  How do existing welfare reform waivers affect the 
application of the Federal time-limit provisions?

    (a)(1) If a State is implementing a time-limit component under a 
waiver, in accordance with this subpart, the provisions of section 
408(a)(7) of the Act will not apply in determining if a penalty should 
be imposed, to the extent that they are inconsistent with the waiver.
    (2) For the purpose of determining if the State's demonstration has 
a time-limit component, the waiver list for the demonstration must 
include provisions that directly correspond to the time-limit policies 
enumerated in section 408(a)(7) of the Act (i.e., address which 
individuals or families are subject to, or exempt from, terminations of 
assistance based solely on the passage of time or who qualifies for 
extensions to the time limit).
    (b)(1) Generally, under an approved waiver, except as provided in 
paragraph (b)(3) of this section, a State will count, toward the 
Federal five-year limit, all months for which the head-of-household or 
spouse of the head-of-household subject to the State time limit 
receives assistance with Federal TANF funds, just as it would if it did 
not have an approved waiver.
    (2) The State need not count, toward the Federal five-year limit, 
any months for which a head-of-household or spouse of the head-of-
household receives assistance with Federal TANF funds while that 
individual is exempt from the State's time limit under the State's 
approved waiver.
    (3) Where a State has continued a time limit under waivers that 
only terminates assistance for adults, the State need not count, toward 
the Federal five-year limit, any months for which an adult subject to 
the State time limit receives assistance with Federal TANF funds.
    (4) The State may continue to provide assistance with Federal TANF 
funds for more than 60 months, without a numerical limit, to families 
provided extensions to the State time limit, under the provisions of 
the terms and conditions of the approved waiver.
    (c) Corresponding to the inconsistencies certified by the Governor 
under Sec. 260.75, we will calculate the State's time-limit exceptions 
by:
    (1) Excluding, from the determination of the number of months of 
Federal assistance received by a family:
    (i) Any month in which the adult(s) were exempt from the State's 
time limit under the terms of an approved waiver or any months in which 
the children received assistance under a waiver that only terminated 
assistance to adults; and
    (ii) If applicable, experimental and control group cases not 
otherwise exempted; and
    (2) Applying the State's waiver policies with respect to the 
availability of extensions to the time limit.


Sec. 260.75  If a State is claiming a waiver inconsistency for work 
requirements or time limits, what must the Governor certify?

    (a) The Governor of the State must certify in writing to the 
Secretary that:
    (1) The applicable policies have been continually applied in 
operating the TANF program, as described in Sec. 260.72(c);
    (2) The inconsistencies claimed by the State are within the scope 
of the approved waivers, as described in Sec. 260.72(b);
    (b) The certification must identify the specific inconsistencies 
that the State chooses to continue with respect to work and time 
limits.
    (1) If the waiver inconsistency claim includes work provisions, the 
certification must specify the standards that will apply, in lieu of 
the provisions in subparts B and C of part 261 of this chapter, to 
determine:
    (i) The number of two-parent and all-parent cases that are exempt 
from participation, if any, for the purpose of determining the 
denominator of the work participation rate;
    (ii) The number of nonexempt two-parent and all-parent cases that 
are participating in work activities for the purpose of determining the 
numerator of the work participation rate, including standards 
applicable to;
    (A) Countable work activities; and
    (B) Required hours of work for participation for individual 
participants; and
    (iii) The penalty against an individual or family when an 
individual refuses to work.
    (2) If the waiver inconsistency claim includes time-limit 
provisions, the certification must include the standards that will 
apply, in lieu of the provisions in Sec. 264.1 of this chapter, in 
determining:
    (i) Which families are counted toward the Federal time limit; and
    (ii) Whether a family is eligible for an extension of its time 
limit on federally funded assistance.
    (3) If the State is continuing policies for evaluation purposes in 
accordance with Sec. 260.76:
    (i) The certification must specify any special work or time-limit 
standards that apply to the control group and experimental group cases; 
and
    (ii) The State may choose to exclude cases assigned to the 
experimental and control groups, which are not otherwise exempt, for 
the purpose of calculating the work participation rate or determining 
State compliance related to limiting assistance to families including 
adults who have received 60 months of Federal TANF assistance. In doing 
so, the State may effectively exclude all experimental group cases and/
or control group cases, not otherwise exempt, but may not exclude 
individual cases on a selective basis.
    (c) The certification may include a claim of inconsistency with 
respect to hours of required participation in work activities only if 
the State has written evidence that, when implemented, the waiver 
policies established specific requirements related to hours of work for 
nonexempt individuals.
    (d)(1) The Governor's certification must be provided no later than 
October 1, 1999.
    (2) If a State modifies its waiver policies in a way that has a 
substantive effect on the determination of its work sanctions, or the 
calculation of its work participation rates or its time-limit 
exceptions, it must submit an amended certification no later than the 
end of the fiscal quarter in which the modifications take effect.

[[Page 17884]]

Sec. 260.76  What special rules apply to States that are continuing 
evaluations of their waiver demonstrations?

    If a State is continuing research that employs an experimental 
design in order to complete an impact evaluation of a waiver 
demonstration, the experimental and control groups may continue to be 
subject to prior AFDC law, except as modified by the waiver.

PART 261--ENSURING THAT RECIPIENTS WORK

Sec.
261.1  What does this part cover?
261.2  What definitions apply to this part?

Subpart A--What Are the Provisions Addressing Individual 
Responsibility?

261.10  What work requirements must an individual meet?
261.11  Which recipients must have an assessment under TANF?
261.12  What is an individual responsibility plan?
261.13  May an individual be penalized for not following an 
individual responsibility plan?
261.14  What is the penalty if an individual refuses to engage in 
work?
261.15  Can a family be penalized if a parent refuses to work 
because he or she cannot find child care?
261.16  Does the imposition of a penalty affect an individual's work 
requirement?

Subpart B--What Are the Provisions Addressing State Accountability?

261.20  How will we hold a State accountable for achieving the work 
objectives of TANF?
261.21  What overall work rate must a State meet?
261.22  How will we determine a State's overall work rate?
261.23  What two-parent work rate must a State meet?
261.24  How will we determine a State's two-parent work rate?
261.25  Does a State include Tribal families in calculating these 
rates?

Subpart C--What Are the Work Activities and How Do They Count?

261.30  What are the work activities?
261.31  How many hours must an individual participate to count in 
the numerator of the overall rate?
261.32  How many hours must an individual participate to count in 
the numerator of the two-parent rate?
261.33  What are the special requirements concerning educational 
activities in determining monthly participation rates?
261.34  Are there any limitations in counting job search and job 
readiness assistance toward the participation rates?
261.35  Are there any special work provisions for single custodial 
parents?
261.36  Do welfare reform waivers affect the calculation of a 
State's participation rates?

Subpart D--How Will We Determine Caseload Reduction Credit for Minimum 
Participation Rates?

261.40  Is there a way for a State to reduce the work participation 
rates?
261.41  How will we determine the caseload reduction credit?
261.42  Which reductions count in determining the caseload reduction 
credit?
261.43  What is the definition of a ``case receiving assistance'' in 
calculating the caseload reduction credit?
261.44  When must a State report the required data on the caseload 
reduction credit?

Subpart E--What Penalties Apply to States Related to Work Requirements?

261.50  What happens if a State fails to meet the participation 
rates?
261.51  Under what circumstances will we reduce the amount of the 
penalty below the maximum?
261.52  Is there a way to waive the State's penalty for failing to 
achieve either of the participation rates?
261.53  May a State correct the problem before incurring a penalty?
261.54  Is a State subject to any other penalty relating to its work 
program?
261.55  Under what circumstances will we reduce the amount of the 
penalty for not properly imposing penalties on individuals?
261.56  What happens if a parent cannot obtain needed child care?
261.57  What happens if the State sanctions a single parent of a 
child under six who cannot get needed child care?

Subpart F--How Do Welfare Reform Waivers Affect State Penalties?

261.60  How do existing welfare reform waivers affect a State's 
penalty liability under this part?

Subpart G--What Nondisplacement Rules Apply in TANF?

261.70  What safeguards are there to ensure that participants in 
work activities do not displace other workers?

    Authority: 42 U.S.C. 601, 602, 607, and 609.


Sec. 261.1  What does this part cover?

    This part includes the regulatory provisions relating to the 
mandatory work requirements of TANF.


Sec. 261.2  What definitions apply to this part?

    The general TANF definitions at Secs. 260.30 through 260.33 of this 
chapter apply to this part.

Subpart A--What Are the Provisions Addressing Individual 
Responsibility?


Sec. 261.10  What work requirements must an individual meet?

    (a)(1) A parent or caretaker receiving assistance must engage in 
work activities when the State has determined that the individual is 
ready to engage in work or when he or she has received assistance for a 
total of 24 months, whichever is earlier, consistent with section 
407(e)(2) of the Act.
    (2) The State must define what it means to engage in work for this 
requirement; its definition may include participation in work 
activities in accordance with section 407 of the Act.
    (b) If a parent or caretaker has received assistance for two 
months, he or she must participate in community service employment, 
consistent with section 407(e)(2) of the Act, unless the State has 
exempted the individual from work requirements or he or she is already 
engaged in work activities as described at Sec. 261.30. The State will 
determine the minimum hours per week and the tasks the individual must 
perform as part of the community service employment.


Sec. 261.11  Which recipients must have an assessment under TANF?

    (a) The State must make an initial assessment of the skills, prior 
work experience, and employability of each recipient who is at least 
age 18 or who has not completed high school (or equivalent) and is not 
attending secondary school.
    (b) The State may make any required assessments within 30 days (90 
days, at State option) of the date an individual becomes eligible for 
assistance.


Sec. 261.12  What is an individual responsibility plan?

    An individual responsibility plan is a plan developed at State 
option, in consultation with the individual, on the basis of the 
assessment made under Sec. 261.11. The plan:
    (a) Should set an employment goal and a plan for moving immediately 
into private-sector employment;
    (b) Should describe the obligations of the individual. These could 
include going to school, maintaining certain grades, keeping school-
aged children in school, immunizing children, going to classes, or 
doing other things that will help the individual become or remain 
employed in the private sector;
    (c) Should be designed to move the individual into whatever 
private-sector employment he or she is capable of handling as quickly 
as possible and to increase over time the responsibility and the amount 
of work the individual handles;
    (d) Should describe the services the State will provide the 
individual to enable the individual to obtain and keep private sector 
employment, including job counseling services; and
    (e) May require the individual to undergo appropriate substance 
abuse treatment.

[[Page 17885]]

Sec. 261.13  May an individual be penalized for not following an 
individual responsibility plan?

    Yes. If an individual fails without good cause to comply with an 
individual responsibility plan that he or she has signed, the State may 
reduce the amount of assistance otherwise payable to the family, by 
whatever amount it considers appropriate. This penalty is in addition 
to any other penalties under the State's TANF program.


Sec. 261.14  What is the penalty if an individual refuses to engage in 
work?

    (a) If an individual refuses to engage in work required under 
section 407 of the Act, the State must reduce or terminate the amount 
of assistance payable to the family, subject to any good cause or other 
exceptions the State may establish. Such a reduction is governed by the 
provisions of Sec. 261.16.
    (b)(1) The State must, at a minimum, reduce the amount of 
assistance otherwise payable to the family pro rata with respect to any 
period during the month in which the individual refuses to work.
    (2) The State may impose a greater reduction, including terminating 
assistance.
    (c) A State that fails to impose penalties on individuals in 
accordance with the provisions of section 407(e) of the Act may be 
subject to the State penalty specified at Sec. 261.54.


Sec. 261.15  Can a family be penalized if a parent refuses to work 
because he or she cannot find child care?

    (a) No, the State may not reduce or terminate assistance based on 
an individual's refusal to engage in required work if the individual is 
a single custodial parent caring for a child under age six who has a 
demonstrated inability to obtain needed child care, as specified at 
Sec. 261.56.
    (b) A State that fails to comply with the penalty exception at 
section 407(e)(2) of the Act and the requirements at Sec. 261.56 may be 
subject to the State penalty specified at Sec. 261.57.


Sec. 261.16  Does the imposition of a penalty affect an individual's 
work requirement?

    A penalty imposed by a State against the family of an individual by 
reason of the failure of the individual to comply with a requirement 
under TANF shall not be construed to be a reduction in any wage paid to 
the individual.

Subpart B--What Are the Provisions Addressing State Accountability?


Sec. 261.20  How will we hold a State accountable for achieving the 
work objectives of TANF?

    (a) Each State must meet two separate work participation rates, 
one--the two-parent rate--based on how well it succeeds in helping 
adults in two-parent families find work activities described at 
Sec. 261.30, the other--the overall rate--based on how well it succeeds 
in finding those activities for adults in all the families that it 
serves.
    (b) Each State must submit data that allows us to measure its 
success in requiring adults to participate in work activities, as 
specified at Sec. 265.3 of this chapter.
    (c) If the data show that a State met both participation rates in a 
fiscal year, then the percentage of historic State expenditures that it 
must expend under TANF, pursuant to Sec. 263.1 of this chapter, 
decreases from 80 percent to 75 percent for that fiscal year. This is 
also known as the State's TANF ``maintenance-of-effort'' requirement.
    (d) If the data show that a State did not meet either minimum work 
participation rate for a fiscal year, a State could be subject to a 
financial penalty.
    (e) Before we impose a penalty, a State will have the opportunity 
to claim reasonable cause or enter into a corrective compliance plan, 
pursuant to Secs. 262.5 and 262.6 of this chapter.


Sec. 261.21  What overall work rate must a State meet?

    Each State must achieve the following minimum overall participation 
rate:

------------------------------------------------------------------------
                                                              Then the
                                                              minimum
                  If the fiscal year is:                   participation
                                                              rate is:
------------------------------------------------------------------------
1997.....................................................            25
1998.....................................................            30
1999.....................................................            35
2000.....................................................            40
2001.....................................................            45
2002 and thereafter......................................            50
------------------------------------------------------------------------

Sec. 261.22  How will we determine a State's overall work rate?

    (a) The overall participation rate for a fiscal year is the average 
of the State's overall participation rates for each month in the fiscal 
year.
    (b) We determine a State's overall participation rate for a month 
as follows:
    (1) The number of families receiving TANF assistance that include 
an adult or a minor head-of-household who is engaged in work for the 
month (i.e., the numerator), divided by,
    (2) The number of families receiving TANF assistance during the 
month that include an adult or a minor head-of-household, minus the 
number of families that are subject to a penalty for refusing to work 
in that month (i.e., the denominator). However, if a family has been 
sanctioned for more than three of the last 12 months, we will not 
exclude it from the participation rate calculation.
    (3) The State may direct us, through its reported participation 
data, to include in the participation calculation families that have 
been sanctioned for no more than three of the last 12 months.
    (c)(1) A State has the option of not requiring a single custodial 
parent caring for a child under age one to engage in work.
    (2) At State option, we will disregard a family with such a parent 
from the participation rate calculation for a maximum of 12 months.
    (d)(1) If a family receives assistance for only part of a month, we 
will count it as a month of participation if an adult in the family is 
engaged in work for the minimum average number of hours in each full 
week that the family receives assistance in that month.
    (2) If a State pays benefits retroactively (i.e., for the period 
between application and approval of benefits), it has the option to 
consider the family to be receiving assistance during the period of 
retroactivity.


Sec. 261.23  What two-parent work rate must a State meet?

    A State receiving a TANF grant for a fiscal year must achieve the 
following minimum two-parent participation rate:

------------------------------------------------------------------------
                                                              Then the
                                                              minimum
                  If the fiscal year is:                   participation
                                                              rate is:
------------------------------------------------------------------------
1997.....................................................            75
1998.....................................................            75
1999 and thereafter......................................            90
------------------------------------------------------------------------

Sec. 261.24  How will we determine a State's two-parent work rate?

    (a) The two-parent participation rate for a fiscal year is the 
average of the State's two-parent participation rates for each month in 
the fiscal year.
    (b) We determine a State's two-parent participation rate for a 
month as follows:
    (1) The number of two-parent families receiving TANF assistance 
that include an adult or minor child head-of-household and other parent 
who meet the requirements set forth in Sec. 261.32 for the month (i.e., 
the numerator), divided by,

[[Page 17886]]

    (2) The number of two-parent families receiving TANF assistance 
during the month, minus the number of two-parent families that are 
subject to a penalty for refusing to work in that month (i.e., the 
denominator). However, if a family has been sanctioned for more than 
three of the last 12 months, we will not exclude it from the 
participation rate calculation.
    (3) The State may direct us, through its reported participation 
data, to include in the participation calculation families that have 
been sanctioned for no more than three of the last 12 months.
    (c) For purposes of the calculation in paragraph (b) of this 
section, a two-parent family includes, at a minimum, all families with 
two natural or adoptive parents (of the same minor child) receiving 
assistance and living in the home, unless both are minors and neither 
is a head-of-household.
    (d)(1) If a family receives assistance for only part of a month, we 
will count it as a month of participation if an adult in the family (or 
both adults, if they are both required to work) is engaged in work for 
the minimum average number of hours in each full week that the family 
receives assistance in that month.
    (2) If a State pays benefits retroactively (i.e., for the period 
between application and approval of benefits), it has the option to 
consider the family to be receiving assistance during the period of 
retroactivity.
    (e) If a family includes a disabled parent, we will not consider 
the family to be a two-parent family under paragraph (b) of this 
section; i.e., we will not include such a family in either the 
numerator or denominator of the two-parent rate.


Sec. 261.25  Does a State include Tribal families in calculating these 
rates?

    At State option, we will include families that are receiving 
assistance under an approved Tribal family assistance plan or under a 
Tribal work program in calculating the State's participation rates 
under Secs. 261.22 and 261.24.

Subpart C--What Are the Work Activities and How Do They Count?


Sec. 261.30  What are the work activities?

    The work activities are:
    (a) Unsubsidized employment;
    (b) Subsidized private-sector employment;
    (c) Subsidized public-sector employment;
    (d) Work experience if sufficient private-sector employment is not 
available;
    (e) On-the-job training (OJT);
    (f) Job search and job readiness assistance;
    (g) Community service programs;
    (h) Vocational educational training;
    (i) Job skills training directly related to employment;
    (j) Education directly related to employment, in the case of a 
recipient who has not received a high school diploma or a certificate 
of high school equivalency;
    (k) Satisfactory attendance at secondary school or in a course of 
study leading to a certificate of general equivalence, if a recipient 
has not completed secondary school or received such a certificate; and
    (l) Providing child care services to an individual who is 
participating in a community service program.


Sec. 261.31  How many hours must an individual participate to count in 
the numerator of the overall rate?

    (a) An individual counts as engaged in work for a month for the 
overall rate if:
    (1) He or she participates in work activities during the month for 
at least the minimum average number of hours per week listed in the 
following table:

------------------------------------------------------------------------
                                                               Then the
                                                               minimum
                   If the fiscal year is:                      average
                                                              hours per
                                                               week is:
------------------------------------------------------------------------
1997.......................................................           20
1998.......................................................           20
1999.......................................................           25
2000 or thereafter.........................................           30
------------------------------------------------------------------------

and
    (2) At least 20 of the above hours per week come from participation 
in the activities listed in paragraph (b) of this section.
    (b) The following nine activities count toward the first 20 hours 
of participation: unsubsidized employment; subsidized private-sector 
employment; subsidized public-sector employment; work experience; on-
the-job training; job search and job readiness assistance; community 
service programs; vocational educational training; and providing child 
care services to an individual who is participating in a community 
service program.
    (c) Above 20 hours per week, the following three activities may 
also count as participation: job skills training directly related to 
employment; education directly related to employment; and satisfactory 
attendance at secondary school or in a course of study leading to a 
certificate of general equivalence.


Sec. 261.32  How many hours must an individual participate to count in 
the numerator of the two-parent rate?

    (a) Subject to paragraph (d) of this section, an individual counts 
as engaged in work for the month for the two-parent rate if:
    (1) If an individual and the other parent in the family are 
participating in work activities for an average of at least 35 hours 
per week during the month, and
    (2) At least 30 of the 35 hours per week come from participation in 
the activities listed in paragraph (b) of this section.
    (b) The following nine activities count for the first 30 hours of 
participation: unsubsidized employment; subsidized private-sector 
employment; subsidized public-sector employment; work experience; on-
the-job training; job search and job readiness assistance; community 
service programs; vocational educational training; and providing child 
care services to an individual who is participating in a community 
service program.
    (c) Above 30 hours per week, the following three activities may 
also count for participation: job skills training directly related to 
employment; education directly related to employment; and satisfactory 
attendance at secondary school or in a course of study leading to a 
certificate of general equivalence.
    (d)(1) If the family receives federally funded child care 
assistance and an adult in the family is not disabled or caring for a 
severely disabled child, then the individual and the other parent must 
be participating in work activities for an average of at least 55 hours 
per week for the individual to count as a two-parent family engaged in 
work for the month.
    (2) At least 50 of the 55 hours per week must come from 
participation in the activities listed in paragraph (b) of this 
section.
    (3) Above 50 hours per week, the three activities listed in 
paragraph (c) of this section may also count as participation.


Sec. 261.33  What are the special requirements concerning educational 
activities in determining monthly participation rates?

    (a) Vocational educational training may only count for a total of 
12 months for any individual.
    (b)(1) A recipient who is married or a single head-of-household 
under 20 years old counts as engaged in work in a month if he or she:
    (i) Maintains satisfactory attendance at a secondary school or the 
equivalent during the month; or

[[Page 17887]]

    (ii) Participates in education directly related to employment for 
an average of at least 20 hours per week during the month.
    (2)(i) For a married recipient, such participation counts as the 
greater of 20 hours or the actual hours of participation.
    (ii) If both parents in the family are under 20 years old, the 
requirements at Sec. 261.32(d) are met if both meet the conditions of 
paragraphs (b)(1)(i) or (b)(1)(ii) of this section.
    (c) In counting individuals for each participation rate, not more 
than 30 percent of individuals engaged in work in a month may be 
included in the numerator because they are:
    (1) Participating in vocational educational training; and
    (2) In fiscal year 2000 or thereafter, individuals deemed to be 
engaged in work by participating in educational activities described in 
paragraph (b) of this section.


Sec. 261.34  Are there any limitations in counting job search and job 
readiness assistance toward the participation rates?

    Yes. There are four limitations concerning job search and job 
readiness.
    (a) Except as provided in paragraph (b) of this section, an 
individual's participation in job search and job readiness assistance 
counts for a maximum of six weeks in any fiscal year.
    (b) If the State's total unemployment rate is at least 50 percent 
greater than the United States' total unemployment rate or if the State 
meets the definition of a needy State, specified at Sec. 260.30 of this 
chapter, then an individual's participation in job search and job 
readiness assistance counts for a maximum of 12 weeks in that fiscal 
year.
    (c) An individual's participation in job search and job readiness 
assistance does not count for a week that immediately follows four 
consecutive weeks of such participation in a fiscal year.
    (d) Not more than once for any individual in a fiscal year, a State 
may count three or four days of job search and job readiness assistance 
during a week as a full week of participation.


Sec. 261.35  Are there any special work provisions for single custodial 
parents?

    Yes. A single custodial parent or caretaker relative with a child 
under age six will count as engaged in work if he or she participates 
for at least an average of 20 hours per week.


Sec. 261.36  Do welfare reform waivers affect the calculation of a 
State's participation rates?

    A welfare reform waiver could affect the calculation of a State's 
participation rate, pursuant to subpart C of part 260 and section 415 
of the Act.

Subpart D--How Will We Determine Caseload Reduction Credit for 
Minimum Participation Rates?


Sec. 261.40  Is there a way for a State to reduce the work 
participation rates?

    (a)(1) If the average monthly number of cases receiving assistance, 
including assistance under a separate State program (as provided at 
Sec. 261.42(b)), in a State in the preceding fiscal year was lower than 
the average monthly number of cases that received assistance in FY 
1995, the minimum overall participation rate the State must meet for 
the fiscal year (as provided at Sec. 261.21) decreases by the number of 
percentage points the prior-year caseload fell in comparison to the FY 
1995 caseload.
    (2) The minimum two-parent participation rate the State must meet 
for the fiscal year (as provided at Sec. 261.23) decreases, at State 
option, by either:
    (i) The number of percentage points the prior-year two-parent 
caseload, including two-parent cases receiving assistance under a 
separate State program (as provided at Sec. 261.42(b)), fell in 
comparison to the FY 1995 two-parent caseload or;
    (ii) The number of percentage points the prior-year overall 
caseload, including assistance under a separate State program (as 
provided at Sec. 261.42(b)), fell in comparison to the FY 1995 overall 
caseload.
    (b) The calculations in paragraph (a) of this section must 
disregard the net caseload reduction (i.e., caseload decreases offset 
by increases) due either to requirements of Federal law or to changes 
that a State has made in its eligibility criteria in comparison to its 
criteria in effect in FY 1995.
    (c)(1)(i) To establish the caseload base for fiscal year 1995, we 
will use the number of AFDC cases and Unemployed Parent cases reported 
on ACF-3637, Statistical Report on Recipients under Public Assistance.
    (ii) We will automatically adjust the Unemployed Parent caseload 
proportionally upward, based on the percentage of cases with two 
parents in the household, as shown in Quality Control data for the 
period prior to the State's reporting two-parent data under TANF.
    (2) To determine the prior-year caseload for subsequent years, we 
will use caseload information from the TANF Data Report and the SSP-MOE 
Data Report.
    (3) To qualify for a caseload reduction, a State must have reported 
monthly caseload information, including cases in separate State 
programs, for the preceding fiscal year for cases receiving assistance 
as defined at Sec. 261.43.
    (d)(1) A State may correct erroneous data or submit accurate data 
to adjust IV-A program data or to include unduplicated cases. For 
example, a State may submit accurate data for Emergency Assistance 
cases and two-parent cases outside the Unemployed Parent program.
    (2) A State may submit data to adjust the caseload for FY 1999 and 
thereafter to include two-parent or other State program cases covered 
by Federal TANF or State MOE expenditures, but not otherwise reported.
    (3) We will adjust both the FY 1995 baseline and the caseload 
information for subsequent years, as appropriate, based on these State 
submissions.
    (e) We refer to the number of percentage points by which a caseload 
falls, disregarding the cases described in paragraph (b), as a caseload 
reduction credit.


Sec. 261.41  How will we determine the caseload reduction credit?

    (a)(1) We will determine the total and two-parent caseload 
reduction credits that apply to each State based on the information and 
estimates reported to us by the State on eligibility policy changes, 
application denials, and case closures.
    (2) We will accept the information and estimates provided by a 
State, unless they are implausible based on the criteria listed in 
paragraph (d) of this section.
    (3) We may conduct on-site reviews and inspect administrative 
records on applications and terminations to validate the accuracy of 
the State estimates.
    (b) In order to receive a caseload reduction credit, a State must 
submit a Caseload Reduction Report to us containing the following 
information:
    (1) A listing of, and implementation dates for, all State and 
Federal eligibility changes, as defined at Sec. 261.42, made by the 
State since the beginning of FY 1995;
    (2) A numerical estimate of the positive or negative impact on the 
applicable caseload of each eligibility change (based, as appropriate, 
on application denials, case closures or other analyses);
    (3) An overall estimate of the total net positive or negative 
impact on the

[[Page 17888]]

applicable caseload as a result of all such eligibility changes;
    (4) An estimate of the State's caseload reduction credit;
    (5) The number of application denials and case closures for fiscal 
year 1995 and the prior fiscal year;
    (6) The distribution of such denials and case closures, by reason, 
for fiscal year 1995 and the prior fiscal year;
    (7) A description of the methodology and the supporting data that 
it used to calculate its caseload reduction estimates;
    (8) A certification that it has provided the public an appropriate 
opportunity to comment on the estimates and methodology, considered 
their comments, and incorporated all net reductions resulting from 
Federal and State eligibility changes; and
    (9) A summary of all public comments.
    (c) A State requesting a caseload reduction credit for both rates 
must provide separate estimates and information for the two-parent 
credit if it wishes to base the caseload reduction credit for the two-
parent rate on reductions in the two-parent caseload.
    (1) The State must base its estimates of the impact of eligibility 
changes for the overall participation rate on decreases in its overall 
caseload compared to the FY 1995 overall caseload baseline established 
in accordance with Sec. 261.40(d).
    (2) The State must base its estimates of the impact of eligibility 
changes for two-parent cases on decreases in its two-parent caseload 
compared to the FY 1995 two-parent caseload baseline established in 
accordance with Sec. 261.40(d).
    (d)(1) For each State, we will assess the adequacy of information 
and estimates using the following criteria: its methodology; its 
estimates of impact compared to other States; the quality of its data; 
and the completeness and adequacy of its documentation.
    (2) If we request additional information to develop or validate 
estimates, the State may negotiate an appropriate deadline or provide 
the information within 30 days of the date of our request.
    (3) The State must provide sufficient data to document the 
information submitted under paragraph (b) of this section.
    (e) We will not calculate a caseload reduction credit unless the 
State reports case-record data on individuals and families served by 
any separate State program, as required under Sec. 265.3(d) of this 
chapter.
    (f) A State may only apply to its participation rate a caseload 
reduction credit that we have calculated. If a State disagrees with the 
caseload reduction credit, it may appeal the decision as an adverse 
action in accordance with Sec. 262.7 of this chapter.


Sec. 261.42  Which reductions count in determining the caseload 
reduction credit?

    (a)(1) A State's caseload reduction estimate must not include net 
caseload decreases (i.e., caseload decreases offset by increases) due 
to Federal requirements or State changes in eligibility rules since FY 
1995 that directly affect a family's eligibility for assistance. These 
include more stringent income and resource limitations, time limits, 
full family sanctions, and other new requirements that deny families 
assistance when an individual does not comply with work requirements, 
cooperate with child support, or fulfill other behavioral requirements.
    (2) A State may count the reductions attributable to enforcement 
mechanisms or procedural requirements that are used to enforce existing 
eligibility criteria (e.g., fingerprinting or other verification 
techniques) to the extent that such mechanisms or requirements identify 
or deter families otherwise ineligible under existing rules.
    (b) A State must include cases receiving assistance in separate 
State programs as part of its prior-year caseload. However, if a State 
provides documentation that separate State program cases meet the 
following conditions, we will exclude them from the caseload count:
    (1) The cases overlap with, or duplicate, cases in the TANF 
caseload; or
    (2) They are cases made ineligible for Federal benefits by Pub. L. 
104-193 that are receiving only State-funded cash assistance, nutrition 
assistance, or other benefits.


Sec. 261.43  What is the definition of a ``case receiving assistance'' 
in calculating the caseload reduction credit?

    (a)(1) The caseload reduction credit is based on decreases in 
caseloads receiving assistance (other than those excluded pursuant to 
Sec. 261.42) both in a State's TANF program and in separate State 
programs that address basic needs and are used to meet the maintenance-
of-effort requirement.
    (2) A State that is investing State MOE funds in eligible families 
in excess of the required 80 percent or 75 percent basic MOE amount 
need only include the pro rata share of caseloads receiving assistance 
that are required to meet basic MOE requirements.
    (b)(1) Depending on a State's TANF implementation date, for fiscal 
years 1995, 1996 and 1997, we will use adjusted baseline caseload data 
as established in accordance with Sec. 261.40(d).
    (2) For subsequent fiscal years, we will determine the caseload 
based on all cases in a State receiving assistance (according to the 
definition of assistance at Sec. 260.31 of this chapter).


Sec. 261.44  When must a State report the required data on the caseload 
reduction credit?

    (a) A State must report the necessary documentation on caseload 
reductions for the preceding fiscal year by December 31.
    (b) We will notify the State of its caseload reduction credit no 
later than March 31.

Subpart E--What Penalties Apply to States Related to Work 
Requirements?


Sec. 261.50  What happens if a State fails to meet the participation 
rates?

    (a) If we determine that a State did not achieve one of the 
required minimum work participation rates, we must reduce the SFAG 
payable to the State.
    (b)(1) If there was no penalty for the preceding fiscal year, the 
base penalty for the current fiscal year is five percent of the 
adjusted SFAG.
    (2) For each consecutive year that the State is subject to a 
penalty under this part, we will increase the amount of the base 
penalty by two percentage points over the previous year's penalty. 
However, the penalty can never exceed 21 percent of the State's 
adjusted SFAG.
    (c) We impose a penalty by reducing the SFAG payable for the fiscal 
year that immediately follows our final determination that a State is 
subject to a penalty and our final determination of the penalty amount.
    (d) In accordance with the procedures specified at Sec. 262.4 of 
this chapter, a State may dispute our determination that it is subject 
to a penalty.


Sec. 261.51  Under what circumstances will we reduce the amount of the 
penalty below the maximum?

    (a) We will reduce the amount of the penalty based on the degree of 
the State's noncompliance.
    (1) If the State fails only the two-parent participation rate 
specified at Sec. 261.23, reduced by any applicable caseload reduction 
credit, its maximum penalty will be a percentage of the penalty 
specified at Sec. 261.50. This percentage will equal the percentage of 
two-parent cases in the State's total caseload.
    (2) If the State fails the overall participation rate specified at 
Sec. 261.21, reduced by any applicable caseload

[[Page 17889]]

reduction credit, or both rates, its maximum penalty will be the 
penalty specified at Sec. 261.50.
    (b)(1) In order to receive a reduction of the penalty amounts 
determined under paragraphs (a)(1) or (a)(2) of this section:
    (i) The State must achieve participation rates equal to a threshold 
level defined as 50 percent of the applicable minimum participation 
rate at Sec. 261.21 or Sec. 261.23, minus any caseload reduction credit 
determined pursuant to subpart D of this part; and
    (ii) The adjustment factor for changes in the number of individuals 
engaged in work, described in paragraph (b)(4) of this section, must be 
greater than zero.
    (2) If the State meets the requirements of paragraph (b)(1) of this 
section, we will base its reduction on the severity of the failure. For 
this purpose, we will calculate the severity of the State's failure 
based on:
    (i) The degree to which it missed the target rate;
    (ii) An adjustment factor that accounts for changes in the number 
of individuals who are engaged in work in the State since the prior 
year; and
    (iii) The number of consecutive years in which the State failed to 
meet the participation rates and the number of rates missed.
    (3) We will determine the degree to which the State missed the 
target rate using the ratio of the following two factors:
    (i) The difference between the participation rate achieved by the 
State and the 50-percent threshold level (adjusted for any caseload 
reduction credit determined pursuant to subpart D of this part); and
    (ii) The difference between the minimum applicable participation 
rate and the threshold level (both adjusted for any caseload reduction 
credit determined pursuant to subpart D of this part).
    (4) We will calculate the adjustment factor for changes in the 
number of individuals engaged in work using the following formula:
    (i) The average monthly number of individuals engaged in work in 
the penalty year minus the average monthly number of individuals 
engaged in work in the prior year, divided by,
    (ii) The product of 0.15 and the average monthly number of 
individuals engaged in work in the prior year.
    (5) Subject to paragraph (c) of this section, if the State fails 
only the two-parent participation rate specified at Sec. 261.23, and 
qualifies for a penalty reduction under paragraph (b)(1) of this 
section, its penalty reduction will be the product of:
    (i) The amount determined in paragraph (a)(1) of this section;
    (ii) The ratio described in paragraph (b)(3) of this section 
computed with respect to two-parent families; and
    (iii) The adjustment factor described in paragraph (b)(4) of this 
section computed with respect to two-parent families.
    (6) Subject to paragraph (c) of this section, if the State fails 
the overall participation rate specified at Sec. 261.21, or both rates, 
and qualifies for a penalty reduction under paragraph (b)(1) of this 
section, its penalty reduction will be the product of:
    (i) The amount determined in paragraph (a)(2) of this section;
    (ii) The ratio described in paragraph (b)(3) of this section 
computed with respect to all families; and
    (iii) The adjustment factor described in paragraph (b)(4) of this 
section.
    (7) Pursuant to Sec. 260.58 of this chapter, we will adjust the 
calculations in this section to exclude cases for which a State has 
granted federally recognized good cause domestic violence waivers.
    (c)(1) If the State was not subject to a penalty the prior year, 
the State will receive:
    (i) The full applicable penalty reduction described in paragraph 
(b)(5) or (b)(6) of this section if it failed only one participation 
rate; or
    (ii) 50 percent of the penalty reduction described in paragraph 
(b)(6) of this section if it failed both participation rates.
    (2) If the penalty year is the second successive year in which the 
State is subject to a penalty, the State will receive:
    (i) 50 percent of the applicable penalty reduction described in 
paragraph (b)(5) or (b)(6) of this section if it failed only one 
participation rate; or
    (ii) 25 percent of the penalty reduction described in paragraph 
(b)(6) of this section if it failed both participation rates.
    (3) If the penalty year is the third or greater successive year in 
which the State is subject to a penalty, the State will not receive a 
penalty reduction described in paragraph (b)(5) or (b)(6) of this 
section.
    (d)(1) We may reduce the penalty if the State failed to achieve a 
participation rate because:
    (i) It meets the definition of a needy State, specified at 
Sec. 260.30 of this chapter; or,
    (ii) Noncompliance is due to extraordinary circumstances such as a 
natural disaster, regional recession, or substantial caseload increase.
    (2) In determining noncompliance under paragraph (d)(1)(ii) of this 
section, we will consider such objective evidence of extraordinary 
circumstances as the State chooses to submit.


Sec. 261.52  Is there a way to waive the State's penalty for failing to 
achieve either of the participation rates?

    (a) We will not impose a penalty under this part if we determine 
that the State has reasonable cause for its failure.
    (b) In addition to the general reasonable cause criteria specified 
at Sec. 262.5 of this chapter, a State may also submit a request for a 
reasonable cause exemption from the requirement to meet the minimum 
participation rate in two specific case situations.
    (1) We will determine that a State has reasonable cause if it 
demonstrates that failure to meet the work participation rates is 
attributable to its provision of federally recognized good cause 
domestic violence waivers (i.e., it provides evidence that it achieved 
the applicable work rates when individuals receiving federally 
recognized good cause domestic violence waivers of work requirements, 
in accordance with the provisions at Secs. 260.54(b) and 260.55 of this 
chapter, are removed from the calculations in Secs. 261.22(b) and 
261.24(b)).
    (2) We will determine that a State has reasonable cause if it 
demonstrates that its failure to meet the work participation rates is 
attributable to its provision of assistance to refugees in federally 
approved alternative projects under section 412(e)(7) of the 
Immigration and Nationality Act (8 U.S.C. 1522(e)(7)).
    (c) In accordance with the procedures specified at Sec. 262.4 of 
this chapter, a State may dispute our determination that it is subject 
to a penalty.


Sec. 261.53  May a State correct the problem before incurring a 
penalty?

    (a) Yes. A State may enter into a corrective compliance plan to 
remedy a problem that caused its failure to meet a participation rate, 
as specified at Sec. 262.6 of this chapter.
    (b) To qualify for a penalty reduction under Sec. 262.6(j)(1) of 
this chapter, based on significant progress towards correcting a 
violation, a State must reduce the difference between the participation 
rate it achieved in the year for which it is subject to a penalty and 
the rate applicable during the penalty year (adjusted for any caseload 
reduction credit determined pursuant to subpart D of this part) by at 
least 50 percent.


Sec. 261.54  Is a State subject to any other penalty relating to its 
work program?

    (a) If we determine that, during a fiscal year, a State has 
violated section 407(e) of the Act, relating to imposing

[[Page 17890]]

penalties against individuals, we must reduce the SFAG payable to the 
State.
    (b) The penalty amount for a fiscal year will equal between one and 
five percent of the adjusted SFAG.
    (c) We impose a penalty by reducing the SFAG payable for the fiscal 
year that immediately follows our final determination that a State is 
subject to a penalty and our final determination of the penalty amount.


Sec. 261.55  Under what circumstances will we reduce the amount of the 
penalty for not properly imposing penalties on individuals?

    (a) We will reduce the amount of the penalty based on the degree of 
the State's noncompliance.
    (b) In determining the size of any reduction, we will consider 
objective evidence of:
    (1) Whether the State has established a control mechanism to ensure 
that the grants of individuals are appropriately reduced for refusing 
to engage in required work; and
    (2) The percentage of cases for which the grants have not been 
appropriately reduced.


Sec. 261.56  What happens if a parent cannot obtain needed child care?

    (a)(1) If the individual is a single custodial parent caring for a 
child under age six, the State may not reduce or terminate assistance 
based on the parent's refusal to engage in required work if he or she 
demonstrates an inability to obtain needed child care for one or more 
of the following reasons:
    (i) Appropriate child care within a reasonable distance from the 
home or work site is unavailable;
    (ii) Informal child care by a relative or under other arrangements 
is unavailable or unsuitable; or
    (iii) Appropriate and affordable formal child care arrangements are 
unavailable.
    (2) Refusal to work when an acceptable form of child care is 
available is not protected from sanctioning.
    (b)(1) The State will determine when the individual has 
demonstrated that he or she cannot find child care, in accordance with 
criteria established by the State.
    (2) These criteria must:
    (i) Address the procedures that the State uses to determine if the 
parent has a demonstrated inability to obtain needed child care;
    (ii) Include definitions of the terms ``appropriate child care,'' 
reasonable distance,'' ``unsuitability of informal care,'' and 
``affordable child care arrangements''; and
    (iii) Be submitted to us.
    (c) The TANF agency must inform parents about:
    (1) The penalty exception to the TANF work requirement, including 
the criteria and applicable definitions for determining whether an 
individual has demonstrated an inability to obtain needed child care;
    (2) The State's process or procedures (including definitions) for 
determining a family's inability to obtain needed child care, and any 
other requirements or procedures, such as fair hearings, associated 
with this provision; and
    (3) The fact that the exception does not extend the time limit for 
receiving Federal assistance.


Sec. 261.57  What happens if a State sanctions a single parent of a 
child under six who cannot get needed child care?

    (a) If we determine that a State has not complied with the 
requirements of Sec. 261.56, we will reduce the SFAG payable to the 
State by no more than five percent for the immediately succeeding 
fiscal year unless the State demonstrates to our satisfaction that it 
had reasonable cause or it achieves compliance under a corrective 
compliance plan pursuant to Secs. 262.5 and 262.6 of this chapter.
    (b) We will impose the maximum penalty if:
    (1) The State does not have a statewide process in place to inform 
parents about the exception to the work requirement and enable them to 
demonstrate that they have been unable to obtain child care; or
    (2) There is a pattern of substantiated complaints from parents or 
organizations verifying that a State has reduced or terminated 
assistance in violation of this requirement.
    (c) We may impose a reduced penalty if the State demonstrates that 
the violations were isolated or that they affected a minimal number of 
families.

Subpart F--How Do Welfare Reform Waivers Affect State Penalties?


Sec. 261.60  How do existing welfare reform waivers affect a State's 
penalty liability under this part?

    A welfare reform waiver could affect a State's penalty liability 
under this part, subject to subpart C of part 260 of this chapter and 
section 415 of the Act.

Subpart G--What Nondisplacement Rules Apply in TANF?


Sec. 261.70  What safeguards are there to ensure that participants in 
work activities do not displace other workers?

    (a) An adult taking part in a work activity outlined in Sec. 261.30 
may not fill a vacant employment position if:
    (1) Another individual is on layoff from the same or any 
substantially equivalent job; or
    (2) The employer has terminated the employment of any regular 
employee or caused an involuntary reduction in its work force in order 
to fill the vacancy with an adult taking part in a work activity.
    (b) A State must establish and maintain a grievance procedure to 
resolve complaints of alleged violations of the displacement rule in 
this section.
    (c) This section does not preempt or supersede State or local laws 
providing greater protection for employees from displacement.

PART 262--ACCOUNTABILITY PROVISIONS--GENERAL

Sec.
262.0  What definitions apply to this part?
262.1  What penalties apply to States?
262.2  When do the TANF penalty provisions apply?
262.3  How will we determine if a State is subject to a penalty?
262.4  What happens if we determine that a State is subject to a 
penalty?
262.5  Under what general circumstances will we determine that a 
State has reasonable cause?
262.6  What happens if a State does not demonstrate reasonable 
cause?
262.7  How can a State appeal our decision to take a penalty?

    Authority: 31 U.S.C. 7501 et seq.; 42 U.S.C. 606, 609, and 610.


Sec. 262.0  What definitions apply to this part?

    The general TANF definitions at Secs. 260.30 through 260.33 of this 
chapter apply to this part.


Sec. 262.1  What penalties apply to States?

    (a) We will assess fiscal penalties against States under 
circumstances defined in parts 261 through 265 of this chapter. The 
penalties are:
    (1) A penalty of the amount by which a State misused its TANF 
funds;
    (2) An additional penalty of five percent of the adjusted SFAG if 
such misuse was intentional;
    (3) A penalty of four percent of the adjusted SFAG for each quarter 
a State fails to submit an accurate, complete and timely required 
report;
    (4) A penalty of up to 21 percent of the adjusted SFAG for failure 
to satisfy the minimum participation rates;
    (5) A penalty of no more than two percent of the adjusted SFAG for 
failure to participate in IEVS;
    (6) A penalty of no more than five percent of the adjusted SFAG for 
failure to enforce penalties on recipients who are not cooperating with 
the State Child Support Enforcement (IV-D) agency;

[[Page 17891]]

    (7) A penalty equal to the outstanding loan amount, plus interest, 
for failure to repay a Federal loan;
    (8) A penalty equal to the amount by which a State fails to meet 
its basic MOE requirement;
    (9) A penalty of five percent of the adjusted SFAG for failure to 
comply with the five-year limit on Federal assistance;
    (10) A penalty equal to the amount of contingency funds that were 
received but were not remitted for a fiscal year, if the State fails to 
maintain 100 percent of historic State expenditures in that fiscal 
year;
    (11) A penalty of no more than five percent of the adjusted SFAG 
for the failure to maintain assistance to an adult single custodial 
parent who cannot obtain child care for a child under age six;
    (12) A penalty of no more than two percent of the adjusted SFAG 
plus the amount a State has failed to expend of its own funds to 
replace the reduction to its SFAG due to the assessment of penalties in 
this section in the immediately succeeding fiscal year;
    (13) A penalty equal to the amount of the State's Welfare-to-Work 
formula grant for failure to meet its basic MOE requirement during a 
year in which it receives the formula grant; and
    (14) A penalty of not less than one percent and not more than five 
percent of the adjusted SFAG for failure to impose penalties properly 
against individuals who refuse to engage in required work in accordance 
with section 407 of the Act.
    (b) In the event of multiple penalties for a fiscal year, we will 
add all applicable penalty percentages together. We will then assess 
the penalty amount against the adjusted SFAG that would have been 
payable to the State if we had assessed no penalties. As a final step, 
we will subtract other (fixed) penalty amounts from the adjusted SFAG.
    (c)(1) We will take the penalties specified in paragraphs (a)(1), 
(a)(2) and (a)(7) of this section by reducing the SFAG payable for the 
quarter that immediately follows our final decision.
    (2) We will take the penalties specified in paragraphs (a)(3), 
(a)(4), (a)(5), (a)(6), (a)(8), (a)(9), (a)(10), (a)(11), (a)(12), 
(a)(13), and (a)(14) of this section by reducing the SFAG payable for 
the fiscal year that immediately follows our final decision.
    (d) When imposing the penalties in paragraph (a) of this section, 
the total reduction in an affected State's quarterly SFAG amount must 
not exceed 25 percent. If this 25-percent limit prevents the recovery 
of the full penalty amount imposed on a State during a quarter or a 
fiscal year, as appropriate, we will apply the remaining amount of the 
penalty to the SFAG payable for the immediately succeeding quarter 
until we recover the full penalty amount.
    (e)(1) In the immediately succeeding fiscal year, a State must 
expend additional State funds to replace any reduction in the SFAG 
resulting from penalties.
    (2) The State must document compliance with this replacement 
provision on its TANF Financial Report (or Territorial Financial 
Report).


Sec. 262.2  When do the TANF penalty provisions apply?

    (a) A State will be subject to the penalties specified in 
Sec. 262.1(a)(1), (2), (7), (8), (9), (10), (11), (12), (13), and (14) 
for conduct occurring on and after the first day the State operates the 
TANF program.
    (b) A State will be subject to the penalties specified in 
Sec. 262.1(a)(3), (4), (5), and (6) for conduct occurring on and after 
July 1, 1997, or the date that is six months after the first day the 
State operates the TANF program, whichever is later.
    (c) For the time period prior to October 1, 1999, we will assess 
State conduct as specified in Sec. 260.40(b) of this chapter.


Sec. 262.3  How will we determine if a State is subject to a penalty?

    (a)(1) We will use the single audit under OMB Circular A-133, in 
conjunction with other reviews, audits, and data sources, as 
appropriate, to determine if a State is subject to a penalty for 
misusing Federal TANF funds (Sec. 263.10 of this chapter), 
intentionally misusing Federal TANF funds (Sec. 263.12 of this 
chapter), failing to participate in IEVS (Sec. 264.10 of this chapter), 
failing to comply with paternity establishment and child support 
requirements (Sec. 264.31 of this chapter), failing to maintain 
assistance to an adult single custodial parent who cannot obtain child 
care for child under six (Sec. 261.57 of this chapter), and failing to 
reduce assistance to a recipient who refuses without good cause to work 
(Sec. 261.54 of this chapter).
    (2) We will also use the single audit as a secondary method of 
determining if a State is subject to other penalties if an audit 
detects lack of compliance in other penalty areas.
    (b)(1) We will use the TANF Data Report required under part 265 of 
this chapter to determine if a State failed to meet participation rates 
(Secs. 261.21 and 261.23 of this chapter) or failed to comply with the 
five-year limit on Federal assistance (Sec. 264.1 of this chapter).
    (2) Data in these reports are subject to our verification in 
accordance with Sec. 265.7 of this chapter.
    (c)(1) We will use the TANF Financial Report (or, as applicable, 
the Territorial Financial Report) as the primary method for determining 
if a State has failed to meet the basic MOE requirement (Sec. 263.8 of 
this chapter), meet the Contingency Fund MOE requirement (Sec. 264.76 
of this chapter), or replace SFAG reductions with State-only funds 
(Sec. 264.50 of this chapter).
    (2) Data in these reports are subject to our verification in 
accordance with Sec. 265.7 of this chapter.
    (d) We will determine that a State is subject to the specific 
penalties for failure to perform if we find information in the reports 
under paragraphs (b) and (c) of this section to be insufficient to show 
compliance or if we determine that the State has not adequately 
documented actions verifying that it has met the participation rates or 
the time limits.
    (e) To determine if a State has met its MOE requirements, we will 
also use the supplemental information in the annual report required in 
accordance with Sec. 265.9(c) of this chapter.
    (f) States must maintain records in accordance with Sec. 92.42 of 
this title.


Sec. 262.4  What happens if we determine that a State is subject to a 
penalty?

    (a) If we determine that a State is subject to a penalty, we will 
notify the State agency in writing, specifying which penalty we will 
impose and the reasons for the penalty. This notice will:
    (1) Specify the penalty provision at issue, including the penalty 
amount;
    (2) Specify the source of information and the reasons for our 
decision;
    (3) Invite the State to present its arguments if it believes that 
the information or method that we used were in error or were 
insufficient or that its actions, in the absence of Federal 
regulations, were based on a reasonable interpretation of the statute; 
and
    (4) Explain how and when the State may submit a reasonable cause 
justification under Sec. 262.5 and/or corrective compliance plan under 
Sec. 262.6.
    (b) Within 60 days of when it receives our notification, the State 
may submit a written response that:
    (1) Demonstrates that our determination is incorrect because our 
information or the method that we used in determining the violation or 
the amount of the penalty was in error or was insufficient, or that the 
State acted, in the absence of Federal rules, on a reasonable 
interpretation of the statute;

[[Page 17892]]

    (2) Demonstrates that the State had reasonable cause for failing to 
meet the requirement(s); and/or
    (3) Provides a corrective compliance plan, pursuant to Sec. 262.6.
    (c) If we find that we determined the penalty erroneously, or that 
the State has adequately demonstrated that it had reasonable cause for 
failing to meet one or more requirements, we will not impose the 
penalty.
    (d) Reasonable cause and corrective compliance plans are not 
available for failing to repay a Federal loan; meet the basic MOE 
requirement; meet the Contingency Fund MOE requirement; expend 
additional State funds to replace adjusted SFAG reductions due to the 
imposition of one or more penalties listed in Sec. 262.1; or maintain 
80 percent, or 75 percent, as appropriate, basic MOE during a year in 
which the State receives a Welfare-to-Work grant.
    (e)(1) If we request additional information from a State that we 
need to determine reasonable cause, the State must ordinarily provide 
such information within 30 days.
    (2) Under unusual circumstances, we may give the State an extension 
of the time to respond to our request.
    (f)(1)(i) We will notify the State in writing of our findings with 
respect to reasonable cause generally within 60 days of the date when 
we receive its response to our penalty notice (in accordance with 
paragraph (b) of this section).
    (ii) If the finding is negative and the State has not yet submitted 
a corrective compliance plan, it may do so in response to this notice 
in accordance with Sec. 262.6.
    (2) We will notify the State of our decision regarding its 
corrective compliance plan in accordance with the provisions of 
Sec. 262.6(g).
    (g) We will impose a penalty in accord with the provisions in 
Sec. 262.1(c) after we make our final decision and the appellate 
process is completed, if applicable. If there is an appellate decision 
upholding the penalty, we will take the penalty and charge interest 
back to the date that we formally notified the Governor of the adverse 
action pursuant to Sec. 262.7(a)(1).


Sec. 262.5  Under what general circumstances will we determine that a 
State has reasonable cause?

    (a) We will not impose a penalty against a State if we determine 
that the State had reasonable cause for its failure. The general 
factors a State may use to claim reasonable cause include:
    (1) Natural disasters and other calamities (e.g., hurricanes, 
earthquakes, fire) whose disruptive impact was so significant as to 
cause the State's failure;
    (2) Formally issued Federal guidance that provided incorrect 
information resulting in the State's failure; or
    (3) Isolated problems of minimal impact that are not indicative of 
a systemic problem.
    (b)(1) We will grant reasonable cause to a State that:
    (i) Clearly demonstrates that its failure to submit complete, 
accurate, and timely data, as required at Sec. 265.8 of this chapter, 
for one or both of the first two quarters of FY 2000, is attributable, 
in significant part, to its need to divert critical system resources to 
Year 2000 compliance activities; and
    (ii) Submits complete and accurate data for the first two quarters 
of FY 2000 by June 30, 2000.
    (2) A State may also use the additional factors for claiming 
reasonable cause for failure to comply with the five-year limit on 
Federal assistance or the minimum participation rates, as specified at 
Secs. 261.52 and 264.3 and subpart B of part 260 of this chapter.
    (c) In determining reasonable cause, we will consider the efforts 
the State made to meet the requirement, as well as the duration and 
severity of the circumstances that led to the State's failure to 
achieve the requirement.
    (d)(1) The burden of proof rests with the State to fully explain 
the circumstances and events that constitute reasonable cause for its 
failure to meet a requirement.
    (2) The State must provide us with sufficient relevant information 
and documentation to substantiate its claim of reasonable cause.


Sec. 262.6  What happens if a State does not demonstrate reasonable 
cause?

    (a) A State may accept the penalty or enter into a corrective 
compliance plan that will correct or discontinue the violation in order 
to avoid the penalty if:
    (1) A State does not claim reasonable cause; or
    (2) We find that the State does not have reasonable cause.
    (b) A State that does not claim reasonable cause will have 60 days 
from receipt of our notice described in Sec. 262.4(a) to submit its 
corrective compliance plan.
    (c) A State that unsuccessfully claimed reasonable cause will have 
60 days from the date that it received our second notice, described in 
Sec. 262.4(f), to submit its corrective compliance plan.
    (d) The corrective compliance plan must include:
    (1) A complete analysis of why the State did not meet the 
requirements;
    (2) A detailed description of how the State will correct or 
discontinue, as appropriate, the violation in a timely manner;
    (3) The time period in which the violation will be corrected or 
discontinued;
    (4) The milestones, including interim process and outcome goals, 
that the State will achieve to assure it comes into compliance within 
the specified time period; and
    (5) A certification by the Governor that the State is committed to 
correcting or discontinuing the violation, in accordance with the plan.
    (e) The corrective compliance plan must correct or discontinue the 
violation within the following time frames:
    (1) For a penalty under Sec. 262.1(a)(4) or (a)(9), by the end of 
the first fiscal year ending at least six months after our receipt of 
the corrective compliance plan; and
    (2) For the remaining penalties, by a date the State proposes that 
reflects the minimum period necessary to achieve compliance.
    (f) During the 60-day period following our receipt of the State's 
corrective compliance plan, we may request additional information and 
consult with the State on modifications to the plan.
    (g) We will accept or reject the State's corrective compliance 
plan, in writing, within 60 days of our receipt of the plan, although a 
corrective compliance plan is deemed to be accepted if we take no 
action during the 60-day period following our receipt of the plan.
    (h) If a State does not submit an acceptable corrective compliance 
plan on time, we will assess the penalty immediately.
    (i) We will not impose a penalty against a State with respect to 
any violation covered by a corrective compliance plan that we accept if 
the State completely corrects or discontinues, as appropriate, the 
violation within the period covered by the plan.
    (j) Under limited circumstances, we may reduce the penalty if the 
State fails to completely correct or discontinue the violation pursuant 
to its corrective compliance plan and in a timely manner. To receive a 
reduced penalty, the State must demonstrate that it met one or both of 
the following conditions:
    (1) Although it did not achieve full compliance, the State made 
significant progress towards correcting or discontinuing the violation; 
or
    (2) The State's failure to comply fully was attributable to either 
a natural disaster or regional recession.

[[Page 17893]]

Sec. 262.7  How can a State appeal our decision to take a penalty?

    (a)(1) We will formally notify the Governor and the State agency of 
an adverse action (i.e., the reduction in the SFAG) within five days 
after we determine that a State is subject to a penalty under parts 261 
through 265 of this chapter.
    (2) Such notice will include the factual and legal basis for taking 
the penalty in sufficient detail for the State to be able to respond in 
an appeal.
    (b)(1) The State may file an appeal of the action, in whole or in 
part, with the HHS Departmental Appeals Board (the Board) within 60 
days after the date it receives notice of the adverse action. The State 
must submit its brief and supporting documents when it files its 
appeal.
    (2) The State must send a copy of the appeal, and any supplemental 
filings, to the Office of the General Counsel, Children, Families and 
Aging Division, Room 411-D, 200 Independence Avenue, S.W., Washington, 
D.C. 20201.
    (c) We will submit our reply brief and supporting documentation 
within 45 days of the receipt of the State's submission under paragraph 
(b) of this section.
    (d) The State may submit a reply and any supporting documentation 
within 21 days of its receipt of our reply under paragraph (c) of this 
section.
    (e) The appeal to the Board must follow the provisions of the rules 
under this section and those at Secs. 16.2, 16.9, 16.10, and 16.13-
16.22 of this title, to the extent that they are consistent with this 
section.
    (f) The Board will consider an appeal filed by a State on the basis 
of the documentation and briefs submitted, along with any additional 
information the Board may require to support a final decision. Such 
information may include a hearing if the Board determines that it is 
necessary. In deciding whether to uphold an adverse action or any 
portion of such action, the Board will conduct a thorough review of the 
issues.
    (g)(1) A State may obtain judicial review of a final decision by 
the Board by filing an action within 90 days after the date of such 
decision. It should file this action with the district court of the 
United States in the judicial district where the State agency is 
located or in the United States District Court for the District of 
Columbia.
    (2) The district court will review the final decision of the Board 
on the record established in the administrative proceeding, in 
accordance with the standards of review prescribed by 5 U.S.C. 706(2). 
The court will base its review on the documents and supporting data 
submitted to the Board.

PART 263--EXPENDITURES OF STATE AND FEDERAL TANF FUNDS

Sec.
263.0  What definitions apply to this part?

Subpart A--What Rules Apply to a State's Maintenance of Effort?

263.1  How much State money must a State expend annually to meet the 
basic MOE requirement?
263.2  What kinds of State expenditures count toward meeting a 
State's basic MOE expenditure requirement?
263.3  When do child care expenditures count?
263.4  When do educational expenditures count?
263.5  When do expenditures in State-funded programs count?
263.6  What kinds of expenditures do not count?
263.8  What happens if a State fails to meet the basic MOE 
requirement?
263.9  May a State avoid a penalty for failing the basic MOE 
requirement through reasonable cause or through corrective 
compliance?

Subpart B--What Rules Apply to the Use of Federal TANF Funds?

263.10  What actions would we take against a State if it uses 
Federal TANF funds in violation of the Act?
263.11  What uses of Federal TANF funds are improper?
263.12  How will we determine if a State intentionally misused 
Federal TANF funds?
263.13  Is there a limit on the amount of Federal TANF funds that a 
State may spend on administrative costs?

Subpart C--What Rules Apply to Individual Development Accounts?

263.20  What definitions apply to Individual Development Accounts 
(IDAs)?
263.21  May a State use the TANF grant to fund IDAs?
263.22  Are there any restrictions on IDA funds?
263.23  How does a State prevent a recipient from using the IDA 
account for unqualified purposes?

    Authority: 42 U.S.C. 604, 607, 609, and 862a.


Sec. 263.0  What definitions apply to this part?

    (a) Except as noted in Sec. 263.2(d), the general TANF definitions 
at Sec. 260.30 through Sec. 260.33 of this chapter apply to this part.
    (b) The term ``administrative costs'' means costs necessary for the 
proper administration of the TANF program or separate State programs.
    (1) It excludes direct costs of providing program services.
    (i) For example, it excludes costs of providing diversion benefits 
and services, providing program information to clients, screening and 
assessments, development of employability plans, work activities, post-
employment services, work supports, and case management. It also 
excludes costs for contracts devoted entirely to such activities.
    (ii) It excludes the salaries and benefits costs for staff 
providing program services and the direct administrative costs 
associated with providing the services, such as the costs for supplies, 
equipment, travel, postage, utilities, rental of office space and 
maintenance of office space.
    (2) It includes costs for general administration and coordination 
of these programs, including contract costs and all indirect (or 
overhead) costs. Examples of administrative costs include:
    (i) Salaries and benefits of staff performing administrative and 
coordination functions;
    (ii) Activities related to eligibility determinations;
    (iii) Preparation of program plans, budgets, and schedules;
    (iv) Monitoring of programs and projects;
    (v) Fraud and abuse units;
    (vi) Procurement activities;
    (vii) Public relations;
    (viii) Services related to accounting, litigation, audits, 
management of property, payroll, and personnel;
    (ix) Costs for the goods and services required for administration 
of the program such as the costs for supplies, equipment, travel, 
postage, utilities, and rental of office space and maintenance of 
office space, provided that such costs are not excluded as a direct 
administrative cost for providing program services under paragraph 
(b)(1) of this section;
    (x) Travel costs incurred for official business and not excluded as 
a direct administrative cost for providing program services under 
paragraph (b)(1) of this section;
    (xi) Management information systems not related to the tracking and 
monitoring of TANF requirements (e.g., for a personnel and payroll 
system for State staff); and
    (xii) Preparing reports and other documents.

Subpart A--What Rules Applies to a State's Maintenance of Effort?


Sec. 263.1  How much State money must a State expend annually to meet 
the basic MOE requirement?

    (a)(1) The minimum basic MOE for a fiscal year is 80 percent of a 
State's historic State expenditures.
    (2) However, if a State meets the minimum work participation rate

[[Page 17894]]

requirements in a fiscal year, as required under Secs. 261.21 and 
261.23 of this chapter, after adjustment for any caseload reduction 
credit under Sec. 261.41 of this chapter, then the minimum basic MOE 
for that fiscal year is 75 percent of the State's historic State 
expenditures.
    (3) A State that does not meet the minimum participation rate 
requirements in a fiscal year, as required under Secs. 261.21 and 
261.23 of this chapter (after adjustment for any caseload reduction 
credit under Sec. 261.41 of this chapter), but which is granted full or 
partial penalty relief for that fiscal year, must still meet the 
minimum basic MOE specified under paragraph (a)(1) of this section.
    (b) The basic MOE level also depends on whether a Tribe or 
consortium of Tribes residing in a State has received approval to 
operate its own TANF program. The State's basic MOE level for a fiscal 
year will be reduced by the same percentage as we reduced the SFAG as 
the result of any Tribal Family Assistance Grants awarded to Tribal 
grantees in the State for that year.


Sec. 263.2  What kinds of State expenditures count toward meeting a 
State's basic MOE expenditure requirement?

    (a) Expenditures of State funds in TANF or separate State programs 
may count if they are made for the following types of benefits or 
services:
    (1) Cash assistance, including the State's share of the assigned 
child support collection that is distributed to the family, and 
disregarded in determining eligibility for, and amount of the TANF 
assistance payment;
    (2) Child care assistance (see Sec. 263.3);
    (3) Education activities designed to increase self-sufficiency, job 
training, and work (see Sec. 263.4);
    (4) Any other use of funds allowable under section 404(a)(1) of the 
Act (such as nonmedical treatment services for alcohol and drug abuse 
and some medical treatment services, provided that the State has not 
commingled its MOE funds with Federal TANF funds to pay for the 
services), if consistent with the goals at Sec. 260.20 of this chapter; 
and
    (5)(i) Administrative costs for activities listed in paragraphs 
(a)(1) through (a)(4) of this section, not to exceed 15 percent of the 
total amount of countable expenditures for the fiscal year.
    (ii) Costs for information technology and computerization needed 
for tracking or monitoring required by or under part IV-A of the Act do 
not count towards the limit in paragraph (5)(i) of this section, even 
if they fall within the definition of ``administrative costs.''
    (A) This exclusion covers the costs for salaries and benefits of 
staff who develop, maintain, support or operate the portions of 
information technology or computer systems used for tracking and 
monitoring.
    (B) It also covers the costs of contracts for development, 
maintenance, support, or operation of those portions of information 
technology or computer systems used for tracking or monitoring.
    (b) The benefits or services listed under paragraph (a) of this 
section count only if they have been provided to or on behalf of 
eligible families. An ``eligible family,'' as defined by the State, 
must:
    (1) Be comprised of citizens or aliens who:
    (i) Are eligible for TANF assistance;
    (ii) Would be eligible for TANF assistance, but for the time limit 
on the receipt of federally funded assistance; or
    (iii) Would be eligible for TANF assistance, but for the 
application of title IV of PRWORA;
    (2) Include a child living with a custodial parent or other adult 
caretaker relative (or consist of a pregnant individual); and
    (3) Be financially eligible according to the appropriate income and 
resource (when applicable) standards established by the State and 
contained in its TANF plan.
    (c) Benefits or services listed under paragraph (a) of this section 
provided to a family that meets the criteria under paragraphs (b)(1) 
through (b)(3) of this section, but who became ineligible solely due to 
the time limitation given under Sec. 264.1 of this chapter, may also 
count.
    (d) Expenditures for the benefits or services listed under 
paragraph (a) of this section count whether or not the benefit or 
service meets the definition of assistance under Sec. 260.31 of this 
chapter.
    (e)(1) The expenditures for benefits or services in State-funded 
programs listed under paragraph (a) of this section count only if they 
also meet the requirements of Sec. 263.5.
    (2) Expenditures that fall within the prohibitions in Sec. 263.6 do 
not count.


Sec. 263.3  When do child care expenditures count?

    (a) State funds expended to meet the requirements of the CCDF 
Matching Fund (i.e., as match or MOE amounts) may also count as basic 
MOE expenditures up to the State's child care MOE amount that must be 
expended to qualify for CCDF matching funds.
    (b) Child care expenditures that have not been used to meet the 
requirements of the CCDF Matching Fund (i.e., as match or MOE amounts), 
or any other Federal child care program, may also count as basic MOE 
expenditures. The limit described in paragraph (a) of this section does 
not apply.
    (c) The child care expenditures described in paragraphs (a) and (b) 
of this section must be made to, or on behalf of, eligible families, as 
defined in Sec. 263.2(b).


Sec. 263.4  When do educational expenditures count?

    (a) Expenditures for educational activities or services count if:
    (1) They are provided to eligible families (as defined in 
Sec. 263.2(b)) to increase self-sufficiency, job training, and work; 
and
    (2) They are not generally available to other residents of the 
State without cost and without regard to their income.
    (b) Expenditures on behalf of eligible families for educational 
services or activities provided through the public education system do 
not count unless they meet the requirements under paragraph (a) of this 
section.


Sec. 263.5  When do expenditures in State-funded programs count?

    (a) If a current State or local program also operated in FY 1995, 
and expenditures in this program would have been previously authorized 
and allowable under the former AFDC, JOBS, Emergency Assistance, Child 
Care for AFDC recipients, At-Risk Child Care, or Transitional Child 
Care programs, then current fiscal year expenditures in this program 
count in their entirety, provided that the State has met all 
requirements under Sec. 263.2.
    (b) If a current State or local program also operated in FY 1995, 
and expenditures in this program would not have been previously 
authorized and allowable under the former AFDC, JOBS, Emergency 
Assistance, Child Care for AFDC recipients, At-Risk Child Care, or 
Transitional Child Care programs, then countable expenditures are 
limited to the amount by which total current fiscal year expenditures 
that meet the requirements under Sec. 263.2 exceed total State 
expenditures in the program during FY 1995.


Sec. 263.6  What kinds of expenditures do not count?

    The following kinds of expenditures do not count:
    (a) Expenditures of funds that originated with the Federal 
government;
    (b) State expenditures under the Medicaid program under title XIX 
of the Act;
    (c) Expenditures that a State makes as a condition of receiving 
Federal funds under another program, except as provided under 
Sec. 263.3;

[[Page 17895]]

    (d) Expenditures that a State made in a prior fiscal year;
    (e) Expenditures that a State uses to match Federal Welfare-to-Work 
funds provided under section 403(a)(5) of the Act; and
    (f) Expenditures that a State makes in the TANF program to replace 
the reductions in the SFAG as a result of penalties, pursuant to 
Sec. 264.50 of this chapter.


Sec. 263.8  What happens if a State fails to meet the basic MOE 
requirement?

    (a) If any State fails to meet its basic MOE requirement for any 
fiscal year, then we will reduce dollar-for-dollar the amount of the 
SFAG payable to the State for the following fiscal year.
    (b) If a State fails to meet its basic MOE requirement for any 
fiscal year, and the State received a WtW formula grant under section 
403(a)(5)(A) of the Act for the same fiscal year, we will also reduce 
the amount of the SFAG payable to the State for the following fiscal 
year by the amount of the WtW formula grant paid to the State.


Sec. 263.9  May a State avoid a penalty for failing to meet the basic 
MOE requirement through reasonable cause or corrective compliance?

    No. The reasonable cause and corrective compliance provisions at 
Secs. 262.4, 262.5, and 262.6 of this chapter do not apply to the 
penalties in Sec. 263.8.

Subpart B--What Rules Apply to the Use of Federal TANF Funds?


Sec. 263.10  What actions would we take against a State if it uses 
Federal TANF funds in violation of the Act?

    (a) If a State misuses its Federal TANF funds, we will reduce the 
SFAG payable for the immediately succeeding fiscal year quarter by the 
amount misused.
    (b) If the State fails to demonstrate that the misuse was not 
intentional, we will further reduce the SFAG payable for the 
immediately succeeding fiscal year quarter in an amount equal to five 
percent of the adjusted SFAG.
    (c) The reasonable cause and corrective compliance provisions of 
Secs. 262.4 through 262.6 of this chapter apply to the penalties 
specified in paragraphs (a) and (b) of this section.


Sec. 263.11  What uses of Federal TANF funds are improper?

    (a) States may use Federal TANF funds for expenditures:
    (1) That are reasonably calculated to accomplish the purposes of 
TANF, as specified at Sec. 260.20 of this chapter; or
    (2) For which the State was authorized to use IV-A or IV-F funds 
under prior law, as in effect on September 30, 1995 (or, at the option 
of the State, August 21, 1996).
    (b) We will consider use of funds in violation of paragraph (a) of 
this section, sections 404 and 408 and other provisions of the Act, 
section 115(a)(1) of PRWORA, the provisions of part 92 of this title, 
or OMB Circular A-87 to be misuse of funds.


Sec. 263.12  How will we determine if a State intentionally misused 
Federal TANF funds?

    (a) The State must show, to our satisfaction, that it used these 
funds for purposes that a reasonable person would consider to be within 
the purposes of the TANF program (as specified at Sec. 260.20 of this 
chapter) and consistent with the provisions listed in Sec. 263.11.
    (b) We may determine that a State misused funds intentionally if 
there is supporting documentation, such as Federal guidance or policy 
instructions, precluding the use of Federal TANF funds for such 
purpose.
    (c) We may also determine that a State intentionally misused funds 
if the State continues to use the funds in the same or similarly 
improper manner after receiving notification that we had determined 
such use to be improper.


Sec. 263.13  Is there a limit on the amount of Federal TANF funds that 
a State may spend on administrative costs?

    (a)(i) Yes, a State may not spend more than 15 percent of the 
amount that it receives as its adjusted SFAG, or under other provisions 
of section 403 of the Act, on ``administrative costs,'' as defined at 
Sec. 263.0(b).
    (ii) Any violation of the limitation in paragraph (a)(i) of this 
section will constitute a misuse of funds under Sec. 263.11(b).
    (b) Expenditures on the information technology and computerization 
needed for tracking and monitoring required by or under part IV-A of 
the Act do not count towards the limit specified in paragraph (a) of 
this section.
    (1) This exclusion covers the costs for salaries and benefits of 
staff who develop, maintain, support or operate the portions of 
information technology or computer systems used for tracking and 
monitoring.
    (2) It also covers the costs of contracts for development, 
maintenance. support, or operation of those portions of information 
technology or computer systems used for tracking or monitoring.

Subpart C--What Rules Apply to Individual Development Accounts?


Sec. 263.20  What definitions apply to Individual Development Accounts 
(IDAs)?

    The following definitions apply with respect to IDAs:
    Date of acquisition means the date on which a binding contract to 
obtain, construct, or reconstruct the new principal residence is 
entered into.
    Eligible educational institution means an institution described in 
section 481(a)(1) or section 1201(a) of the Higher Education Act of 
1965 (20 U.S.C. 1088(a)(1) or 1141(a)), as such sections were in effect 
on August 21, 1996. Also, an area vocational education school (as 
defined in subparagraph (C) or (D) of section 521(4) of the Carl D. 
Perkins Vocational and Applied Technology Education Act (20 U.S.C. 
2471(4)) that is in any State (as defined in section 521(33) of such 
Act), as such sections were in effect on August 21, 1996.
    Individual Development Account (IDA) means an account established 
by, or for, an individual who is eligible for assistance under the TANF 
program, to allow the individual to accumulate funds for specific 
purposes. Notwithstanding any other provision of law (other than the 
Internal Revenue Code of 1986), the funds in an IDA account must be 
disregarded in determining eligibility for, or the amount of, 
assistance in any Federal means-tested programs.
    Post-secondary educational expenses means a student's tuition and 
fees required for the enrollment or attendance at an eligible 
educational institution, and required course fees, books, supplies, and 
equipment required at an eligible educational institution.
    Qualified acquisition costs means the cost of obtaining, 
constructing, or reconstructing a residence. The term includes any 
usual or reasonable settlement, financing, or other closing costs.
    Qualified business means any business that does not contravene 
State law or public policy.
    Qualified business capitalization expenses means business expenses 
pursuant to a qualified plan.
    Qualified entity means a nonprofit, tax-exempt organization, or a 
State or local government agency that works cooperatively with a 
nonprofit, tax-exempt organization.
    Qualified expenditures means expenses entailed in a qualified plan, 
including capital, plant equipment, working capital, and inventory 
expenses.

[[Page 17896]]

    Qualified first-time home buyer means a taxpayer (and, if married, 
the taxpayer's spouse) who has not owned a principal residence during 
the three-year period ending on the date of acquisition of the new 
principal residence.
    Qualified plan means a business plan that is approved by a 
financial institution, or by a nonprofit loan fund having demonstrated 
fiduciary integrity. It includes a description of services or goods to 
be sold, a marketing plan, and projected financial statements, and it 
may require the eligible recipient to obtain the assistance of an 
experienced entrepreneurial advisor.
    Qualified principal residence means the place a qualified first-
time home buyer will reside in accordance with the meaning of section 
1034 of the Internal Revenue Code of 1986 (26 U.S.C. 1034). The 
qualified acquisition cost of the residence cannot exceed the average 
purchase price of similar residences in the area.


Sec. 263.21  May a State use the TANF grant to fund IDAs?

    If the State elects to operate an IDA program, then the States may 
use Federal TANF funds or WtW funds to fund IDAs for individuals who 
are eligible for TANF assistance and exercise flexibility within the 
limits of Federal regulations and the statute.


Sec. 263.22  Are there any restrictions on IDA funds?

    The following restrictions apply to IDA funds:
    (a) A recipient may deposit only earned income into an IDA.
    (b) A recipient's contributions to an IDA may be matched by, or 
through, a qualified entity.
    (c) A recipient may withdraw funds only for the following reasons:
    (1) To cover post-secondary education expenses, if the amount is 
paid directly to an eligible educational institution;
    (2) For the recipient to purchase a first home, if the amount is 
paid directly to the person to whom the amounts are due and it is a 
qualified acquisition cost for a qualified principal residence by a 
qualified first-time home buyer; or
    (3) For business capitalization, if the amounts are paid directly 
to a business capitalization account in a federally insured financial 
institution and used for a qualified business capitalization expense.


Sec. 263.23  How does a State prevent a recipient from using the IDA 
account for unqualified purposes?

    To prevent recipients from using the IDA account improperly, States 
may do the following:
    (a) Count withdrawals as earned income in the month of withdrawal 
(unless already counted as income);
    (b) Count withdrawals as resources in determining eligibility; or
    (c) Take such other steps as the State has established in its State 
plan or written State policies to deter inappropriate use.

PART 264--OTHER ACCOUNTABILITY PROVISIONS

Sec.
264.0  What definitions apply to this part?

Subpart A--What Specific Rules Apply for Other Program Penalties?

264.1  What restrictions apply to the length of time Federal TANF 
assistance may be provided?
264.2  What happens if a State does not comply with the five-year 
limit?
264.3  How can a State avoid a penalty for failure to comply with 
the five-year limit?
264.10  Must States do computer matching of data records under IEVS 
to verify recipient information?
264.11  How much is the penalty for not participating in IEVS?
264.30  What procedures exist to ensure cooperation with the child 
support enforcement requirements?
264.31  What happens if a State does not comply with the IV-D 
sanction requirement?
264.40  What happens if a State does not repay a Federal loan?
264.50  What happens if, in a fiscal year, a State does not expend, 
with its own funds, an amount equal to the reduction to the adjusted 
SFAG resulting from a penalty?

Subpart B--What are the Requirements for the Contingency Fund?

264.70  What makes a State eligible to receive a provisional payment 
of contingency funds?
264.71  What determines the amount of the provisional payment of 
contingency funds that will be made to a State?
264.72  What requirements are imposed on a State if it receives 
contingency funds?
264.73  What is an annual reconciliation?
264.74  How will we determine the Contingency Fund MOE level for the 
annual reconciliation?
264.75  For the annual reconciliation, what are qualifying State 
expenditures?
264.76  What action will we take if a State fails to remit funds 
after failing to meet its required Contingency Fund MOE level?
264.77  How will we determine if a State met its Contingency Fund 
expenditure requirements?

Subpart C--What Rules Pertain Specifically to the Spending Levels of 
the Territories?

264.80  If a Territory receives Matching Grant funds, what funds 
must it expend?
264.81  What expenditures qualify for Territories to meet the 
Matching Grant MOE requirement?
264.82  What expenditures qualify for meeting the Matching Grant FAG 
amount requirement?
264.83  How will we know if a Territory failed to meet the Matching 
Grant funding requirements at Sec. 264.80?
264.84  What will we do if a Territory fails to meet the Matching 
Grant funding requirements at Sec. 264.80?
264.85  What rights of appeal are available to the Territories?

    Authority: 31 U.S.C. 7501 et seq.; 42 U.S.C. 609, 654, 1302, 
1308, and 1337.


Sec. 264.0  What definitions apply to this part?

    (a) The general TANF definitions at Secs. 260.30 through 260.33 of 
this chapter apply to this part.
    (b) The following definitions also apply to this part:
    Countable State Expenditures means the amount of qualifying State 
expenditures, as defined in Sec. 264.75, plus the amount of contingency 
funds expended by the State in the fiscal year.
    FAG means the Family Assistance Grant granted to a Territory 
pursuant to section 403(a)(1) of the Act. It is thus the Territorial 
equivalent of the SFAG, as defined at Sec. 260.30 of this chapter.
    Food Stamp Trigger means a State's monthly average of individuals 
participating in the Food Stamp program (as of the last day of the 
month) for the most recent three-month period that exceeds its monthly 
average of individuals in the corresponding three-month period in the 
Food Stamp caseload for FY 1994 or FY 1995, whichever is less, by at 
least ten percent, assuming that the immigrant provisions of title IV 
and the Food Stamp provisions under title VII of PRWORA had been in 
effect in those years.
    Unemployment Trigger means a State's average unemployment rate for 
the most recent three-month period of at least 6.5 percent and equal to 
at least 110 percent of the State's unemployment rate for the 
corresponding three-month period in either of the two preceding 
calendar years.

Subpart A--What Specific Rules Apply for Other Program Penalties?


Sec. 264.1  What restrictions apply to the length of time Federal TANF 
assistance may be provided?

    (a)(1) Subject to the exceptions in this section, no State may use 
any of its Federal TANF funds to provide assistance (as defined in 
Sec. 260.31 of this chapter) to a family that includes an adult head-
of-household or a spouse of the head-of-household who has received 
Federal assistance for a total of five years (i.e., 60 cumulative 
months, whether or not consecutive).

[[Page 17897]]

    (2) The provision in paragraph (a)(1) of this section also applies 
to a family that includes a pregnant minor head-of-household, minor 
parent head-of-household, or spouse of such a head-of-household who has 
received Federal assistance for a total of five years.
    (3) Notwithstanding the provisions of paragraphs (a)(1) and (a)(2) 
of this section, a State may provide assistance under WtW, pursuant to 
section 403(a)(5) of the Act, to a family that is ineligible for TANF 
solely because it has reached the five-year time limit.
    (b)(1) States must not count toward the five-year limit:
    (i) Any month of receipt of assistance by an individual who is not 
the head-of-household or married to the head-of-household;
    (ii) Any month of receipt of assistance by an adult while living in 
Indian country (as defined in section 1151 of title 18, United States 
Code) or a Native Alaskan Village where at least 50 percent of the 
adults were not employed; and
    (iii) Any month for which an individual receives only noncash 
assistance provided under WtW, pursuant to section 403(a)(5) of the 
Act.
    (2) Only months of assistance that are paid for with Federal TANF 
funds (in whole or in part) count towards the five-year time limit.
    (c) States have the option to extend assistance paid for by Federal 
TANF funds beyond the five-year limit for up to 20 percent of the 
average monthly number of families receiving assistance during the 
fiscal year or the immediately preceding fiscal year, whichever the 
State elects. States are permitted to extend assistance to families 
only on the basis of:
    (1) Hardship, as defined by the State; or
    (2) The fact that the family includes someone who has been 
battered, or subject to extreme cruelty based on the fact that the 
individual has been subjected to:
    (i) Physical acts that resulted in, or threatened to result in, 
physical injury to the individual;
    (ii) Sexual abuse;
    (iii) Sexual activity involving a dependent child;
    (iv) Being forced as the caretaker relative of a dependent child to 
engage in nonconsensual sexual acts or activities;
    (v) Threats of, or attempts at, physical or sexual abuse;
    (vi) Mental abuse; or
    (vii) Neglect or deprivation of medical care.
    (d) If a State opts to extend assistance to part of its caseload as 
permitted under paragraph (c) of this section, it would grant such an 
extension to a specific family once a head-of-household or spouse of a 
head-of-household in the family has received 60 cumulative months of 
assistance.
    (e) To determine whether a State has failed to comply with the 
five-year limit on Federal assistance established in paragraph (c) of 
this section for a fiscal year, we would divide the average monthly 
number of families with a head-of-household or a spouse of a head-of-
household who has received assistance for more than 60 cumulative 
months by the average monthly number of all families that received 
assistance during that fiscal year or during the immediately preceding 
fiscal year.
    (f) If the five-year limit is inconsistent with a State's waiver 
granted under section 1115 of the Act, we will determine State 
compliance with the Federal time limit in accordance with the 
provisions of subpart C of part 260.


Sec. 264.2  What happens if a State does not comply with the five-year 
limit?

    If we determine that a State has not complied with the requirements 
of Sec. 264.1, we will reduce the SFAG payable to the State for the 
immediately succeeding fiscal year by five percent of the adjusted SFAG 
unless the State demonstrates to our satisfaction that it had 
reasonable cause, or it corrects or discontinues the violation under an 
approved corrective compliance plan.


Sec. 264.3  How can a State avoid a penalty for failure to comply with 
the five-year limit?

    (a) We will not impose the penalty if the State demonstrates to our 
satisfaction that it had reasonable cause for failing to comply with 
the five-year limit on Federal assistance or it achieves compliance 
under a corrective compliance plan, pursuant to Secs. 262.5 and 262.6 
of this chapter.
    (b) In addition, we will determine a State has reasonable cause if 
it demonstrates that it failed to comply with the five-year limit on 
Federal assistance of federally recognized good cause domestic violence 
waivers provided to victims of domestic violence in accordance with the 
provisions of subpart B of part 260.


Sec. 264.10  Must States do computer matching of data records under 
IEVS to verify recipient information?

    (a) Pursuant to section 1137 of the Act and subject to paragraph 
(a)(2) of that section, States must meet the requirements of IEVS and 
request the following information from the Internal Revenue Service 
(IRS), the State Wage Information Collections Agency (SWICA), the 
Social Security Administration (SSA), and the Immigration and 
Naturalization Service (INS):
    (1) IRS unearned income;
    (2) SWICA employer quarterly reports of income and unemployment 
insurance benefit payments;
    (3) IRS earned income maintained by SSA; and
    (4) Immigration status information maintained by the INS.
    (b) The requirements at Secs. 205.51 through 205.62 of this chapter 
also apply to the TANF IEVS requirement.


Sec. 264.11  How much is the penalty for not participating in IEVS?

    If we determine that the State has not complied with the 
requirements of Sec. 264.10, we will reduce the SFAG payable for the 
immediately succeeding fiscal year by two percent of the adjusted SFAG 
unless the State demonstrates to our satisfaction that it had 
reasonable cause or achieved compliance under a corrective compliance 
plan pursuant to Secs. 262.5 and 262.6 of this chapter.


Sec. 264.30  What procedures exist to ensure cooperation with the child 
support enforcement requirements?

    (a)(1) The State agency must refer all appropriate individuals in 
the family of a child, for whom paternity has not been established or 
for whom a child support order needs to be established, modified or 
enforced, to the child support enforcement agency (i.e., the IV-D 
agency).
    (2) Referred individuals must cooperate in establishing paternity 
and in establishing, modifying, or enforcing a support order with 
respect to the child.
    (b) If the IV-D agency determines that an individual is not 
cooperating, and the individual does not qualify for a good cause or 
other exception established by the State agency responsible for making 
good cause determinations in accordance with section 454(29) of the Act 
or for a good cause domestic violence waiver granted in accordance with 
Sec. 260.52 of this chapter, then the IV-D agency must notify the IV-A 
agency promptly.
    (c) The IV-A agency must then take appropriate action by:
    (1) Deducting from the assistance that would otherwise be provided 
to the family of the individual an amount equal to not less than 25 
percent of the amount of such assistance; or
    (2) Denying the family any assistance under the program.

[[Page 17898]]

Sec. 264.31  What happens if a State does not comply with the IV-D 
sanction requirement?

    (a)(1) If we find that, for a fiscal year, the State IV-A agency 
did not enforce the penalties against recipients required under 
Sec. 264.30(c), we will reduce the SFAG payable for the next fiscal 
year by one percent of the adjusted SFAG.
    (2) Upon a finding for a second fiscal year, we will reduce the 
SFAG by two percent of the adjusted SFAG for the following year.
    (3) A third or subsequent finding will result in the maximum 
penalty of five percent.
    (b) We will not impose a penalty if:
    (1) The State demonstrates to our satisfaction that it had 
reasonable cause pursuant to Sec. 262.5 of this chapter; or
    (2) The State achieves compliance under a corrective compliance 
plan pursuant to Sec. 262.6 of this chapter.


Sec. 264.40  What happens if a State does not repay a Federal loan?

    (a) If a State fails to repay the amount of principal and interest 
due at any point under a loan agreement developed pursuant to section 
406 of the Act:
    (1) The entire outstanding loan balance, plus all accumulated 
interest, becomes due and payable immediately; and
    (2) We will reduce the SFAG payable for the immediately succeeding 
fiscal year quarter by the outstanding loan amount plus interest.
    (b) Neither the reasonable cause provisions at Sec. 262.5 of this 
chapter nor the corrective compliance plan provisions at Sec. 262.6 of 
this chapter apply when a State fails to repay a Federal loan.


Sec. 264.50  What happens if, in a fiscal year, a State does not 
expend, with its own funds, an amount equal to the reduction to the 
adjusted SFAG resulting from a penalty?

    (a)(1) When we withhold Federal TANF funds from a State during a 
fiscal year because of other penalty actions listed at Sec. 262.1 of 
this chapter, the State must replace these Federal TANF funds with 
State funds during the subsequent fiscal year.
    (2) If the State fails to replace funds during the subsequent year, 
then we will assess an additional penalty of no more than two percent 
of the adjusted SFAG during the year that follows the subsequent year.
    (b) A State must expend such replacement funds under its TANF 
program, not under ``separate State programs.''
    (c) We will assess a penalty of no more than two percent of the 
adjusted SFAG plus the amount equal to the difference between the 
amount the State was required to expend and the amount it actually 
expended in the fiscal year.
    (1) We will assess the maximum penalty amount if the State made no 
additional expenditures to compensate for the reductions to its 
adjusted SFAG resulting from penalties.
    (2) We will reduce the percentage portion of the penalty if the 
State has expended some of the amount required. In such case, we will 
calculate the applicable percentage portion of the penalty by 
multiplying the percentage of the required expenditures that the State 
failed to make in the fiscal year by two percent.
    (d) The reasonable cause and corrective compliance plan provisions 
at Secs. 262.5 and 262.6 of this chapter do not apply to this penalty.

Subpart B--What Are the Requirements for the Contingency Fund?


Sec. 264.70  What makes a State eligible to receive a provisional 
payment of contingency funds?

    (a) In order to receive a provisional payment of contingency funds, 
a State must:
    (1) Be a needy State, as defined in Sec. 260.30 of this chapter; 
and
    (2) Submit to ACF a request for contingency funds for an eligible 
month (i.e., a month in which a State is a needy State).
    (b) A determination that a State is a needy State for a month makes 
that State eligible to receive a provisional payment of contingency 
funds for two consecutive months.
    (c) Only the 50 States and the District of Columbia may receive 
contingency funds. Territories and Tribal TANF grantees are not 
eligible.


Sec. 264.71  What determines the amount of the provisional payment of 
contingency funds that will be made to a State?

    We will make a provisional payment to a State that meets the 
requirements of Sec. 264.70, within the following limits:
    (a) The amount that we will pay to a State in a fiscal year will 
not exceed an amount equal to \1/12\ times 20 percent of that State's 
SFAG for that fiscal year, multiplied by the number of eligible months 
for which the State has requested contingency funds;
    (b) The total amount that we will pay to all States during a fiscal 
year will not exceed the amount appropriated for this purpose; and
    (c) We will pay contingency funds to States in the order in which 
we receive requests for such payments.


Sec. 264.72  What requirements are imposed on a State if it receives 
contingency funds?

    (a)(1) A State must meet a Contingency Fund MOE level of 100 
percent of historic State expenditures for FY 1994.
    (2) A State must exceed the Contingency Fund MOE level to keep any 
of the contingency funds that it received. It may be able to retain a 
portion of the amount of contingency funds that match countable State 
expenditures, as defined in Sec. 264.0, that are in excess of the 
State's Contingency Fund MOE level, after the overall adjustment 
required by section 403(b)(6)(C) of the Act.
    (b) A State must complete an annual reconciliation, in accordance 
with Sec. 264.73, in order to determine how much, if any, of the 
contingency funds that it received in a fiscal year it may retain.
    (c) If required to remit funds under the annual reconciliation, a 
State must remit all (or a portion) of the funds paid to it for a 
fiscal year within one year after it has failed to meet either the Food 
Stamp trigger or the Unemployment trigger, as defined in Sec. 264.0, 
for three consecutive months.
    (d) A State must expend contingency funds in the fiscal year in 
which they are awarded.
    (e) A State may not transfer contingency funds to the Discretionary 
Fund of the CCDF or the SSBG.
    (f) A State must follow the restrictions and prohibitions in effect 
for Federal TANF funds, including the provisions of Sec. 263.11 of this 
chapter, in its use of contingency funds.


Sec. 264.73  What is an annual reconciliation?

    (a) The annual reconciliation involves the calculation, for a 
fiscal year, of:
    (1) The amount of a State's qualifying expenditures;
    (2) The amount by which a State's countable State expenditures, as 
defined in Sec. 264.0, exceed the State's required Contingency Fund MOE 
level; and
    (3) The amount of contingency funds that the State may retain or 
must remit.
    (b) If a State exceeded its required Contingency Fund MOE level, it 
may be able to retain some or all of the contingency funds that it 
received.
    (c) A State determines the amount of contingency funds that it may 
retain by performing the following calculations:
    (1) From the lesser of the following two amounts:
    (i) The amount of contingency funds paid to it during the fiscal 
year; or
    (ii) Its countable State expenditures, as defined in Sec. 264.0, 
minus its required Contingency Fund MOE level, multiplied by:

[[Page 17899]]

    (A) The State's Federal Medical Assistance Percentage (FMAP) 
applicable for the fiscal year for which funds were awarded; and
    (B) \1/12\ times the number of months during the fiscal year for 
which the State received contingency funds.
    (2) Subtract the State's proportionate remittance (as reported to 
the State by ACF) for the overall adjustment of the Contingency Fund 
for that fiscal year required by section 403(b)(6)(C) of the Act.


Sec. 264.74  How will we determine the Contingency Fund MOE level for 
the annual reconciliation?

    (a)(1) The Contingency Fund MOE level includes the State's share of 
expenditures for AFDC benefit payments, administration, and FAMIS; EA; 
and the JOBS program for FY 1994.
    (2) We will use the same data sources and date, i.e., April 28, 
1995, that we used to determine the basic MOE levels for FY 1994. We 
will exclude the State's share of expenditures from the former IV-A 
child care programs (AFDC/JOBS, Transitional and At-Risk child care) in 
the calculation.
    (b) We will reduce a State's Contingency Fund MOE level by the same 
percentage that we reduce the basic MOE level for any fiscal year in 
which we reduce the State's annual SFAG allocation to provide funding 
to Tribal grantees operating a Tribal TANF program.


Sec. 264.75  For the annual reconciliation, what are qualifying State 
expenditures?

    (a) Qualifying State expenditures are expenditures of State funds 
made in the State TANF program, with respect to eligible families, for 
the following:
    (1) Cash assistance, including assigned child support collected by 
the State, distributed to the family, and disregarded in determining 
eligibility for, and amount of the TANF assistance payment;
    (2) Educational activities designed to increase self-sufficiency, 
job training, and work, excluding any expenditure for public education 
in the State except expenditures involving the provision of services or 
assistance to an eligible family that are not generally available to 
persons who are not members of an eligible family;
    (3) Any other services allowable under section 404(a)(1) of the Act 
and consistent with the goals at Sec. 260.20 of this chapter; and
    (4) Administrative costs in connection with the provision of the 
benefits and services listed in paragraphs (a)(1) through (a)(3) of 
this section, but only to the extent that such costs are consistent 
with the 15-percent limitation at Sec. 263.2(a)(5) of this chapter.
    (b) Qualifying State expenditures do not include:
    (1) Child care expenditures; and
    (2) Expenditures made under separate State programs.


Sec. 264.76  What action will we take if a State fails to remit funds 
after failing to meet its required Contingency Fund MOE level?

    (a) If, for a fiscal year in which it receives contingency funds, a 
State fails to meet its required Contingency Fund MOE level, we will 
penalize the State by reducing the SFAG payable for the next fiscal 
year by the amount of contingency funds not remitted.
    (b) A State may appeal this decision, as provided in Sec. 262.7 of 
this chapter.
    (c) The reasonable cause exceptions and corrective compliance 
regulations at Secs. 262.5 and 262.6 of this chapter do not apply to 
this penalty.


Sec. 264.77  How will we determine if a State met its Contingency Fund 
expenditure requirements?

    (a) States receiving contingency funds for a fiscal year must 
complete the quarterly TANF Financial Report. As part of the fourth 
quarter's report, a State must complete its annual reconciliation.
    (b) The TANF Financial Report and State reporting on expenditures 
are subject to our review.

Subpart C--What Rules Pertain Specifically to the Spending Levels 
of the Territories?


Sec. 264.80  If a Territory receives Matching Grant funds, what funds 
must it expend?

    (a) If a Territory receives Matching Grant funds under section 
1108(b) of the Act, it must:
    (1) Contribute 25 percent of the expenditures funded under the 
Matching Grant for title IV-A or title IV-E expenditures;
    (2) Expend 100 percent of the amount of historic expenditures for 
FY 1995 for the AFDC program (including administrative costs and 
FAMIS), the EA program, and the JOBS program; and
    (3) Expend 100 percent of the amount of the Family Assistance Grant 
annual allocation using Federal TANF, title IV-E funds and/or 
Territory-only funds, without regard to any penalties applied in 
accordance with section 409 of the Act.
    (b) Territories may not use the same Territorial expenditures to 
satisfy the requirements of paragraphs (a)(1), (a)(2) and (a)(3) of 
this section.


Sec. 264.81  What expenditures qualify for Territories to meet the 
Matching Grant MOE requirement?

    To meet the Matching Grant MOE requirements, Territories may count:
    (a) Territorial expenditures made in accordance with Secs. 263.2, 
263.3, 263.4, and 263.6 of this chapter that are commingled with 
Federal TANF funds or made under a segregated TANF program; and
    (b) Territorial expenditures made pursuant to the regulations at 45 
CFR parts 1355 and 1356 for the Foster Care and Adoption Assistance 
programs and section 477 of the Act for the Independent Living program.


Sec. 264.82  What expenditures qualify for meeting the Matching Grant 
FAG amount requirement?

    To meet the Matching Grant FAG amount requirement, Territories may 
count:
    (a) Expenditures made with Federal TANF funds pursuant to 
Sec. 263.11 of this chapter;
    (b) Expenditures made in accordance with Secs. 263.2, 263.3, 263.4, 
and 263.6 of this chapter that are commingled with Federal TANF funds 
or made under a segregated TANF program;
    (c) Amounts transferred from TANF funds pursuant to section 404(d) 
of the Act; and
    (d) The Federal and Territorial shares of expenditures made 
pursuant to the regulations at 45 CFR parts 1355 and 1356 for the 
Foster Care and Adoption Assistance programs and section 477 of the Act 
for the Independent Living program.


Sec. 264.83  How will we know if a Territory failed to meet the 
Matching Grant funding requirements at Sec. 264.80?

    We will require the Territories to report the expenditures required 
by Sec. 264.80(a)(2) and (a)(3) on the quarterly Territorial Financial 
Report.


Sec. 264.84  What will we do if a Territory fails to meet the Matching 
Grant funding requirements at Sec. 264.80?

    If a Territory does not meet the requirements at either or both of 
Sec. 264.80(a)(2) and (a)(3), we will disallow all Matching Grant funds 
received for the fiscal year.


Sec. 264.85  What rights of appeal are available to the Territories?

    The Territories may appeal our decisions to the Departmental 
Appeals Board in accordance with our regulations at part 16 of this 
title if we decide to take disallowances under section 1108(b) of the 
Act.

[[Page 17900]]

PART 265--DATA COLLECTION AND REPORTING REQUIREMENTS

Sec.
265.1  What does this part cover?
265.2  What definitions apply to this part?
265.3  What reports must the State file on a quarterly basis?
265.4  When are quarterly reports due?
265.5  May States use sampling?
265.6  Must States file reports electronically?
265.7  How will we determine if the State is meeting the quarterly 
reporting requirements?
265.8  Under what circumstances will we take action to impose a 
reporting penalty for failure to submit quarterly and annual 
reports?
265.9  What information must the State file annually?
265.10  When is the annual report due?

    Authority: 42 U.S.C. 603, 605, 607, 609, 611, and 613.


Sec. 265.1  What does this part cover?

    (a) This part explains how we will collect the information required 
by section 411(a) of the Act (data collection and reporting); the 
information required to implement section 407 of the Act (work 
participation requirements), as authorized by section 
411(a)(1)(A)(xii); the information required to implement section 409 
(penalties), section 403 (grants to States), section 405 
(administrative provisions), section 411(b) (report to Congress), and 
section 413 (annual rankings of State TANF programs); and the data 
necessary to carry out our financial management and oversight 
responsibilities.
    (b) This part describes the information in the quarterly and annual 
reports that each State must file, as follows: \1\
---------------------------------------------------------------------------

    \1\ The Appendices contain the specific data elements in the 
quarterly Data Report, the quarterly Financial Report, and the 
Annual Report on State MOE Programs, as well as the instructions for 
filing these reports. They also include the form and instructions 
for the Caseload Reduction Report described at Sec. 261.41(b) of 
this chapter.
---------------------------------------------------------------------------

    (1) The case record information (disaggregated and aggregated) on 
individuals and families in the quarterly TANF Data Report;
    (2) The expenditure data in the quarterly TANF Financial Report 
(or, as applicable, the Territorial Financial Report); and
    (3) The definitions and other information on the State's TANF and 
MOE programs that must be filed annually.
    (c) If a State claims MOE expenditures under a separate State 
program(s), this part specifies the circumstances under which the State 
must collect and report case-record information on individuals and 
families served by the separate State program(s).
    (d) This part describes when reports are due, how we will determine 
if reporting requirements have been met, and how we will apply the 
statutory penalty for failure to file a timely report. It also 
specifies electronic filing and sampling requirements.


Sec. 265.2  What definitions apply to this part?

    (a) Except as provided in paragraph (b) of this section, the 
general TANF definitions at Secs. 260.30 through 260.33 of this chapter 
apply to this part.
    (b) For data collection and reporting purposes only, family means:
    (1) All individuals receiving assistance as part of a family under 
the State's TANF or separate State program (including noncustodial 
parents, where required under Sec. 265.3(f)); and
    (2) The following additional persons living in the household, if 
not included under paragraph (b)(1) of this section:
    (i) Parent(s) or caretaker relative(s) of any minor child receiving 
assistance;
    (ii) Minor siblings of any child receiving assistance; and
    (iii) Any person whose income or resources would be counted in 
determining the family's eligibility for or amount of assistance.


Sec. 265.3  What reports must the State file on a quarterly basis?

    (a) Quarterly reports. (1) Each State must collect on a monthly 
basis, and file on a quarterly basis, the data specified in the TANF 
Data Report and the TANF Financial Report (or, as applicable, the 
Territorial Financial Report).
    (2) Under the circumstances described in paragraph (d)(1) of this 
section, the State must collect and file the data specified in the SSP-
MOE (Separate State Program-Maintenance-of-Effort) Data Report.
    (b) TANF Data Report. The TANF Data Report consists of three 
sections. Two sections contain disaggregated data elements and one 
section contains aggregated data elements.
    (1) Disaggregated Data on Families Receiving TANF Assistance--
Section one. Each State must file disaggregated information on families 
receiving TANF assistance.\2\ This section specifies identifying and 
demographic data such as the individual's Social Security Number; and 
information such as the type and amount of assistance received, 
educational level, employment status, work participation activities, 
citizenship status, and earned and unearned income. The data apply to 
adults and children.
---------------------------------------------------------------------------

    \2\ See Appendix A for the specific data elements and 
instructions.
---------------------------------------------------------------------------

    (2) Disaggregated Data on Families No Longer Receiving TANF 
Assistance--Section two. Each State must file disaggregated information 
on families no longer receiving TANF assistance.\3\ This section 
specifies the reasons for case closure and data similar to the data in 
section one.
---------------------------------------------------------------------------

    \3\ See Appendix B for the specific data elements and 
instructions.
---------------------------------------------------------------------------

    (3) Aggregated Data--Section three. Each State must file aggregated 
information on families receiving, applying for, and no longer 
receiving TANF assistance.\4\ This section of the Report requires 
aggregate figures in such areas as: The number of applications and 
their disposition; the number of recipient families, adult recipients, 
and child recipients; the number of births and out-of-wedlock births 
for families receiving TANF assistance; the number of noncustodial 
parents participating in work activities; and the number of closed 
cases.
---------------------------------------------------------------------------

    \4\ See Appendix C for the specific data elements and 
instructions.
---------------------------------------------------------------------------

    (c) The TANF Financial Report (or Territorial Financial Report).
    (1) Each State must file quarterly expenditure data on the State's 
use of Federal TANF funds, State TANF expenditures, and State 
expenditures of MOE funds in separate State programs.\5\
---------------------------------------------------------------------------

    \5\ See Appendix D for the TANF Financial Report and filing 
instructions.
---------------------------------------------------------------------------

    (2) If a State is expending Federal TANF funds received in prior 
fiscal years, it must file a separate quarterly TANF Financial Report 
(or, as applicable, Territorial Financial Report) for each fiscal year 
that provides information on the expenditures of that year's TANF 
funds.
    (3) Territories must report their expenditure and other fiscal data 
on the Territorial Financial Report, as provided at Sec. 264.85 of this 
chapter, in lieu of the TANF Financial Report.
    (d) SSP-MOE Data Report. (1) Subject to paragraph (d)(2) of this 
section, if a State claims MOE expenditures under a separate State 
program(s), it must collect and file disaggregated and aggregated 
information on families receiving assistance and families no longer 
receiving assistance under the separate State program(s) as follows:
    (i) If a State wishes to receive a high performance bonus, it must 
file the information in sections one and three of the SSP-MOE Data 
Report; and
    (ii) If a State wishes to qualify for caseload reduction credit 
under subpart D of part 261 of this chapter, it must file the 
information in sections one, two, and three of the SSP-MOE Data Report.
    (2) The State must file the SSP-MOE Data Report only on separate 
State programs that provide benefits that meet

[[Page 17901]]

the definition of assistance at Sec. 260.31 of this chapter.
    (3) The SSP-MOE Data Report consists of three sections. Section one 
contains disaggregated information on families receiving assistance 
under separate State programs; section two contains disaggregated 
information on families no longer receiving assistance under separate 
State programs; and section three contains aggregated data on families 
receiving and families no longer receiving assistance under separate 
State programs.\6\
---------------------------------------------------------------------------

    \6\ See Appendices E, F, and G for the specific data elements 
and instructions.
---------------------------------------------------------------------------

    (e) Optional data elements. A State has the option not to report on 
some data elements for some individuals in the TANF Data Report and the 
SSP-MOE Data Report, as specified in the instructions to these reports.
    (f) Noncustodial parents. A State must report information on a 
noncustodial parent (as defined in Sec. 260.30 of this chapter) if the 
noncustodial parent:
    (1) Is receiving assistance as defined in Sec. 260.31 of this 
chapter;
    (2) Is participating in work activities as defined in section 
407(d) of the Act; or
    (3) Has been designated by the State as a member of a family 
receiving assistance.


Sec. 265.4  When are quarterly reports due?

    (a) Each State must file the TANF Data Report and the TANF 
Financial Report (or, as applicable, the Territorial Financial Report) 
within 45 days following the end of the quarter or be subject to a 
penalty.
    (b) A State that fails to submit the reports within 45 days will be 
subject to a penalty unless the State files complete and accurate 
reports before the end of the fiscal quarter that immediately succeeds 
the quarter for which the reports were required to be submitted.
    (c) Each State may file its quarterly SSP-MOE Data Report:
    (1) At the same time as it submits its quarterly TANF Data Report; 
or
    (2) At the time it seeks to be considered for a high performance 
bonus or a caseload reduction credit as long as it submits the required 
data for the full period for which these determinations will be made.


Sec. 265.5  May States use sampling?

    (a) Each State may report the disaggregated data in the TANF Data 
Report and the SSP-MOE Data Report on all recipient families or on a 
sample of families selected through the use of a scientifically 
acceptable sampling method that we have approved. States may use 
sampling to generate certain aggregated data elements as identified in 
the instructions to the reports. States may not use sampling to report 
expenditure data.
    (b) ``Scientifically acceptable sampling method'' means:
    (1) A probability sampling method in which every sampling unit in 
the population has a known, non-zero chance to be included in the 
sample; and
    (2) Our sample size requirements are met.
    (c) In reporting data based on sampling, the State must follow the 
specifications and procedures in the TANF Sampling Manual.


Sec. 265.6  Must States file reports electronically?

    Each State must file all quarterly reports (i.e., the TANF Data 
Report, the TANF Financial Report (or, as applicable, the Territorial 
Financial Report), and the SSP-MOE Data Report) electronically, based 
on format specifications that we will provide.


Sec. 265.7  How will we determine if the State is meeting the quarterly 
reporting requirements?

    (a) Each State's quarterly reports (the TANF Data Report, the TANF 
Financial Report (or Territorial Financial Report), and the SSP-MOE 
Data Report) must be complete and accurate and filed by the due date.
    (b) For a disaggregated data report, ``a complete and accurate 
report'' means that:
    (1) The reported data accurately reflect information available to 
the State in case records, financial records, and automated data 
systems;
    (2) The data are free from computational errors and are internally 
consistent (e.g., items that should add to totals do so);
    (3) The State reports data for all required elements (i.e., no data 
are missing);
    (4)(i) The State provides data on all families; or
    (ii) If the State opts to use sampling, the State reports data on 
all families selected in a sample that meets the specification and 
procedures in the TANF Sampling Manual (except for families listed in 
error); and
    (5) Where estimates are necessary (e.g., some types of assistance 
may require cost estimates), the State uses reasonable methods to 
develop these estimates.
    (c) For an aggregated data report, ``a complete and accurate 
report'' means that:
    (1) The reported data accurately reflect information available to 
the State in case records, financial records, and automated data 
systems;
    (2) The data are free from computational errors and are internally 
consistent (e.g., items that should add to totals do so);
    (3) The State reports data on all applicable elements; and
    (4) Monthly totals are unduplicated counts for all families (e.g., 
the number of families and the number of out-of-wedlock births are 
unduplicated counts).
    (d) For the TANF Financial Report (or, as applicable, the 
Territorial Financial Report), ``a complete and accurate report'' means 
that:
    (1) The reported data accurately reflect information available to 
the State in case records, financial records, and automated data 
systems;
    (2) The data are free from computational errors and are internally 
consistent (e.g., items that should add to totals do so);
    (3) The State reports data on all applicable elements; and
    (4) All expenditures have been made in accordance with 
Sec. 92.20(a) of this title.
    (e) We will review the data filed in the quarterly reports to 
determine if they meet these standards. In addition, we will use audits 
and reviews to verify the accuracy of the data filed by the States.
    (f) States must maintain records to adequately support any report, 
in accordance with Sec. 92.42 of this title.


Sec. 265.8  Under what circumstances will we take action to impose a 
reporting penalty for failure to submit quarterly and annual reports?

    (a) We will take action to impose a reporting penalty under 
Sec. 262.1(a)(3) of this chapter if:
    (1) A State fails to file the quarterly TANF Data Report or the 
quarterly TANF Financial Report (or, as applicable, the Territorial 
Financial Report) within 45 days of the end of the quarter;
    (2) The disaggregated data in the TANF Data Report is not accurate 
or does not include all the data required by section 411(a) of the Act 
(other than section 411(a)(1)(A)(xii) of the Act) or the nine 
additional elements necessary to carry out the data collection system 
requirements, including the social security number;
    (3) The aggregated data elements in the TANF Data Report required 
by section 411(a) of the Act are not accurate and the report does not 
include the data elements necessary to carry out the data collection 
system requirements and to verify and validate the disaggregated data;

[[Page 17902]]

    (4) The TANF Financial Report (or, as applicable, the Territorial 
Financial Report) does not contain complete and accurate information on 
total expenditures and expenditures on administrative costs and 
transitional services; or
    (5) The annual report under Sec. 265.9 does not contain the 
definition of work activities and the description of transitional 
services provided by a State to families no longer receiving assistance 
due to employment.
    (b) We will not apply the reporting penalty to the SSP-MOE Data 
Report.
    (c) If we determine that a State meets one or more of the 
conditions set forth in paragraph (a) of this section, we will notify 
the State that we intend to reduce the SFAG payable for the immediately 
succeeding fiscal year.
    (d) We will not impose the penalty at Sec. 262.1(a)(3) of this 
chapter if the State files the complete and accurate quarterly report 
or the annual report before the end of the fiscal quarter that 
immediately succeeds the fiscal quarter for which the reports were 
required.
    (e) If the State does not file all reports as provided under 
paragraph (a) of this section by the end of the immediately succeeding 
fiscal quarter, the penalty provisions of Secs. 262.4 through 262.6 of 
this chapter will apply.
    (f) Subject to paragraphs (a) through (d) of this section and 
Secs. 262.4 through 262.6 of this chapter, for each quarter for which a 
State fails to meet the reporting requirements, we will reduce the SFAG 
payable by an amount equal to four percent of the adjusted SFAG (or a 
lesser amount if the State achieves substantial compliance under a 
corrective compliance plan).


Sec. 265.9  What information must the State file annually?

    (a) Each State must file an annual report containing information on 
the TANF program and the State's MOE program(s) for that year. The 
report may be filed as:
    (1) An addendum to the fourth quarter TANF Data Report; or
    (2) A separate annual report.
    (b) Each State must provide the following information on the TANF 
program:
    (1) The State's definition of each work activity;
    (2) A description of the transitional services provided to families 
no longer receiving assistance due to employment;
    (3) A description of how a State will reduce the amount of 
assistance payable to a family when an individual refuses to engage in 
work without good cause pursuant to Sec. 261.14 of this chapter;
    (4) The average monthly number of payments for child care services 
made by the State through the use of disregards, by the following types 
of child care providers:
    (i) Licensed/regulated in-home child care;
    (ii) Licensed/regulated family child care;
    (iii) Licensed/regulated group home child care;
    (iv) Licensed/regulated center-based child care;
    (v) Legally operating (i.e., no license category available in State 
or locality) in-home child care provided by a nonrelative;
    (vi) Legally operating (i.e., no license category available in 
State or locality) in-home child care provided by a relative;
    (vii) Legally operating (i.e., no license category available in 
State or locality) family child care provided by a nonrelative;
    (viii) Legally operating (i.e., no license category available in 
State or locality) family child care provided by a relative;
    (ix) Legally operating (i.e., no license category available in 
State or locality) group child care provided by a nonrelative;
    (x) Legally operating (i.e., no license category available in State 
or locality) group child care provided by a relative; and
    (xi) Legally operated (i.e., no license category available in State 
or locality) center-based child care;
    (5) If the State has adopted the Family Violence Option and wants 
Federal recognition of its good cause domestic violence waivers under 
subpart B of part 260 of this chapter, a description of the strategies 
and procedures in place to ensure that victims of domestic violence 
receive appropriate alternative services and an aggregate figure for 
the total number of good cause domestic waivers granted;
    (6) A description of any nonrecurrent, short-term benefits 
provided, including:
    (i) The eligibility criteria associated with such benefits, 
including any restrictions on the amount, duration, or frequency of 
payments;
    (ii) Any policies that limit such payments to families that are 
eligible for TANF assistance or that have the effect of delaying or 
suspending a family's eligibility for assistance; and
    (iii) Any procedures or activities developed under the TANF program 
to ensure that individuals diverted from assistance receive information 
about, referrals to, or access to other program benefits (such as 
Medicaid and food stamps) that might help them make the transition from 
welfare to work;
    (7) A description of the procedures the State has established and 
is maintaining to resolve displacement complaints, pursuant to section 
407(f)(3) of the Act. This description must include the name of the 
State agency with the lead responsibility for administering this 
provision and explanations of how the State has notified the public 
about these procedures and how an individual can register a complaint;
    (8) A summary of State programs and activities directed at the 
third and fourth statutory purposes of TANF (as specified at 
Sec. 260.20(c) and (d) of this chapter); and
    (9) An estimate of the total number of individuals who have 
participated in subsidized employment under Sec. 261.30(b) or (c) of 
this chapter.
    (c) Each State must provide the following information on the 
State's program(s) for which the State claims MOE expenditures:
    (1) The name of each program and a description of the major 
activities provided to eligible families under each such program;
    (2) Each program's statement of purpose;
    (3) If applicable, a description of the work activities in each 
separate State MOE program in which eligible families are 
participating;
    (4) For each program, both the total annual State expenditures and 
the total annual State expenditures claimed as MOE;
    (5) For each program, the average monthly total number or the total 
number of eligible families served for which the State claims MOE 
expenditures as of the end of the fiscal year;
    (6) The eligibility criteria for the families served under each 
program/activity;
    (7) A statement whether the program/activity had been previously 
authorized and allowable as of August 21, 1996, under section 403 of 
prior law;
    (8) The FY 1995 State expenditures for each program/activity not 
authorized and allowable as of August 21, 1996, under section 403 of 
prior law (see Sec. 263.5(b) of this chapter); and
    (9) A certification that those families for which the State is 
claiming MOE expenditures met the State's criteria for ``eligible 
families.'' \7\
---------------------------------------------------------------------------

    \7\ See Appendix I for the reporting form for the Annual Report 
on State Maintenance-of-Effort Programs.
---------------------------------------------------------------------------

    (d) If the State has submitted the information required in 
paragraphs (b) and (c) of this section in the State Plan, it may meet 
the annual reporting requirements by reference in lieu of re-
submission. If the information in the

[[Page 17903]]

annual report has not changed since the previous annual report, the 
State may reference this information in lieu of re-submission.
    (e) If a State makes a substantive change in certain data elements 
in paragraphs (b) and (c) of this section, it must file a copy of the 
change with the next quarterly data report or as an amendment to its 
State Plan. The State must also indicate the effective date of the 
change. This requirement is applicable to the following data elements:
    (1) Paragraphs (b)(1), (b)(2), and (b)(3) of this section; and
    (2) Paragraphs (c)(1), (c)(2), (c)(3), (c)(6), (c)(7), and (c)(8) 
of this section.


Sec. 265.10  When is the annual report due?

    The annual report required by Sec. 265.9 is due at the same time as 
the fourth quarter TANF Data Report.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices

Appendix A--TANF Data Report--Section One (Disaggregated Data 
Collection for Families Receiving Assistance under the TANF Program)
Appendix B--TANF Data Report--Section Two (Disaggregated Data 
Collection for Families No Longer Receiving Assistance under the 
TANF Program)
Appendix C--TANF Data Report--Section Three (Aggregated Data 
Collection for Families Applying for, Receiving, and No Longer 
Receiving Assistance under the TANF Program)
Appendix D--TANF Financial Report
Appendix E--SSP-MOE Data Report--Section One (Disaggregated Data 
Collection for Families Receiving Assistance under the Separate 
State Programs)
Appendix F--SSP-MOE Data Report--Section Two (Disaggregated Data 
Collection for Families No Longer Receiving Assistance under the 
Separate State Programs)
Appendix G--SSP-MOE Data Report--Section Three (Aggregated Data 
Collection for Families Receiving Assistance under the Separate 
State Programs)
Appendix H--Caseload Reduction Report
Appendix I--Annual Report on State Maintenance-of-Effort Programs

Appendix A--TANF Data Report--Section One Disaggregated Data Collection 
for Families Receiving Assistance under the TANF Program

Instructions and Definitions

    General Instruction: The State agency or Tribal grantee should 
collect and report data for each data element. The data must be 
complete (unless explicitly instructed to leave the field blank) and 
accurate (i.e, correct).
    An ``Unknown'' code may appear only on four sets of data 
elements ([#32 and #67] Date of Birth, [#33 and #68] Social Security 
Number, [#41 and #74] Educational Level, and [#42 and #75] 
Citizenship/Alienage). For these data elements, unknown is not an 
acceptable code for individuals who are members of the eligible 
family (i.e., family affiliation code ``1'').
    There are five data elements for which States have the option to 
report based on either the budget month or the reporting month. 
These are: #16 Amount of Food Stamps Assistance; #19 Amount of Child 
Support; #20 Amount of Families Cash Resources; #64 Amount of Earned 
Income; and [#35 and #76] Amount of Unearned Income. Whichever 
choice the State selects must be used for all families reported each 
month and must be used for all months in the fiscal year.
    1. State FIPS Code: Enter your two-digit State code from the 
following listing. These codes are the standard codes used by the 
National Institute of Standards and Technology. Tribal grantees 
should leave this field blank.

------------------------------------------------------------------------
                              State                                Code
------------------------------------------------------------------------
Alabama.........................................................      01
Alaska..........................................................      02
American Samoa..................................................      60
Arizona.........................................................      04
Arkansas........................................................      05
California......................................................      06
Colorado........................................................      08
Connecticut.....................................................      09
Delaware........................................................      10
District of Columbia............................................      11
Florida.........................................................      12
Georgia.........................................................      13
Guam............................................................      66
Hawaii..........................................................      15
Idaho...........................................................      16
Illinois........................................................      17
Indiana.........................................................      18
Iowa............................................................      19
Kansas..........................................................      20
Kentucky........................................................      21
Louisiana.......................................................      22
Maine...........................................................      23
Maryland........................................................      24
Massachusetts...................................................      25
Michigan........................................................      26
Minnesota.......................................................      27
Mississippi.....................................................      28
Missouri........................................................      29
Montana.........................................................      30
Nebraska........................................................      31
Nevada..........................................................      32
New Hampshire...................................................      33
New Jersey......................................................      34
New Mexico......................................................      35
New York........................................................      36
North Carolina..................................................      37
North Dakota....................................................      38
Ohio............................................................      39
Oklahoma........................................................      40
Oregon..........................................................      41
Pennsylvania....................................................      42
Puerto Rico.....................................................      72
Rhode Island....................................................      44
South Carolina..................................................      45
South Dakota....................................................      46
Tennessee.......................................................      47
Texas...........................................................      48
Utah............................................................      49
Vermont.........................................................      50
Virgin Islands..................................................      78
Virginia........................................................      51
Washington......................................................      53
West Virginia...................................................      54
Wisconsin.......................................................      55
Wyoming.........................................................      56
------------------------------------------------------------------------

    2. County FIPS Code: Enter the three-digit code established by 
the National Institute of Standards and Technology for 
classification of counties and county equivalents. Codes were 
devised by listing counties alphabetically and assigning 
sequentially odd integers; e.g., 01, 03, 05. A complete list of 
codes is available in Appendix F of the TANF Sampling and 
Statistical Methods Manual. Tribal grantees should leave this field 
blank.
    3. Tribal Code: For Tribal grantees, enter the three-digit 
Tribal code that represents your Tribe (See Appendix E of the TANF 
Sampling and Statistical Methods Manual for a complete listing of 
Tribal Codes.) State agencies should leave this field blank.
    4. Reporting Month: Enter the four-digit year and two-digit 
month codes that identify the year and month for which the data are 
being reported.
    5. Stratum:
    Guidance: All TANF families selected in the sample from the same 
stratum must be assigned the same stratum code. Valid stratum codes 
may range from ``00'' to ``99.'' States and Tribes with stratified 
samples should provide the ACF Regional Office with a listing of the 
numeric codes utilized to identify any stratification. If a State or 
Tribe opts to provide data for its entire caseload, enter the same 
stratum code (any two-digit number) for each TANF family.
    Instruction: Enter the two-digit stratum code.

Family-Level Data

    Definition: For reporting purposes, the TANF family means (a) 
all individuals receiving assistance as part of a family under the 
State's TANF Program; and (b) the following additional persons 
living in the household, if not included under (a) above:
    (1) Parent(s) or caretaker relative(s) of any minor child 
receiving assistance;
    (2) Minor siblings of any child receiving assistance; and
    (3) Any person whose income or resources would be counted in 
determining the family's eligibility for or amount of assistance.
    6. Case Number--TANF:
    Guidance: If the case number is less than the allowable eleven 
characters, a State should use lead zeros to fill in the number.
    Instruction: Enter the number assigned by the State agency or 
Tribal grantee to uniquely identify the case.
    7. ZIP Code: Enter the five-digit ZIP code for the TANF family's 
place of residence for the reporting month.
    8. Funding Stream:
    Guidance: The TANF Data Report collects information on families 
receiving assistance as defined in Sec. 260.31. We do not collect 
information on families receiving benefits and services that do not 
meet the definition of assistance. A family that receives TANF

[[Page 17904]]

assistance funded, entirely or in part, with Federal funds is 
subject to the Federal time limits. A family that receives 
assistance under a segregated State TANF program funded solely with 
State funds is not subject to the Federal time limits.We will 
collect information on families who receive assistance under a 
separate State program in the SSP-MOE Data Report.
    Instructions: For States that bifurcate their caseloads, enter 
the appropriate code for the funding stream used to provide 
assistance to this TANF family. If the State (Tribe) does not 
bifurcate its caseload, enter code ``1.''
    1=Funded, in whole or in part, with Federal TANF block grant 
funds.
    2=Funded entirely from State-only funds. (segregated State TANF 
program) which are subject to most, but not all, TANF rules.
    9. Disposition:
    Guidance: A family that did not receive any assistance for the 
reporting month but was listed on the monthly sample frame for the 
reporting month is ``listed in error.'' States must collect and 
report complete data for all sampled cases that are not listed in 
error.
    Instruction: Enter one of the following codes for each TANF 
sampled case.
    1=Data collection completed.
    2=Not subject to data collection/listed in error.
    10. New Applicant:
    Guidance: A newly-approved applicant means the current reporting 
month is the first month in which the TANF family receives TANF 
assistance (and thus has had a chance to be selected into the TANF 
sample). This may be either the first month that the TANF family has 
ever received assistance or the first month of a new spell on 
assistance. A TANF family that is reinstated from a suspension is 
not a newly, approved applicant.
    Instruction: Enter the one-digit code that indicates whether or 
not the TANF family is a newly-approved applicant.
    1=Yes, a newly-approved application
    2=No.
    11. Number of Family Members: Enter two digits that represent 
the number of members in the family receiving assistance under the 
State's (Tribe's) TANF Program during the reporting month. Include 
in the number of family members, the noncustodial parent who the 
State (Tribe) has opted to include as part of the eligible family, 
who is receiving assistance as defined in Sec. 260.31, or who is 
participating in work activities as defined in section 407(d) of the 
Act.
    12. Type of Family for Work Participation: 
    Guidance: This data element identifies whether the family will 
be used to calculate both the overall and two-parent work 
participation rates, will be used to calculate only the overall work 
participation rate, or will not be used to calculate either work 
participation rate.
    A family with an adult or minor child head-of-household is 
included in the overall work participation rate unless explicitly 
disregarded. See data element #48 ``Work Participation Status'' for 
reasons for disregarding a family.
    For the purpose of calculating the two-parent work participation 
rate, the two-parent families include any family with two or more 
natural or adoptive parents (of the same minor child) receiving 
assistance and living in the home, unless both are minors and 
neither is a head-of-household. All two-parent families must be 
included in the two-parent work participation rate unless the family 
is explicitly disregarded. See the ``Work Participation Status'' 
data element for reasons for disregarding a family. A two-parent 
family that includes a disabled parent will not be included in the 
two-parent work participation rate.
    A family with a minor child head-of-household should be coded as 
either a single-parent family or two-parent family, whichever is 
appropriate.
    A noncustodial parent is defined in Sec. 260.30 as a parent who 
lives in the State and does not live with his/her child(ren). The 
State must report information on the noncustodial parent if the 
noncustodial parent: (1) is receiving assistance as defined in 
Sec. 260.31; (2) is participating in work activities as defined in 
section 407(d) of the Act; or (3) has been designated by the State 
as a member of a family receiving assistance.
    However, the State may choose whether a two-parent family with a 
noncustodial parent as one of the two parents is a two-parent family 
for the purposes of calculating the two-parent work participation 
rate. If a State chooses to exclude a two-parent family with a 
noncustodial parent as one of the parents from the two-parent work 
participation rate, the State must code the data element ``Type of 
Family for Work Participation'' with a ``1'' and code the data 
element ``Work Participation Status'' for the noncustodial parent 
with a ``99''.
    Instruction: Enter the one-digit code that represents the type 
of family for purposes of calculating the work participation rates.
    1=Family included only in overall work participation rate.
    2=Two-Parent Family included in both the overall and two-parent 
work participation rates.
    3=Family excluded from both the overall and two-parent work 
participation rates.
    13. Receives Subsidized Housing: 
    Guidance: Subsidized housing refers to housing for which money 
was paid by the Federal, State, or local government or through a 
private social service agency to the family or to the owner of the 
housing to assist the family in paying rent. Two families sharing 
living expenses does not constitute subsidized housing.
    Instruction: Enter the one-digit code that indicates whether or 
not the TANF family received subsidized housing for the reporting 
month.
    1=Public housing.
    2=Rent subsidy.
    3=No housing subsidy.
    14. Receives Medical Assistance: Enter ``1'' if, for the 
reporting month, any TANF family member is enrolled in Medicaid and 
thus eligible to receive medical assistance under the State plan 
approved under Title XIX or ``2'' if no TANF family member is 
enrolled in Medicaid.
    1=Yes, enrolled in Medicaid.
    2=No.
    15. Receives Food Stamps: Enter the one-digit code that 
indicates whether or not the TANF family is receiving food stamp 
assistance.
    1=Yes, receives food stamp assistance.
    2=No.
    16. Amount of Food Stamp Assistance:
    Guidance: For situations in which the food stamp household 
differs from the TANF family, code this element in a manner that 
most accurately reflects the resources available to the TANF family. 
One acceptable method for calculating the amount of food stamp 
assistance available to the TANF family is to prorate the amount of 
food stamps equally among each food stamp recipient then add 
together the amounts belonging to the TANF recipients to get the 
total amount for the TANF family.
    Instruction: Enter the TANF family's authorized dollar amount of 
food stamp assistance for the reporting month or for the month used 
to budget for the reporting month.
    17. Receives Subsidized Child Care:
    Instruction: If the TANF family receives subsidized child care 
for the reporting month, enter code ``1'' or ``2,'' whichever is 
appropriate. Otherwise, enter code ``3.''
    1=Yes, receives child care funded entirely or in part with 
Federal funds (e.g., receives TANF, CCDF, SSBG, or other federally 
funded child care).
    2=Yes, receives child care funded entirely under a State, 
Tribal, and/or local program (i.e., no Federal funds used).
    3=No subsidized child care received.
    18. Amount of Subsidized Child Care:
    Guidance: Subsidized child care means a grant by the Federal, 
State or local government to or on behalf of a parent (or caretaker 
relative) to support, in part or whole, the cost of child care 
services provided by an eligible provider to an eligible child. The 
grant may be paid directly to the parent (or caretaker relative) or 
to a child care provider on behalf of the parent (or caretaker 
relative).
    Instruction: Enter the total dollar amount of subsidized child 
care from all sources (e.g., CCDF, TANF, SSBG, State, local, etc.) 
that the TANF family has received for services in the reporting 
month. If the TANF family did not receive any subsidized child care 
for services in the reporting month, enter ``0.''
    19. Amount of Child Support: Enter the total dollar value of 
child support received on behalf of the TANF family in the reporting 
month or for the month used to budget for the reporting month. This 
includes current payments, arrearages, recoupment, and pass-through 
amounts whether paid to the State or the family.
    20. Amount of the Family's Cash Resources: Enter the total 
dollar amount of the TANF family's cash resources as the State 
defines them for determining eligibility and/or computing benefits 
for the reporting month or for the month used to budget for the 
reporting month.

Amount of Assistance Received and the Number of Months That the Family 
has Received Each Type of Assistance Under the State (Tribal) TANF 
Program

    Guidance: The term ``assistance'' includes cash, payments, 
vouchers, and other forms of benefits designed to meet a family's 
ongoing

[[Page 17905]]

basic needs (i.e., for food, clothing, shelter, utilities, household 
goods, personal care items, and general incidental expenses). It 
includes such benefits even when they are provided in the form of 
payments by a TANF agency, or other agency on its behalf, to 
individual recipients and conditioned on their participation in work 
experience, community service, or other work activities (i.e., under 
the CFR Sec. 261.30).
    Except where excluded as indicated in the following paragraph, 
it also includes supportive services such as transportation and 
child care provided to families who are not employed.
    The term ``assistance'' excludes:
    (1) Nonrecurrent, short-term benefits (such as payments for rent 
deposits or appliance repairs) that:
    (i) Are designed to deal with a specific crisis situation or 
episode of need;
    (ii) Are not intended to meet recurrent or ongoing needs; and
    (iii) Will not extend beyond four months.
    (2) Work subsidies (i.e., payments to employers or third parties 
to help cover the costs of employee wages, benefits, supervision, 
and training);
    (3) Supportive services such as child care and transportation 
provided to families who are employed;
    (4) Refundable earned income tax credits;
    (5) Contributions to, and distributions from, Individual 
Development Accounts;
    (6) Services such as counseling, case management, peer support, 
child care information and referral, transitional services, job 
retention, job advancement, and other employment-related services 
that do not provide basic income support; and
    (7) Transportation benefits provided under an Access to Jobs or 
Reverse Commute project, pursuant to section 404(k) of the Act, to 
an individual who is not otherwise receiving assistance.
    The exclusion of nonrecurrent, short-term benefits under (1) of 
this paragraph also covers supportive services for recently employed 
families, for temporary periods of unemployment, in order to enable 
continuity in their service arrangements.
    Instruction: For each type of assistance provided under the 
State's (Tribal) TANF Program, enter the dollar amount of assistance 
that the TANF family received or that was paid on behalf of the TANF 
family for the reporting month and the number of months that the 
TANF family has received assistance under the State's (Tribe's) TANF 
program. For TANF Child Care also enter the number of children 
covered by the dollar amount of child care. If, for a ``type of 
assistance,'' no dollar amount of assistance was provided during the 
reporting month, enter ``0'' as the amount. If, for a ``type of 
assistance,'' no assistance has been received (since the State began 
its TANF Program) by the TANF eligible family, enter ``0'' as the 
number of months of assistance.
    21. Cash and Cash Equivalents:
    A. Amount
    B. Number of Months
    22. TANF Child Care:
    Guidance: For TANF Child Care, enter the dollar amount, the 
number of children covered by the dollar amount of child care, and 
the total number of months that the family has received TANF child 
care assistance for families not employed. For example, a TANF 
family may receive a total of $500.00 in TANF child care assistance 
for two children for the reporting month. Furthermore, the family 
may have received TANF child care for one or more child(ren) for a 
total of six months under the State (Tribal) TANF Program. In this 
example, the State (Tribe) would code 500, 2, and 6 for the amount, 
number of children and number of months respectively. Include only 
the child care funded directly by the State (Tribal) TANF Program. 
Do not include child care funded under the Child Care and 
Development Fund, even though some of the funds were transferred to 
the CCDF from the TANF program.
    Number of:
    A. Amount
    B. Children Covered
    C. Number of Months
    23. Transportation:
    A. Amount
    B. Number of Months
    24. Transitional Services:
    A. Amount
    B. Number of Months
    25. Other:
    A. Amount
    B. Number of Months
    26. Reason for and Amount of Reductions in Assistance:
    Instruction: The amount of assistance received by a TANF family 
may have been reduced for one or more of the following reasons. For 
each reason listed below, indicate whether the TANF family received 
a reduction in assistance. Enter the total dollar value of the 
reduction(s) for each group of reasons for the reporting month. If 
for any reason there was no reduction in assistance, enter ``0.''
    a. Sanctions:
    i. Total Dollar Amount of Reductions due to Sanctions: Enter the 
total dollar value of reduction in assistance due to sanctions.
    ii. Work Requirements Sanction:
    1=Yes.
    2=No.
    iii. Family Sanction for an Adult with No High School Diploma or 
Equivalent:
    1=Yes.
    2=No.
    iv. Sanction for Teen Parent not Attending School:
    1=Yes.
    2=No.
    v. Non-Cooperation with Child Support:
    1=Yes.
    2=No.
    vi. Failure to Comply with an Individual Responsibility Plan:
    1=Yes.
    2=No.
    vii. Other Sanction:
    1=Yes.
    2=No.
    b. Recoupment of Prior Overpayment:
    Enter the total dollar value of reduction in assistance due to 
recoupment of a prior overpayment.
    c. Other:
    i. Total Dollar Amount of Reductions due to Other Reasons 
(exclude amounts for sanctions and recoupment): Enter the total 
dollar value of reduction in assistance due to reasons other than 
sanctions and recoupment.
    ii. Family Cap:
    1=Yes.
    2=No.
    iii. Reduction Based on Family Moving into State From Another 
State:
    1=Yes.
    2=No.
    iv. Reduction Based on Length of Receipt of Assistance:
    1=Yes.
    2=No.
    v. Other, Non-sanction:
    1=Yes.
    2=No.
    27. Waiver Evaluation Experimental and Control Groups:
    Guidance: If this data element is not applicable to your State 
(Tribe), either code this element ``9'' or leave this data element 
blank. In connection with waivers that are approved to allow States 
to implement Welfare Reform Demonstrations, a State assigned a 
portion of its cases to control groups (subject to the provisions of 
the regular, statutory AFDC program as defined by prior law) and 
experimental groups (subject to the provisions of the regular, 
statutory AFDC program as defined by prior law as modified by 
waivers). A State may choose, for the purpose of completing impact 
analyses, to maintain applicable control snd experimental group 
treatment policies as they were implemented under their welfare 
reform demonstration (including prior law policies not modified by 
waivers), even if such policies are inconsistent with TANF. However, 
cases not assigned to an experimental or control group, but subject 
to waiver policies in accordance with terms and conditions of the 
waiver approval, may not apply prior law policies inconsistent with 
TANF unless such policies are specifically linked to approved 
waivers. When a State continues waivers, but does not maintain 
experimental and control groups for impact evaluation purposes, all 
cases in the demonstration site will be treated as cases subject to 
waiver policies in accordance with the terms and conditions 
regardless of their original assignment as control group cases 
(i.e., prior law policies may only apply to the extent they are 
specially linked to approved waivers and former control group cases 
will now be subject to waiver policies.)
    Instruction: Enter the one-digit code that indicates the 
family's waiver evaluation case status.
    1=Control group case (for impact analysis purposes).
    2=Experimental group case.
    3=Other cases subject to waiver policies.
    9=Not applicable (no waivers apply to this case).
    28. Is the TANF Family Exempt from the Federal Time-Limit 
Provisions:
    Guidance: Under TANF rules, an eligible family that does not 
include a recipient who is an adult head-of-household, a spouse of 
the head-of-household, or a minor child head-of-household who has 
received federally-funded assistance for 60 countable months may 
continue to receive assistance. A

[[Page 17906]]

countable month is a month of assistance for which the adult head-
of-household, the spouse of the head-of-household, or the minor 
child head-of-household is not exempt from the Federal time-limit 
provisions. TANF rules provide for two categories of exceptions. 
Certain families are exempt from the accrual of months of assistance 
(i.e., the clock is not ticking). Certain families with an adult 
head-of-household, a spouse of a head-of-house, or minor child head-
of-household who has received 60 countable months of assistance may 
be exempt from termination of assistance. Exemptions from 
termination of assistance include a hardship exemption that allows 
up to 20% of the families to receive assistance beyond the 60-month 
time limit. In lieu of the 20% hardship exemptions, States with 
prior-approved welfare reform waivers may choose to employ extension 
policies prescribed under their waivers.
    Instruction: If the TANF family has no exemption from the 
Federal five-year time limit, enter code ``01.'' If the TANF family 
does not include an adult head-of-household, a spouse of the head-
of-household, or a minor child head-of-household who has received 
federally-funded assistance for 60 countable months or is otherwise 
exempt from accrual of months of assistance or termination of 
assistance under the Federal five-year time limit for the reporting 
month, enter ``02.'' If the TANF family includes an adult head-of-
household, a spouse of the head-of-household, or minor child head-
of-household who has not received federally-funded assistance for 60 
countable months and the family is exempt from the accrual of months 
of assistance, enter ``03,'' ``04,'' or ``05,'' whichever is 
appropriate. If the TANF family includes an adult head-of-household, 
a spouse of the head-of-household, or minor child head-of-household 
who has received assistance for 60 countable months and the family 
is exempt from termination of assistance, enter code ``06'' ``07,'' 
``08,'' ``09,'' ``10,'' or ``11,'' whichever is appropriate.
    01=Family is not exempt from Federal time limit.
    Family does not include an adult head-of-household, a spouse of 
the head-of-household, or minor child head-of-household who has 
received federally-funded assistance for 60 countable months:
    02=Yes, family is exempt from accrual of months and termination 
of assistance under the Federal five-year time limit for the 
reporting month because no adult head-of-household, a spouse of the 
head-of-household, or minor child head-of-household in the eligible 
family is receiving assistance.
    Family includes an adult head-of-household, a spouse of the 
head-of-household, or minor child head-of-household, but has accrued 
less than 60 months of assistance:
    03=Yes, family is exempt from accrual of months under the 
Federal five-year time limit for the reporting month because 
assistance to family is funded entirely from State-only funds.
    04=Yes, family is exempt from accrual of months under the 
Federal five-year time limit for the reporting month because the 
family is living in Indian country or an Alaskan native village, 
where at least 50 percent of the adults living in the Indian country 
or Alaskan native village are not employed.
    05=Yes, family is exempt from accrual of months under the 
Federal five-year time limit for the reporting month based on an 
approved welfare reform waiver policy.
    Family includes an adult head-of-household, a spouse of the 
head-of-household, or minor child head-of-household who has received 
federally-funded assistance for 60 countable months:
    06=Yes, family is exempt from termination of assistance under 
the Federal five-year time limit for the reporting month because 
assistance to the family is funded entirely from State-only funds.
    07=Yes, family is exempt from termination of assistance under 
the Federal five-year time limit for the reporting month due to a 
hardship exemption, battery, or extreme cruelty.
    08=Yes, family is exempt from termination of assistance under 
State policy for the reporting month based on a federally recognized 
good cause domestic violence waiver of time limits.
    09=Yes, family is exempt from termination of assistance under 
the Federal five-year time limit for the reporting month because the 
adult head-of-household, the spouse of the head-of-household, or 
minor child head-of-household is living in Indian country or an 
Alaskan native village, where at least 50 percent of whose adults 
are not employed.
    10=Yes, family (including adults) is exempt from termination of 
assistance under the Federal five-year time limit for the reporting 
month in accordance with extension policies prescribed under 
approved welfare reform waivers.
    11=Yes, the children in the family are receiving assistance 
beyond the 60 countable months and the family is exempt from 
termination of assistance under the Federal five-year time limit for 
the reporting month in accordance with extension policies prescribed 
under approved welfare reform waivers (i.e., under an adult-only 
time limit).
    29. Is the TANF Family A New Child-Only Family?:
    Guidance: A child-only family is a TANF family that does not 
include an adult or a minor child head-of-household who is receiving 
TANF assistance. For purposes of this data element, a new child-only 
family is a TANF family that: (a) has received TANF assistance for 
at least two months (i.e., the reporting month and the month prior 
to the reporting month); (b) received benefits in the prior month, 
but not as a child-only case; and (c) is a child-only family for the 
reporting month. All other families--including those that are not a 
child-only case during the reporting month--get coded as ``not a 
new-child-only family,'' i.e., as code 2.
    Instructions: If the TANF family is a new child-only family, 
enter code ``1.'' Otherwise, enter code ``2.''
    1=Yes, a new child-only family.
    2=No, not a new child-only family.

Person-Level Data

    Person-level data has two sections: (1) The adult and minor 
child head-of-household characteristic section and (2) the child 
characteristics section. Section 419 of the Act defines adult and 
minor child. An adult is an individual that is not a minor child. A 
minor child is an individual who (a) has not attained 18 years of 
age or (b) has not attained 19 years of age and is a full-time 
student in a secondary school (or in the equivalent level of 
vocational or technical training).
    Detailed data elements must be reported on all individuals 
unless, for a specific data element, the instructions explicitly 
give States (Tribes) an option to not report for a specific group of 
individuals.

Adult and Minor Child Head-of-Household Characteristics

    This section allows for coding up to six adults (or a minor 
child who is either a head-of-household or married to the head-of-
household and up to five adults) in the TANF family. A minor child 
who is either a head-of-household or married to the head-of-
household should be coded as an adult and will hereafter be referred 
to as a ``minor child head-of-household.'' For each adult (or minor 
child head-of-household) in the TANF family, complete the adult 
characteristics section. A noncustodial parent is defined in section 
260.30 as a parent who lives in the State and does not live with 
his/her child(ren). The State must report information on the 
noncustodial parent if the noncustodial parent: (1) Is receiving 
assistance as defined in Sec. 260.31; (2) is participating in work 
activities as defined in section 407(d) of the Act; or (3) has been 
designated by the State as a member of a family receiving 
assistance.
    The State has the option to count a family with a noncustodial 
parent receiving assistance as a two-parent family for work 
participation rate purposes. As indicated below, reporting for 
certain specified data elements in this section is optional for 
certain individuals (whose family affiliation code is a 2, 3, or 5).
    If there are more than six adults (or a minor child head-of-
household and five adults) in the TANF family, use the following 
order to identify the persons to be coded: (1) The head-of-
household; (2) parents in the eligible family receiving assistance; 
(3) other adults in the eligible family receiving assistance; (4) 
parents not in the eligible family receiving assistance; (5) 
caretaker relatives not in the eligible family receiving assistance; 
and (6) other persons whose income or resources count in determining 
eligibility for or amount of assistance of the eligible family 
receiving assistance, in descending order from the person with the 
most income to the person with least income.
    30. Family Affiliation:
    Guidance: This data element is used both for (1) The adult and 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for adults.
    Instruction: Enter the one-digit code that shows the adult's (or 
minor child head-of-household's) relation to the eligible family 
receiving assistance.
    1=Member of the eligible family receiving assistance.

[[Page 17907]]

    Not in eligible family receiving assistance, but in the 
household:
    2=Parent of minor child in the eligible family receiving 
assistance.
    3=Caretaker relative of minor child in the eligible family 
receiving assistance.
    4=Minor sibling of child in the eligible family receiving 
assistance.
    5=Person whose income or resources are considered in determining 
eligibility for or amount of assistance for the eligible family 
receiving assistance.
    31. Noncustodial Parent Indicator:
    Guidance: A noncustodial parent is defined in section 260.30 as 
a parent who lives in the State and does not live with his/her 
child(ren). The State must report information on the noncustodial 
parent if the noncustodial parent: (1) Is receiving assistance as 
defined in Sec. 260.31; (2) is participating in work activities as 
defined in section 407(d) of the Act; or (3) has been designated by 
the State as a member of a family receiving assistance.
    Instruction: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) noncustodial parent status.
    1=Yes, a noncustodial parent.
    2=No.
    32. Date of Birth: Enter the eight-digit code for date of birth 
for the adult (or minor child head-of-household) under the State 
(Tribal) TANF Program in the format YYYYMMDD. If the adult's (or 
minor child head-of-household's) date of birth is unknown and the 
family affiliation code is not ``1,'' enter the code ``99999999''.
    33. Social Security Number: Enter the nine-digit Social Security 
Number for the adult (or minor child head-of-household) in the 
format nnnnnnnnn. If the social security number is unknown and the 
family affiliation code is not ``1,'' enter ``999999999''.
    34. Race/Ethnicity:
    Instruction: To allow for the multiplicity of race/ethnicity, 
please enter the one-digit code for each category of race and 
ethnicity of the TANF adult (or minor child head-of-household). 
Reporting of this data element is optional for individuals whose 
family affiliation code is 5.
    Ethnicity:
    a. Hispanic or Latino:
    1=Yes, Hispanic or Latino.
    2=No.
    Race:
    b. American Indian or Alaska Native:
    1=Yes, American Indian or Alaska Native.
    2=No.
    c. Asian:
    1=Yes, Asian.
    2=No.
    d. Black or African American:
    1=Yes, Black or African American.
    2=No.
    e. Native Hawaiian or Other Pacific Islander:
    1=Yes, Native Hawaiian or Pacific Islander.
    2=No.
    f. White:
    1=Yes, White.
    2=No.
    35. Gender: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) gender:
    1=Male.
    2=Female.
    36. Receives Disability Benefits: The Act specifies five types 
of disability benefits. For each type of disability benefits, enter 
the one-digit code that indicates whether or not the adult (or minor 
child head-of-household) received the benefit.
    a. Receives Federal Disability Insurance Benefits Under the 
Social Security OASDI Program (Title II of the Social Security Act):
    1=Yes, received Federal disability insurance.
    2=No.
    b. Receives Benefits Based on Federal Disability Status Under 
Non-Social Security Act Programs: These programs include Veteran's 
disability benefits, Worker's disability compensation, and Black 
Lung Disease disability benefits.
    1=Yes, received benefits based on Federal disability status.
    2=No.
    c. Receives Aid to the Permanently and Totally Disabled Under 
Title XIV-APDT of the Social Security Act: 
    1=Yes, received aid under Title XIV-APDT.
    2=No.
    d. Receives Aid to the Aged, Blind, and Disabled Under Title 
XVI-AABD of the Social Security Act:
    1=Yes, received aid under Title XVI-AABD.
    2=No.
    e. Receives Supplemental Security Income Under Title XVI-SSI of 
the Social Security Act:
    1=Yes, received aid under Title XVI-SSI.
    2=No.
    37. Marital Status: Enter the one-digit code for the adult's (or 
minor child head-of-household's) marital status for the reporting 
month. Reporting of this data element is optional for individuals 
whose family affiliation code is 5.
    1=Single, never married.
    2=Married, living together.
    3=Married, but separated.
    4=Widowed.
    5=Divorced.
    38. Relationship to Head-of-Household:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for adults.
    Instruction: Enter the two-digit code that shows the adult's 
relationship (including by marriage) to the head of the household, 
as defined by the Food Stamp Program or as determined by the State 
(Tribe) (i.e., the relationship to the principal person of each 
person living in the household). If minor child head-of-household, 
enter code ``01.''
    01=Head-of-household.
    02=Spouse.
    03=Parent.
    04=Daughter or son.
    05=Stepdaughter or stepson.
    06=Grandchild or great grandchild.
    07=Other related person (brother, niece, cousin).
    08=Foster child.
    09=Unrelated child.
    10=Unrelated adult.
    39. Parent With Minor Child in the Family:
    Guidance: A parent with a minor child in the family may be a 
natural parent, adoptive parent, or step-parent of a minor child in 
the family. Reporting of this data element is optional for 
individuals whose family affiliation code is 3 or 5.
    Instruction: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) parental status.
    1=Yes, a parent with a minor child in the family and used in 
two-parent participation rate.
    2=Yes, a parent with a minor child in the family, but not used 
in two-parent participation rate.
    3=No.
    40. Needs of a Pregnant Woman: Some States (Tribes) consider the 
needs of a pregnant woman in determining the amount of assistance 
that the TANF family receives. If the adult (or minor child head-of-
household) is pregnant and the needs associated with this pregnancy 
are considered in determining the amount of assistance for the 
reporting month, enter a ``1'' for this data element. Otherwise 
enter a ``2'' for this data element. This data element is applicable 
only for individuals whose family affiliation code is 1.
    1=Yes, additional needs associated with pregnancy are considered 
in determining the amount of assistance.
    2=No.
    41. Educational Level: Enter the two-digit code to indicate the 
highest level of education attained by the adult (or minor child 
head-of-household). Unknown is not an acceptable code for 
individuals whose family affiliation code is ``1''. Reporting of 
this data element is optional for individuals whose family 
affiliation code is 5.
    01-11=Grade level completed in primary/secondary school 
including secondary level vocational school or adult high school.
    12=High school diploma, GED, or National External Diploma 
Program.
    13=Awarded Associate's Degree.
    14=Awarded Bachelor's Degree.
    15=Awarded graduate degree (Master's or higher).
    16=Other credentials (degree, certificate, diploma, etc.).
    98=No formal education.
    99=Unknown.
    42. Citizenship/Alienage:
    Instruction: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) citizenship/alienage. Unknown 
is not an acceptable code for individuals whose family affiliation 
code is ``1''. Reporting of this data element is optional for 
individuals whose family affiliation code is 5.
    1=U.S. citizen, including naturalized citizens.
    2=Qualified alien.
    9=Unknown.
    43. Cooperation with Child Support: Enter the one-digit code 
that indicates if the adult (or minor child head-of-household) has 
cooperated with child support. Reporting of this data element is 
optional for individuals whose family affiliation code is 5.
    1=Yes, adult (or minor child head-of-household) has cooperated 
with child support.

[[Page 17908]]

    2=No.
    9=Not applicable.
    44. Number of Months Countable toward Federal Time Limit: Enter 
the number of months countable toward the adult's (or minor child 
head-of-household's) Federal five-year time limit based on the 
cumulative amount of time the individual has received Federal TANF 
assistance received from both the State (Tribe) and other States or 
Tribes. Reporting of this data element is optional for individuals 
whose family affiliation code is 2, 3, or 5.
    45. Number of Countable Months Remaining Under State's (Tribe's) 
Time Limit: Enter the number of months that remain countable toward 
the adult's (or minor child head-of-household's) State (Tribal) time 
limit. Reporting of this data element is optional for individuals 
whose family affiliation code is 2, 3, or 5.
    46. Is Current Month Exempt from the State's (Tribe's) Time 
Limit: Enter the one-digit code that indicates the adult's (or minor 
child head-of-household's) current exempt status from State's 
(Tribe's) time limit. Reporting of this data element is optional for 
individuals whose family affiliation code is 2, 3, or 5.
    1=Yes, adult (or minor child head-of-household) is exempt from 
the State's (Tribe's) time limit for the reporting month.
    2=No.
    47. Employment Status: Enter the one-digit code that indicates 
the adult's (or minor child head-of-household's) employment status. 
Reporting of this data element is optional for individuals whose 
family affiliation code is 5.
    1=Employed.
    2=Unemployed, looking for work.
    3=Not in labor force (i.e, unemployed, not looking for work, 
includes discouraged workers).
    48. Work Participation Status:
    Guidance: This item is used in calculating the work 
participation rates. The following two definitions are used in 
reporting this item and in determining which families are included 
in and excluded from the calculations.
    ``Disregarded'' from the participation rate means the TANF 
family is not included in the calculation of the work participation 
rate.
    ``Exempt'' means that the individual will not be penalized for 
failure to engage in work (i.e., good cause exception); however, the 
TANF family is included in the calculation of the work participation 
rate.
    A State is not required to disregard all families that could be 
disregarded. For example, a family with a single custodial parent 
with child under 12 months (and the parent has not been disregarded 
for 12 months) may be disregarded. However, if the single custodial 
parent is meeting the work requirements, the State may want to 
include the family in its work participation rate. In this 
situation, the State should use work participation status code 
``19'' rather than code ``01''.
    Instruction: Enter the two-digit code that indicates the adult's 
(or minor child head-of-household's) work participation status. If 
the State chooses to include the noncustodial parent in the two-
parent work participation rate, the State must code the data element 
``Type of Family for Work Participation Rate'' with a ``2'' and 
enter the applicable code for this data element. If a State chooses 
to exclude the noncustodial parent from the two-parent work 
participation rate, the State must code the data element ``Type of 
Family for Work Participation'' with a ``1'' and code the data 
element ``Work Participation Status'' for the noncustodial parent 
with a ``99''. This data element is not applicable for individuals 
whose family affiliation code is 2, 3, 4, or 5 (i.e., use code 
``99'' or leave blank).
    01=Disregarded from participation rate, single custodial parent 
with child under 12 months.
    02=Disregarded from participation rate because all of the 
following apply: required to participate, but not participating; and 
sanctioned for the reporting month, but not sanctioned for more than 
3 months within the preceding 12-month period (Note, this code 
should be used only in a month for which the family is disregarded 
from the participation rate. While one or more adults may be 
sanctioned in more than 3 months within the preceding 12-month 
period, the family may not be disregarded from the participation 
rate for more than 3 months within the preceding 12-month period).
    03=Disregarded, family is part of an ongoing research evaluation 
(as a member of a control group or experimental group) approved 
under Section 1115 of the Social Security Act.
    04=Disregarded from the work participation rate based on an 
inconsistency under an approved welfare reform waiver that exempts 
the family from participation.
    05=Disregarded from participation rate, based on participation 
in a Tribal Work Program, and State has opted to exclude all Tribal 
Work Program participants from its work participation rate.
    06=Exempt, single custodial parent with child under age 6 and 
child care unavailable.
    07=Exempt, disabled (not using an extended definition under a 
State waiver).
    08=Exempt, caring for a severely disabled child (not using an 
extended definition under a State waiver).
    09=Exempt, under a federally recognized good cause domestic 
violence waiver.
    10=Exempt, State waiver.
    11=Exempt, other.
    12=Required to participate, but not participating; sanctioned 
for the reporting month; and sanctioned for more than 3 months 
within the preceding 12-month period.
    13=Required to participate, but not participating; and 
sanctioned for the reporting month, but not sanctioned for more than 
3 months within the preceding 12-month period.
    14=Required to participate, but not participating; and not 
sanctioned for the reporting month.
    15=Deemed engaged in work--single teen head-of-household or 
married teen who maintains satisfactory school attendance.
    16=Deemed engaged in work--single teen head-of-household or 
married teen who participates in education directly related to 
employment for an average of at least 20 hours per week during the 
reporting month.
    17=Deemed engaged in work--parent or relative (who is the only 
parent or caretaker relative in the family) with child under age 6 
and parent engaged in work activities for at least 20 hours per 
week.
    18=Required to participate and participating, but not meeting 
minimum participation requirements.
    19=Required to participate and meeting minimum participation 
requirements.
    99=Not applicable (e.g., person living in household and whose 
income or resources are counted in determining eligibility for or 
amount of assistance of the family receiving assistance, but not in 
eligible family receiving assistance or noncustodial parent that the 
State opted to exclude in determining participation rate).

Adult Work Participation Activities

    Guidance: To calculate the average number of hours per week of 
participation in a work activity, add the number of hours of 
participation across all weeks in the month and divide by the number 
of weeks in the month. Round to the nearest whole number.
    Some weeks have days in more than one month. Include such a week 
in the calculation for the month that contains the most days of the 
week (e.g., the week of July 27-August 2, 1997 would be included in 
the July calculation). Acceptable alternatives to this approach must 
account for all weeks in the fiscal year. One acceptable alternative 
is to include the week in the calculation for whichever month the 
Friday falls (i.e., the JOBS approach.) A second acceptable 
alternative is to count each month as having 4.33 weeks.
    During the first or last month of any spell of assistance, a 
family may happen to receive assistance for only part of the month. 
If a family receives assistance for only part of a month, the State 
(Tribe) may count it as a month of participation if an adult (or 
minor child head-of-household) in the family (both adults, if they 
are both required to work) is engaged in work for the minimum 
average number of hours for any full week(s) that the family 
receives assistance in that month.
    Special Rules: Each adult (or minor child head-of-household) has 
a life-time limit for vocational educational training. Vocational 
educational training may only count as a work activity for a total 
of 12 months. For any adult (or minor child head-of-household) that 
has exceeded this limit, enter ``0'' as the average number of hours 
per week of participation in vocational education training, even if 
(s)he is engaged in vocational education training. The additional 
participation in vocational education training may be coded under 
``Other.''
    The exception to the above 12-month rule may be a State that 
received a waiver that is inconsistent with the provision limiting 
vocational education training. In this case the State would adhere 
to the terms and conditions of the waiver.
    Limitations: The four limitations concerning job search and job 
readiness are: (1) Job search and job readiness assistance only 
count for 6 weeks in any fiscal year; (2) An individual's 
participation in job search and job readiness assistance counts for 
no more than 4 consecutive weeks; (3) If the

[[Page 17909]]

State's (Tribe's) total unemployment rate for a fiscal year is at 
least 50 percent greater than the United States' total unemployment 
rate for that fiscal year or the State is a needy State (within the 
meaning of section 403 (b)(6)), then an individual's participation 
in job search or job readiness assistance counts for up to 12 weeks 
in that fiscal year; and (4) A State may count 3 or 4 days of job 
search and job readiness assistance during a week as a full week of 
participation, but only once for any individual.
    For each week in which an adult (or minor child head-of-
household) exceeds any of these limitations, use ``0'' as the number 
of hours in calculating the average number of hours per week of job 
search and job readiness, even if (s)he may be engaged in job search 
or job readiness activities.
    If a State is operating its TANF Program under a waiver that 
permits broader rules for participation in job search and job 
readiness training, the TANF rules apply. Any additional 
participation in job search and job readiness training permitted 
under the waiver rules should be coded under data element 
61 ``Additional Work Activities Permitted Under 
Waiver Demonstration.''
    Instruction: For each work activity in which the adult (or minor 
child head-of-household) participated during the reporting month, 
enter the average number of hours per week of participation, except 
as noted above. For each work activity in which the adult (or minor 
child head-of-household) did not participate, enter zero as the 
average number of hours per week of participation. These work 
activity data elements are applicable only for individuals whose 
family affiliation code is 1.
    49. Unsubsidized Employment.
    50. Subsidized Private-Sector Employment.
    51. Subsidized Public-Sector Employment.
    52. Work Experience.
    53. On-the-job Training.
    54. Job Search and Job Readiness Assistance.
    Instruction: As noted above, the statute limits participation in 
job search and job readiness training in four ways. Enter, in this 
data element, the average number of hours per week of participation 
in job search and job readiness training that are within the 
statutory limitations.
    Some State waivers permit participation in job search and job 
readiness training beyond the statutory limits. Do not count hours 
of participation in job search and job readiness training beyond the 
TANF limit where allowed by waivers in this item. Instead, count the 
hours of participation beyond the TANF limit in the item 
``Additional Work Activities Permitted Under Waiver Demonstration.'' 
Otherwise, count the additional hours of work participation under 
the work activity ``Other Work Activities.''
    55. Community Service Programs.
    56. Vocational Educational Training:
    Instruction: As noted above, the statute contains special rules 
limiting an adult's (or minor child head-of-household's) 
participation in vocational educational training to twelve months. 
Enter, in this data element, the average number of hours per week of 
participation in vocational educational training that are within the 
statutory limits.
    Some State waivers permit participation in vocational 
educational training beyond the statutory limits. Do not count hours 
of participation in vocational educational training beyond the TANF 
12 month life-time limit where allowed by waivers in this item. 
Instead, count the hours of participation beyond the TANF limit in 
the item ``Additional Work Activities Permitted Under Waiver 
Demonstration.'' Otherwise, count the additional hours of work 
participation under the work activity ``Other Work Activities.''
    57. Job Skills Training Directly Related to Employment.
    58. Education Directly Related to Employment for Individuals 
with no High School Diploma or Certificate of High School 
Equivalency.
    59. Satisfactory School Attendance for Individuals with No High 
School Diploma or Certificate of High School Equivalency.
    60. Providing Child Care Services to an Individual Who Is 
Participating in a Community Service Program.
    61. Additional Work Activities Permitted Under Waiver 
Demonstration:
    Instruction: Some States' waivers permit participation in work 
activities that are not permitted under the statute. Enter the 
adult's (or minor child head-of-household's) average number of hours 
per week of participation in such work activities in this data 
element. For example, some State waivers permit participation in 
vocational educational training and job search beyond the TANF 
statutory limits. Count hours of participation in these activities 
beyond the TANF limits where allowed by the State waivers in this 
item. Otherwise, count the additional hours of work participation in 
the activity ``Other Work Activities.''
    62. Other Work Activities:
    Guidance: This data element collects information on work 
activities provided that are not permitted under a State waiver and 
are beyond the requirements of the statute. Reporting on this data 
element is optional. States may want to demonstrate their additional 
efforts at helping individuals become self-sufficient even though 
these activities are not considered in the calculation of the work 
participation rates.
    63. Required Hours of Work Under Waiver Demonstration:
    Guidance: In approving waivers, ACF specified hours of 
participation in several instances. One type of hour change in the 
welfare reform demonstrations was the recognition, as part of a 
change in work activities and/or exemptions, that the hours 
individuals worked should be consistent with their abilities and in 
compliance with an employability or personal responsibility plan or 
other criteria in accordance with the waiver terms and conditions. 
If the hour requirement in this case was part of a specific work 
component waiver, the State could show inconsistency and could use 
the waiver hours instead of the hours in section 407.
    Instruction: If applicable, enter the two-digit number that 
represents the average number of hours per week of work 
participation required of the individual under a work component 
waiver. Otherwise, leave blank or enter ``0.'' This data element is 
not applicable for individuals whose family affiliation code is 2, 
3, 4, or 5.
    64. Amount of Earned Income: Enter the dollar amount of the 
adult's (or minor child head-of-household's) earned income for the 
reporting month or for the month used to budget for the reporting 
month. Include wages, salaries, and other earned income in this 
item.
    65. Amount of Unearned Income: Unearned income has five 
categories. For each category of unearned income, enter the dollar 
amount of the adult's (or minor child head-of-household's) unearned 
income for the reporting month or for the month used to budget for 
the reporting month.
    a. Earned Income Tax Credit (EITC):
    Guidance: Earned Income Tax Credit is a refundable Federal, 
State, or local tax credit for families and dependent children. EITC 
payments are received monthly (as advance payment through the 
employer), annually (as a refund from IRS), or both.
    Instruction: Enter the total dollar amount of the Earned Income 
Tax Credit actually received, whether received as an advance payment 
or a single payment (e.g., tax refund), by the adult (or minor child 
head-of-household) during the reporting month or the month used to 
budget for the reporting month. If the State counts the EITC as a 
resource, report it here as unearned income in the month received 
(i.e., reporting month or budget month, whichever the State is 
using). If the State assumes an advance payment is applied for and 
obtained, only report what is actually received for this item.
    b. Social Security: Enter the dollar amount of Social Security 
benefits that the adult in the State (Tribal) TANF family has 
received for the reporting month or for the month used to budget for 
the reporting month.
    c. SSI: Enter the dollar amount of SSI that the adult in the 
State (Tribal) TANF family has received for the reporting month or 
for the month used to budget for the reporting month.
    d. Worker's Compensation: Enter the dollar amount of Worker's 
Compensation that the adult in the State (Tribal) TANF family has 
received for the reporting month or for the month used to budget for 
the reporting month.
    e. Other Unearned Income:
    Guidance: Other unearned income includes (but is not limited to) 
RSDI benefits, Veterans benefits, Unemployment Compensation, other 
government benefits, a housing subsidy, a contribution or income-in-
kind, deemed income, Public Assistance or General Assistance, 
educational grants/scholarships/loans, and other. Do not include 
EITC, Social Security, SSI, Worker's Compensation, value of food 
stamp assistance, the amount of a Child Care subsidy, or the amount 
of Child Support.
    Instruction: Enter the dollar amount of other unearned income 
that the adult in the State TANF family has received for the 
reporting month or for the month used to budget for the reporting 
month.

Child Characteristics

    This section allows for coding the child characteristics for up 
to ten children in the TANF family. A minor child head-of-

[[Page 17910]]

household should be coded as an adult, not as a child. The youngest 
child should be coded as the first child in the family, the second 
youngest child as the second child, and so on.
    If there are more than ten children in the TANF family, use the 
following order to identify the persons to be coded: (1) children in 
the eligible family receiving assistance in order from youngest to 
oldest; (2) minor siblings of child in the eligible family receiving 
assistance from youngest to oldest; and (3) any other children.
    66. Family Affiliation:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for children.
    Instruction: Enter the one-digit code that shows the child's 
relation to the eligible family receiving assistance.
    1=Member of the eligible family receiving assistance.
    Not in eligible family receiving assistance, but in the 
household
    2=Parent of minor child in the eligible family receiving 
assistance.
    3=Caretaker relative of minor child in the eligible family 
receiving assistance.
    4=Minor sibling of child in the eligible family receiving 
assistance.
    5=Person whose income or resources are considered in determining 
eligibility for or amount of assistance for the eligible family 
receiving assistance.
    67. Date of Birth: Enter the eight-digit code for date of birth 
for this child under the State (Tribal) TANF Program in the format 
YYYYMMDD. If the child's date of birth is unknown and the family 
affiliation code is not ``1,'' enter the code ``99999999''.
    68. Social Security Number: Enter the nine-digit Social Security 
Number for the child in the format nnnnnnnnn. Reporting of this data 
element is optional for individuals whose family affiliation code is 
4. If the Social Security number is unknown and the family 
affiliation code is not ``1,'' enter ``999999999''.
    69. Race/Ethnicity
    Instruction: To allow for the multiplicity of race/ethnicity, 
please enter the one-digit code for each category of race and 
ethnicity of the TANF child. Reporting of this data element is 
optional for individuals whose family affiliation code is 4 or 5.
    Ethnicity:
    a. Hispanic or Latino:
    1=Yes, Hispanic or Latino.
    2=No.
    Race:
    b. American Indian or Alaska Native:
    1=Yes, American Indian or Alaska Native.
    2=No.
    c. Asian:
    1=Yes, Asian.
    2=No.
    d. Black or African American:
    1=Yes, Black or African American.
    2=No.
    e. Native Hawaiian or Other Pacific Islander:
    1=Yes, Native Hawaiian or Pacific Islander.
    2=No.
    f. White:
    1=Yes, White.
    2=No.
    70. Gender: Enter the one-digit code that indicates the child's 
gender.
    1=Male.
    2=Female.
    71. Receives Disability Benefits: The Act specifies five types 
of disability benefits. Two of these types of disability benefits 
are applicable to children. For each type of disability benefits, 
enter the one-digit code that indicates whether or not the child 
received the benefit.
    a. Receives Benefits Based on Federal Disability Status Under 
Non-Social Security Act Programs: These programs include Veteran's 
disability benefits, Worker's disability compensation, and Black 
Lung Disease disability benefits.
    1=Yes, received benefits based on Federal disability status.
    2=No.
    b. Receives Supplemental Security Income Under Title XVI-SSI of 
the Social Security Act: 
    1=Yes, received aid under Title XVI-SSI.
    2=No.
    72. Relationship to Head-of-Household:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for children.
    Instruction: Enter the two-digit code that shows the child's 
relationship (including by marriage) to the head of the household, 
as defined by the Food Stamp Program or as determined by the State 
(Tribe), (i.e., the relationship to the principal person of each 
person living in the household.)
    01=Head-of-household.
    02=Spouse.
    03=Parent.
    04=Daughter or son.
    05=Stepdaughter or stepson.
    06=Grandchild or great grandchild.
    07=Other related person (brother, niece, cousin).
    08=Foster child.
    09=Unrelated child.
    10=Unrelated adult.
    73. Parent With Minor Child In the Family:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Code 
``1'' is not applicable for children. A parent with a minor child in 
the family may be a natural parent, adoptive parent, or step-parent 
of a minor child in the family. Reporting of this data element is 
optional for individuals whose family affiliation code is 4 or 5.
    Instruction: Enter the one-digit code that indicates the child's 
parental status.
    1=Yes, a parent with a minor child in the family and used in 
two-parent participation rate.
    2=Yes, a parent with a minor child in the family, but not used 
in two-parent participation rate.
    3=No.
    74. Educational Level: Enter the two-digit code to indicate the 
highest level of education attained by the child. Unknown is not an 
acceptable code for individuals whose family affiliation code is 
``1''. Reporting of this data element is optional for individuals 
whose family affiliation code is 4.
    01-11=Grade level completed in primary/secondary school 
including secondary level vocational school or adult high school.
    12=High school diploma, GED, or National External Diploma 
Program.
    13=Awarded Associate's Degree.
    14=Awarded Bachelor's Degree.
    15=Awarded graduate degree (Master's or higher).
    16=Other credentials (degree, certificate, diploma, etc.).
    98=No formal education.
    99=Unknown.
    75. Citizenship/Alienage:
    Instruction: Enter the one-digit code that indicates the child's 
citizenship/alienage. Unknown is not an acceptable code for an 
individual whose family affiliation code is ``1''. Reporting of this 
data element is optional for individuals whose family affiliation 
code is 4.
    1=U.S. citizen, including naturalized citizens.
    2=Qualified alien.
    9=Unknown.
    76. Amount of Unearned Income: Unearned income has two 
categories. For each category of unearned income, enter the dollar 
amount of the child's unearned income.
    a. SSI: Enter the dollar amount of SSI that the child in the 
State (Tribal) TANF family has received for the reporting month or 
for the month used to budget for the reporting month.
    b. Other Unearned Income: Enter the dollar amount of other 
unearned income that the child in the State (Tribal) TANF family has 
received for the reporting month or for the month used to budget for 
the reporting month.

Appendix B--TANF Data Report--Section Two Disaggregated Data Collection 
for Families No Longer Receiving Assistance under the TANF Program

Instructions and Definitions

    General Instruction: The State agency or Tribal grantee should 
collect and report data for each data element. The data must be 
complete (unless explicitly instructed to leave the field blank) and 
accurate (i.e., correct).
    An ``Unknown'' code may appear only on four data elements (#15 
Date of Birth, #16 Social Security Number, #24 Educational Level, 
and #25 Citizenship/Alienage). For these data elements, unknown is 
not an acceptable code for individuals who are members of the 
eligible family (i.e., family affiliation code ``1''). States are 
not expected to track closed cases in order to collect information 
on families for months after the family has left the rolls. Rather, 
States are to report based on the last month of assistance.
    1. State FIPS Code: Enter your two-digit State code from the 
following listing. These codes are the standard codes used by the 
National Institute of Standards and Technology. Tribal grantees 
should leave this field blank.

[[Page 17911]]



------------------------------------------------------------------------
                              State                                Code
------------------------------------------------------------------------
Alabama.........................................................      01
Alaska..........................................................      02
American Samoa..................................................      60
Arizona.........................................................      04
Arkansas........................................................      05
California......................................................      06
Colorado........................................................      08
Connecticut.....................................................      09
Delaware........................................................      10
Dist. of Columbia...............................................      11
Florida.........................................................      12
Georgia.........................................................      13
Guam............................................................      66
Hawaii..........................................................      15
Idaho...........................................................      16
Illinois........................................................      17
Indiana.........................................................      18
Iowa............................................................      19
Kansas..........................................................      20
Kentucky........................................................      21
Louisiana.......................................................      22
Maine...........................................................      23
Maryland........................................................      24
Massachusetts...................................................      25
Michigan........................................................      26
Minnesota.......................................................      27
Mississippi.....................................................      28
Missouri........................................................      29
Montana.........................................................      30
Nebraska........................................................      31
Nevada..........................................................      32
New Hampshire...................................................      33
New Jersey......................................................      34
New Mexico......................................................      35
New York........................................................      36
North Carolina..................................................      37
North Dakota....................................................      38
Ohio............................................................      39
Oklahoma........................................................      40
Oregon..........................................................      41
Pennsylvania....................................................      42
Puerto Rico.....................................................      72
Rhode Island....................................................      44
South Carolina..................................................      45
South Dakota....................................................      46
Tennessee.......................................................      47
Texas...........................................................      48
Utah............................................................      49
Vermont.........................................................      50
Virgin Islands..................................................      78
Virginia........................................................      51
Washington......................................................      53
West Virginia...................................................      54
Wisconsin.......................................................      55
Wyoming.........................................................      56
------------------------------------------------------------------------

    2. County FIPS Code: Enter the three-digit code established by 
the National Institute of Standards and Technology for 
classification of counties and county equivalents. Codes were 
devised by listing counties alphabetically and assigning 
sequentially odd integers; e.g., 001, 003, 005. A complete list of 
codes is available in Appendix F of the TANF Sampling and 
Statistical Methods Manual. Tribal grantees should leave this field 
blank.
    3. Tribal Code: For Tribal grantees, enter the three-digit 
Tribal code that represents your Tribe (See Appendix E of the TANF 
Sampling and Statistical Methods Manual for a complete listing of 
Tribal Codes). State agencies should leave this field blank.
    4. Reporting Month: Enter the four-digit year and two-digit 
month code that identifies the year and month for which the data are 
being reported.
    5. Stratum:
    Guidance: All families selected in the sample from the same 
stratum must be assigned the same stratum code. Valid stratum codes 
may range from ``00'' to ``99.'' States and Tribes with stratified 
samples should provide the ACF Regional Office with a listing of the 
numeric codes utilized to identify any stratification. If a State or 
Tribe uses a non-stratified sample design or opts to provide data 
for its entire caseload, enter the same stratum code any two-digit 
number) for each family.
    Instruction: Enter the two-digit stratum code.

Family-Level Data

    Definition: For reporting purposes, the TANF family means (a) 
all individuals receiving assistance as part of a family under the 
State's TANF Program; and (b) the following additional persons 
living in the household, if not included under (a) above:
    (1) Parent(s) or caretaker relative(s) of any minor child 
receiving assistance;
    (2) Minor siblings (including unborn children) of any child 
receiving assistance; and
    (3) Any person whose income or resources would be counted in 
determining the family's eligibility for or amount of assistance.
    6. Case Number--TANF:
    Guidance: If the case number is less than the allowable eleven 
characters, a State may use lead zeros to fill in the number.
    Instruction: Enter the number that was assigned by the State 
agency or Tribal grantee to uniquely identify the TANF family.
    7. ZIP Code: Enter the five-digit ZIP code for the family's 
place of residence for the reporting month.
    8. Disposition: Enter one of the following codes for each TANF 
family.
    1=Data collection completed.
    2=Not subject to data collection/listed in error.
    9. Reason for Closure:
    Guidance: A closed case is a family whose assistance was 
terminated for the reporting month, but received assistance under 
the State's TANF Program in the prior month. A temporarily suspended 
case is not a closed case. If there is more than one applicable 
reason for closure, determine the principal (i.e., most relevant) 
reason. If two or more reasons are equally relevant, use the reason 
with the lowest numeric code. For example, when an adult marries, 
the income and resources of the new spouse are considered in 
determining eligibility. If, at the time of the marriage, the family 
becomes ineligible because of the addition of the spouse's income 
and/or resources, the case closure should be coded using code ``2''. 
If the family did not became ineligible based on the income and 
resources at the time of the marriage, but rather due to an increase 
in earnings subsequent to the marriage, then the case closure should 
be coded using code ``1''.
    Instruction: Enter the two-digit code that indicates the reason 
for the TANF family no longer receiving assistance.
    01=Employment and/or excess earnings.
    02=Marriage.
    03=Federal five-year time limit.
    Sanctions:
    04=Work-related sanction.
    05=Child support sanction.
    06=Teen parent failing to meet school attendance requirement.
    07=Teen parent failing to live in an adult setting.
    08=Failure to finalize an individual responsibility plan (e.g., 
did not sign plan).
    09=Failure to meet individual responsibility plan provision or 
other behavioral requirements (e.g., immunize a minor child, attend 
parenting classes).
    State (Tribal) Policies:
    10=State (Tribal) time limit, if different than Federal.
    11=Child support collected.
    12=Excess unearned income (exclusive of child support 
collected).
    13=Excess resources.
    14=Youngest child too old to qualify for assistance.
    15=Minor child absent from the home for a significant time 
period.
    16=Failure to appear at eligibility/redetermination appointment, 
submit required verification materials, and/or cooperate with 
eligibility requirements.
    17=Transfer to separate State MOE program.
    Other.
    18=Family voluntarily closes the case.
    99=Other.
    10. Received Subsidized Housing:
    Guidance: Subsidized housing refers to housing for which money 
was paid by the Federal, State, or local government or through a 
private social service agency to the family or to the owner of the 
housing to assist the family in paying rent. Two families sharing 
living expenses does not constitute subsidized housing.
    Instruction: Enter the one-digit code that indicates whether or 
not the TANF family received subsidized housing for the reporting 
month (or for the last month of TANF assistance).
    1=Public housing.
    2=Rent subsidy.
    3=No housing subsidy.
    11. Received Medical Assistance: Enter ``1'' if, for the 
reporting month (or for the last month of TANF assistance), any TANF 
family member was enrolled in Medicaid and, thus eligible to receive 
medical assistance under the State plan approved under Title XIX or 
``2'' if no TANF family member was enrolled in Medicaid.
    1=Yes, enrolled in Medicaid.
    2=No.
    12. Received Food Stamps: Enter the one-digit code that 
indicates whether or not the TANF family received food stamp 
assistance for the reporting month (or for the last month of TANF 
assistance).
    1=Yes, received food stamp assistance.
    2=No.
    13. Received Subsidized Child Care:
    Instruction: If the TANF family received subsidized child care 
for services in the reporting month (or for the last month of TANF 
assistance), enter code ``1'' or ``2,'' whichever is appropriate. 
Otherwise, enter code ``3.''

[[Page 17912]]

    1=Yes, received federally funded (entirely or in part) child 
care (e.g., receives either TANF, CCDF, SSBG, or other federally 
funded child care).
    2=Yes, received child care funded entirely under a State, 
Tribal, and/or local program (i.e., no Federal funds used).
    3=No.

Person-Level Data

    This section allows for coding up to sixteen persons in the TANF 
family. If there are more than sixteen persons in the TANF family, 
use the following order to identify the persons to be coded: (1) the 
head-of-household; (2) parents in the eligible family receiving 
assistance; (3) children in the eligible family receiving 
assistance; (4) other adults in the eligible family receiving 
assistance; (5) parents not in the eligible family receiving 
assistance; (6) caretaker relatives not in the eligible family 
receiving assistance; (7) minor siblings of a child in the eligible 
family; and (8) other persons, whose income or resources count in 
determining eligibility for or amount of assistance of the eligible 
family receiving assistance, in descending order from the person 
with the most income to the person with the least income. As 
indicated below, reporting for certain specified data elements in 
this section is optional for certain individuals (whose family 
affiliation code is a 2, 3, 4, or 5).
    14. Family Affiliation:
    Instruction: Enter the one-digit code that shows the 
individual's relation to the eligible family receiving assistance.
    1=Member of the eligible family receiving assistance.
    Not in eligible family receiving assistance, but in the 
household:
    2=Parent of minor child in the eligible family receiving 
assistance.
    3=Caretaker relative of minor child in the eligible family 
receiving assistance.
    4=Minor sibling of child in the eligible family receiving 
assistance.
    5=Person whose income or resources are considered in determining 
eligibility for or amount of assistance for the eligible family 
receiving assistance.
    15. Date of Birth: Enter the eight-digit code for date of birth 
for this individual under TANF in the format YYYYMMDD. If the 
individual's date of birth is unknown and the individual's family 
affiliation code is not ``1,'' enter the code ``99999999''.
    16. Social Security Number: Enter the nine-digit Social Security 
Number for the individual in the format nnnnnnnnn. If the social 
security number is unknown and the individual's family affiliation 
code is not ``1,'' enter ``999999999''.
    17. Race/Ethnicity: Instructions: To allow for the multiplicity 
of race/ethnicity, please enter the one-digit code for each category 
of race and ethnicity of the TANF individual. Reporting of this data 
element is optional for individuals whose family affiliation code is 
4 or 5.
    Ethnicity:
    a. Hispanic or Latino:
    1=Yes, Hispanic or Latino.
    2=No.
    b. Race:
    c. American Indian or Alaska Native:
    1=Yes, American Indian or Alaska Native.
    2=No.
    d. Asian:
    1=Yes, Asian.
    2=No.
    e. Black or African American:
    1=Yes, Black or African American.
    2=No.
    f. Native Hawaiian or Other Pacific Islander:
    1=Yes, Native Hawaiian or Pacific Islander.
    2=No.
    g. White:
    1=Yes, White.
    2=No.
    18. Gender: Enter the one-digit code that indicates the 
individual's gender.
    1=Male.
    2=Female.
    19. Received Disability Benefits:
    Instructions: The Act specifies five types of disability 
benefits. For each type of disability benefits, enter the one-digit 
code that indicates whether or not the individual received the 
benefit.
    a. Received Federal Disability Insurance Benefits Under the 
Social Security OASDI Program (Title II of the Social Security Act): 
Enter the one-digit code that indicates the adult received Federal 
disability insurance benefits for the reporting month (or the last 
month of TANF assistance). This item is not required to be coded for 
a child.
    1=Yes, received Federal disability insurance.
    2=No.
    b. Receives Benefits Based on Federal Disability Status Under 
Non-Social Security Act Programs: These programs include Veteran's 
disability benefits, Worker's disability compensation, and Black 
Lung Disease disability benefits. Enter the one-digit code that 
indicates the individual received benefits based on Federal 
disability status for the reporting month (or the last month of TANF 
assistance). This data element should be coded for each adult and 
child with family affiliation code ``1''.
    1=Yes, received benefits based on Federal disability status.
    2=No.
     c. Received Aid to the Permanently and Totally Disabled Under 
Title XIV-APDT of the Social Security Act: Enter the one-digit code 
that indicates the adult received aid under a State plan approved 
under Title XIV for the reporting month (or the last month of TANF 
assistance). This item is not required to be coded for a child.
    1=Yes, received aid under Title XIV-APDT.
    2=No.
    d. Received Aid to the Aged, Blind, and Disabled Under Title 
XVI-AABD of the Social Security Act: Enter the one-digit code that 
indicates the adult received aid under a State plan approved under 
Title XVI-AABD for the reporting month (or the last month of TANF 
assistance). This item is not required to be coded for a child.
    1=Yes, received aid under Title XVI-AABD.
    2=No.
    e. Received Supplemental Security Income Under Title XVI-SSI of 
the Social Security Act: Enter the one-digit code that indicates the 
individual received aid under a State plan approved under Title XVI-
SSI for the reporting month (or the last month of TANF assistance). 
This data element should be coded for each adult and child with 
family affiliation code ``1''.
    1=Yes, received aid under Title XVI-SSI.
    2=No.
    20. Marital Status: Enter the one-digit code for the marital 
status of the adult recipient. Reporting of this data element is 
optional for individuals whose family affiliation code is 4 or 5.
    1=Single, never married.
    2=Married, living together.
    3=Married, but separated.
    4=Widowed.
    5=Divorced.
    21. Relationship to Head-of-Household:
    Instruction: Enter the two-digit code that shows the 
individual's relationship (including by marriage) to the head of the 
household, as defined by the Food Stamp Program or as determined by 
the State (Tribe), (i.e., the relationship to the principal person 
of each person living in the household.) If a minor child head-of-
household, enter code ``01.''
    01=Head-of-household.
    02=Spouse.
    03=Parent.
    04=Daughter or son.
    05=Stepdaughter or stepson.
    06=Grandchild or great grandchild.
    07=Other related person (brother, niece, cousin).
    08=Foster child.
    09=Unrelated child.
    10=Unrelated adult.
    22. Parent With Minor Child In the Family:
    Guidance: A parent with a minor child in the family may be a 
natural parent, adoptive parent, or step-parent of a minor child in 
the family. Reporting of this data element is optional for 
individuals whose family affiliation code is 3, 4, or 5.
    Instruction: Enter the one-digit code that indicates the 
individual's parental status.
    1=Yes, a parent with a minor child in the family.
    2=No.
    23. Needs of a Pregnant Woman: Some States (Tribes) consider the 
needs of a pregnant woman in determining the amount of assistance 
that the TANF family receives. If the individual was pregnant and 
the needs associated with this pregnancy were considered in 
determining the amount of assistance for the last month of TANF 
assistance, enter a ``1'' for this data element. Otherwise enter a 
``2'' for this data element. This data element is applicable only 
for individuals whose family affiliation code is 1.
    1=Yes, additional needs associated with pregnancy were 
considered in determining the amount of assistance.
    2=No.
    24. Educational Level: Enter the two-digit code to indicate the 
highest level of education attained by the individual. Unknown is 
not an acceptable code for individuals whose family affiliation code 
is ``1''. Reporting of this data element is optional for individuals 
whose family affiliation code is 4 or 5.

[[Page 17913]]

    01-11=Grade level completed in primary/secondary school 
including secondary level vocational school or adult high school.
    12=High school diploma, GED, or National External Diploma 
Program.
    13=Awarded Associate's Degree.
    14=Awarded Bachelor's Degree.
    15=Awarded graduate degree (Master's or higher).
    16=Other credentials (degree, certificate, diploma, etc.).
    98=No formal education.
    99=Unknown.
    25. Citizenship/Alienage:
    Instruction: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) citizenship/alienage. Unknown 
is not an acceptable code for an individual whose family affiliation 
code is ``1''. Reporting of this data element is optional for 
individuals whose family affiliation code is 4 or 5.
    1=U.S. citizen, including naturalized citizens.
    2=Qualified alien.
    9=Unknown.
    26. Number of Months Countable toward Federal Time Limit: Enter 
the number of months countable toward the adult's (or minor child 
head-of-household's) Federal five-year time limit based on 
assistance received from (1) the State (Tribe) and (2) other States 
or Tribes. Reporting of this data element is optional for 
individuals whose family affiliation code is 2, 3, 4, or 5.
    27. Number of Countable Months Remaining Under State's (Tribe's) 
Time Limit: Enter the number of months that remain countable toward 
the adult's (or minor child head-of-household's) State (Tribal) time 
limit. Reporting of this data element is optional for individuals 
whose family affiliation code is 2, 3, 4, or 5.
    28. Employment Status: Enter the one-digit code that indicates 
the adult's (or minor child head-of-household's) employment status. 
Leave this field blank for other minor children. Reporting of this 
data element is optional for individuals whose family affiliation 
code is 4 or 5.
    1=Employed.
    2=Unemployed, looking for work.
    3=Not in labor force (i.e, unemployed, not looking for work, 
includes discouraged workers).
    29. Amount of Earned Income: Enter the amount of the adult's (or 
minor child head-of-household's) earned income for the last month on 
assistance or for the month used to budget for the last month on 
assistance.
    30. Amount of Unearned Income: Enter the dollar amount of the 
individual's unearned income for the last month on assistance or for 
the month used to budget for the last month on assistance.

Appendix C--TANF Data Report--Section Three--Aggregated Data Collection 
for Families Applying for, Receiving, and No Longer Receiving 
Assistance Under the TANF Program

Instructions and Definitions

    General Instruction: The State agency or Tribal grantee are to 
collect and report data for each data element, unless explicitly 
instructed to leave the field blank. Monthly caseload counts (e.g., 
number of families, number of two-parent families, and number of 
closed cases) and number of recipients must be unduplicated monthly 
totals. States and Tribal grantees may use samples to estimate the 
monthly totals only for data elements #4, #5, #6, #15, #16, and #17.
    1. State FIPS Code: Enter your two-digit State code. Tribal 
grantees should leave this field blank.
    2. Tribal Code: For Tribal grantees only, enter the three-digit 
Tribal code that represents your Tribe (See Appendix E of the TANF 
Sampling and Statistical Methods Manual for a complete listing of 
Tribal Codes). State agencies should leave this field blank.
    3. Calendar Quarter: The four calendar quarters are as follows:
    First quarter--January-March.
    Second quarter--April-June.
    Third quarter--July-September.
    Fourth quarter--October-December.
    Enter the four-digit year and one-digit quarter code (in the 
format YYYYQ) that identifies the calendar year and quarter for 
which the data are being reported (e.g., first quarter of 1997 is 
entered as ``19971'').

Applications

    Guidance: The term ``application'' means the action by which an 
individual indicates in writing to the agency administering the 
State (or Tribal) TANF Program his/her desire to receive assistance.
    Instruction: All counts of applications should be unduplicated 
monthly totals.
    4. Total Number of Applications: Enter the total number of 
approved and denied applications received for each month of the 
quarter. For each month in the quarter, the total in this item 
should equal the sum of the number of approved applications (in item 
#5) and the number of denied applications (in item #6). The monthly 
totals for this element may be estimated from samples.
    A. First Month:
    B. Second Month:
    C. Third Month:
    5. Total Number of Approved Applications: Enter the number of 
applications approved during each month of the quarter. The monthly 
totals for this element may be estimated from samples.
    A. First Month:
    B. Second Month:
    C. Third Month:
    6. Total Number of Denied Applications: Enter the number of 
applications denied (or otherwise disposed of) during each month of 
the quarter. The monthly totals for this element may be estimated 
from samples.
    A. First Month:
    B. Second Month:
    C. Third Month:

Active Cases

    For purposes of completing this report, include all TANF 
eligible cases receiving assistance (i.e., cases funded under the 
TANF block grant and State MOE funded TANF cases) as cases receiving 
assistance under the State (Tribal) TANF Program. All counts of 
families and recipients should be unduplicated monthly totals.
    7. Total Amount of Assistance: Enter the dollar value of all 
assistance (cash and non-cash) provided to TANF families under the 
State (Tribal) TANF Program for each month of the quarter. Round the 
amount of assistance to the nearest dollar.
    A. First Month:
    B. Second Month:
    C. Third Month:
    8. Total Number of Families: Enter the number of families 
receiving assistance under the State (Tribal) TANF Program for each 
month of the quarter. The total in this item should equal the sum of 
the number of two-parent families (in item #9), the number of one-
parent families (in item #10) and the number of no-parent families 
(in item #11).
    A. First Month:
    B. Second Month:
    C. Third Month:
    9. Total Number of Two-parent Families: Enter the total number 
of 2-parent families receiving assistance under the State (Tribal) 
TANF Program for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    10. Total Number of One-Parent Families: Enter the total number 
of one-parent families receiving assistance under the State (Tribal) 
TANF Program for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    11. Total Number of No-Parent Families: Enter the total number 
of no-parent families receiving assistance under the State (Tribal) 
TANF Program for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    12. Total Number of Recipients: Enter the total number of 
recipients receiving assistance under the State (Tribal) TANF 
Program for each month of the quarter. The total in this item should 
equal the sum of the number of adult recipients (in item #13) and 
the number of child recipients (in item #14).
    A. First Month:
    B. Second Month:
    C. Third Month:
    13. Total Number of Adult Recipients: Enter the total number of 
adult recipients receiving assistance under the State (Tribal) TANF 
Program for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    14. Total Number of Child Recipients: Enter the total number of 
child recipients receiving assistance under the State (Tribal) TANF 
Program for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    15. Total Number of Non-Custodial Parents Participating in Work 
Activities: Enter the total number of noncustodial parents 
participating in work activities (even if not receiving assistance) 
under the State (Tribal) TANF Program for each month of the quarter. 
The monthly totals for this element may be estimated from samples.
    A. First Month:
    B. Second Month:
    C. Third Month:
    16. Total Number of Births: Enter the total number of births in 
families receiving

[[Page 17914]]

assistance under the State (Tribal) TANF Program for each month of 
the quarter. The monthly totals for this element may be estimated 
from samples.
    A. First Month:
    B. Second Month:
    C. Third Month:
    17. Total Number of Out-of-Wedlock Births: Enter the total 
number of out-of-wedlock births in families receiving assistance 
under the State (Tribal) TANF Program for each month of the quarter. 
The monthly totals for this element may be estimated from samples.
    A. First Month:
    B. Second Month:
    C. Third Month:

Closed Cases

    18. Total Number of Closed Cases: Enter the total number of 
closed cases for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:

BILLING CODE 4184-01-M

[[Page 17915]]

[GRAPHIC] [TIFF OMITTED] TR12AP99.000



BILLDING CODE 4184-01-C

[[Page 17916]]

Appendix D--Section 2--Instruction For Completion of Form ACF-196--
Financial Reporting Form for the Temporary Assistance for Needy 
Families (TANF) Program

    All States must complete and submit this report in accordance 
with these instructions on behalf of the State agency administering 
the TANF Program.
    Due Dates: This form must be submitted quarterly by February 14, 
May 15, August 14 and November 14.
    States must submit separate quarterly reports regarding the use 
of each fiscal year's funds. For example, States must submit a 
report regarding the expenditure of FY 98 funds in FY 99 separately 
from the report on the use of FY 99 funds in FY 99. Until the State 
reports that all of the Federal funds awarded for a given fiscal 
year have been transferred or expended, States must continue to 
submit quarterly reports on the use of funds from that fiscal year.
    Distribution: The original copy (with an original signature) 
should be submitted to: Administration for Children and Families, 
Office of Financial Services, Division of Formula, Entitlement and 
Block Grants, Aerospace Building, 6th Floor, 370 L'Enfant Promenade, 
S.W., Washington, D.C. 20447. An additional copy should be submitted 
to the ACF Regional Administrator.
    General Instructions:

--Round all entries to the nearest dollar. Omit cents.
--Include costs of contracts and subcontracts in the appropriate 
reporting category based on their nature or function.
--Enter State Name.
--Enter the Fiscal Year for which this report is being submitted. 
Funding for each fiscal year is available until expended. Therefore, 
for each fiscal year, a State may be submitting reports 
simultaneously to cover two or more fiscal years. It is important to 
indicate the year for which information is being reported.

    The State must note that prior fiscal year unobligated balances 
may only be expended on assistance or on the related administrative 
costs of providing assistance. Expenditure of prior year unobligated 
balances must be reported on the Expenditures on Assistance 
categories (lines 5(a) through 5(d)) and any related administrative 
costs reported on line 6(j).

--Transfers of TANF funds to the CCDF or SSBG must be made in the 
current fiscal year with current fiscal year TANF funds. Transfers 
of unobligated balances are not allowed after the end of the Federal 
fiscal year in which the funds were awarded.
--Enter the ending dates for the current quarter (the quarter just 
ended for which this constitutes the report of actual expenditures 
and obligations) and the ending date of the next quarter (the 
upcoming quarter which estimates are being requested on line 12).

    Example: the State is reporting for the 1st quarter of the 
Federal fiscal year (10/1 through 12/31), the report is due February 
14, the current quarter ending date is 12/31, the next quarter 
ending date for which estimates are requested is 6/30. The estimate 
submitted by the State will be for the quarter of 4/1 through 6/30. 
Estimates are not required on quarterly reports submitted for prior 
fiscal years.

--Enter whether this report is being used for annual reconciliation 
of the Contingency Fund.
--Enter the Federal Medical Assistance Percentage Rate used by the 
State for the fiscal year for which contingency funds were received.
--Indicate whether this is a new report or a revision of a report 
previously submitted for the same period.
--Entries are not required or are not applicable to blocks that are 
shaded.

    Columns: All amounts reported in columns (A) through (D) must be 
actual expenditures or obligations made in accordance with all 
applicable statutes and regulations. Amounts reported in the 
estimates section are estimates of Federal expenditures to be made 
during the quarter indicated based on the best information available 
to the State.
    Explanation of Columns:
    Column (A) lines 1 through 4 refer to the Federal State Family 
Assistance Grant (SFAG) awards plus any Supplemental Grant or Bonus 
Funds, amounts transferred to the Child Care and Development Fund 
(CCDF) (Discretionary Fund) and the Social Services Block Grant 
(SSBG) program, and the amount Available for TANF.
    Column: (A) lines 5 through 9 refer to the Federal TANF funds 
that the State expended and obligated under its TANF program.
    Column: (A) line 10 refers to the unobligated balance, which is 
calculated by subtracting the amounts on lines 7 and 9 from the 
amount on line 4.
    Column: (A) line 12 is the SFAG grant award amount or the 
percentage of the SFAG that the State estimates it will need for the 
next quarter ending on the date indicated at the top of the form. 
(See page 6 of Line Item Instructions)
    Column: (B) lines 5 through 7 refer to State TANF expenditures 
that the State is making to meet its basic Maintenance-of-Effort 
(MOE) requirement. Include State funds that are commingled with 
Federal funds and segregated State funds expended under the State 
TANF program.

    Note: States receiving contingency funds under section 403(b) 
for the fiscal year must also use this column to report State TANF 
expenditures made to meet the Contingency Fund (CF) MOE requirement 
and matching expenditures made above the 100-percent MOE level. 
Expenditures made to meet the CF MOE requirement and expenditures 
made above the MOE level (for matching purposes) must be 
expenditures made under the State TANF program only; they cannot 
include expenditures made under ``separate State programs.'' In 
addition, child care expenditures cannot be included as CF MOE 
expenditures or expenditures that are matched with contingency 
funds.

    Column(B) line 11 refers to State replacement funds that the 
State must expend in the TANF program due to the assessment of a 
penalty and a reduction in its TANF grant awards.
    Column (C) lines 5 through 7 refer to State expenditures that 
the State is making in Separate State Programs, outside the State 
TANF program, to meet its basic MOE requirement.

    Note: For the basic MOE requirement, the cumulative total 
expenditures (i.e., the sum of 7(B) + 7(C)) reported at the end of 
the Federal fiscal year must add up to 80% of fiscal year 1994 
historic State expenditures if the State did not meet the TANF work 
participation requirements, or 75% of fiscal year 1994 historic 
State expenditures if the State met the TANF work participation 
requirements. Basic MOE requirements and tables were published in 
Program Instruction No. TANF-ACF-PI-97-9, dated October 31, 1997.
    For States that received contingency funds, line 7(B) minus line 
5(B)(b)(assistance--child care) minus line 6(B)(b)(non--assistance 
child care) must exceed 100 percent of the CF MOE requirement.

    Column (D) line 1 refers to the Federal Contingency Fund grant 
awards.
    Column (D) lines 5 through 7 refer to the Federal share of 
expenditures for which Federal funding is available at the FMAP rate 
for the fiscal year for which contingency funds were received. 
Contingency funds are available for match for State expenditures in 
excess of 100% of CF MOE requirements as explained in the ``Note'' 
above.

    Example: The State received contingency funds of $100,000 for 6 
months of the fiscal year; the FMAP rate is 60% Federal and 40% 
State; the CF 100% MOE requirement is $1,000,000; the State reported 
expenditures under Columns (B) and (D) of $1,200,000. To determine 
how much of the contingency funds the State can keep, the 
expenditures of $1,000,000 (CF MOE requirement) must be subtracted 
from the total State expenditures of $1,200,000. That difference 
($200,000) is to be multiplied by 60 percent, i.e., $200,000  x  60% 
= $120,000. The $120,000 must then be multiplied by \1/12\ times the 
number of months a State received contingency funds, i.e., $120,000 
x  \1/12\  x  6 = $60,000. The State may keep no more than $60,000 
of the $100,000 ACF awarded it for the Contingency Fund. (This 
$60,000 may be further reduced as the result of the amendments to 
section 403(b)(6) under the Adoption and Safe Families Act.)
    Determining how much, if any, a State may keep of the 
contingency funds awarded to it for a fiscal year, is possible only 
after annual reconciliation of the Contingency Fund account is 
completed. This form will serve as the annual reconciliation report 
when submitted for the fourth quarter of the fiscal year. Based on 
the example above, the amount claimed in line 7 of Column D (Total 
Expenditures - Contingency Fund) may be no more than $60,000.
    It is possible that a State will have received contingency funds 
after the end of the fiscal year that apply to expenditures made in 
the prior fiscal year. For a State receiving contingency funds for a 
fiscal year after it has ended, the State will be required to submit 
a revised fourth quarter report within 45 days of receipt of the 
additional contingency funds. There is no carryover of such funds 
from one fiscal year to the next.

[[Page 17917]]

Unobligated Balances Reported on a State Fourth Quarter Financial 
Report for the Immediately Preceding Fiscal Year

    Pursuant to section 404(e) of PRWORA of 1996, a State may 
reserve amounts awarded to the State under section 403 (excluding 
contingency funds), without fiscal year limitation, to provide 
assistance under the State TANF program. Federal Unobligated 
Balances carried forward from previous fiscal years may only be 
expended on assistance and related administrative costs associated 
with providing such assistance. The related Administrative Costs to 
provide the assistance will be reported against the 15 percent 
administrative cost cap for the fiscal year for which the Federal 
funds were originally awarded.

Current Fiscal Year Federal Expenditures on Non-Assistance

    The State must obligate by September 30 of the current fiscal 
year any funds for Expenditures on Non-Assistance. Non-Assistance 
expenditures are reported on Line 6 categories of this report. The 
State must liquidate these obligations by September 30 of the 
immediately succeeding Federal fiscal year for which the funds were 
awarded. If the final liquidation amounts are lower than the 
original amount obligated, these funds must be included in the 
Unobligated Balance Line Item for the year in which they were 
awarded. As mentioned in the previous paragraph, unobligated 
balances from previous fiscal years may only be expended on 
assistance and the administrative costs related to providing the 
assistance.

Transfers

    The State may transfer Federal funds to the CCDF Discretionary 
Fund and/or the SSBG programs only during the current fiscal year 
for which the funds were awarded. The State cannot transfer 
unobligated balances from a previous fiscal year to the CCDF and/or 
the SSBG programs. Limitations on transfers to these programs are 
explained in the Line Item instructions.

State Replacement of Grant Reductions Resulting From Penalties

    If a State's State Family Assistance Grant is reduced because of 
the imposition of a penalty under section 409, section 409(a)(12) 
provides that the State must replace the funds lost due to the 
penalty with State funds in an amount that is no less than the 
amount withheld. The State replacement funds must be included in 
Line 11 Column (B). These funds must be in addition to funds 
reported under line 7(B).

Line Item Instructions--Cumulative Fiscal Year Expenditures and 
Obligations

    Line 1. Awarded. Enter in column (A) the cumulative total of 
Federal TANF funds awarded to the State (after any Tribal 
adjustments) from October 1 of the Federal fiscal year for which the 
report is being submitted through the current quarter being 
reported. Enter in column (D) the cumulative total of contingency 
funds awarded to the State from October 1 of the Federal fiscal year 
for which the report is being submitted through the current quarter 
being reported.

    Note: The State must include all Federal TANF funds awarded for 
the current fiscal year on Line 1(A), except contingency funds. This 
includes SFAG funds, Supplemental Funds or any Bonus Funds. It does 
not include Welfare-to-Work funds awarded under section 403(a)(5).

    Line 2. Transferred to Child Care and Development Fund (CCDF). 
Enter in column (A) the cumulative total of funds that the State 
transferred to the Discretionary Fund of the Child Care and 
Development Fund from October 1 of the Federal fiscal year for which 
the report is being submitted through the current quarter being 
reported. Section 404(d)(1) of the Act governs the transfer of TANF 
funds to the Discretionary Fund. In compliance with section 
404(d)(1), a State may not transfer more than 30% of its total 
annual TANF funds. A State may transfer this entire amount to the 
Discretionary Fund of the CCDF program. All funds transferred to the 
Discretionary Fund of the CCDF program take on the rules and 
regulations of that recipient Fund in place for the current fiscal 
year at the time when the transfer occurs. A State can transfer 
current-year Federal TANF funds only. The State may not transfer 
prior year unobligated balances to the CCDF.
    Line 3. Transferred to SSBG. Enter in column (A) the cumulative 
total of funds the State transferred to the Social Services Block 
Grant (SSBG) program from October 1 of the Federal fiscal year for 
which the report is being submitted through the current quarter 
being reported. Section 404(d)(2) of the Act governs the transfer of 
TANF funds to the SSBG program; it limits the amount that a State 
may transfer to no more than 10% of its total annual TANF grant to 
SSBG. (Also, the combined amount transferred to SSBG and the 
Discretionary Fund may not exceed 30% of the annual TANF grant. In 
other words, for all financial reports applicable to grant funds for 
one fiscal year, the sum of the total cumulative amount reported on 
line 3 and the total cumulative amount reported on line 2 cannot 
exceed 30% of the annual TANF grant.) All funds transferred to the 
SSBG program are subject to the statute and regulations of the 
recipient SSBG program in place for the current fiscal year at the 
time when the transfer occurs. A State may transfer current-year 
Federal TANF funds only. The State may not transfer prior-year 
unobligated balances to SSBG.

    Note: Beginning in FY 2001 the maximum amount of SFAG funds a 
State may transfer to the SSBG program is 4.25% of its annual TANF 
grant.
    Also, the total amount transferred to SSBG and CCDBG affects the 
amount available for Job Access activities that may be used as the 
non-Federal match under that program, See instructions for line 6c1.

    Line 4. Adjusted SFAG. Enter in column (A) the cumulative total 
of funds available for TANF after subtracting the amounts 
transferred to the CCDF program (Discretionary Fund) (line 2(A)) 
and/or the SSBG program (line 3(A)) from October 1 of the Federal 
fiscal year for which the report is being submitted through the 
current quarter being reported.
    Line 5. Expenditures on Assistance. Blocks are shaded. 
Expenditures in this category must be included in Lines 5a through 
5d from October 1 of the Federal fiscal year for which the report is 
being submitted through the current quarter being reported.
    Line 5a. Basic Assistance. Enter in columns (A), (B), (C), and 
(D) the cumulative total expenditures for basic assistance from 
October 1 of the Federal fiscal year for which the report is being 
submitted through the current quarter being reported. Include 
benefits not reported on line 5d provided in the form of cash, 
payments, vouchers, or other forms designed to meet on going, basic 
needs. Include such benefits, even when provided in the form of 
payments by a TANF agency, or other agency on its behalf, to 
individuals and conditioned on their participation in work 
experience or community service (or any other work activity under 
section 261.30).
    Line 5b. Child Care. Enter in columns (A), (B), (C), and (D) the 
cumulative total expenditures for child care that meet the 
definition of assistance from October 1 of the Federal fiscal year 
for which the report is being submitted through the current quarter 
being reported. The amounts reported in this category do not include 
funds transferred to the CCDF (Discretionary Fund--reported on the 
ACF-696) or SSBG programs. Include child care expenditures for 
families that are not employed, but need child care to participate 
in other work activities such as job search, community service, 
education, or training, or for respite purposes. Do not include 
child care provided as a nonrecurrent, short-term benefit (for 
example, during applicant job search or to recently employed 
families who need child care extended during a temporary period of 
unemployment in order to maintain continuity of care). Do not 
include expenditures on pre-K activities or other programs designed 
to provide early childhood development or educational services 
(e.g., following the Head Start model); such activities should be 
reported as ``other'' and identified as such in a footnote to that 
category in the 4th Quarter Financial Report.
    LIne 5c. Other Supportive Services. Enter in columns (A), (B), 
(C), and (D) the cumulative total expenditures for transportation 
and other supportive services that meet the definition of assistance 
from October 1 of the Federal fiscal year for which the report is 
being submitted through the current quarter being reported. Include 
expenditures for families that are not employed but need supportive 
services to participate in other work activities such as job search, 
community service, education, or training, or for respite purposes. 
Do not include transportation or other supports provided as a 
nonrecurrent, short-term benefit (for example, during applicant job 
search).
    Line 5d. Assistance Authorized Solely Under Prior Law. Enter in 
columns (A) and (D) any expenditures of Federal funds on assistance 
that are authorized solely under section 404(a)(2) of the Act from 
October 1 of the Federal fiscal year for which the report is being 
submitted through the current quarter being reported.
    These are expenditures that are not otherwise consistent with 
the purposes of

[[Page 17918]]

TANF and/or with the prohibitions in section 408. States including 
expenditures on this line must include a footnote explaining the 
nature of these benefits (e.g., previously authorized juvenile 
justice or State foster care payments) and reference the State plan 
provision under which they were authorized.

    Note: States may not report MOE expenditures in this category; 
all State MOE expenditures must be consistent with the purposes of 
TANF.

    Line 6. Expenditures on Non-Assistance. Blocks are shaded. 
Expenditures in this category must be included in Lines 6a through 
6l.
    Line 6a. Work-Related Activities and Expenses. Enter in columns 
(A), (B), (C), and (D) the cumulative total expenditures (sum of 
6(a)1 + 6(a)2 + 6(a)3 for each column) for work-related activities 
and expenses, as described in the instructions for those 3 lines, 
from October 1 of the Federal fiscal year for which the report is 
being submitted through the current quarter being reported.
    Line 6a1. Work Subsidies. Enter in columns (A), (B), (C), and 
(D) the cumulative total expenditures for work subsidies from 
October 1 of the Federal fiscal year for which the report is being 
submitted through the current quarter being reported. Work subsidies 
include payments to employers or third parties to help cover the 
costs of employee wages, benefits, supervision, or training. Do not 
include expenditures related to payments to participants in 
community service and work experience activities that are within the 
definition of assistance.
    Line 6a2. Education. Enter in columns (A), (B), (C), and (D) 
costs related to educational activities from October 1 of the 
Federal fiscal year for which the report is being submitted through 
the current quarter being reported. These are expenditures on 
educational activities that are consistent with the recognized work 
activities at Sec. 261.30 or as a supplement to such activities. 
Thus, include secondary education (including alternative programs); 
adult education, GED, and ESL classes; education directly related to 
employment; education provided as vocational educational training; 
and post-secondary education. Do not include costs of early 
childhood education or after-school or summer enrichment programs 
for children in elementary or junior high school; such activities 
should be reported as ``other'' and identified as such in a footnote 
to that category in the 4th Quarter Financial Report.
    Line 6a3. Other Work Activities/Expenses. Enter in columns (A), 
(B), (C), and (D) expenditures on other work activities from October 
1 of the Federal fiscal year for which the report is being submitted 
through the current quarter being reported. These are expenditures 
on: (a) work activities that have not been reported as education or 
work subsidies (including staff costs related to providing work 
experience and community service activities, on-the-job training, 
job search and job readiness, job skills training, and training 
provided as vocational educational training); (b) related services 
(such as employment counseling, coaching, job development, 
information and referral, and outreach to business and non profit 
community groups); and (c) other work-related expenses (such as 
costs for work clothes and equipment). Include such costs when 
provided as part of a diversion program or as transitional services 
to individuals who ceased to receive assistance due to employment.
    Line 6b. Child Care. Enter in columns (A), (B), (C), and (D) the 
cumulative total expenditures for child care that does not meet the 
definition of assistance from October 1 of the Federal fiscal year 
for which the report is being submitted through the current quarter 
being reported. Include child care provided to employed families 
(related either to their work or related job retention and 
advancement activities) and child care provided as a nonrecurrent, 
short-term benefit (e.g., during applicant job search or to a 
recently employed family during a temporary period of unemployment). 
Do not include amounts of funds transferred to the CCDF 
(Discretionary Fund--reported on the ACF-696) or SSBG programs. 
Also, do not include expenditures on pre-K activities or other 
programs designed to provide early childhood development or 
educational services (e.g., following the Head Start model); such 
activities should be reported as ``other'' and identified as such in 
a footnote to that category in the 4th Quarter Financial Report).
    Line 6c. Transportation. Enter in columns (A), (B), (C), and (D) 
the cumulative total expenditures (sum of 6(d)1 + 6(d)2 for each 
column) for transportation activities that do not meet the 
definition of assistance from October 1 of the Federal fiscal year 
for which the report is being submitted through the current quarter 
being reported. Include the value of transportation benefits (such 
as allowances, bus tokens, car payments, auto insurance 
reimbursement, and van services) provided to employed families 
(related either to their work or related job retention and 
advancement activities) and provided as a nonrecurrent, short-term 
benefit (e.g., during applicant job search).
    Line 6c1. Job Access. Enter in Columns (A), (B), (C), and (D) 
the cumulative total expenditures for the Department of 
Transportation Job Access program from October 1 of the Federal 
fiscal year for which the report is being submitted through the 
current quarter being reported.

    Note: The amount of TANF funds expended on Job Access programs 
that may be used as non-Federal matching under the Job Access 
program is limited to the difference between 30 percent of TANF 
funds (amount reported on line 1(A)) and the total amount 
transferred to SSBG and the Discretionary Fund of CCDF (sum of 
amounts reported on lines 2(B) and 2(C)).

    Line 6c2. Other Transportation. Enter in Columns (A), (B), (C), 
and (D) the cumulative total expenditures for other types of 
transportation activities that do not meet the definition of 
assistance from October 1 of the Federal fiscal year for which the 
report is being submitted through the current quarter being 
reported.
    Line 6d. Individual Development Accounts. Enter in columns (A), 
(B), (C), and (D) expenditures on contributions to Individual 
Development Accounts and any other expenditures related to the 
operation of an IDA program that fall outside the definition of 
administrative costs from October 1 of the Federal fiscal year for 
which the report is being submitted through the current quarter 
being reported.
    Line 6e. Refundable Earned Income Tax Credits. Enter in columns 
(A), (B), (C), and (D) expenditures on refundable earned income tax 
credits paid to families and otherwise consistent with the 
requirements of parts 260 and 263 of the TANF regulations from 
October 1 of the Federal fiscal year for which the report is being 
submitted through the current quarter being reported. Include State 
and local tax credits that represent a specific portion of the 
Federal Earned Income Credit and expenditures on similar State 
programs designed to defray the costs of employment for low-income 
families.
    Line 6f. Other Refundable Tax Credits. Enter in columns (A), 
(B), (C), and (D) expenditures on any other refundable tax credits 
provided under State or local law that are consistent with the 
purposes of TANF and the requirements of parts 260 and 263 of the 
TANF regulations from October 1 of the Federal fiscal year for which 
the report is being submitted through the current quarter being 
reported.
    Line 6g. Diversion Payments. Enter in columns (A), (B), (C), and 
(D) any expenditures on nonrecurrent, short-term benefits to 
families in the form of cash payments, vouchers, or similar form of 
payment to deal with a specific crisis situation or episode of need 
and excluded from the definition of assistance on that basis. Do not 
include expenditures on support services such as child care or 
transportation (including car repairs) or work activities and 
expenses (such as applicant job search) provided under a diversion 
program; these items should have been reported in prior reporting 
categories.
    Line 6h. Prevention of Out-of-Wedlock Pregnancies. Enter in 
columns (A), (B), (C), and (D) the cumulative total program 
expenditures for prevention of out-of-wedlock pregnancies activities 
that have not otherwise been reported from October 1 of the Federal 
fiscal year for which the report is being submitted through the 
current quarter being reported.
    Line 6i. Two-Parent Family Formation and Maintenance. Enter in 
columns (A), (B), (C), and (D) the cumulative total program 
expenditures for two-parent family formation and maintenance 
activities that have not otherwise been reported from October 1 of 
the Federal fiscal year for which the report is being submitted 
through the current quarter being reported.
    Line 6j. Administration. Enter in columns (A), (B), (C), and (D) 
the cumulative total expenditures for administrative costs (as 
defined at Sec. 263.0) from October 1 of the Federal fiscal year for 
which the report is being submitted through the current quarter 
being reported.
    For Federal TANF funds, the 15% administrative cost cap applies 
to the amount Available for TANF reported on line 4(A) of this form. 
For State expenditures reported in columns (B) and (C), the 15% 
administrative cost cap applies to the cumulative amount of Total 
Expenditures (i.e., the sum of line 7(B) + 7(C)) reported for these 
columns.

[[Page 17919]]

    Based on the nature or function of the contract, States must 
include appropriate administrative costs associated with contracts 
and subcontracts that count towards the 15% administrative cost 
caps.
    Line 6k. Systems. Enter in columns (A), (B), (C), and (D) the 
cumulative total expenditures for systems costs related to 
monitoring and tracking under the program from October 1 of the 
Federal fiscal year for which the report is being submitted through 
the current quarter being reported.

    Note: Section 404(b)(1) of the Act limits States to which a 
grant is made under section 403 to expend no more than 15% of the 
grant for administrative costs. In addition, section 404(b)(2) of 
the Act states that the 15% administrative cost cap shall not apply 
to the use of a grant for information technology and computerization 
needed for tracking or monitoring required by or under part IV-A of 
the Act. The systems exclusion applies to items that might normally 
be administrative costs, but are systems-related and needed for 
monitoring or tracking purposes under TANF. Under our final rules 
the same information technology exclusion applies to MOE 
expenditures. The TANF rules at Secs. 263.2 and 263.13 provide 
guidance about what is excluded under this provision.

    Line 6l. Other. Enter in columns (A), (B), (C), and (D) the 
cumulative total expenditures for other expenditures considered 
``expenditures on non-assistance'' that were not included on Lines 
6a through 6j from October 1 of the Federal fiscal year for which 
the report is being submitted through the current quarter being 
reported. For example, include as ``other'' costs on general family 
preservation activities and parenting training. Include costs on 
activities such as substance abuse treatment, domestic violence 
services, and case management to the extent that such costs are not 
directed at the second goal of TANF and included as work-related 
costs above.

    Note: In the 4th quarter annual report the State must describe 
in a footnote the activities for which ``other expenditures'' under 
this line item applies.

    Line 7. Total Expenditures. Enter in columns (A), (B), (C), and 
(D) the cumulative total expenditures (i.e., the sum of Line 5a 
through Line 6l) from October 1 of the Federal fiscal year for which 
the report is being submitted through the current quarter being 
reported.
    Line 8. Transitional Services for Employed. Enter in columns 
(A), (B), (C), and (D) the cumulative total expenditures to provide 
transitional services to families that cease to receive assistance 
under the TANF program because of employment from October 1 of the 
Federal fiscal year for which the report is being submitted through 
the current quarter being reported. Expenditures reported on this 
line must also be included in the expenditure categories reported on 
lines 5 through 7.

    Note: The expenditures reported on this line will duplicate 
expenditures reported elsewhere in this report. Section 411(a)(5) 
requires separate quarterly reporting of expenditures on 
transitional services for families that have ceased to receive 
assistance because of employment.

    Line 9. Federal Unliquidated Obligations. Enter in columns (A) 
and (D) the cumulative total Federal unliquidated obligations from 
October 1 of the Federal fiscal year for which the report is being 
submitted through the current quarter being reported. Obligations 
reported on this line must meet the definition of obligations 
contained in 45 CFR 92.3. For the Contingency Fund, this line should 
indicate $0 for the report submitted for the fourth quarter.
    Line 10. Unobligated Balance. Enter in columns (A) and (D) the 
cumulative total Federal unobligated balances from October 1 of the 
Federal fiscal year for which the report is being submitted through 
the current quarter being reported. After the end of the Federal 
fiscal year any amount reported in column (D), as an unobligated 
balance, will be de-obligated by ACF.

    Note: The State must report any Federal funds reserved for 
``rainy day'' purposes as an unobligated balance on this line. 
Unobligated balances expended in any future Federal fiscal year must 
be expended only on assistance (reported on Line 5 categories of 
this report) or administrative costs related to providing assistance 
(reported on line 6(j)).

    Line 11. State Replacement Funds. Enter in column (B) the 
cumulative total State Replacement Funds expended as a result of the 
imposition of a TANF penalty from October 1 of the Federal fiscal 
year for which the report is being submitted through the current 
quarter being reported.
    Line 12. Estimate for Next Quarter Ended. Enter in column (A) 
the estimate of SFAG grant award funds requested for the next 
quarter ending, whose ending date was entered at the top of this 
report.

    Note: Section 405(c)(1) of the Act states that ACF shall 
estimate the amount to be paid to each eligible State for each 
quarter, such estimate is to be based on a report filed by the State 
of the total sum to be expended by the State in the quarter under 
the State program funded under section 403.

Appendix E--SSP MOE Data Report--Section One--Disaggregated Data 
Collection for Families Receiving Assistance Under the Separate State 
Program(s)

Instructions and Definitions

    General Instruction: If a State claims MOE expenditures for 
separate State programs (SSPs) and for persons served by those 
programs, it must collect and report this information on the SSP-MOE 
Data Report on SSP-MOE families receiving assistance only as 
follows: (1) If the State wishes to receive a high performance 
bonus, it must file the information in sections one and three of the 
SSP-MOE Data Report; and (2) if the State wishes to quality for 
caseload reduction credit, it must file the information in all three 
sections of the SSP-MOE Data Report.
    The State agency should collect and report data for each data 
element. The data must be complete (unless explicitly instructed to 
leave the field blank) and accurate (i.e, correct).
    An ``Unknown'' code may appear only on four sets of data 
elements ([#28 and #60] Date of Birth, [#29 and #61] Social Security 
Number, [#37 and #67] Educational Level, and (#38 and #68] 
Citizenship/Alienage). For these data elements, unknown is not an 
acceptable code for individuals who are members of the eligible 
family (i.e., family affiliation code ``1'').
    There are six data elements for which States have the option to 
report based on either the budget month or the reporting month. 
These are: #14 Amount of Food Stamps Assistance; #17 Amount of Child 
Support; #18 Amount of Families Cash Resources; #57 Amount of Earned 
Income; and [#58 and #69] Amount of Unearned Income. Whichever 
choice the State selects must be used for all families reported each 
month and must be used for all months in the fiscal year.
    The data elements in the SSP-MOE Data Report are similar to 
those in the TANF Data Report for the TANF Program. This will give 
us comparable information on the SSP programs. It will allow us, for 
example, to calculate a SSP-MOE work participation rate. Because a 
State's definitions and eligibility requirements for its SSPs may be 
different from those in its TANF Program, the data required in its 
SSP-MOE Data Report may not precisely correspond to the information 
collected by the State in its SSP-MOE Data Report. We encourage 
States to provide the best possible information.
    1. State FIPS Code: Enter your two-digit State code from the 
following listing. These codes are the standard codes used by the 
National Institute of Standards and Technology.

------------------------------------------------------------------------
                              State                                Code
------------------------------------------------------------------------
Alabama.........................................................      01
Alaska..........................................................      02
American Samoa..................................................      60
Arizona.........................................................      04
Arkansas........................................................      05
California......................................................      06
Colorado........................................................      08
Connecticut.....................................................      09
Delaware........................................................      10
Dist. of Columbia...............................................      11
Florida.........................................................      12
Georgia.........................................................      13
Guam............................................................      66
Hawaii..........................................................      15
Idaho...........................................................      16
Illinois........................................................      17
Indiana.........................................................      18
Iowa............................................................      19
Kansas..........................................................      20
Kentucky........................................................      21
Louisiana.......................................................      22
Maine...........................................................      23
Maryland........................................................      24
Massachusetts...................................................      25
Michigan........................................................      26
Minnesota.......................................................      27
Mississippi.....................................................      28
Missouri........................................................      29
Montana.........................................................      30
Nebraska........................................................      31
Nevada..........................................................      32
New Hampshire...................................................      33
New Jersey......................................................      34
New Mexico......................................................      35
New York........................................................      36
North Carolina..................................................      37
North Dakota....................................................      38

[[Page 17920]]

 
Ohio............................................................      39
Oklahoma........................................................      40
Oregon..........................................................      41
Pennsylvania....................................................      42
Puerto Rico.....................................................      72
Rhode Island....................................................      44
South Carolina..................................................      45
South Dakota....................................................      46
Tennessee.......................................................      47
Texas...........................................................      48
Utah............................................................      49
Vermont.........................................................      50
Virgin Islands..................................................      78
Virginia........................................................      51
Washington......................................................      53
West Virginia...................................................      54
Wisconsin.......................................................      55
Wyoming.........................................................      56
------------------------------------------------------------------------

    2. County FIPS Code: Enter the three-digit code established by 
the National Institute of Standards and Technology for 
classification of counties and county equivalents. Codes were 
devised by listing counties alphabetically and assigning 
sequentially odd integers; e.g., 001, 003, 005. A complete list of 
codes is available in Appendix F of the TANF Sampling and 
Statistical Methods Manual.
    3. Reporting Month: Enter the four-digit year and two-digit 
month codes that identify the year and month for which the data are 
being reported.
    4. Stratum:
    Guidance: All families that receive assistance under separate 
State Programs (i.e, SSP-MOE families) and are selected in the 
sample from the same stratum must be assigned the same stratum code. 
Valid stratum codes may range from ``00'' to ``99.'' States with 
stratified samples should provide the ACF Regional Office with a 
listing of the numeric codes utilized to identify any 
stratification. If a State opts to provide data for its entire 
caseload, enter the same stratum code (any two-digit number) for 
each SSP-MOE family.
    Instruction: Enter the two-digit stratum code.

Family-Level Data

    Definition: For reporting purposes, the SSP-MOE family means (a) 
all individuals receiving assistance as part of a family under the 
separate State program(s); and (b) the following additional persons 
living in the household, if not included under (a) above:
    (1) Parent(s) or caretaker relative(s) of any minor child 
receiving assistance;
    (2) Minor siblings of any child receiving assistance; and
    (3) Any person whose income or resources would be counted in 
determining the family's eligibility for or amount of assistance.
    5. Case Number--Separate State MOE:
    Guidance: If the case number is less than the allowable eleven 
characters, a State may use lead zeros to fill in the number.
    Instruction: Enter the number assigned by the State agency to 
uniquely identify the case.
    6. ZIP Code: Enter the five-digit ZIP code for the SSP-MOE 
family's place of residence for the reporting month.
    7. Disposition:
    Guidance: A family that did not receive any assistance for the 
reporting month but was listed on the monthly sample frame for the 
reporting month is ``listed in error.'' States are to complete data 
collection for all sampled cases that are not listed in error.
    Instruction: Enter one of the following codes for each SSP-MOE 
sampled case.
    1=Data collection completed.
    2=Not subject to data collection/listed in error.
    8. Number of Family Members: Enter two digits that represent the 
number of members in the family receiving assistance under the 
separate State program(s). Include in the number of family members, 
the noncustodial parent whom the State has opted to include as part 
of the eligible family, who is receiving assistance as defined in 
Sec. 260.31, or who is participating in work activities as defined 
in section 407(d) of the Act.
    9. Type of Family for Work Participation:
    Guidance: This data element identifies whether the family would 
be used in the calculations for both the overall and two-parent work 
participation rates, would be used in only the overall work 
participation rate, or would not be used in either work 
participation rate.
    A family with an adult or minor child head-of-household will be 
included in the overall work participation rate unless explicitly 
disregarded. See data element #41 ``Work Participation Status'' for 
reasons for disregarding a family.
    For the purpose of calculating the two-parent work participation 
rate, the two-parent families include any family with two or more 
natural or adoptive parents (of the same minor child) receiving 
assistance and living in the home, unless both are minor and neither 
is a head-of-household. All two-parent families are included in the 
two-parent work participation rate unless the family is explicitly 
disregarded. See data element #41 ``Work Participation Status'' for 
reasons for disregarding a family. A two-parent family that includes 
a disabled parent is not included in the two-parent work 
participation rate.
    A family with a minor child head-of-household should be coded as 
either a single-parent family or two-parent family, whichever is 
appropriate.
    A noncustodial parent is defined in Sec. 260.30 as a parent who 
lives in the State and does not live with his/her child(ren). The 
State must report information on the noncustodial parent if the 
noncustodial parent: (1) Is receiving assistance as defined in 
Sec. 260.31; (2) is participating in work activities as defined in 
section 407(d) of the Act; or (3) has been designated by the State 
as a member of a family receiving assistance.
    Instruction: Enter the one-digit code that represents the type 
of family for purposes of calculating the work participation rates.
    1=Family included only in overall work participation rate.
    2=Two-Parent Family included in both the overall and two-parent 
work participation rates.
    3=Family excluded from both the overall and two-parent work 
participation rates.
    10. Has the Family Received Assistance Under a State (Tribal) 
TANF Program Within the Past Six Months: If the SSP-MOE family has 
received assistance under a State (Tribal) TANF Program within the 
past six months, enter code ``1.'' Otherwise, enter ``2.''
    1=Yes, family has received assistance under a State (Tribal) 
TANF program within the past six months.
    2=No.
    11. Receives Subsidized Housing:
    Guidance: Subsidized housing refers to housing for which money 
was paid by the Federal, State, or local government or through a 
private social service agency to the family or to the owner of the 
housing to assist the family in paying rent. Two families sharing 
living expenses does not constitute subsidized housing.
    Instruction: Enter the one-digit code that indicates whether or 
not the SSP-MOE family received subsidized housing for the reporting 
month.
    1=Public housing.
    2=Rent subsidy.
    3=No housing subsidy.
    12. Receives Medical Assistance: Enter ``1'' if, for the 
reporting month, any SSP-MOE family member is enrolled in Medicaid 
and thus eligible to receive medical assistance under the State plan 
approved under Title XIX or ``2'' if no SSP-MOE family member is 
enrolled in Medicaid.
    1=Yes, enrolled in Medicaid.
    2=No.
    13. Receives Food Stamps: Enter the one-digit code that 
indicates whether or not the SSP-MOE family is receiving food stamp 
assistance.
    1=Yes, receives food stamp assistance.
    2=No.
    14. Amount of Food Stamp Assistance:
    Guidance: For situations in which the food stamp household 
differs from the SSP-MOE family, code this element in a manner that 
most accurately reflects the resources available to the SSP-MOE 
family. One acceptable method for calculating the amount of food 
stamp assistance available to the SSP-MOE family is to prorate the 
amount of food stamps equally between each food stamp recipient then 
add together the amounts belonging to the SSP-MOE recipients.
    Instruction: Enter the SSP-MOE eligible family's authorized 
dollar amount of food stamp assistance for the reporting month or 
for the month used to budget for the reporting month. If the SSP-MOE 
family did not receive any food stamps for the reporting month, 
enter ``0.''
    15. Receives Subsidized Child Care:
    Instruction: If the SSP-MOE family receives subsidized child 
care for the reporting month, enter code ``1'' or ``2,'' whichever 
is appropriate. Otherwise, enter code ``3.''
    1=Yes, receives child care funded entirely or in part with 
Federal funds (e.g., receives either TANF, CCDF, SSBG, or other 
federally funded child care).
    2=Yes, receives child care funded entirely under a State, 
Tribal, and/or local program.
    3=No subsidized child care received.
    16. Amount of Subsidized Child Care:
    Guidance: Subsidized child care means a grant by the Federal, 
State or local government to or on behalf of a parent (or

[[Page 17921]]

caretaker relative) to support, in part or whole, the cost of child 
care services provided by an eligible provider to an eligible child. 
The grant may be paid directly to the parent (or caretaker relative) 
or to a child care provider on behalf of the parent (or caretaker 
relative).
    Instruction: Enter the dollar amount of subsidized child care 
that the SSP-MOE family has received from all sources (e.g., CCDF, 
TANF, SSBG, State, local, etc.) for services in the reporting month. 
If SSP-MOE family did not receive any subsidized child care for 
services in the reporting month, enter ``0'' as the amount.
    17. Amount of Child Support: Enter the total dollar value of 
child support received on behalf of the SSP-MOE family in the 
reporting month or for the month used to budget for the reporting 
month. This includes current payments, arrearages, recoupment, and 
pass-through amounts whether paid to the State or the family.
    18. Amount of the Family's Cash Resources Enter the total dollar 
amount of the SSP-MOE family's cash resources as the State defines 
them for determining eligibility and/or computing benefits for the 
reporting month or for the month used to budget for the reporting 
month.

Amount of Assistance Received and the Number of Months That the Family 
Has Received Each Type of Assistance Under the Separate State Program

    Guidance: The term ``assistance'' includes cash, payments, 
vouchers, and other forms of benefits designed to meet a family's 
ongoing basic needs (i.e., for food, clothing, shelter, utilities, 
household goods, personal care items, and general incidental 
expenses). It includes such benefits even when they are provided in 
the form of payments by a TANF agency, or other agency on its 
behalf, to individual recipients and conditioned on their 
participation in work experience, community service, or other work 
activities (i.e., under the CFR Sec. 261.30).
    Except where excluded as indicated in the following paragraph, 
it also includes supportive services such as transportation and 
child care provided to families who are not employed.
    The term ``assistance'' excludes:
    (1) Nonrecurrent, short-term benefits (such as payments for rent 
deposits or appliance repairs) that:
    (i) Are designed to deal with a specific crisis situation or 
episode of need;
    (ii) Are not intended to meet recurrent or ongoing needs; and
    (iii) Will not extend beyond four months.
    (2) Work subsidies (i.e., payments to employers or third parties 
to help cover the costs of employee wages, benefits, supervision, 
and training);
    (3) Supportive services such as child care and transportation 
provided to families who are employed;
    (4) Refundable earned income tax credits;
    (5) Contributions to, and distributions from, Individual 
Development Accounts;
    (6) Services such as counseling, case management, peer support, 
child care information and referral, transitional services, job 
retention, job advancement, and other employment-related services 
that do not provide basic income support; and
    (7) Transportation benefits provided under an Access to Jobs or 
Reverse Commute project, pursuant to section 404(k) of the Act, to 
an individual who is not otherwise receiving assistance.
    The exclusion of nonrecurrent, short-term benefits under (1) of 
this paragraph also covers supportive services for recently employed 
families, for temporary periods of unemployment, in order to enable 
continuity in their service arrangements.
    Instruction: For each type of assistance provided under the 
separate State program, enter the dollar amount of assistance that 
the SSP-MOE family received or that was paid on behalf of the SSP-
MOE family for the reporting month and the number of months that the 
SSP-MOE family has received assistance under the State's Separate 
MOE programs. Also, for SSP-MOE Child Care, enter the number of 
children covered by the child care. If, for a ``type of 
assistance,'' no dollar amount of assistance was provided during the 
reporting month, enter ``0'' as the amount. If, for a ``type of 
assistance,'' no assistance has ever been received by the eligible 
family, enter ``0'' as the number of months of assistance.
    19. Cash and Cash Equivalents:
    A. Amount
    B. Number of Months
    20. Child Care:
    Guidance: Include only the child care funded directly by these 
Separate State programs. Do not include child care funded under the 
TANF Program or the Child Care and Development Fund.
    Number of:
    A. Amount
    B. Children Covered
    C. Number of Months
    21. Transportation:
    A. Amount
    B. Number of Months
    22. Transitional Services:
    A. Amount
    B. Number of Months
    23. Other:
    A. Amount
    B. Number of Months
    24. Reason for and Amount of Reduction in Assistance:
    Instruction: The amount of assistance received by a SSP-MOE 
family may be reduced for one or more reasons. For each reason 
listed below, indicate whether the SSP-MOE family received a 
reduction in assistance. Enter the total dollar value of the 
reduction(s) for each group of reasons for reductions in assistance 
for the reporting month. If for any reason there was no reduction in 
assistance, enter ``0.''
    a. Sanctions:
    i. Total Dollar Amount of Reductions due to Sanctions: Enter the 
total dollar value of reduction in assistance due to sanctions.
    ii. Work Requirements Sanction:
    1=Yes.
    2=No.
    iii. Family Sanction for an Adult with No High School Diploma or 
Equivalent:
    1=Yes.
    2=No.
    iv. Sanction for Teen Parent not Attending School:
    1=Yes.
    2=No.
    v. Non-Cooperation with Child Support:
    1=Yes.
    2=No.
    vi. Failure to Comply with an Individual Responsibility Plan:
    1=Yes.
    2=No.
    vii. Other Sanctions:
    1=Yes.
    2=No.
    b. Recoupment of Prior Overpayment: Enter the total dollar value 
of reduction in assistance due to recoupment of a prior overpayment.
    c. Other:
    i. Total Dollar Amount of Reductions due to Other Reasons 
(exclude the amounts for sanction and recoupment): Enter the total 
dollar value of reduction in assistance due to reasons other than 
sanctions and recoupment.
    ii. Family Cap:
    1=Yes.
    2=No.
    iii. Reduction Based on Family Moving into State From Another 
State:
    1=Yes.
    2=No.
    iv. Reduction Based on Length of Receipt of Assistance:
    1=Yes.
    2=No.
    v. Other, Non-sanction:
    1=Yes.
    2=No.
    25. Waiver Evaluation Experimental and Control Groups:
    Guidance: If this data element is not applicable to your State 
(Tribe), either code this element ``9'' or leave this data element 
blank. In connection with waivers that are approved to allow States 
to implement Welfare Reform Demonstrations, a State assigned a 
portion of its cases to control groups (subject to the provisions of 
the regular, statutory AFDC program as defined by prior law) and 
experimental groups (subject to the provisions of the regular, 
statutory AFDC program as defined by prior law as modified by 
waivers). A State may choose, for the purpose of completing impact 
analyses, to maintain applicable control and experimental group 
treatment policies as they were implemented under their welfare 
reform demonstration (including prior law policies not modified by 
waivers), even if such policies are inconsistent with TANF. However, 
cases not assigned to an experimental or control group but subject 
to waiver policies in accordance with the terms and conditions of 
the waiver approval, may not apply prior law policies inconsistent 
with TANF unless such policies are specifically linked to approved 
waivers. When a State continues waivers, but does not maintain 
experimental and control groups for impact evaluation purposes, all 
cases in the demonstration site will be treated as cases subject to 
waiver policies in accordance with terms and conditions regardless 
of their original assignment as control group cases (i.e., prior law 
policies may only apply to the extent they are specially linked to 
approved waivers and former control group cases will now be subject 
to waiver policies.)

[[Page 17922]]

    Instruction: Enter the one-digit code that indicates the 
family's waiver evaluation case status.
    1=Control group case (for impact analysis purposes).
    2=Experimental group case.
    3=Other cases subject to waiver policies.
    9=Not applicable (no waivers apply to this case).

Person-Level Data

    Person-level data has two sections: (1) The adult and minor 
child head-of-household characteristic section and (2) the child 
characteristics section. An adult is an individual that is not a 
minor child. A minor child is an individual who (a) has not attained 
18 years of age or (b) has not attained 19 years of age and is a 
full-time student in a secondary school (or in the equivalent level 
of vocational or technical training.)
    Detailed data elements must be reported on all individuals 
unless, for a specific data element, the instructions explicitly 
give States an option to not report for a specific group of 
individuals.

Adult and Minor Child Head-of-Household Characteristics

    This section allows for coding up to six adults (or a minor 
child who is either a head-of-household or married to the head-of-
household and up to five adults) in the SSP-MOE family. A minor 
child who is either a head-of-household or married to the head-of-
household should be coded as an adult and will hereafter be referred 
to as a ``minor child head-of-household.'' For each adult (or minor 
child head-of-household) in the SSP-MOE family, complete the adult 
characteristics section. As indicated below, reporting for certain 
specified data elements in this section is optional for certain 
individuals (whose family affiliation code is a 2, 3, or 5).
    If there are more than six adults (or a minor child head-of-
household and five adults) in the SSP-MOE family, use the following 
order to identify the persons to be coded: (1) The head-of-
household; (2) parents in the eligible family receiving assistance; 
(3) other adults in the eligible family receiving assistance; (4) 
Parents not in the eligible family receiving assistance; (5) 
caretaker relatives not in the eligible family receiving assistance; 
and (6) other persons, whose income or resources count in 
determining eligibility for or amount of assistance of the eligible 
family receiving assistance, in descending order the person with the 
most income to the person with least income.
    26. Family Affiliation:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for adults.
    Instruction: Enter the one-digit code that shows the adult's (or 
minor child head-of-household's) relation to the eligible family 
receiving assistance.
    1=Member of the eligible family receiving assistance.
    Not in eligible family receiving assistance, but in the 
household:
    2=Parent of minor child in the eligible family receiving 
assistance.
    3=Caretaker relative of minor child in the eligible family 
receiving assistance.
    4=Minor sibling of child in the eligible family receiving 
assistance.
    5=Person whose income or resources are considered in determining 
eligibility for or amount of assistance for the eligible family 
receiving assistance.
    27. Noncustodial Parent Indicator:
    Guidance: A noncustodial parent is defined in Sec. 260.30 as a 
parent who lives in the State and does not live with his/her 
child(ren). The State must report information on the noncustodial 
parent if the noncustodial parent: (1) Is receiving assistance as 
defined in Sec. 260.31; (2) is participating in work activities as 
defined in section 407(d) of the Act; or (3) has been designated by 
the State as a member of a family receiving assistance.
    Instruction: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) noncustodial parent status.
    1=Yes, a noncustodial parent.
    2=No, not a noncustodial parent.
    28. Date of Birth: Enter the eight-digit code for date of birth 
for the adult (or minor child head-of-household) under the separate 
State program in the format YYYYMMDD. If the adult's (or minor child 
head-of-household's) date of birth is unknown and the family 
affiliation code is not ``1,'' enter the code ``99999999''.
    29. Social Security Number: Enter the nine-digit Social Security 
Number for the adult (or minor child head-of-household) in the 
format nnnnnnnnn. If the social security number is unknown and the 
family affiliation code is not ``1,'' enter ``999999999''.
    30. Race/Ethnicity:
    Instruction: To allow for the multiplicity of race/ethnicity, 
please enter the one-digit code for each category of race and 
ethnicity of the adult (or minor child head-of-household). Reporting 
of this data element is optional for individuals whose family 
affiliation code is 5.
    Ethnicity:
    a. Hispanic or Latino:
    1=Yes, Hispanic or Latino.
    2=No.
    Race:
    b. American Indian or Alaska Native:
    1=Yes, American Indian or Alaska Native.
    2=No.
    c. Asian:
    1=Yes, Asian.
    2= No.
    d. Black or African American:
    1=Yes, Black or African American.
    2=No.
    e. Native Hawaiian or Other Pacific Islander:
    1=Yes, Native Hawaiian or Pacific Islander.
    2=No.
    f. White:
    1=Yes, White.
    2=No.
    31. Gender: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) gender.
    1=Male.
    2=Female.
    32. Receives Disability Benefits: The Act specifies five types 
of disability benefits. For each type of disability benefits, enter 
the one-digit code that indicates whether or not the adult (or minor 
child head-of-household) received the benefit.
    a. Receives Federal Disability Insurance Benefits Under the 
Social Security OASDI Program (Title II of the Social Security Act):
    1=Yes, received Federal disability insurance.
    2=No.
    b. Receives Benefits Based on Federal Disability Status Under 
Non-Social Security Act Programs: These programs include Veteran's 
disability benefits, Worker's disability compensation, and Black 
Lung Disease disability benefits.
    1=Yes, received benefits based on Federal disability status.
    2=No.
    c. Receives Aid to the Permanently and Totally Disabled Under 
Title XIV-APDT of the Social Security Act:
    1=Yes, received aid under Title XIV-APDT.
    2=No.
    d. Receives Aid to the Aged, Blind, and Disabled Under Title 
XVI-AABD of the Social Security Act:
    1=Yes, received aid under Title XVI-AABD.
    2=No.
    e. Receives Supplemental Security Income Under Title XVI-SSI of 
the Social Security Act:
    1=Yes, received aid under Title XVI-SSI.
    2=No.
    33. Marital Status: Enter the one-digit code for the adult's (or 
minor child head-of-household's) marital status for the reporting 
month. Reporting of this data element is optional for individuals 
whose family affiliation code is 5.
    1=Single, never married.
    2=Married, living together.
    3=Married, but separated.
    4=Widowed.
    5=Divorced.
    34. Relationship to Head-of-Household:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for adults.
    Instruction: Enter the two-digit code that shows the adult's (or 
minor child head-of-household's) relationship (including by 
marriage) to the head of the household, as defined by the Food Stamp 
Program or as determined by the State, (i.e., the relationship to 
the principal person of each person living in the household.) If a 
minor child head-of-household, enter code ``01.''
    01=Head-of-household.
    02=Spouse.
    03=Parent.
    04=Daughter or son (Natural or adoptive).
    05=Stepdaughter or stepson.
    06=Grandchild or great grandchild
    07=Other related person (brother, niece, cousin).
    08=Foster child.
    09=Unrelated child.
    10=Unrelated adult.
    35. Parent With Minor Child In the Family:
    Guidance: A parent with a minor child in the family may be a 
natural parent, adoptive

[[Page 17923]]

parent, or step-parent of a minor child in the family. Reporting of 
this data element is optional for individuals whose family 
affiliation code is 3 or 5.
    Instruction: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) parental status.
    1=Yes, a parent with a minor child in the family and used in 
two-parent participation rate.
    2=Yes, a parent with a minor child in the family, but not used 
in two-parent participation rate.
    3=No.
    36. Needs of a Pregnant Woman: Some States (Tribes) consider the 
needs of a pregnant woman in determining the amount of assistance 
that the SSP-MOE family receives. If the adult (or minor child head-
of-household) is pregnant and the needs associated with this 
pregnancy are considered in determining the amount of assistance for 
the reporting month, enter a ``1'' for this data element. Otherwise 
enter a ``2'' for this data element. This data element is applicable 
only for individuals whose family affiliation code is 1.
    1=Yes, additional needs associated with pregnancy are considered 
in determining the amount of assistance.
    2=No.
    37. Educational Level: Enter the two-digit code to indicate the 
highest level of education attained by the adult (or minor child 
head-of-household). Unknown is not an acceptable code for an 
individual whose family affiliation code is ``1''. Reporting of this 
data element is optional for individuals whose family affiliation 
code is 5.
    01-11=Grade level completed in primary/secondary school 
including secondary level vocational school or adult high school.
    12=High school diploma, GED, or National External Diploma 
Program.
    13=Awarded Associate's Degree.
    14=Awarded Bachelor's Degree.
    15=Awarded graduate degree (Master's or higher).
    16=Other credentials (degree, certificate, diploma, etc.).
    98=No formal education.
    99=Unknown.
    38. Citizenship/Alienage:
    Instruction: Enter the one-digit code that indicates the adult's 
(or minor child head-of-household's) citizenship/alienage. Unknown 
is not an acceptable code for an individual whose family affiliation 
code is ``1''. Reporting of this data element is optional for 
individuals whose family affiliation code is 5.
    1=U.S. citizen, including naturalized citizens.
    2=Qualified alien.
    3=Non qualified alien.
    9=Unknown.
    39. Cooperation with Child Support: Enter the one-digit code 
that indicates whether this adult (or minor child head-of-household) 
has cooperated with child support. Reporting of this data element is 
optional for individuals whose family affiliation code is 5.
    1=Yes, adult (or minor child head-of-household) cooperated with 
child support.
    2=No.
    3=Not applicable.
    40. Employment Status: Enter the one-digit code that indicates 
the adult's (or minor child head-of-household's) employment status. 
Reporting of this data element is optional for individuals whose 
family affiliation code is 5.
    1=Employed.
    2=Unemployed, looking for work.
    3=Not in labor force (i.e, unemployed, not looking for work, 
includes discouraged workers)
    41. Work Participation Status: 
    Guidance: This item could be used in calculating an SSP work 
participation rate and includes information comparable to TANF. The 
following two definitions are used in reporting this item and in 
determining which families might be included in and excluded from 
the calculations.
    ``Disregarded'' from the participation rate means the SSP-MOE 
family is not included in the calculation of the work participation 
rate.
    ``Exempt'' means that the individual will not be penalized for 
failure to engage in work (i.e., good cause exception); however, the 
SSP-MOE family is included in the calculation of the work 
participation rate.
    A State is not required to disregard all families that could be 
disregarded. For example, a family with a single custodial parent 
with child under 12 months (and the parent has not been disregarded 
for 12 months) may be disregarded. However, if the single custodial 
parent is meeting the work requirements, the State may want to 
include the family in its work participation rate. In this 
situation, the State should used work participation status code 
``19'' rather than code ``01''.
    Instruction: Enter the two-digit code that indicates a work 
participation status for the adult or minor child head-of-household. 
This data element is not applicable for individuals whose family 
affiliation code is 2, 3, 4, or 5.
    01=Disregarded from participation rate, single custodial parent 
with child under 12 months.
    02=Disregarded from participation rate because all of the 
following apply: required to participate; but not participating; 
sanctioned for the reporting month; but not sanctioned for more than 
3 months within the preceding 12-month period.

    Note: this code should be used only in a month for which the 
family is disregarded from the participation rate. While one or more 
adults may be sanctioned in more than 3 months within the preceding 
12-month period, the family may not be disregarded from the 
participation rate for more than 3 months within the preceding 
12=month period.

    03=Disregarded, family is part of an ongoing research evaluation 
(as a member of a control group or experimental group) approved 
under section 1115 of the Social Security Act.
    04=Disregarded from the work participation rate based on an 
inconsistency under an approved welfare reform waiver that exempts 
the family from participation.
    05=Disregarded from participation rate, based on participation 
in a Tribal Work Program, and State has opted to exclude all Tribal 
Work Program participants from its work participation rate.
    06=Exempt, single custodial parent with child under age 6 and 
child care available.
    07=Exempt, disabled (not using an extended definition under a 
State waiver).
    08=Exempt, caring for a severely disabled child (not using an 
extended definition under a State waiver).
    09=Exempt, under a federally recognized good cause domestic 
violence waiver.
    10=Exempt, State waiver.
    11=Exempt, other.
    12=Required to participate, but not participating; sanctioned 
for the reporting month and sanctioned for more than 3 months within 
the preceding 12-month period.
    13=Required to participate, but not participating; sanctioned 
for the reporting month, but not sanctioned for more than 3 months 
within the preceding 12-month period.
    14=Required to participate, but not participating; and not 
sanctioned for the reporting month.
    15=Deemed engaged in work--single teen head-of-household or 
married teen who maintains satisfactory school attendance.
    16=Deemed engaged in work--single teen head-of-household or 
married teen who participates in education directly related to 
employment for an average of at least 20 hours per week during the 
reporting month.
    17=Deemed engaged in work--parent or relative (who is the only 
parent or caretaker relative in the family) with child under age 6 
and parent engaged in work activities for at least 20 hours per 
week.
    18=Required to participate and participating, but not meeting 
minimum participation requirements.
    19=Required to participate and meeting minimum participation 
requirements.
    99=Not applicable (e.g., person living in household and whose 
income or resources are counted in determining eligibility for or 
amount of assistance of the family receiving assistance, but not in 
eligible family receiving assistance or noncustodial parent that the 
State opted to exclude in determining participation rate).

Adult Work Participation Activities

    Guidance: To calculate the average number of hours per week of 
participation in a work activity, add the number of hours of 
participation across all weeks in the month and divide by the number 
of weeks in the month. Round to the nearest whole number.
    Some weeks have days in more than one month. Include such a week 
in the calculation for the month that contains the most days of the 
week (e.g., the week of July 27--August 2, 1997 would be included in 
the July calculation). Acceptable alternatives to this approach must 
account for all weeks in the fiscal year. One acceptable alternative 
is to include the week in the calculation for the month in which the 
Friday falls (i.e., the JOBS approach). A second acceptable 
alternative is to count each month as having 4.33 weeks.
    During the first or last month of any spell of assistance, a 
family may happen to receive assistance for only part of the month. 
If a family receives assistance for only part of a

[[Page 17924]]

month, the State (Tribe) may count it as a month of participation if 
an adult (or minor child head-of-household) in the family (both 
adults, if they are both required to work) is engaged in work for 
the minimum average number of hours for the full week(s) that the 
family receives assistance in that month.
    Instruction: For each work activity in which the adult (or minor 
child head-of-household) participated during the reporting month, 
enter the average number of hours per week of participation. For 
each work activity in which the adult (or minor child head-of-
household) did not participate, enter zero as the average number of 
hours per week of participation. These work activity data elements 
are applicable only for individuals whose family affiliation code is 
1.
    42. Unsubsidized Employment.
    43. Subsidized Private-Sector Employment.
    44. Subsidized Public-Sector Employment
    45. Work Experience
    46. On-the-job Training
    47. Job Search and Job Readiness Assistance:
    Instruction: Do not count hours of participation in job search 
and job readiness training beyond the TANF limit where allowed by 
waivers in this item. Instead, count the hours of participation 
beyond the TANF limit in data element #54 ``Additional Work 
Activities Permitted Under Waiver Demonstration.'' Otherwise, count 
the additional hours of work participation under data element #55 
``Other Work Activities.''
    48. Community Service Programs.
    49. Vocational Educational Training:
    Instruction: Do not count hours of participation in vocational 
educational training beyond the TANF 12 month life-time limit where 
allowed by waivers in this item. Instead, count the hours of 
participation beyond the TANF limit in data element #54 ``Additional 
Work Activities Permitted Under Waiver Demonstration.'' Otherwise, 
count the additional hours of work participation under data element 
#55 ``Other Work Activities.''
    50. Job Skills Training Directly Related to Employment.
    51. Education Directly Related to Employment for Individuals 
with no High School Diploma or Certificate of High School 
Equivalency.
    52. Satisfactory School Attendance for Individuals with No High 
School Diploma or Certificate of High School Equivalency.
    53. Providing Child Care Services to an Individual who is 
Participating in a Community Service Program.
    54. Additional Work Activities Permitted Under Waiver 
Demonstration:
    Instruction: Some States' waivers permit participation in work 
activities that are not permitted under the statute. Enter the 
adult's (or minor child head-of-household's) average number of hours 
per week of participation in such work activities in this data 
element. For example, some State waivers permit participation in 
vocational educational training and job search beyond the TANF 
statutory limits. Count hours of participation in these activities 
beyond the TANF limits where allowed by the State waivers in this 
item. Otherwise, count the addditional hours of participation in the 
activity ``Other Work Activities.''
    55. Other Work Activities. This data element collects 
information on work activities provided that are not permitted under 
a State waiver and are beyond the requirements of the statute.
    56. Required Hours of Work Under Waiver Demonstration:
    Guidance: In approving waivers, ACF specified hours of 
participation in several instances. One type of hour change in the 
welfare reform demonstrations was the recognition, as part of a 
change in work activities and/or exemptions, that the hours 
individuals worked should be consistent with their abilities and in 
compliance with an employability or personal responsibility plan or 
other criteria in accordance to waiver terms and conditions. If the 
hour requirement in this case was part of a specific work component 
waiver, the State could show inconsistency and could use the waiver 
hours instead of the hours in section 407.
    Instruction: If applicable, enter the two-digit number that 
represents the average number of hours per week of work 
participation required of the individual under a work component 
waiver. Otherwise, leave blank or enter ``0.'' This data element is 
not applicable for individuals whose family affiliation code is 2, 
3, 4, or 5.
    57. Amount of Earned Income: Enter the dollar amount of the 
adult's (or minor child head-of-household's) earned income for the 
reporting month or for the month used to budget for the reporting 
month.
    58. Amount of Unearned Income: Unearned income has five 
categories. For each category of unearned income, enter the dollar 
amount of the adult's (or minor child head-of-household's) unearned 
income.
    a. Earned Income Tax Credit (EITC):
    Guidance: Earned Income Tax Credit is a refundable tax credit 
for families and dependent children. EITC payments are received 
monthly (as advance payment through the employer), annually (as a 
refund from IRS), or both.
    Instruction: Enter the total dollar amount of the Earned Income 
Tax Credit actually received, whether received as an advance payment 
or a single payment (e.g., tax refund), by the adult (or minor child 
head-of-household) during the reporting month or the month used to 
budget for the reporting month. If the State counts the EITC as a 
resource, report it here as unearned income in the month received 
(i.e., the reporting month or budget month). If the State assumes an 
advance payment is applied for and obtained, only report what is 
actually received for this item.
    b. Social Security: Enter the dollar amount of Social Security 
benefits that the adult in the SSP-MOE family has received for the 
reporting month or for the month used to budget for the reporting 
month.
    c. SSI: Enter the dollar amount of SSI benefits that the adult 
in the SSP-MOE family has received for the reporting month or for 
the month used to budget for the reporting month.
    d. Worker's Compensation: Enter the dollar amount of Worker's 
Compensation that the adult in the SSP-MOE family has received for 
the reporting month or for the month used to budget for the 
reporting month.
    e. Other Unearned Income:
    Guidance: Other unearned income includes RSDI benefits, Veterans 
benefits, Unemployment Compensation, other government benefits, 
housing subsidy, contribution/income-in-kind, deemed income, Public 
Assistance or General Assistance, educational grants/scholarships/
loans, other. Do not include EITC, Social Security, SSI, Worker's 
Compensation, value of food stamp assistance, the amount of the 
Child Care subsidy, and the amount of Child Support.
    Instruction: Enter the dollar amount of other unearned income 
that the adult in the SSP-MOE family has received for the reporting 
month or for the month used to budget for the reporting month.

Child Characteristics

    This section allows for coding the child characteristics for up 
to ten children in the SSP-MOE family. A minor child head-of-
household should be coded as an adult, not as a child. The youngest 
child should be coded as the first child in the family, the second 
youngest child as the second child, and so on.
    If there are more than ten children in the SSP-MOE family, use 
the following order to identify the persons to be coded: (1) 
Children in the eligible family receiving assistance in order from 
youngest to oldest; (2) minor siblings of child in the eligible 
family receiving assistance from youngest to oldest; and (3) any 
other children.
    59. Family Affiliation:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for children.
    Instruction: Enter the one-digit code that shows the child's 
relation to the eligible family receiving assistance.
    1=Member of the eligible family receiving assistance.
    Not in eligible family receiving assistance, but in the 
household:
    2=Parent of minor child in the eligible family receiving 
assistance.
    3=Caretaker relative of minor child in the eligible family 
receiving assistance.
    4=Minor sibling of child in the eligible family receiving 
assistance.
    5=Person whose income is considered in determining eligibility 
for and amount of assistance for the eligible family receiving 
assistance.
    60. Date of Birth: Enter the eight-digit code for date of birth 
for this child under the separate State programs in the format 
YYYYMMDD. If the child's date of birth is unknown and the family 
affiliation code is not ``1,'' enter the code ``99999999''.
    61. Social Security Number: Enter the nine-digit Social Security 
Number for the child in the format nnnnnnnnn. If the child's social 
security number is unknown and the family affiliation code is not 
``1,'' enter the 9-digit code ``999999999''. Reporting of this data 
element is optional for individuals whose family affiliation code is 
4.
    62. Race/Ethnicity:
    Instruction: To allow for the multiplicity of race/ethnicity, 
please enter the one-digit code

[[Page 17925]]

for each category of race and ethnicity of the child. Reporting of 
this data element is optional for individuals whose family 
affiliation code is 4.
    Ethnicity:
    a. Hispanic or Latino:
    1=Yes, Hispanic or Latino.
    2=No.
    Race:
    b. American Indian or Alaska Native:
    1=Yes, American Indian or Alaska Native.
    2=No.
    c. Asian:
    1=Yes, Asian.
    2=No.
    d. Black or African American:
    1=Yes, Black or African American.
    2=No.
    e. Native Hawaiian or Other Pacific Islander:
    1=Yes, Native Hawaiian or Pacific Islander.
    2=No.
    f. White:
    1=Yes, White.
    2=No.
    63. Gender: Enter the one-digit code that indicates the child's 
gender.
    1=Male.
    2=Female.
    64. Receives Disability Benefits: The Act specifies five types 
of disability benefits. Two of these types of disability benefits 
are applicable to children. For each type of disability benefits, 
enter the one-digit code that indicates whether or not the child 
received the benefit.
    a. Receives Benefits Based on Federal Disability Status Under 
Non-Social Security Act Programs: These programs include Veteran's 
disability benefits, Worker's disability compensation, and Black 
Lung Disease disability benefits.
    1=Yes, received benefits based on Federal disability status.
    2=No.
    b. Receives Supplemental Security Income Under Title XVI-SSI of 
the Social Security Act:
    1=Yes, received aid under Title XVI-SSI.
    2=No.
    65. Relationship to Head-of-Household:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Some of 
these codes may not be applicable for children.
    Instruction: Enter the two-digit code that shows the child's 
relationship (including by marriage) to the head of the household, 
as defined by the Food Stamp Program or, principal person of each 
person living in the household.
    01=Head-of-household.
    02=Spouse.
    03=Parent.
    04=Daughter or son (Natural or adoptive).
    05=Stepdaughter or stepson.
    06=Grandchild or great grandchild.
    07=Other related person (brother, niece, cousin).
    08=Foster child.
    09=Unrelated child.
    10=Unrelated adult.
    66. Parent With Minor Child In the Family:
    Guidance: This data element is used both for (1) the adult or 
minor child head-of-household section and (2) the minor child 
section. The same coding schemes are used in both sections. Code 
``1'' is not applicable for children. A parent with a minor child in 
the family may be a natural parent, adoptive parent, or step-parent 
of a minor child in the family. Reporting of this data element is 
optional for individuals whose family affiliation code is 4 or 5.
    Instruction: Enter the one-digit code that indicates the child's 
parental status.
    1=Yes, a parent with a minor child in the family and used in 
two-parent participation rate.
    2=Yes, a parent with a minor child in the family, but not used 
in two-parent participation rate.
    3=No.
    67. Educational Level: Enter the two-digit code to indicate the 
highest level of education attained by the child. Unknown is not an 
acceptable code for an individual whose family affiliation code is 
``1''. Reporting of this data element is optional for individuals 
whose family affiliation code is 4.
    01-11=Grade level completed in primary/secondary school 
including secondary level vocational school or adult high school.
    12=High school diploma, GED, or National External Diploma 
Program.
    13=Awarded Associate's Degree.
    14=Awarded Bachelor's Degree.
    15=Awarded graduate degree (Master's or higher).
    16=Other credentials (degree, certificate, diploma, etc.).
    98=No formal education.
    99=Unknown.
    68. Citizenship/Alienage:
    Instruction: Enter the one-digit code that indicates the child 
citizenship/alienage. Unknown is not an acceptable code for an 
individual whose family affiliation code is ``1''. Reporting of this 
data element is optional for individuals whose family affiliation 
code is 4.
    1=U.S. citizen, including naturalized citizens.
    2=Qualified alien.
    3=Non qualified alien.
    9=Unknown.
    69. Amount of Unearned Income: Unearned income has two 
categories. For each category of unearned income, enter the dollar 
amount of the child's unearned income for the reporting month or for 
the month used to budget for the reporting month.
    a. SSI: Enter the dollar amount of SSI that the child in the 
SSP-MOE family has received for the reporting month or for the month 
used to budget for the reporting month.
    b. Other Unearned Income: Enter the dollar amount of other 
unearned income that the child in the SSP-MOE family has received 
for the reporting month or for the month used to budget for the 
reporting month.

Appendix F--SSP MOE Data Report--Section Two--Disaggregated Data 
Collection for Families No Longer Receiving Assistance Under the 
Separate State Program(s)

Instructions and Definitions

    General Instruction: The State agency should collect and report 
data for each data element. The data must be complete (unless 
explicitly instructed to leave the field blank) and accurate (i.e, 
correct).
    An ``Unknown'' code may appear only on four data elements (#14 
Date of Birth, #15 Social Security Number, #23 Educational Level, 
and #24 Citizenship/Alienage). For these data elements, unknown is 
not an acceptable code for individuals who are members of the 
eligible family (i.e., family affiliation code ``1''). States are 
not expected to track closed cases in order to collect information 
on families for months after the family has left the rolls. Rather 
it is acceptable to report based on the last month of assistance.
    1. State FIPS Code: Enter your two-digit State code from the 
following listing. These codes are the standard codes used by the 
National Institute of Standards and Technology.

------------------------------------------------------------------------
                              State                                Code
------------------------------------------------------------------------
Alabama.........................................................      01
Alaska..........................................................      02
American Samoa..................................................      60
Arizona.........................................................      04
Arkansas........................................................      05
California......................................................      06
Colorado........................................................      08
Connecticut.....................................................      09
Delaware........................................................      10
Dist. of Columbia...............................................      11
Florida.........................................................      12
Georgia.........................................................      13
Guam............................................................      66
Hawaii..........................................................      15
Idaho...........................................................      16
Illinois........................................................      17
Indiana.........................................................      18
Iowa............................................................      19
Kansas..........................................................      20
Kentucky........................................................      21
Louisiana.......................................................      22
Maine...........................................................      23
Maryland........................................................      24
Massachusetts...................................................      25
Michigan........................................................      26
Minnesota.......................................................      27
Mississippi.....................................................      28
Missouri........................................................      29
Montana.........................................................      30
Nebraska........................................................      31
Nevada..........................................................      32
New Hampshire...................................................      33
New Jersey......................................................      34
New Mexico......................................................      35
New York........................................................      36
North Carolina..................................................      37
North Dakota....................................................      38
Ohio............................................................      39
Oklahoma........................................................      40
Oregon..........................................................      41
Pennsylvania....................................................      42
Puerto Rico.....................................................      72
Rhode Island....................................................      44
South Carolina..................................................      45

[[Page 17926]]

 
South Dakota....................................................      46
Tennessee.......................................................      47
Texas...........................................................      48
Utah............................................................      49
Vermont.........................................................      50
Virgin Islands..................................................      78
Virginia........................................................      51
Washington......................................................      53
West Virginia...................................................      54
Wisconsin.......................................................      55
Wyoming.........................................................      56
------------------------------------------------------------------------

    2. County FIPS Code: Enter the three-digit code established by 
the National Institute of Standards and Technology for 
classification of counties and county equivalents. Codes were 
devised by listing counties alphabetically and assigning 
sequentially odd integers; e.g., 001, 003, 005. A complete list of 
codes is available in Appendix F of the TANF Sampling and 
Statistical Methods Manual.
    3. Reporting Month: Enter the four-digit year and two-digit 
month code that identifies the year and month for which the data are 
being reported.
    4. Stratum:
    Guidance: All families that receive assistance under separate 
State Programs (i.e, SSP-MOE families) and are selected in the 
sample from the same stratum must be assigned the same stratum code. 
Valid stratum codes may range from ``00'' to ``99.'' States with 
stratified samples should provide the ACF Regional Office with a 
listing of the numeric codes utilized to identify any 
stratification. If a State opts to provide data for its entire 
caseload, enter the same stratum code (any two-digit number) for 
each SSP-MOE family.
    Instruction: Enter the two-digit stratum code.

Family-Level Data

    Definition: For reporting purposes, the SSP-MOE family means (a) 
all individuals receiving assistance as part of a family under the 
separate State program; and (b) the following additional persons 
living in the household, if not included under (a) above:
    (1) Parent(s) or caretaker relative(s) of any minor child 
receiving assistance;
    (2) Minor siblings (including unborn children) of any child 
receiving assistance; and
    (3) Any person whose income or resources would be counted in 
determining the family's eligibility for or amount of assistance.
    5. Case Number:
    Guidance: If the case number is less than the allowable eleven 
characters, a State may use lead zeros to fill in the number.
    Instruction: Enter the number that was assigned by the State 
agency to uniquely identify the SSP-MOE family.
    6. ZIP Code: Enter the five-digit ZIP code for the family's 
place of residence for the reporting month.
    7. Disposition: Enter one of the following codes for each SSP-
MOE family.
    1=Data collection completed.
    2=Not subject to data collection/listed in error.
    8. Reason for Closure:
    Guidance: A closed case is a family whose assistance was 
terminated for the reporting month, but received assistance under 
the State's MOE Program in the prior month. A temporarily suspended 
case is not a closed case. If there is more than one applicable 
reason for closure, determine the principal (i.e., most relevant) 
reason. If two or more reasons are equally relevant, use the reason 
with the lowest numeric code. For example, when an adult marries, 
the income and resources of the new spouse are considered in 
determining eligibility. If, at the time of the marriage, the family 
becomes ineligible because of the addition of the spouse's income 
and/or resources, the case closure should be coded using code ``2''. 
If the family did not became ineligible based on the income and 
resources at the time of the marriage, but rather due to an increase 
in earnings subsequent to the marriage, then the case closure should 
be coded using code ``1''.
    Instruction: Enter the two-digit code that indicates the reason 
for the SSP-MOE family no longer receiving assistance.
    01=Employment and/or excess earnings.
    02=Marriage.
    03=Five-year time limit.
    Sanctions:
    04=Work related sanction.
    05=Child support sanction.
    06=Teen parent failing to meet school attendance requirement.
    07=Teen parent failing to live in an adult setting.
    08=Failure to meet individual responsibility plan provision or 
other behavioral requirements (e.g., immunize a minor child, attend 
parenting classes).
    09=Failure to complete individual responsibility plan (e.g., did 
not sign plan).
    State Policies:
    10=State time limit, if different than five-year limit.
    11=Child support collected.
    12=Excess unearned income (exclusive of child support 
collected).
    13=Excess resources.
    14=Youngest child too old to qualify for assistance.
    15=Minor child absent from the home for a significant time 
period.
    16=Failure to appear at eligibility/redetermination appointment, 
submit required verification materials, and/or cooperate with 
eligibility requirements.
    17=Transfer to State's TANF program.
    Other:
    18=Family voluntarily closes the case.
    99=Other.
    9. Received Subsidized Housing:
    Guidance: Subsidized housing refers to housing for which money 
was paid by the Federal, State, or local government or through a 
private social service agency to the family or to the owner of the 
housing to assist the family in paying rent. Two families sharing 
living expenses does not constitute subsidized housing.
    Instruction: Enter the one-digit code that indicates whether or 
not the SSP-MOE family received subsidized housing for the reporting 
month.
    1=Public housing.
    2=Rent subsidy.
    3=No housing subsidy.
    10. Received Medical Assistance: Enter ``1'' if, for the 
reporting month, any SSP-MOE family member was enrolled in Medicaid 
and, thus eligible to receive medical assistance under the State 
plan approved under Title XIX or ``2'' if no SSP-MOE family member 
was enrolled in Medicaid.
    1=Yes, enrolled in Medicaid.
    2=No.
    11. Received Food Stamps: Enter the one-digit code that 
indicates whether or not the SSP-MOE family has received food stamp 
assistance.
    1=Yes, received food stamp assistance.
    2=No.
    12. Received Subsidized Child Care:
    Instruction: If the SSP-MOE family received subsidized child 
care for the reporting month (or for the last month of SSP-MOE 
assistance), enter code ``1'' or ``2,'' whichever is appropriate. 
Otherwise, enter code ``3.''
    1=Yes, receives child care funded (entirely or in part) with 
Federal funds (e.g., receives either TANF, CCDF, SSBG, or other 
federally funded child care).
    2=Yes, received child care funded entirely under a State, 
Tribal, and/or local program (i.e., no Federal funds used).
    3=No.

Person-Level Data

    This section allows for coding up to sixteen persons in the SSP-
MOE family. If there are more than sixteen persons in the SSP-MOE 
family, use the following order to identify the persons to be coded: 
(1) The head-of-household; (2) parents in the eligible family 
receiving assistance; (3) children in the eligible family receiving 
assistance; (4) other adults in the eligible family receiving 
assistance; (5) Parents not in the eligible family receiving 
assistance; (6) caretaker relatives not in the eligible family 
receiving assistance; (7) minor siblings of a child in the eligible 
family; and (8) other persons, whose income or resources count in 
determining eligibility for or amount of assistance of the eligible 
family receiving assistance, in descending order the person with the 
most income to the person with least income. As indicated below, 
reporting for certain specified data elements in this section is 
optional for certain individuals (whose family affiliation code is a 
2, 3, 4 or 5).
    13. Family Affiliation:
    Instruction: Enter the one-digit code that shows the 
individual's relation to the eligible family receiving assistance.
    1=Member of the eligible family receiving assistance.
    Not in eligible family receiving assistance, but in the 
household:
    2=Parent of minor child in the eligible family receiving 
assistance.
    3=Caretaker relative of minor child in the eligible family 
receiving assistance.
    4=Minor sibling of child in the eligible family receiving 
assistance.
    5=Person whose income or resources are considered in determining 
eligibility for or amount of assistance for the eligible family 
receiving assistance.
    14. Date of Birth: Enter the eight-digit code for date of birth 
for this individual under separate State programs in the format

[[Page 17927]]

YYYYMMDD. If the individual's date of birth is unknown and the 
family affiliation code is not ``1,'' enter the code ``99999999''.
    15. Social Security Number: Enter the nine-digit Social Security 
Number for the individual in the format nnnnnnnnn. If the social 
security number is unknown and the family affiliation code is not 
``1,'' enter ``999999999''.
    16. Race/Ethnicity:
    Instructions: To allow for the multiplicity of race/ethnicity, 
please enter the one-digit code for each category of race and 
ethnicity of the SSP-MOE individual. Reporting of this data element 
is optional for individuals whose family affiliation code is 4 or 5.
    Ethnicity:
    a. Hispanic or Latino:
    1=Yes, Hispanic or Latino.
    2=No.
    Race:
    b. American Indian or Alaska Native:
    1=Yes, American Indian or Alaska Native.
    2=No.
    c. Asian:
    1=Yes, Asian.
    2=No.
    d. Black or African American:
    1=Yes, Black or African American.
    2=No.
    e. Native Hawaiian or Other Pacific Islander:
    1=Yes, Native Hawaiian or Pacific Islander.
    2=No.
    f. White:
    1=Yes, White.
    2=No.
    17. Gender: Enter the one-digit code that indicates the 
individual's gender.
    1=Male.
    2=Female.
    18. Received Disability Benefits: The Act specifies five types 
of disability benefits. For each type of disability benefits, enter 
the one-digit code that indicates whether or not the individual 
received the benefit.
    a. Received Federal Disability Insurance Benefits Under the 
Social Security OASDI Program (Title II of the Social Security Act): 
Enter the one-digit code that indicates the adult (or minor child 
head-of-household) received Federal disability insurance benefits 
for the reporting month (or the last month of TANF assistance). This 
item is not required to be coded for a child.
    1=Yes, received Federal disability insurance.
    2=No.
    b. Received Benefits Based on Federal Disability Status Under 
Non-Social Security Act Programs: These programs include Veteran's 
disability benefits, Worker's disability compensation, and Black 
Lung Disease disability benefits. Enter the one-digit code that 
indicates the individual received benefits based on Federal 
disability status for the reporting month (or the last month of SSP-
MOE assistance). This data element should be coded for each adult 
and child with family affiliation code ``1''.
    1=Yes, received benefits based on Federal disability status.
    2=No.
    c. Received Aid to the Permanently and Totally Disabled Under 
Title XIV-APDT of the Social Security Act: Enter the one-digit code 
that indicates the individual received aid under a State plan 
approved under Title XIV for the reporting month (or the last month 
of SSP-MOE assistance). This item is not required to be coded for a 
child.
    1=Yes, received aid under Title XIV-APDT.
    2=No.
    d. Received Aid to the Aged, Blind, and Disabled Under Title 
XVI-AABD of the Social Security Act: Enter the one-digit code that 
indicates the individual received aid under a State plan approved 
under Title XVI-AABD for the reporting month (or the last month of 
SSP-MOE assistance). This item is not required to be coded for a 
child.
    1=Yes, received aid under Title XVI-AABD.
    2=No.
    e. Received Supplemental Security Income Under Title XVI-SSI of 
the Social Security Act: Enter the one-digit code that indicates the 
individual received aid under a State plan approved under Title XVI-
SSI for the reporting month (or the last month of SSP-MOE 
assistance). This data element should be coded for each adult and 
child with family affiliation code ``1''.
    1=Yes, received aid under Title XVI-SSI.
    2=No.
    19. Marital Status: Enter the one-digit code for the marital 
status of the adult (or minor child head-of-household). Leave this 
field blank for other minor children. Reporting of this data element 
is optional for individuals whose family affiliation code is 4 or 5.
    1=Single, never married.
    2=Married, living together.
    3=Married, but separated.
    4=Widowed.
    5=Divorced.
    20. Relationship to Head-of-Household:
    Instruction: Enter the two-digit code that shows the 
individual's relationship (including by marriage) to the head of the 
household, as defined by the Food Stamp Program or, principal person 
of each person living in the household. If a minor child head-of-
household, enter code ``01.''
    01=Head-of-household.
    02=Spouse.
    03=Parent.
    04=Daughter or son.
    05=Stepdaughter or stepson.
    06=Grandchild or great grandchild.
    07=Other related person (brother, niece, cousin).
    08=Foster child.
    09=Unrelated child.
    10=Unrelated adult.
    21. Parent With Minor Child In the Family:
    Guidance: A parent with a minor child in the family may be a 
natural parent, adoptive parent, or step-parent of a minor child in 
the family. Reporting of this data element is optional for 
individuals whose family affiliation code is 3, 4, or 5.
    Instruction: Enter the one-digit code that indicates the 
individual's parental status.
    1=Yes, a parent with a minor child in the family.
    2=No.
    22. Needs of a Pregnant Woman: Some States consider the needs of 
a pregnant woman in determining the amount of assistance that the 
SSP-MOE family receives. If the individual was pregnant and the 
needs associated with this pregnancy were considered in determining 
the amount of assistance for the last month of assistance, enter a 
``1'' for this data element. Otherwise enter a ``2'' for this data 
element. This data element is applicable only for individuals whose 
family affiliation code is 1.
    1=Yes, additional needs associated with pregnancy were 
considered in determining the amount of assistance.
    2=No.
    23. Educational level: Enter the two-digit code to indicate the 
educational level attained by the individual. Unknown is not an 
acceptable code for an individual whose family affiliation code is 
``1''. Reporting of this data element is optional for individuals 
whose family affiliation code is 4 or 5.
    01-11=Grade level completed in primary/secondary school 
including secondary level vocational school or adult high school.
    12=High school diploma, GED, or National External Diploma 
Program.
    13=Awarded Associate's Degree.
    14=Awarded Bachelor's Degree.
    15=Awarded graduate degree (Master's or higher).
    16=Other credentials (degree, certificate, diploma, etc.).
    98=No formal education.
    99=Unknown.
    24. Citizenship/Alienage:
    Instruction: Enter the one-digit code that indicates the 
individual's citizenship/alienage. Unknown is not an acceptable code 
for an individual whose family affiliation code is ``1''. Reporting 
of this data element is optional for individuals whose family 
affiliation code is 4 or 5.
    1=U.S. citizen, including naturalized citizens.
    2=Qualified alien.
    3=Non qualified alien.
    9=Unknown.
    25. Employment Status: Enter the one-digit code that indicates 
the adult's (or minor child head-of-household's) employment status. 
Leave this field blank for other minor children. Reporting of this 
data element is optional for individuals whose family affiliation 
code is 2, 3, 4, or 5.
    1=Employed.
    2=Unemployed, looking for work.
    3=Not in labor force (i.e, unemployed, not looking for work, 
includes discouraged workers).
    26. Amount of Earned Income: Enter the amount of the adult's (or 
minor child head-of-household's) earned income for the last month on 
SSP-MOE assistance or for the month used to budget for the last 
month on assistance. Leave these fields blank for other minor 
children (i.e., children whose family affiliation code is 4).
    27. Amount of Unearned Income: Enter the amount of the 
individual's unearned income for the last month on SSP-MOE 
assistance or for the month used to budget for the last month on 
assistance. Leave these fields blank for other minor children (i.e., 
children whose family affiliation code is 4).

[[Page 17928]]

Appendix G--SSP-MOE Data Report--Section Three--Aggregated Data 
Collection for Families Receiving Assistance Under the Separate State 
Program(s)

Instructions and Definitions

    General Instruction: The State agency must collect and report 
data for each data element, unless explicitly instructed to leave 
the field blank. Monthly caseload counts (e.g., number of families, 
number of two-parent families, and number of closed cases) and 
number of recipients must be unduplicated monthly totals. States may 
use samples to estimate the monthly totals if explicitly stated in 
the instruction for the data element.
    1. State FIPS Code: Enter your two-digit State code.
    2. Calendar Quarter: The four calendar quarters are as follows:
    First quarter--January-March.
    Second quarter--April-June.
    Third quarter--July-September.
    Fourth quarter--October-December.
    Enter the four-digit year and one-digit quarter code (in the 
format YYYYQ) that identifies the calendar year and quarter for 
which the data are being reported (e.g., first quarter of 1997 is 
entered as ``19971'').

Active Cases

    For purposes of completing this report, include all eligible 
families receiving assistance under the separate State programs, 
i.e., SSP-MOE families. All counts of families and recipients should 
be unduplicated monthly totals.
    3. Total Number of SSP-MOE Families: Enter the number of 
families receiving assistance under the separate State programs for 
each month of the quarter. The total in this item should equal the 
sum of the number of two-parent families (in item #4), the number of 
one-parent families (in item #5) and the number of no-parent 
families (in item #6).
    A. First Month:
    B. Second Month:
    C. Third Month:
    4. Total Number of Two-parent Families: Enter the total number 
of two-parent families receiving assistance under the separate State 
programs for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    5. Total Number of One-Parent Families: Enter the total number 
of one-parent families receiving assistance under the separate State 
programs for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    6. Total Number of No-Parent Families: Enter the total number of 
no-parent families receiving assistance under the separate State 
programs for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    7. Total Number of Recipients: Enter the total number of 
recipients receiving assistance under the separate State programs 
for each month of the quarter. The total in this item should equal 
the sum of the number of adult recipients (in item #8) and the 
number of child recipients (in item #9).
    A. First Month:
    B. Second Month:
    C. Third Month:
    8. Total Number of Adult Recipients: Enter the total number of 
adult recipients receiving assistance under the separate State 
programs for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    9. Total Number of Child Recipients: Enter the total number of 
child recipients receiving assistance under the separate State 
programs for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:
    10. Total Number of Non-Custodial Parents Participating in Work 
Activities: Enter the total number of non-custodial parents 
participating in work activities under the separate State programs 
for each month of the quarter. The monthly totals for this element 
may be estimated from samples.
    A. First Month:
    B. Second Month:
    C. Third Month:
    11. Total Amount of Assistance: Enter the dollar value of all 
SSP-MOE assistance (cash and non-cash) provided to families under 
the separate State programs for each month of the quarter. Round the 
amount of assistance to the nearest dollar.
    A. First Month:
    B. Second Month:
    C. Third Month:

Closed Cases

    12. Total Number of Closed Cases: Enter the total number of 
closed cases for each month of the quarter.
    A. First Month:
    B. Second Month:
    C. Third Month:

                                                         Appendix H.--Caseload Reduction Report
                                                         [State________    Fiscal Year ________]
 
                                    Part I--Implementation of All Eligibility Changes Made by the State Since FY 1995
---------------------------------------------------------------------------------------------------------------------------------------------------------
     #               Eligibility change                  Implementation date           Estimated impact on caseload since change (positive or negative)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Changes Required by Federal Law
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
 
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                State-Implemented Changes
--------------------------------------------------------------------------------------------------------------------------------------------------------
 Changes Related to Income and Resources:
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes Related to Categorical or Demographic Eligibility Factors:
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
 
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Changes Related to Behavioral Requirements
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
 
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
[[Page 17929]]

 
Changes Due to Full-Family Sanctions:
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
 
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
 Other Eligibility Changes:
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
 
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
     Estimated Total Net Impact on the Caseload of All Eligibility Changes
--------------------------------------------------------------------------------------------------------------------------------------------------------
     Total Prior-Year Caseload
--------------------------------------------------------------------------------------------------------------------------------------------------------
     Estimated Caseload Reduction Credit
--------------------------------------------------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                Part II--Application Denials and Case Closures, by Reason
---------------------------------------------------------------------------------------------------------------------------------------------------------
                                                          Fiscal year 1995                                          Fiscal year ____
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                 Number                     Percentage                     Number                     Percentage
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reason for Application Denials:
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                     -------------------------------------------------------------------------------------------------------------------
    Total Application Denials
                                     ===================================================================================================================
Reason for Case Closures:
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                      ...........................  ...........................  ...........................  ...........................
                                     -------------------------------------------------------------------------------------------------------------------
    Total Case Closures
--------------------------------------------------------------------------------------------------------------------------------------------------------


                 Appendix H.--Caseload Reduction Report
                 State ________     Fiscal Year________
------------------------------------------------------------------------
 Part III--description of the methodology used to calculate the caseload
      reduction estimates (attach any supporting data to this form)
-------------------------------------------------------------------------
 
------------------------------------------------------------------------

Appendix H--Caseload Reduction Report

State ________       Fiscal Year ________

Part IV--Certification

    I certify that we have provided the public an appropriate 
opportunity to comment on the estimates and methodology used to 
complete this report and considered those comments in completing it. 
Further, I certify that this report incorporates all reductions in 
the caseload resulting from State eligibility changes and changes in 
Federal requirements since Fiscal Year 1995.

----------------------------------------------------------------------
(signature)

----------------------------------------------------------------------
(name)

----------------------------------------------------------------------

(title)

[[Page 17930]]

Instructions for Completing Form ACF-202, Caseload Reduction Report

    All States wishing to receive a caseload reduction credit must 
complete and submit this report on behalf of the State agency 
administering the TANF program in accordance with these 
instructions.

Due Date

    This report must be submitted by December 31 of each year.

Submission

    Submit the original to the ACF Regional Administrator. Submit a 
copy to: Administration for Children and Families, Office of Family 
Assistance, 5th Floor East, 370 L'Enfant Promenade, SW, Washington, 
DC 20447.

General Instructions

    Form ACF-202 consists of a series of tables, a narrative 
description, and a certification page. If you are completing this 
report electronically, you may need to add rows to some of the 
tables to accommodate all the information you need to enter. If a 
section of a table is not applicable, specify ``none'' or ``not 
applicable,'' as appropriate in the first line.

Appendix H--Caseload Reduction Report

    We have designed Form ACF-202 so that you can complete it 
electronically or manually, but we do not currently have the 
capacity to accept electronic submissions of the report.
    Each State must submit a summary of all public comments on the 
State's estimates and methodology as part of its Caseload Reduction 
Report. Please be advised that there is nothing on form ACF-202 for 
the State to complete for this requirement, but the instructions for 
``Attachments'' direct the State to include the summary of comments.
    Please remember that the caseload reduction credit is based on 
changes both in the State's TANF caseload and in any separate State 
program caseloads; therefore you should be sure that the figures in 
this report reflect separate State program information as well as 
TANF information.
    If you have opted to use separate reduction credits for your 
State's overall and two-parent participation rates, you must submit 
separate reports for the overall and two-parent caseloads. Please 
indicate at the top of each page and each attachment to which 
caseload the report pertains.
     Enter the name of the State and the current fiscal year 
in the space provided at the top of each page. If you are completing 
the report electronically, you will only need to enter this 
information once for each table and the once for the certification 
page.

Instructions for Completing Part I

     Enter each eligibility change the State has made since 
FY 1995 in the appropriate category (e.g., ``Changes related to 
Income and Resources''), numbering each change for easy reference. 
For convenience, we have separated Federal changes from State-
implemented ones and listed some common State eligibility changes; 
however, you should be sure to include each change, whether Federal 
or State in origin, on a separate line. If you are completing this 
report electronically, you may need to add one or more rows to the 
table in order to list all of your State's eligibility changes in 
the various categories. If you are completing it manually, you may 
need to attach additional pages instead.
    Please note that you need not list any changes the State has 
implemented since October 1 of the current fiscal year, since this 
report applies to caseload reductions in the prior fiscal year.
    You should not consider the creation of a separate State program 
as an eligibility change, since separate State program caseloads 
must be included in calculating the caseload reduction credit, as we 
indicated above.
     For each eligibility change, enter the implementation 
date and your estimate of the impact the change has had on the 
caseload since its implementation. For example, if a particular 
eligibility change had the effect of reducing the caseload by 5,000 
cases, you should enter, ``-5,000.'' It is important that your 
estimate account for the cumulative impact of each change on the 
caseload since 1995, not simply the impact in the year that the 
State implemented the change.
     Please note that an eligibility change may have a positive or 
negative effect on the caseload. If the effect was negative, include 
a minus sign in front of the number. If the effect was positive, 
include a plus sign in front of the number.
     Enter the total estimated impact of all the eligibility 
changes you listed. In making this estimate, you should be sure that 
you have not counted case impacts more than once, even if they could 
be included under more than one eligibility change. Thus, the total 
impact may not equal the sum of all the individual impacts because 
of interaction among eligibility changes. In such cases, Part III of 
the report (the methodology section) should address any 
discrepancies.
     Enter the total caseload for the prior year, including 
separate State program cases. You may use the combined total number 
of families reported in the TANF Data Report and the SSP-MOE Data 
Report (in section three of each report) for the prior year. If the 
total prior-year caseload reflects adjustments you have made in 
accordance with Sec. 261.40 to improve the comparability of FY 1995 
and prior-year caseloads, please attach an explanation of your 
adjustments.
     Enter the State's estimated caseload reduction credit. 
In arriving at this number, you should subtract your estimated net 
reduction in caseload due to eligibility changes from the total 
caseload decline between FY 1995 and the prior year and divide the 
resulting number by the total prior-year caseload. For example, if 
the net result of the eligibility changes is that the State's 
caseload in the prior year decreased by 2,000 from the FY 1995 
level, then you should subtract 2,000 from the total caseload 
decline between FY 1995 and the prior fiscal year. If there is a net 
increase in caseload due to eligibility changes, you should not 
subtract anything from the caseload decline between FY 1995 and the 
prior year.

Instructions for Completing Part II

     Enter the prior fiscal year in the heading of the 
column that follows ``Fiscal Year 1995.'' For example, if this is 
the State's FY 2000 report (due by December 31, 1999), then the 
column heading should read ``Fiscal Year 1999.''
     Enter each reason for application denial, the number of 
denials for each such reason for the applicable fiscal year, and the 
percentage that the number represents of total denials for the 
fiscal year.
     Enter the total number of application denials for the 
applicable fiscal year. The total percentages for each year should 
equal 100.
     Enter the same information for each case closure 
reason, i.e., the reason for case closures, the number of closures 
for that reason, and the percentage that the number represents of 
total case closures.
     Enter the total number of case closures for the 
applicable fiscal year. The total percentages for each year should 
equal 100.

Instructions for Completing Part III

     Describe in detail how you arrived at the estimated 
impacts on the caseload of the various eligibility changes and how 
you arrived at the estimated caseload reduction credit.
     If there were changes in the number or distribution of 
application denials or case closures since FY 1995 that do not 
appear to be consistent with the information listed in Part II of 
the report, include a discussion explaining the inconsistencies.
     Attach any information that documents the State's 
estimates.

Instructions for Completing Part IV

     Enter the name and title of the individual making the 
certification on behalf of the State.
     Sign the certification. Although you may complete the 
form electronically, you must submit this page with the original 
signature to the ACF Regional Administrator and a copy to the Office 
of Family Assistance, as indicated above.

Attachments

     Attach a summary of all public comments on the State's 
estimates and methodology.
     Be sure that all attachments include the name of the 
State and the current fiscal year and indicate that they are 
attachments to Form ACF-202.

Appendix I

Annual Report on State Maintenance-of-Effort Programs: ACF-204

State ________Fiscal Year ____Date Submitted ________

Complete this form for each program for which the State claims MOE 
expenditures.
    1. Program Name:

[[Page 17931]]

    2. Description of Major Program Activities:
    3. Program Purpose(s):
    4. Program Type. Program is: under the TANF program __ is a 
separate State/local program __
    5. Description of Work Activities (Complete only if this is a 
separate State/local program):
    6. Total State Expenditures for Program: ________
    7. Total State MOE Expenditures: ________
    8. Number of Families Served with MOE Funds: ________
    This figure represents: the average monthly total ____ total for 
the year ____
    9. Eligibility Criteria:
    10. Prior Program Authorization:
    Was this program authorized and allowable under prior law? 
Yes____ No ____
    11. Total Program Expenditures in FY 1995. ________
    This certifies that all families for which the State claims MOE 
expenditures for the fiscal year meet the State's criteria for 
``eligible families.''

Signature:-------------------------------------------------------------

Name:------------------------------------------------------------------

Title:-----------------------------------------------------------------
    Approved OMB No. xxxx-xxxx Form ACF-204

Instruction for Completion of Form ACF-204 Annual Report on State 
Maintenance-of-Effort Programs

    All States must complete and submit this report in accordance 
with these instructions and the requirements at 45 CFR 265.9(c) on 
behalf of the State agency administering the TANF Program.
    Due Dates: This form must be submitted by November 14.
    States must submit this report for each fiscal year. Also, each 
State must complete a form for each program for which the State has 
claimed MOE expenditures for the fiscal year.
    Distribution: The original copy (with original signatures) 
should be submitted to: Administration for Children and Families, 
Office of Family Assistance, Aerospace Building, 5th Floor, 370 
L'Enfant Promenade, S.W., Washington, D.C. 20447. An additional copy 
should be submitted to the ACF Regional Administrator.
    General Instructions
--Round all dollar amounts to the nearest dollar. Omit cents.
--Enter State Name.
    --Enter the Fiscal Year for which this report is being 
submitted. Enter the date that the report is being submitted.

Line Item Instructions

    Line 1. Program name. Enter the name of the program.
    Line 2. Description of major activities. Describe the major 
activities and major types of benefits and services provided under 
the program.
    Line 3. Program purpose. Provide the purpose(s) of the program 
and relate this purpose to the statutory and regulatory TANF 
purposes (at 45 CFR 260.20).
    Line 4. Program type. Put an ``X'' on the appropriate line 
(indicating whether the MOE expenditures are being made under the 
TANF program or under a separate State program.
    Line 5. Work program description. If the program is a separate 
State program, describe the work activities (if any) provided for 
eligible families and the extent to which eligible families are 
subject to work requirements. If the work activities are the same as 
the TANF activities, or a subset of the TANF activities, you may 
include a list of the activities and a cross-reference to the 
definitions provide in the annual report rather than representing 
them. (It is not necessary to describe work activities provided 
under TANF because that information is provided elsewhere.) Also 
include information explaining whether individuals served by the 
program must participate in work activities and describing the 
extent to which such requirements apply (e.g., to which categories 
of recipients).
    Line 6. Total amount of State expenditures. Enter the total 
dollar amount of State expenditures in the program during the 
Federal fiscal year.
    Line 7. Total State MOE expenditures. Enter the total dollar 
amount of expenditures reported in item 6 that are reported 
as State MOE expenditures.
    Line 8. Number of families served with MOE funds. Enter the 
number of eligible families that are receiving assistance and other 
forms of services and supports under the program. Also, put an ``X'' 
on the appropriate line to indicate whether the number being 
provided is a report on the average monthly number of families being 
served or on the total number served over the course of the fiscal 
year.
    Line 9. Eligibility criteria. Provide the eligibility criteria 
for families served under this program. If the eligibility criteria 
differ for different kinds of program benefits or activities, 
specify the eligibility criteria for all the major benefits and 
activities.
    Line 10. Prior authorization. Put an ``X'' on the appropriate 
line to indicate whether the program was authorized and allowable 
under prior law. Programs that were previously authorized and 
allowable under prior law (i.e., under an approved State IV-A plan 
in effect either on Sept. 30, 1995, or August 21, 1996, at State 
option) are not subject to the ``new spending'' test.
    Line 11. Total program expenditures in 1995. If the program was 
not previously authorized and allowable (i.e., if the answer on item 
#10 is ``No''), enter the total expenditures for the program in 
1995. Only qualified State expenditures above this level may count 
towards the State MOE total.
    Certification. The certification must be signed by an authorized 
official. Under the signature line, type the title of the authorized 
official, together with the agency name.

[FR Doc. 99-8000 Filed 4-9-99; 8:45 am]
BILLING CODE 4184-01-P