[Federal Register Volume 72, Number 41 (Friday, March 2, 2007)]
[Proposed Rules]
[Pages 9491-9499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-3664]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Part 98

RIN 0970-AC29


Child Care and Development Fund Error Rate Reporting

AGENCY: Administration for Children and Families (ACF), HHS.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This proposed rule revises the Child Care and Development Fund 
(CCDF) regulations to provide for the reporting of error rates in the 
expenditure of CCDF grant funds by the fifty States, the District of 
Columbia and Puerto Rico. The error rate reports will serve to 
implement provisions of the Improper Payments Information Act of 2002 
(IPIA) and the President's Management Agenda (PMA)'s goal of 
``Eliminating Improper Payments.'' For reasons that will be explained 
in the preamble to the rule, the initial information collection under 
this proposed rule will require States, the District of Columbia, and 
Puerto Rico to review and report on a random sample of cases estimated 
to achieve the calculation of annual improper authorizations for 
payment (rather than improper payments made) with a 90 percent 
confidence interval of +/-5.0 percent.

DATES: Comment Period: You may submit comments through May 1, 2007. We 
will not consider comments received after this date.

ADDRESSES: You may mail comments to the Administration for Children and 
Families, Child Care Bureau, 1250 Maryland Ave. SW., 8th Floor, 
Washington, DC 20024. Attention: Christine Calpin, Associate Director.
    Commenters also may provide comments on the ACF website. To 
transmit comments electronically, or to download an electronic version 
of the proposed rule, please go to http://regulations.acf.hhs.gov. We 
will have comments available for public inspection Monday through 
Friday, 8:30 a.m. to 5 p.m. at the above address. The information 
collection related to this regulation can be found at http://www.acf.hhs.gov/programs/ccb/ccdf/ipi/ipi.htm.

FOR FURTHER INFORMATION CONTACT: Jeff Polich, Child Care Program 
Specialist, Child Care Bureau, at (202) 205-8696, or by email at 
[email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Child Care and Development Fund
    B. Improper Payments
    C. Statutory and Administrative Directives To Measure Improper 
Payments and Calculate Error Rates
    D. Error Rate Methodology Pilots
    E. Operationalizing the Error Rate Methodology
II. Statutory Authority
III. Provisions of Proposed Rule
    A. Summary of the Existing Regulations
    B. Consultation with States, Territories and Other Organizations
    C. Changes Made in This Proposed Rule
    D. Relation to Existing Regulations
IV. 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
    F. Congressional Review
    G. Executive Order 13132

I. Background

    This proposed rule adds a new subpart to the Child Care and 
Development Fund (CCDF) regulations that would require States, the 
District of Columbia and Puerto Rico to employ a case review process in 
calculating CCDF error rates in accordance with an error rate 
methodology established by the Secretary of Health and Human Services 
(the Secretary). The proposed rule would require States, the District 
of Columbia and Puerto Rico to report specified information regarding 
errors to the Department of Health and Human Services. The basic 
components of this error rate methodology, and how it was developed and 
pilot tested, are described in this proposed rule. The specifics of 
this methodology and how it will be implemented are detailed in the 
information collection forms and instructions associated with this 
rule, copies of which may be downloaded or requested as detailed in the 
section discussing the Paperwork Reduction Act below.

A. Child Care and Development Fund (CCDF)

    CCDF provides Federal funds to States, Territories, Indian Tribes 
and tribal organizations for the purpose of assisting low-income 
families, including families receiving or transitioning from the 
Temporary Assistance for Needy Families program (TANF), in the purchase 
of child care services, thereby allowing parents to work or attend job 
training or an educational program. States and Territories must spend a 
portion of their CCDF allotment on expenditures to improve the quality 
and availability of child care. A principle goal of CCDF set forth in 
Section 658A of the Child Care and Development Block Grant (CCDBG) Act 
of 1990, as amended (42 U.S.C. 9858, et seq.), is to ``Allow each State 
maximum flexibility in developing child care programs and policies that 
best suit the needs of children and parents within such State.'' CCDF 
is provided only to States, Territories and Tribes--there is no 
provision for direct funding to individual families or providers.
    Federal law establishes eligibility criteria for families receiving 
CCDF assistance; however, States and Territories administering CCDF 
funds may impose more restrictive eligibility standards. Regulations 
governing CCDF are codified in 45 CFR Parts 98 and 99, and the Federal 
definition of a child's eligibility for child care services is set 
forth in 45 CFR 98.20. This description includes eligibility 
requirements related to a child's age, a child's special needs or 
protective services status, family income and parent's work, training 
or educational activity. Lead Agencies of the CCDF Program--which are 
the State, territorial or tribal entities to which CCDF block grants 
are awarded and that are accountable for the use of the funds 
provided--have established policies and procedures that vary 
considerably across and even within jurisdictions, including, but not 
limited to, stricter income limits, special eligibility or priority for 
families receiving TANF and

[[Page 9492]]

eligibility that differs for a child with special needs. All clients 
seeking child care assistance supported by CCDF funds must undergo an 
eligibility determination process when they initially apply, and all 
Lead Agencies have defined a process for verifying information 
submitted in the application. Eligibility determination affects many 
other aspects of the program, including provider payment rates, 
authorized hours of care and a family's co-payment responsibility.
    Section 658E of the CCDBG Act (42 U.S.C. 9858c) and 45 CFR 98.52 
limit expenditures by States and Territories for the costs of 
administering the CCDF program to no more than five percent of the 
State's or Territory's aggregate expenditures from a fiscal year's 
allotment of CCDF funds. Various costs that are considered an integral 
part of service delivery are excluded from the five percent 
administrative cap, including eligibility determination and 
redetermination and the establishment and maintenance of computerized 
child care information systems.

B. Improper Payments

    An August 2002 General Accountability Office (GAO) report, 
``Coordinated Approach Needed to Address the Government's Improper 
Payments Problems,'' (GAO-02-749) found that Federal agencies reported 
over $19 billion in improper payments for fiscal year 2001 and 
estimated that the actual amount of improper payments is likely 
billions of dollars more. GAO further noted in a June 2004 report, 
``HHS Lacks Adequate Information to Assess Risk and Assist States in 
Managing Improper Payments,'' (GAO-04-723) that minimizing improper 
payments in the CCDF program is particularly important considering that 
almost $5 billion in Federal CCDF funds is appropriated to the program 
annually. In the latter report, GAO recommended that HHS develop 
mechanisms to gather information on a recurring basis from all States 
on their internal control systems for measuring and minimizing improper 
payments. Finally, a November 2006 report, ``Agencies' Fiscal Year 2005 
Reporting under the Improper Payments Information Act Remains 
Incomplete,'' (GAO-07-92) cites CCDF as a susceptible program that is 
not currently reporting improper payment estimates. The GAO reports may 
be downloaded electronically at http://www.gao.gov/new.items/d02749.pdf, http://www.gao.gov/new.items/d04723.pdf, and http://www.gao.gov/new.items/d0792.pdf.

C. Statutory and Administrative Directives To Measure Improper Payments 
and Calculate Error Rates

    Congress responded to the issue of improper payments by enacting 
the Improper Payments Information Act of 2002 (IPIA) (31 U.S.C. 3321 
note). The IPIA requires Federal agencies to identify programs that are 
vulnerable to improper payments and to estimate annually the amount of 
underpayments and overpayments made by these programs. An improper 
payment, as defined by the IPIA, is any payment that should not have 
been made or that was made in an incorrect amount under statutory, 
contractual, administrative or other legally applicable requirement. 
Incorrect amounts are overpayments and underpayments (including 
inappropriate denials of payment or service). An improper payment 
includes any payment that was made to an ineligible recipient or for an 
ineligible service. Improper payments also are duplicate payments, 
payments for services not received and payments that do not account for 
credit for applicable discounts.
    According to the IPIA, Federal agencies also must report on the 
actions they are taking to reduce improper payments. This report must 
include a discussion of the causes of improper payments, what actions 
Federal agencies have taken to correct those causes and the results 
achieved. Federal agencies also must state whether they have the 
information systems and other infrastructure needed to reduce improper 
payments and, if not, what resources they have requested in their 
budget submissions. Finally, Federal agencies must report on what steps 
they have taken to hold managers accountable for reducing improper 
payments. The IPIA may be downloaded at http://thomas.loc.gov/cgi-bin/bdquery/z?d107:HR04878:TOM:/bss/d107query.html. 
    The Executive Branch has also worked to address the improper 
payments issue. The President's Management Agenda (PMA)'s goal of 
``Eliminating Improper Payments'' promises to establish a baseline of 
the extent of improper payments and to work with agencies to set goals 
to reduce improper payments for each program. The anticipated result of 
this effort is greater accuracy in benefit and assistance programs, 
which will enable programs to serve additional eligible recipients. The 
PMA may be downloaded at http://www.whitehouse.gov/omb/budget/fy2002/mgmt.pdf.
    The modifications proposed in this notice of proposed rulemaking 
(NPRM) are designed to meet the requirements of IPIA as well as to meet 
the PMA's goal of ``Eliminating Improper Payments.''

D. Error Rate Methodology Pilots

    The methodology that will be implemented through this rule is based 
on a methodology the Child Care Bureau developed and field-tested in 
2005 in partnership with four States that volunteered to participate in 
a pilot study (Arkansas, Colorado, Illinois and Ohio). This methodology 
focused on administrative error associated with client eligibility. A 
principal reason for focusing on client eligibility is that, while the 
methods used to determine initial and ongoing client eligibility are 
not uniform across States, Territories and Tribes, all States, 
Territories and Tribes have procedures in place for parents to apply 
for child care services and some system to initially determine and 
periodically re-determine eligibility. Also, determining client 
eligibility is the first step in the child care subsidy process and 
therefore affects the administration of the entire program.
    Federal staff and contractors worked with pilot State staff to 
select a statistically valid statewide random sample of child care 
subsidy cases from the universe of cases in which a child care payment 
had been authorized. Electronic or hard copy files for the selected 
cases were then retrieved and documentation from the case record was 
reviewed to determine if errors were made in determining client 
eligibility, whether any errors that were made resulted in an improper 
authorization for payment and the amount of any improper authorization.
    Pilot States employed this case review process to identify the 
percentage of cases with an error, the percentage of cases with an 
improper authorization for payment, the percentage of improper 
authorizations for payment and the average amount of improper 
authorization for payment per child. This methodology focused on 
improper authorizations for payment rather than actual payments because 
we believe that improper authorizations for payment are closely related 
to improper payments. Eligibility and authorization are the first steps 
in the child care subsidy process and errors made at this stage in the 
process are likely to affect the administration of the entire program.
    The Child Care Bureau provided the pilot States with a template of 
items to examine as part of each case review; pilot States were asked 
to modify this template to reflect specific State policies

[[Page 9493]]

and practices. Federal staff and contractors provided guidance and 
oversight through on-site visits and other means regarding the 
selection of the sample, the identification and categorization of 
errors as part of the case reviews and the calculation of the resulting 
error rates.
    In summary, the error rate methodology used in the pilot included: 
(1) Sample Selection: A sample of cases was selected by each State 
using a sampling frame based on the child population served by 
eligibility offices for a one month period. (The number of cases 
selected was estimated to achieve a precision level of 6 percent at the 
90 percent confidence interval.); (2) Record Review Worksheet: A 
template of a record review worksheet, which captured the detail for 
each element of eligibility, the benefit calculation as documented by 
the agency, the amount of the subsidy authorized for the review month 
and any resulting errors, modified by each State so their worksheets 
would conform to the specifics of their State plans; (3) Case Review: 
State representatives conducted case reviews and collected key pieces 
of information for a defined review month, including the county of 
service, administrative errors occurring during the review month, cause 
of improper authorization for payment, total amount of improper 
authorizations for payment during the review month and total amount of 
authorizations during the review month; (4) Error Rate Calculation: 
These data were compiled and error rates were computed for each State, 
including percentage of cases with an error (case error rate) 
(percentage of cases with an error as compared to the total number of 
cases in the sample), percentage of cases with an improper 
authorization for payment case rate (percentage of cases with an 
improper authorization for payment as compared to the total number of 
cases in the sample), percentage of improper authorizations for payment 
rate (percentage of child care payment dollars that were improper 
authorizations for payment as compared to the total amount of child 
care authorizations for payment dollars for the sample), and average 
amount of improper authorization for payment per child (total dollar 
amount of child care improper authorizations for payment made divided 
by the number of cases that had an improper authorization for payment); 
(5) Federal Oversight and Monitoring, and Ongoing Technical Assistance: 
As part of the pilot, Child Care Bureau and ACF Regional staff provided 
ongoing oversight, monitoring and technical assistance, both on- and 
off-site. For example, the Child Care Bureau held a planning conference 
in February 2005 to provide an overview of the proposed research design 
and obtain input from participating States and conducted site visits of 
each participating State to review the error rate calculation process. 
Again, the pilot focused on administrative error in determining client 
eligibility (i.e., the extent of errors made by the agency in 
determining eligibility based on program rules and information 
available in case records); however, one State decided to extend the 
methodology to include provider error and client error.
    The final report on the error rate methodology pilots may be 
downloaded electronically at http://www.acf.hhs.gov/programs/ccb/ccdf//ipi/phase2/sec1_1.htm. A pilot study of additional States (Florida, 
Kansas, New Jersey, Oregon, and West Virginia) was conducted in 2006, 
but results are still forthcoming.

E. Operationalizing the Error Rate Methodology

    At the conclusion of the pilot, it was determined that a version of 
the tested methodology would be an appropriate tool for calculating 
error rates related to client eligibility. The proposed methodology 
described in this proposed rule and detailed in the information 
collection forms and instructions is substantively the same as the 
pilot described above with the following exceptions: (1) The sample 
size must be increased to achieve a 90% confidence level +/-5%; (2) 
States will do the sampling and calculate findings (a contractor 
performed those functions for pilot States), (3) Two items (portion of 
improper authorizations for payment attributable to insufficient or 
lack of documentation and type of improper authorization for payment 
[underauthorization and overauthorization]) are added to the required 
Data Entry Form to capture information required by revised Appendix C 
of OMB Circular A-123; (4) An informal process used with the pilots to 
consider causes of improper authorizations for payment and future 
actions to reduce them is formalized and requires submission of a State 
Improper Authorizations for Payment Report, and (5) States must review 
cases from each month of the year, rather than from one particular 
month as was done by the pilot States. The rationale for reviewing 
cases from each month of the year is to improve the statistical 
reliability of the case reviews: reviewing cases from only one 
designated month--as was done in the pilots--would have yielded a 
statistically valid error rate only for that particular month rather 
than for the whole year.
    Although the proposed rule is broad enough to encompass reporting 
on all types of errors, the initial methodology and reporting 
requirements will focus on administrative errors associated with client 
eligibility and improper authorizations for payment, as described in 
more detail in the information collection forms and instructions 
associated with this rule (please refer to the section discussing the 
Paperwork Reduction Act below).
    During the initial information collection, States, the District of 
Columbia, and Puerto Rico will evaluate both the frequency with which 
errors occurred and the amount of improper authorization for payment. 
ACF will use the improper authorization for payment error rates and 
amounts for each State, the District of Columbia, and Puerto Rico to 
compute a national improper authorizations for payment rate and amount 
that will be annually reported in the HHS's Performance and 
Accountability Report (PAR) beginning with the Fiscal Year 2008 PAR.
    We will use a 3-year rotational cycle to measure improper 
authorizations for payment in Child Care programs in the States, the 
District of Columbia, and Puerto Rico. Out of this group, we will 
select 18 to measure in the first year of each cycle and 17 in the 
remaining 2 years of each cycle. The result is that each State, the 
District of Columbia, and Puerto Rico will be measured once, and only 
once, in every 3 years. This rotation allows respondents to plan for 
the reviews because they know in advance in which year they will be 
measured. States, the District of Columbia, and Puerto Rico will be 
randomly assigned using the following methodology. First, each entity 
will be stratified by the 10 ACF regions, with the regions randomly 
ordered. Then within region each group will be sorted by caseload, from 
the most cases to the least cases. Every third State (including the 
District of Columbia and Puerto Rico) on the list will be selected, 
using a random start number between one and three the first year. After 
removing those selected for the first year from the frame, a second 
random start is drawn between one and two and every other State 
(including the District of Columbia and Puerto Rico, if they remain) is 
selected for the second year. The third year will include those not 
selected in year one or year two. This sampling approach will yield a 
mix of county-administered and State-administered programs and programs 
serving both large and small numbers of children each year. A list of

[[Page 9494]]

States (including the District of Columbia and Puerto Rico) assigned to 
each review year can be found in the information collection 
instructions.
    Again, and for the reasons noted earlier, we are proposing to 
require States, the District of Columbia, and Puerto Rico to measure 
improper authorizations for payment rather than improper payments at 
this time. However, we would be interested in hearing from States, the 
District of Columbia, and Puerto Rico--as well as other interested 
stakeholders--as to how closely-related authorization for payment and 
final payment are linked. We would also be interested in hearing about 
how useful information about improper authorizations for payment will 
be in reducing improper payments and pursuing corrective action, 
without information about final payment. We would also like to better 
understand what additional burden and/or benefit the States, the 
District of Columbia, and Puerto Rico might reap if, at some future 
date, we were to request the measurement of actual improper payments as 
part of the measurement of improper authorizations for payment.

II. Statutory Authority

    This proposed regulation is being issued under the authority 
granted to the Secretary by Section 658I of the CCDBG Act (42 U.S.C. 
9858g) and in accordance with the IPIA (31 U.S.C. 3321 note).

III. Provisions of Proposed Rule

A. Summary of the Existing Regulations

    Under CCDF regulations, ACF employs several methods to gather the 
information from States, the District of Columbia, and Territories 
needed to comply with the statutory requirements of the CCDBG Act and 
to efficiently oversee the administration of the CCDF program. States 
and Territories must submit plans every two years detailing their 
intentions for implementing programs under 45 CFR 98.17. Pursuant to 45 
CFR 98.70, States and Territories also must collect monthly case-level 
reports (which may be submitted monthly or quarterly) and submit annual 
aggregated reports on services provided through all CCDF grant funds. 
Finally, States and Territories are required to submit quarterly 
reports on estimates and expenditures in conjunction with 45 CFR 98.65.
    45 CFR 98.65(a) requires Lead Agencies to have an audit conducted 
after the close of each program period in accordance with OMB Circular 
A-133 and the Single Audit Act Amendments of 1996 and 45 CFR 98.67(c) 
requires Lead Agencies to have fiscal control and accounting procedures 
sufficient to establish that funds have been expended appropriately. 
CCDF regulations do not currently require the reporting of error rates 
at regular intervals.

B. Consultation With States, Territories and Other Organizations

    The Child Care Bureau has consulted with States, the District of 
Columbia and Territories since 2003 on different approaches to 
addressing improper payments. Through quarterly conference calls, 
workshops at annual State Administrators Meetings and an Improper 
Payments survey, the Child Care Bureau has engaged States and 
Territories in conversations about strategies to identify, measure, 
prevent, reduce and collect improper payments. The Child Care Bureau 
also has been in contact with national organizations such as the 
American Public Human Services Association, the National Association 
for Program Information and Performance Measurement and the United 
Council on Welfare Fraud through conferences, meetings and conference 
calls regarding strategies to address improper payments.

C. Changes Made in This Proposed Rule

    While retaining the provisions governing CCDF Lead Agency audits, 
financial reporting requirements and fiscal requirements (located in 45 
CFR 98.65 and 45 CFR 98.67), this NPRM proposes to add a new Subpart 
K--Error Rate Reporting to require CCDF Lead Agencies of the fifty 
States, the District of Columbia and Puerto Rico to measure, calculate 
and report to the Department of Health and Human Services error rates 
in accordance with an error rate methodology established by the 
Secretary, as summarized in this rule and detailed in the associated 
information collection forms and instructions.
    We anticipate publishing a final rule with an effective date of 
October 1, 2007. This means that the first round of States (including 
the District of Columbia and/or Puerto Rico if applicable) subject to 
the final regulations would need to complete their reviews and submit 
their data to ACF by June 30, 2008.
Error Rate Report (Section 98.100)
    Under proposed section 98.100(a), these requirements would apply 
only to the fifty States, the District of Columbia and Puerto Rico. 
American Samoa, the U.S. Virgin Islands, the Commonwealth of the 
Northern Mariana Islands, Guam and the Tribes would be exempted from 
the requirements of the proposed rule because they serve smaller 
numbers of families. We do not believe that the benefits of the error 
rate data obtained from these exempted Territories and the Tribes 
justify the costs of compliance with the proposed regulation, which 
would require a much greater portion of child care resources relative 
to the States, the District of Columbia and Puerto Rico. However, we 
would encourage exempted Territories and Tribes to comply voluntarily 
with the requirements of the proposed rule or to create their own 
methods and strategies for identifying and reducing improper payments. 
Additionally, should funding and provision of services change in these 
exempted Tribes and Territories, we will consider removing the 
exemption through the notice and comment rulemaking process.
    As stated earlier, the terms ``error'' and ``improper payment'' 
have been defined broadly enough in this rule to encompass reporting on 
all types of errors and all types of improper payments. For example, 
paragraph (c) proposes a definition of ``error''; and paragraph (d) 
proposes a definition of ``improper payment.'' The important 
distinction between the two terms is that every improper payment is the 
result of an error; however, not every error result in an improper 
payment. Error is defined as any violation or misapplication of 
statutory, contractual, administrative, or other legally applicable 
requirements governing the administration of CCDF grant funds, 
regardless of whether such violations results in an improper payment. 
An improper payment is defined to mean any payment of CCDF grant funds 
that should not have been made or that was made in an incorrect amount 
(including overpayments and underpayments) under statutory, 
contractual, administrative or other legally applicable requirements 
governing the administration of CCDF grant funds, including any payment 
of CCDF grant funds to an ineligible recipient, any payment of CCDF 
grant funds for an ineligible service, any duplicate payment of CCDF 
grants funds and payments of CCDF grant funds for services not 
received.
    Though we may consider expanding the measurement of error and 
improper payments in the future to include the full range of errors and 
improper payments, we are proposing to implement this rule for the time 
being by focusing on the measurement of error in eligibility 
determinations and improper authorizations for payment. For example, 
under proposed paragraph (b), States, the District of Columbia and 
Puerto Rico would prepare a report

[[Page 9495]]

calculating the ``error rates,'' defined as the percentage of cases 
with an error (expressed as the total number of cases with an error 
compared to the total number of cases). At this time--and consistent 
with our initial focus on client eligibility errors--we will be 
operationalizing this requirement by asking States, the District of 
Columbia, and Puerto Rico to measure only administrative errors.
    Similarly, for the time being, we are asking States, the District 
of Columbia, and Puerto Rico to review and measure the improper 
authorizations for payments to subsidy recipients rather than improper 
payments made. Thus, under proposed paragraph (b), States, the District 
of Columbia, and Puerto Rico would also prepare a report calculating 
the percentage of cases with an error, the percentage of cases with an 
improper authorization for payment (expressed as the total number of 
cases with an improper authorization for payment compared to the total 
number of cases); the percentage of improper authorizations for payment 
(expressed as the total amount of improper authorizations for payment 
compared to the total dollar amount of authorizations made); the 
average amount of improper authorization for payment; and the estimated 
annual amount of improper authorizations for payment. The report would 
provide strategies for reducing the error rates and will allow States, 
the District of Columbia and Puerto Rico to set target error rates for 
the next cycle.
    The rationale for capturing the information is as follows: (1) 
Percentage of cases with an error within a sample of cases for a 
reporting period is the basic measure of error rate for a child care 
agency. The overall goal of an agency should be to get this rate as 
close to zero as possible. (2) Percentage of cases with an improper 
authorization for payment typically should be a lower rate than the 
percentage of cases with an error because not all errors result in an 
improper authorization for payment being made. (3) Percentage of 
improper authorizations for payment based on the total amount (in 
dollars) of child care improper authorizations for payment in the 
sample divided by the total amount of child care authorizations (in 
dollars) for the sample. This provides a measure of the magnitude (from 
a financial standpoint) of the improper authorizations for payment 
compared with the authorizations for payment properly made during the 
reporting period. (4) Average amount of improper authorization for 
payment gives an estimate of the size (i.e., the average amount in 
dollars) of the errors for the reporting period. This can be helpful in 
determining courses of action for recovery and also gives an agency a 
basis for estimating the potential benefit of preventive actions to 
improve the eligibility determination process (e.g., management 
interventions to reduce error rates). (5) Estimated annual amount of 
improper authorizations for payment gives an estimate of the total 
amount of improper authorizations for payment for the reporting period. 
The percentage of cases with an improper authorization for payment and 
the estimated annual amount of improper authorizations for payment are 
necessary to comply with the requirements of the IPIA and to provide a 
baseline from which future accomplishments in reducing improper 
authorizations for payment can be measured. We believe the other 
information will be useful for the States, the District of Columbia, 
and Puerto Rico to reduce errors and any improper payments resulting 
from errors. Additionally, we believe this information will be valuable 
to ACF in monitoring progress in addressing improper authorizations for 
payments, reducing improper payments, and providing technical 
assistance, as well as focusing entities on potential problems in the 
administration of their child care programs.
Case Review Methodology (Section 98.101)
    Under proposed section 98.101, Case Review Methodology, the error 
reports that would be required by this proposed rule must be based on 
comprehensive reviews of case records conducted by States, the District 
of Columbia and Puerto Rico in accordance with a methodology 
established by the Secretary and detailed in this proposed rule and 
associated information collection forms and instructions. In 
determining which case records to review, States, the District of 
Columbia, and Puerto Rico must select a random sample of child records 
estimated to achieve the calculation of an estimated annual amount of 
improper payments with a 90 percent confidence interval of 5.0 percent. At this time--and for reasons stated earlier--we are 
operationalizing this requirement, through the information collection 
instruments and instructions, by asking States, the District of 
Columbia, and Puerto Rico to select a random sample of child records 
estimated to achieve the calculation of an estimated annual amount of 
improper authorizations for payments with a 90 percent confidence 
interval of 5.0 percent.
    Pursuant to the proposed paragraph (b), the Secretary would provide 
forms for use in complying with the proposed rule, together with 
instructions on an acceptable methodology. These forms and instructions 
may be requested or downloaded as detailed in the section discussing 
the Paperwork Reduction Act below. States, the District of Columbia, 
and Puerto Rico would be required under proposed paragraph (c) to 
conduct case reviews and submit error rate reports every three years on 
a staggered basis according to a cycle established by the Secretary and 
shared in instructions accompanying information collection forms. The 
proposed rule at paragraph (d) would require States, the District of 
Columbia and Puerto Rico to provide access to Federal staff to 
participate and provide oversight in the case review and error rate 
calculation process. Federal staff may make site visits, as was done 
during the error rate methodology pilots, to provide technical 
assistance and review compliance with the regulatory requirements. 
Pursuant to paragraph (e) of the proposed rule, States, the District of 
Columbia, and Puerto Rico would be required to retain records pertinent 
to the case reviews and submission of error rate reports for a period 
of five years from the date of submission of the applicable error rate 
report or, if the error rate report was revised, from the date of 
submission of the revision. We selected a period of five years so that 
records would be available for review through two cycles of case 
reviews and report submissions.
Content of Error Rate Reports (Section 98.102)
    This proposed rule adds a new section 98.102, Content of Error Rate 
Reports addressing submission of baseline reports and standard reports. 
Under proposed paragraph (a), in the initial cycle, States, the 
District of Columbia and Puerto Rico would submit a baseline report 
listing baseline error rate information and targets for the next cycle, 
as well as information about causes of, and strategies to address, 
error and information about their information technology systems. Under 
proposed paragraph (b), in subsequent cycles, States, the District of 
Columbia and Puerto Rico would submit a standard report that would, in 
addition to updating the information provided in the baseline report, 
enable States, the District of Columbia and Puerto Rico to examine 
their ability to meet previously submitted targets, set future targets, 
and describe strategies to reduce their error rates. This report would 
be used by the Department to comply with the reporting requirements of 
the IPIA, to advance the goals of the PMA and to

[[Page 9496]]

address concerns raised by GAO and others regarding the problem of 
improper payments.
    We intend that the initial case reviews and reports would focus on 
administrative error associated with client eligibility and 
authorizations for payment for the reasons previously set forth; 
however the regulatory language provides flexibility to allow for 
changing or expanding the error rate study and report if future 
circumstances warrant doing so. Therefore, should we decide to broaden 
the examination of ``errors,'' we would provide notice and comment 
through the information collection process. However, we welcome 
comments regarding the use of improper authorizations for payment as a 
means to estimate improper payments as well as comments regarding the 
additional burden and/or benefit that measuring improper payments would 
entail.
    We are proposing that the frequency of reporting would be every 
three years to conserve resources and to allow time for the results of 
responses to error rates undertaken by States, the District of Columbia 
and Puerto Rico to take effect. However, entities are encouraged to 
measure the impact of their corrective actions more frequently. In 
addition, the proposed rule would allow for sampling of cases as part 
of the review of case records, using methodology established by the 
Secretary and set forth in instructions accompanying information 
collection forms.

D. Relation to Existing Regulations

    Administrative Costs Cap--45 CFR 98.52 prohibits Lead Agencies from 
spending more than five percent of the aggregate CCDF funds expended by 
the Lead Agency from each fiscal year's allotment for administrative 
activities. Section 658E(c)(3)(C) of the CCDBG Act (42 U.S.C. 
9858c(c)(3)(C)) and the accompanying Conference Report (H.R. Conf. Rep. 
104-725) specify that the costs of providing direct services are to be 
excluded from any definition of administrative costs. The Conference 
Report specifically identified eligibility determination and 
redetermination, reviews and supervision of child care placements and 
establishment and maintenance of computerized child care information 
systems as ``integral part[s] of service delivery'' that ``should not 
be considered administrative costs.'' Therefore, provided the focus of 
the error rate calculations and reports continue to focus on client 
eligibility, the costs to Lead Agencies of conducting case reviews and 
preparing error rate reports shall be considered a part of service 
delivery and excluded from administrative costs subject to the five 
percent administrative cap. Further, any costs incurred by a Lead 
Agency in complying with this proposed regulation that are directed 
toward establishing or improving child care information systems shall 
also be excluded from administrative costs subject to the five percent 
administrative cap.
    Identified Improper Payments--Pursuant to 45 CFR 98.66, any actual 
improper payments related to specific cases that were included in the 
sample during the case review process would be subject to disallowance 
in accordance with the procedures set forth in 45 CFR 98.66. 
Extrapolations of estimated improper payments derived from random 
sampling of total cases are not subject to disallowance. In the event 
that improper payments identified through the case review process are 
recovered, 45 CFR 98.60(g) provides that such payments shall (1) if 
received by the Lead Agency during the applicable obligation period 
(described in 45 CFR 98.60(d) & (e)), be used for activities specified 
in the Lead Agency's approved plan and must be obligated by the end of 
the obligation period; or (2) if received after the end of the 
applicable obligation period, be returned to the Federal government.
    No Private Right of Action--Section 658F(a) of the CCDBG Act (42 
U.S.C. 9858d(a)) makes clear that CCDF funding is not an entitlement to 
any child care provider or recipient of child care services. As a 
result, detection of an underpayment in any specific case does not 
create an entitlement to that individual to a particular service or 
benefit. Nothing in this proposed rule should be construed to create a 
right requiring the States, the District of Columbia or Puerto Rico to 
remedy any individual, even if a payment error in the form of an 
underpayment has been made.

IV. 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 Executive Order 12866. The Department has determined that this 
proposed rule is consistent with these priorities and principles.
    Executive Order 12866 encourages agencies, as appropriate, to 
provide the public with meaningful participation in the regulatory 
process. As described earlier, the Child Care Bureau has consulted with 
States, the District of Columbia, and Territories on numerous occasions 
since 2003 concerning different approaches to addressing improper 
payments. Specifically, through quarterly conference calls, workshops 
at annual State Administrators Meetings and an Improper Payments 
survey, the Child Care Bureau has engaged States and Territories in 
conversations about strategies to identify, measure, prevent, reduce 
and collect improper payments. The Child Care Bureau also has been in 
contact with national organizations such as the American Public Human 
Services Association, the National Association for Program Information 
and Performance Measurement and the United Council on Welfare Fraud 
through conferences, meetings and conference calls regarding strategies 
to address improper payments. In addition, we are providing a 60 day 
public comment period.
    This rule is considered a ``significant regulatory action'' as 
defined under Executive Order 12866 and therefore has been reviewed by 
the Office of Management and Budget. Specifically, the rule raises 
``novel legal or policy issues arising out of legal mandates, the 
President's priorities, or the principles set forth in the Executive 
Order.''

B. Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (RFA) (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 RFA to include small businesses, 
small non-profit organizations and small governmental entities. This 
rule will affect only the 50 States, the District of Columbia and 
Puerto Rico. 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 proposed rule's 
impact on the well-being of families, as required under Section 654 of 
the Treasury and General Appropriations Act of 1999. This proposed rule 
aims to identify and reduce errors in the administration of CCDF funds, 
thus ensuring that the program is operated as efficiently and fairly as 
possible. Because CCDF block grant allotments are capped (i.e., CCDF is 
not an entitlement), fewer improper payments translates into more funds 
for use in assisting low-income families in purchasing child care 
services, providing comprehensive consumer education to parents and the 
public and

[[Page 9497]]

improving the quality and availility of child care.

D. Paperwork Reduction Act

    The proposed rule would require States, the District of Columbia 
and Puerto Rico to compile information regarding errors made in the 
administration of CCDF funds using an error rate methodology 
established by the Secretary and detailed in this proposed rule and 
proposed information collection forms and instructions. Towards this 
end, this rule would require States, the District of Columbia and 
Puerto Rico to submit reports to the Department on their findings. 
Copies of the proposed information collection forms and instructions 
may be obtained by writing to the Administration for Children and 
Families, Office of Administration, Office of Information Services, 370 
L'Enfant Promenade, SW., Washington, DC 20447, Attn: ACF Reports 
Clearance Officer. All requests should be identified by the title of 
the information collection. E-mail address: [email protected]. Copies 
of the proposed information collection forms and instructions may also 
be obtained on the Child Care Bureau's webpage on Addressing Improper 
Payments at: http://www.acf.hhs.gov/programs/ccb/ccdf/ipi/ipi.htm.
    In accordance with the Paperwork Reduction Act of 1995, this notice 
invites the general public and other public agencies to comment on the 
information collection requirements contained in this proposed rule. 
The Administration for Children and Families (ACF) will consider 
comments by the public on this proposed collection of information in 
the following areas:
    (1) Evaluating whether the proposed collection is necessary for the 
proper performance of the functions of ACF, including whether the 
information will have practical utility. For example, will the 
measurement of improper authorizations for payment provide a useful and 
meaningful component estimate of improper payments?;
    (2) Evaluating the accuracy of ACF's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used;
    (3) Enhancing the quality, usefulness and clarity of the 
information to be collected; and
    (4) 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., permitting 
electronic submission of responses.
    As required by the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)), the Administration for Children and Families has submitted a 
copy of this section, together with a copy of this notice of proposed 
rulemaking to the Office of Management and Budget (OMB) for its review.
    OMB is required to make a decision concerning the collection of 
information contained in these proposed regulations between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment is best assured of having its full effect if OMB 
receives it within 30 days of publication. This does not affect the 
deadline for the public to comment to the Department on the proposed 
regulations. These information collection requirements will not become 
effective until approved by OMB.
    To make sure that your comments and related material reach OMB, 
please submit them by one of the following means:
    1. By fax to OMB at (202) 395-6974. To ensure your comments are 
received in time, mark the fax to the attention of the Desk Officer for 
the Administration for Children and Families.
    2. By e-mail to [email protected]. To ensure your 
comments are received in time, mark the e-mail to the attention of the 
Desk Officer for the Administration for Children and Families.
    Title: Child Care and Development Fund: Error Rate Report for 
States, the District of Columbia and Puerto Rico.
    Description: States, the District of Columbia and Puerto Rico must 
prepare and submit to the Department reports of errors occurring in the 
administration of CCDF grant funds. They would be required to report 
the percentage of cases with an error, the percentage of cases with an 
improper authorization for payment; the percentage of improper 
authorizations for payment; the average improper authorization for 
payment amount; and the estimated annual amount of improper 
authorizations for payment. The report also will provide strategies for 
reducing the error rates and allow States, the District of Columbia and 
Puerto Rico to set target error rates for the next cycle.
    Respondents: The fifty States, the District of Columbia and Puerto 
Rico.

                                             Annual Burden Estimates
----------------------------------------------------------------------------------------------------------------
                                                                                      Average
            Instrument or requirement                Number of        Yearly       burden hours    Total burden
                                                   respondents*     submittals     per submittal       hours
----------------------------------------------------------------------------------------------------------------
Record Review Worksheet.........................           17.33           **271           13.74          64,562
Data Entry Form.................................           17.33           **271             .14             652
State Improper Payments Report..................           17.33               1             367           6,360
                                                 ---------------------------------------------------------------
    Estimated Total Annual Burden Hours.........  ..............  ..............  ..............         71,574
----------------------------------------------------------------------------------------------------------------
* States, the District of Columbia and Puerto Rico will compile and submit error rate reports in staggered three-
  year cycles.
** These burden estimates are based on a review of 271 cases, which is estimated to be the amount needed to meet
  the sampling requirements of the proposed rule.

E. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) 
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.
    ACF has estimated the cost impact of conducting an error rate case 
review and preparing the required reports in compliance with the 
proposed rule. The cost estimate analysis was based on the error rate 
pilots and an estimation of the amount of time and cost required to 
complete various tasks. The estimated cost for a single respondent to 
conduct its case reviews and prepare the required report is 
approximately $150,000. The total estimated cost includes the cost from 
drawing of the sample of cases from 12 monthly sampling frames, 
training staff,

[[Page 9498]]

conducting record reviews, compiling data, calculating error rates and 
preparing the final report. The total annual cost burden of having 17 
respondents, the average number required in any year, to conduct error 
rate case reviews and prepare the required reports would be 
approximately $2.6 million. Thus, this proposed rule will not result in 
the expenditure by State, territorial, local and tribal governments, in 
the aggregate, or by the private sector, of $100 million or more in any 
one year.

F. Congressional Review

    This proposed rule is not a major rule as defined in 5 U.S.C. 804.

G. Executive Order 13132

    Executive Order 13132 on Federalism requires that Federal agencies 
consult with State and local government officials in the development of 
regulatory policies with federalism implications. As noted above, the 
Child Care Bureau has engaged States and Territories in conversations 
about strategies to identify, measure, prevent, reduce and collect 
improper payments through quarterly conference calls, workshops at 
annual State Administrators Meetings and an Improper Payments survey. 
Further, consistent with Executive Order 13132, we specifically solicit 
comment from State and local government officials on this proposed 
rule. We will seriously consider these comments in developing the final 
rule.

List of Subjects in 45 CFR Part 98

    Administrative practice and procedure, Day care, Grant programs, 
Reporting and recordkeeping requirements.

(Catalogue of Federal Domestic Assistance Programs: 93.575, Child 
Care and Development Block Grant; 93.596, Child Care Mandatory and 
Matching Funds)

    Dated: April 10, 2006.
Wade F. Horn,
Assistant Secretary for Children and Families.
    Approved: February 5, 2007.
Michael O. Leavitt,
Secretary, Department of Health and Human Services.

    For the reasons set forth in the preamble, the Administration for 
Children and Families proposes to amend part 98 of title 45 of the Code 
of Federal Regulations as follows:

PART 98-CHILD CARE AND DEVELOPMENT FUND

    1. The authority for part 98 continues to read:

    Authority: 42 U.S.C. 618, 9858.

    2. Amend 45 CFR Part 98 to add Subpart K to read as follows:

Subpart K--Error Rate Reporting

Sec.
98.100 Error Rate Report.
98.101 Case Review Methodology.
98.102 Content of Error Rate Reports.


Sec.  98.100  Error Rate Report.

    (a) Applicability--The requirements of this subpart apply to the 
fifty States, the District of Columbia and Puerto Rico.
    (b) Generally--States, the District of Columbia and Puerto Rico 
shall calculate, prepare and submit to the Department, a report of 
errors occurring in the administration of CCDF grant funds, at times 
and in a manner specified by the Secretary in instructions. States, the 
District of Columbia and Puerto Rico must use this report to calculate 
their error rates, which is defined as the percentage of cases with an 
error (expressed as the total number of cases with an error compared to 
the total number of cases); the percentage of cases with an improper 
payment (expressed as the total number of cases with an improper 
payment compared to the total number of cases); the percentage of 
improper payments (expressed as the total amount of improper payments 
in the sample compared to the total dollar amount of payments made in 
the sample); the average amount of improper payment; and the estimated 
annual amount of improper payments. The report also will provide 
strategies for reducing their error rates and allow States, the 
District of Columbia and Puerto Rico to set target error rates for the 
next cycle.
    (c) Error Defined--For purposes of this subpart, an ``error'' shall 
mean any violation or misapplication of statutory, contractual, 
administrative, or other legally applicable requirements governing the 
administration of CCDF grant funds, regardless of whether such 
violation results in an improper payment.
    (d) Improper Payment Defined--For purposes of this subpart, 
``improper payment'' (1) means any payment of CCDF grant funds that 
should not have been made or that was made in an incorrect amount 
(including overpayments and underpayments) under statutory, 
contractual, administrative, or other legally applicable requirements 
governing the administration of CCDF grant funds; and
    (2) Includes any payment of CCDF grant funds to an ineligible 
recipient, any payment of CCDF grant funds for an ineligible service, 
any duplicate payment of CCDF grant funds and payments of CCDF grant 
funds for services not received.
    (e) Costs of Preparing the Error Rate Report--Provided the error 
rate calculations and reports focus on client eligibility, expenses 
incurred by the States, the District of Columbia and Puerto Rico in 
complying with this rule, including preparation of required reports, 
shall be considered a cost of direct service related to eligibility 
determination and therefore is not subject to the five percent 
limitation on CCDF administrative costs pursuant to Sec.  98.52(a).


Sec.  98.101  Case Review Methodology.

    (a) Case Reviews and Sampling--In preparing the error reports 
required by this subpart, States, the District of Columbia and Puerto 
Rico shall conduct comprehensive reviews of case records using a 
methodology established by the Secretary. For purposes of the case 
reviews, States, the District of Columbia and Puerto Rico shall select 
a random sample of child records which is estimated to achieve the 
calculation of an estimated annual amount of improper payments with a 
90 percent confidence interval of 5.0 percent.
    (b) Methodology and Forms--States, the District of Columbia and 
Puerto Rico must prepare and submit forms issued by the Secretary, 
following the accompanying instructions setting forth the methodology 
to be used in conducting case reviews and calculating the error rates.
    (c) Reporting Frequency and Cycle--States, the District of Columbia 
and Puerto Rico shall conduct case reviews and submit error rate 
reports to the Department according to a staggered three-year cycle 
established by the Secretary such that each State, the District of 
Columbia, and Puerto Rico will be selected once, and only once, in 
every three years.
    (d) Access to Federal Staff--States, the District of Columbia and 
Puerto Rico must provide access to Federal staff to participate and 
provide oversight in case reviews and error rate calculations, 
including access to forms related to determining error rates.
    (e) Record Retention--Records pertinent to the case reviews and 
submission of error rate report shall be retained for a period of five 
years from the date of submission of the applicable error rate report 
or, if the error rate report was revised, from the date of submission 
of the revision. Records must be made available to Federal staff upon 
request.

[[Page 9499]]

Sec.  98.102  Content of Error Rate Reports.

    (a) Baseline Submission Report--At a minimum, States, the District 
of Columbia and Puerto Rico shall submit an initial error rate report 
to the Department, as required in Sec.  98.100, which includes the 
following information on errors and resulting improper payments 
occurring in the administration of CCDF grant funds, including Federal 
Discretionary Funds (which includes any funds transferred from the TANF 
Block Grant), Mandatory and Matching Funds and State Matching and 
Maintenance-of-Effort (MOE Funds):
    (1) Percentage of cases with an error (regardless of whether such 
error resulted in an over or under payment), expressed as the total 
number of cases in the sample with an error compared to the total 
number of cases in the sample;
    (2) Percentage of cases with an improper payment (both over and 
under payments), expressed as the total number of cases in the sample 
with an improper payment compared to the total number of cases in the 
sample;
    (3) Percentage of improper payments (both over and under payments), 
expressed as the total dollar amount of improper payments in the sample 
compared to the total dollar amount of payments made in the sample;
    (4) Average amount of improper payments (gross over and under 
payments, divided by the total number of cases in the sample that had 
an improper payment (both over and under payments));
    (5) Estimated annual amount of improper payments (which is a 
projection of the results from the sample to the universe of cases 
statewide during the 12-month review period) calculated by multiplying 
the percentage of improper payments by the total dollar amount of child 
care payments that the State, the District of Columbia or Puerto Rico 
paid during the 12-month review period;
    (6) For each category of data listed above, targets for errors and 
improper payments in the next reporting cycle (which must be lower than 
the most recent estimated error rates);
    (7) Summary of methodology used to arrive at estimate, including 
fieldwork preparation, sample generation, record review and error rate 
computation processes;
    (8) Discussion of the causes of improper payments identified and 
actions that will be taken to correct those causes in order to reduce 
the error rates;
    (9) Description of the information systems and other infrastructure 
that assist the State, the District of Columbia and Puerto Rico in 
identifying and reducing improper payments, or if the State, the 
District of Columbia or Puerto Rico does not have these tools, a 
description of actions that will be taken to acquire the necessary 
information systems and other infrastructure; and
    (10) Such other information as specified by the Secretary.
    (b) Standard Report--At a minimum, the State, the District of 
Columbia and Puerto Rico shall submit an error rate report to the 
Department, as required in Sec.  98.100, made subsequent to the 
baseline submission report as set forth in Sec.  98.102(a) which 
includes the following information on errors and resulting improper 
payments occurring in the administration of CCDF grant funds, including 
Federal Discretionary Funds (which includes any funds transferred from 
the TANF Block Grant), Mandatory and Matching Funds and State Matching 
and Maintenance-of-Effort (MOE Funds):
    (1) All the information reported in the baseline submission, as set 
forth in Sec.  98.102(a), updated for the current cycle;
    (2) For each category of data listed in Sec.  98.102(a)(1) through 
(5), States, the District of Columbia and Puerto Rico must include data 
and targets from the prior cycle in addition to data from the current 
cycle and targets for the next cycle;
    (3) Description of whether the State, the District of Columbia or 
Puerto Rico met error rate targets set in the prior cycle and, if not, 
an explanation of why not;
    (4) Discussion of the causes of improper payments identified in the 
prior cycle and actions that were taken to correct those causes, in 
addition to a discussion on the causes of improper payments identified 
in the current cycle and actions that will be taken to correct those 
causes in order to reduce the error rates; and
    (5) Such other information as specified by the Secretary.

 [FR Doc. E7-3664 Filed 3-1-07; 8:45 am]
BILLING CODE 4184-01-P