[Federal Register Volume 72, Number 171 (Wednesday, September 5, 2007)]
[Rules and Regulations]
[Pages 50889-50900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-4308]


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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: Final rule.

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SUMMARY: This final 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.''

DATES: Effective October 1, 2007.

FOR FURTHER INFORMATION CONTACT: Cheryl Vincent, Child Care Program 
Specialist, Child Care Bureau, 1250 Maryland Ave., SW., 8th Floor, 
Washington, DC 20024, telephone (202) 205-0750, e-mail 
[email protected].

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. Child Care and Development Fund
    B. Summary of the Statutory and Administrative Directives To 
Measure Improper Payments
    C. Error Rate Methodology
    D. Notice of Proposed Rulemaking
II. Statutory Authority
III. Summary of Existing Regulations
IV. Provisions of Final Rule
    A. Consultation With States, Territories and Other Organizations
    B. Discussion of Comments
    C. Changes Made in Final Rule
V. 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 final rule adds a new subpart to the Child Care and 
Development Fund (CCDF) regulations that requires 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). This methodology is specified in this rule and 
associated information collection forms and instructions. The final 
rule requires States, the District of Columbia and Puerto Rico to 
report specified information regarding errors to the Department of 
Health and Human Services. A discussion of comments received in 
response to the publication of a Notice of Proposed Rulemaking (NPRM) 
on March 2, 2007 (72 FR 9491) may be found below in the preamble. This 
final rule is not substantively different from the NPRM; however, minor 
technical changes have been made to address concerns raised by some 
commenters.

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 also must 
spend no less than four percent of their CCDF allotment on expenditures 
to improve the quality and availability of child care. CCDF is provided 
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

[[Page 50890]]

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 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 
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 Child Care and Development Block Grant (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. Summary of the Statutory and Administrative Directives To Measure 
Improper Payments

    The Improper Payments Information Act of 2002 (IPIA) (31 U.S.C. 
3321 note) 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 must report on the actions 
they are taking to reduce improper payments if the estimated amount of 
improper payments for an activity or program exceeds $10 million and 
2.5 percent of program payments. CCDF has been identified by the Office 
of Management and Budget (OMB) as a program susceptible to significant 
erroneous payments and for which improper payment information is 
required to be reported under the IPIA. 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 also has 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 in this final rule are designed to meet the 
requirements of the IPIA as well as to meet the PMA's goal of 
``Eliminating Improper Payments.''

C. Error Rate Methodology

    The methodology that is implemented in this final 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 and 
improper authorizations for payment. 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. A pilot study of additional States (Florida, Kansas, New 
Jersey, Oregon, and West Virginia) was completed in 2007. The final 
reports on the error rate methodology pilots may be downloaded 
electronically at: http://www.acf.hhs.gov/programs/ccb/ccdf/ipi/ipi.htm.
    Although this final 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 preamble and accompanying information collection forms and 
instructions associated with the 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' Performance and 
Accountability Report (PAR) beginning with the Fiscal Year 2008 PAR.
    We will use a three-year rotational cycle to measure improper 
authorizations for payment in CCDF programs in the States, the District 
of Columbia, and Puerto Rico. Out of this group, we have selected 18 to 
measure in the first year of each cycle and 17 to measure in each of 
the remaining two years. The result is that each State, the District of 
Columbia, and Puerto Rico will be measured once, and only once, every 
three years. This rotation allows jurisdictions 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 have been randomly 
assigned using the following methodology. First, each entity was 
stratified by the 10 ACF regions, with the regions randomly ordered. 
Then within region each group was 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 was 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 was 
drawn between one and two and every other State (including the District 
of Columbia and Puerto Rico, if they remained) was selected for the 
second

[[Page 50891]]

year. The third year includes those not selected in year one or year 
two. This sampling approach yielded a mix of county-administered and 
State-administered programs and programs serving both large and small 
numbers of children each year. A list of States (including the District 
of Columbia and Puerto Rico) assigned to each review year can be found 
in the information collection instructions.

D. Notice of Proposed Rulemaking

    A Notice of Proposed Rulemaking (NPRM) was published in the Federal 
Register on Friday, March 2, 2007 (72 FR 9491) with a 60-day public 
comment period. As discussed later in this preamble, we received 
comments from 19 entities, including State child care administrators, 
national child care advocacy groups, and other organizations.

II. Statutory Authority

    This 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. 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. 
Further, the regulations at 45 CFR 98.66 provide that ``[a]ny 
expenditures not made in accordance with the Act, the implementing 
regulations, or the approved Plan, will be subject to disallowance.'' 
However, prior to this final rule statute and regulations governing 
CCDF did not require States and Territories to systematically measure 
or report on errors committed in the administration of CCDF funds.

IV. Provisions of Final 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 final rule adds 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 error rates to the Department of Health and Human Services. This 
reporting must be in accordance with an error rate methodology 
established by the Secretary, as summarized in this final rule and 
detailed in the associated information collection forms and 
instructions. States, the District of Columbia and Puerto Rico are 
required to report specified information regarding errors every three 
years and to report on strategies for reducing the error rate. The rule 
also requires States, the District of Columbia and Puerto Rico to set 
target error rates for the next cycle. The first cohort of States 
(including Puerto Rico) subject to the final regulations will need to 
complete their reviews and submit their data to ACF on or before June 
30, 2008.
    Requirements under Subpart K 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 are exempted from the requirements of this rule. We do not 
believe that the benefits of the error rate data obtained from these 
exempted Territories and Tribes justify the costs of compliance with 
the 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 encourage exempted Territories and Tribes to 
comply voluntarily with the requirements of the 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.
    Under Section 98.100(b) in the final rule, States, the District of 
Columbia and Puerto Rico are required to prepare a report calculating 
``error rates.'' At this time--and consistent with our initial focus on 
client eligibility errors--we are operationalizing these requirements 
by asking States, the District of Columbia, and Puerto Rico to measure 
only administrative errors in eligibility determination and improper 
authorizations for payments to subsidy recipients rather than improper 
payments made to subsidy recipients.
    As stated in the proposed rule and detailed in the associated 
information collection forms and instructions, the initial error rate 
methodology includes: (1) Sample Selection: A sample of 271 (or 276) 
cases will be selected by each State using a sampling frame based on 
the child population served by eligibility offices for each month of 
the designated Federal Fiscal Year to achieve a 90% confidence level +/
- 5%; (2) Record Review Worksheet: A template of a record review 
worksheet will be customized by each State so its worksheet conforms to 
the specifics of State policies and procedures. The worksheet captures 
the detail for each element of eligibility, the benefit calculation as 
documented by the agency, the amount of the subsidy authorized, and any 
resulting errors; (3) Case Review: State reviewers will conduct case 
record reviews and collect key pieces of information, including 
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 Measures Calculation: 
States, the District of Columbia, and Puerto Rico will prepare a report 
calculating percentage of cases with an error, percentage of cases with 
an improper authorization for payment (expressed as the total number of 
cases with an improper authorization for payment as compared to the 
total number of cases), 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), 
average amount of improper authorization for payment, and the estimated 
annual amount of improper authorizations for payment; (5) Federal 
Oversight and Monitoring, and Ongoing Technical Assistance: The Child 
Care Bureau will provide ongoing oversight, monitoring, and technical 
assistance.
    Under CCDF regulations at 45 CFR 98.52, Lead Agencies are 
prohibited 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

[[Page 50892]]

(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, 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 regulation that are directed toward 
establishing or improving child care information systems also shall be 
excluded from administrative costs subject to the five percent 
administrative cap.
    Should an improper payment related to specific cases that were 
included in the sample during the case review process be identified, 
these funds are subject to existing disallowance procedures for 
misspent funds as set forth at 45 CFR 98.66 of CCDF regulations. 
Extrapolations of estimated improper payments derived from random 
sampling of total cases are not subject to disallowance.
    Pursuant to CCDF regulations at 45 CFR 98.60(i), a Lead Agency is 
required to recover child care payments that are the result of fraud. 
The Lead Agency has discretion as to whether to recover misspent funds 
that were not the result of fraud, such as in cases of administrative 
error. Improperly spent funds are subject to disallowance regardless of 
whether the State pursues recovery.
    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.
    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 during the error rate review process 
does not create an entitlement to that individual to a particular 
service or benefit. Nothing in this final 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.

A. 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 and has field tested an error rate 
methodology in nine volunteer pilot States. 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.

B. Discussion of Comments

    In response to the proposed rule, comments were received from 19 
State child care administrators, national child care advocacy groups, 
and other organizations as follows.
National Error Rate Does Not Reflect Block Grant Flexibility
    Comment: Several commenters questioned the practical application of 
a uniform national error rate to a block grant program, given the 
differences in programmatic activity that result from the flexibility 
inherent in CCDF. Commenters felt it would not be appropriate to 
establish a national error rate, since CCDF eligibility requirements 
vary greatly across States meaning that the difficulty of achieving 
accuracy in determining client eligibility varies from State to State. 
Commenters recommended that the final rule be limited to review of 
Federal requirements to reflect a true national error rate.
    Response: We acknowledge concerns about establishing a national 
error measure for the CCDF program, and understand that States differ 
greatly in their eligibility requirements which may lead to a wide 
range of error rates. 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.'' As a 
result, there is significant variation in how CCDF is implemented 
across the country.
    However, the methodology focuses on administrative error associated 
with client eligibility and improper authorizations for payment. 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 must 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.
    The primary purpose of this final rule is to improve State 
administration of the CCDF program. We believe that the State error 
measures will be useful for improving overall program integrity and 
that it will help inform program administrators about which quality 
control or other initiatives will be most effective in reducing error 
rates and improper authorizations for payment in their own programs. At 
the same time, the Improper Payments Information Act (IPIA) requires a 
national-level measure of improper payments, which will provide a 
broader perspective of the CCDF program as it is administered across 
States.
    Finally, we do not believe limiting the rule to only Federal 
requirements would be useful for the purpose of identifying and 
reducing improper payments. Federal law establishes broad eligibility 
criteria for families receiving CCDF assistance; however, States, 
Territories, and Tribes administering CCDF funds may impose more 
restrictive eligibility standards. States must describe the basis for 
determining family eligibility in their CCDF Plan and are responsible 
for ensuring that the program complies with the approved Plan and all 
Federal requirements. States are accountable for properly implementing 
the eligibility policies and procedures they have in place.

[[Page 50893]]

Short Implementation Timeframe
    Comment: A number of commenters expressed concerns about the short 
implementation timeframe for the proposed rule. Commenters felt that 
States included in the first cycle of the review process would not have 
adequate lead time to secure funding from their State legislatures, 
hire and train staff, prepare and enhance their automated systems, and 
ensure access to archived records.
    Response: The Improper Payments Information Act (IPIA) requires 
Federal agencies to submit estimates of improper payments to Congress 
in accordance with guidance prescribed by the Office of Management and 
Budget (OMB). The timeframe included in the rule is based on the 
requirement that HHS report a national improper authorizations for 
payment rate and amount for the CCDF program in the HHS Performance and 
Accountability Report (PAR) beginning with the Fiscal Year 2008 PAR. We 
recognize that the timeframe is expedited and will present challenges 
for some States. The Child Care Bureau intends to assist States by 
providing significant technical assistance and training to help them 
implement the error rate review process within the prescribed timeline.
    Comment: Three commenters noted that under the proposed timeframe 
some States will be participating simultaneously in Medicaid's Payment 
Error Rate Measurement Project (PERM) and the CCDF error rate reporting 
cycle. Commenters felt that concurrent operation of these projects 
would create an extraordinary work burden, and asked that States not be 
subject to error rate reporting by multiple Federal agencies within the 
same year.
    Response: States were randomly selected to participate in a three-
year rotational cycle to arrive at a valid nationally representative 
improper authorizations for payment rate and amount for child care. The 
sampling approach yielded a mix of county-administered and State-
administered programs and programs serving both large and small numbers 
of children each year. Selectively excluding States would undermine 
this methodology. The rotational cycle also allows jurisdictions to 
plan for future reviews because they know in advance in which year they 
will be measured.
Negative Fiscal Impact on States
    Comment: Several commenters argued that the proposed rule would 
have a wide range of negative fiscal and operational impacts on States 
and that the additional costs of conducting the proposed activities 
would compromise the amount of funding available for program services.
    Response: This final rule aims to identify and reduce errors and 
improper payments in the administration of CCDF funds, thus ensuring 
that the program is operated as efficiently and fairly as possible. 
Because States, Territories, and Tribes receive a fixed allotment of 
CCDF funds regardless of the number of children served, fewer improper 
payments translates into more funds for use in assisting eligible low-
income families in purchasing child care services, providing 
comprehensive consumer education to parents and the public and 
improving the quality and availability of child care. In addition, we 
have tried to minimize the fiscal impact of conducting reviews by 
limiting the frequency of reporting to every three years and by 
allowing for sampling of cases as part of the review of case records.
    Comment: Several commenters felt that the annual burden estimate 
included in the proposed rule did not reflect the full implementation 
cost of conducting the error rate review. Commenter's cited additional 
travel and mailing costs, staff hiring and training, updating automated 
computer systems, and costs associated with accessing hard copy records 
for the review process. Commenters found the estimated cost in the NPRM 
of approximately $150,000 for a single jurisdiction to conduct its case 
reviews and prepare the required reports to be insufficient. One 
commenter cited that travel costs alone would exceed the federally 
estimated cost. Commenters estimated the full implementation cost as 
ranging from 40 percent higher to as much as four times the proposed 
$150,000.
    Response: We agreed with these comments and have revised the annual 
burden estimates for conducting the error rate case review and 
preparing the three required reports in compliance with the final rule. 
The cost estimate analysis was increased to reflect comments that costs 
of preparation, training, programming automated systems, and other 
support activities associated with the information collection forms 
were underestimated in the proposed rule. States vary greatly in their 
systems and personnel capacity and the burden of implementing the final 
rule may disproportionately impact some States more than others. The 
revised annual burden estimates account for these differences among 
States and reflect average burden. However, as States implement this 
methodology, we encourage all States to keep track of the burden 
associated with these reporting requirements--in terms of both time and 
monetary cost--and to provide us comments through the Paperwork 
Reduction Act information collection process so that we can update our 
estimates if necessary.
Distinction Between Improper Payments and Improper Authorizations for 
Payment
    Comment: Several commenters questioned the inconsistency between 
the information collection forms and instructions and the regulatory 
language in the proposed rule, which distinguished between improper 
authorizations for payment and an actual improper payment. Commenters 
noted that the forms and instructions require States to report on the 
``improper authorizations for payment,'' while the definition of 
``improper payment'' given in Section 98.100(d) of the rule defines 
improper payment as an actual payment. Commenters noted that the broad 
language of the proposed rule would allow for the imposition of more 
extensive review and reporting requirements than discussed in the 
preamble and included in the information collection forms and 
instructions. Commenters recommended that we amend the rule to define 
``improper payment'' consistently with the forms and instructions.
    Response: This deviation between the rule and information 
collection forms and instructions is intentional. The terms ``error'' 
and ``improper payment'' have purposefully been defined broadly enough 
in the final rule to encompass reporting on all possible types of 
errors and improper payments, and are consistent with the definitions 
used in the Improper Payments Information Act (IPIA). Section 98.100 
paragraph (c) defines the term ``error'' and paragraph (d) defines the 
term ``improper payment.'' The important distinction between the two 
terms is that every improper payment is the result of an error however, 
not every error results 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 result 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

[[Page 50894]]

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.
    At this time, we are implementing this rule narrowly, collecting 
data from States on improper authorizations for payment due to 
administrative error in client eligibility determination because we 
believe that improper authorizations for payment are closely related to 
improper payments. The forms and instructions related to the regulation 
deal only with these errors. (Note: More information on the forms and 
instructions that accompany this regulation can be found in the 
Regulatory Impact Analysis--Paperwork Reduction Act section of this 
rule.)
    Eligibility determination and payment authorization are the first 
steps in the child care subsidy process and errors made at this stage 
are likely to affect the administration of the entire program. However, 
the regulatory language in the final rule provides flexibility to allow 
for changing or expanding the error rate methodology if future 
circumstances warrant doing so. Should we decide to revise or broaden 
the examination of ``error'' and ``improper payment'' we would provide 
advance notice and an opportunity for public comment through the 
information collection process.
    Comment: Several commenters asked that we clearly differentiate 
between administrative errors and errors involving the independent 
verification of eligibility and authorization data elements. Commenters 
recommended that we amend the language in the proposed rule limiting 
improper authorizations for payment-- ``based on an administrative 
misapplication of statutory or other legally applicable requirements.''
    Response: We believe that the review of administrative errors in 
eligibility determination should be based on policies States have in 
place. If a State has established an eligibility verification policy 
that requires caseworkers to independently verify eligibility through a 
phone call or otherwise, then this should be documented and supported 
in the case record. The error rate record review process itself does 
not require reviewers to independently verify eligibility or other 
authorization data elements.
    Comment: A few commenters were concerned that the initial error 
rate methodology's focus on eligibility determination and authorization 
for payment does not mirror administrative procedures for many States 
in which clients are deemed eligible for CCDF and authorized for a 
range of services and a subsidy rate, but then choose a particular 
service from that range and receive actual payment based on the 
appropriate applied subsidy.
    Response: We acknowledge that State policies regarding eligibility 
determination and subsidy payment vary in the extent to which they are 
interrelated. As long as the client's eligibility and authorization for 
payment is correctly determined there is no error. If the authorized 
payment range properly reflects the client's eligibility status and 
need for care there is no improper authorization for payment. The 
initial error rate methodology is focused on client eligibility, and 
authorization to receive a subsidy is indicative of whether the 
eligibility determination process was properly conducted. Further, we 
received comments from a number of States indicating that their 
administrative procedures do align with the error rate methodology. 
These commenters said that there was not a distinction between an 
authorization for payment and actual payment in their processing of 
claims for service, and thus there would be little additional value to 
expanding the measurement of improper payments beyond improper 
authorizations for payment.
Multiple and Combined Funding Sources for Child Care
    Comment: Several commenters requested that the proposed rule apply 
only to those cases reported on the ACF-801 reporting form to define 
the sample population as only those cases paid for with CCDF and pooled 
funds. Commenters were concerned that purely State-funded child care 
services also would be accountable to the proposed rule.
    Response: This final rule applies to all child care cases served 
with CCDF grant funds, including Federal Discretionary Funds (which 
includes any funds transferred from the Temporary Assistance for Needy 
Families Block Grant), Mandatory and Matching Funds and State Matching 
and Maintenance-of-Effort (MOE) Funds. In States that cannot separately 
report on cases served with CCDF funds only, the rule applies to cases 
served by all child care funds pooled with CCDF. For many States, this 
will correspond to those cases reported on the ACF-801 reporting form.
    Comment: One commenter suggested that we allow States that pool 
CCDF and non-CCDF funds to use the percentage of total CCDF 
expenditures to calculate an estimated amount of CCDF funds used to 
provide child care subsidies impacted in the sample.
    Response: We recognize that many States do not serve children 
exclusively with CCDF funds. Many States combine CCDF and non-CCDF 
funds to serve the child care needs of their State--referred to as 
``pooling'' funds--and may be unable to isolate those cases served only 
by CCDF funds. We have modified the information collection forms and 
instructions to allow States that pool child care funds (and 
correspondingly draw their sample for the error rate review from the 
universe of cases served by these combined funds) to multiply the total 
pooled child care funds by a percentage that reflects the proportion of 
these funds that are CCDF funds (also referred to as a ``pooling 
factor'') when calculating the total estimated amount of annual 
improper authorizations for payment. This will more accurately reflect 
the amount of improperly spent CCDF funds in those States that combine 
CCDF with non-CCDF funds to provide child care services.
Anticipated Problems With Sampling Methodology and Record Review
    Comment: Some commenters thought that the proposed sampling frame 
would be a burden for States with smaller caseloads and suggested the 
sample size be determined based on the universe of cases in a 
particular State.
    Response: Under Sec.  98.101, Case Review Methodology, the error 
reports required by this final rule must be based on comprehensive 
reviews of case records conducted in accordance with the methodology 
detailed in this final 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 271 (or 276) child records to achieve the calculation of an 
estimated annual amount of improper authorizations for payment with a 
90 percent confidence interval of +/-5.0 percent. We believe this 
sampling frame will achieve statistically valid data with the desired 
confidence levels. Sampling the same number of cases, regardless of 
caseload size, standardizes the methodology across States and reflects 
accepted practice for achieving the required precision.
    Comment: Several commenters opposed the requirement to draw the 
sample of cases from 12 monthly sampling frames and suggested that 
States be allowed to choose a particular month from which to draw the 
sample for the error rate review.
    Response: We believe the sampling methodology included in the rule

[[Page 50895]]

reduces the risk of bias in annual estimates associated with selection 
of the sample in particular months and accounts for variation that may 
occur throughout the year. If States were to review less than twelve 
months for the sampling frame, the resulting error rate would not be 
representative of the entire year.
    Comment: A few commenters pointed out that some States do not have 
statewide data systems, particularly States that are county-
administered, or do not have a system advanced enough to support the 
sampling methodology in the proposed rule. Commenters recommended that 
States be given flexibility to define the case review process based on 
the availability of data and case file information systems that exist 
in each State.
    Response: A standard sampling methodology is necessary to ensure 
integrity and promote uniformity across States--particularly since 
State results will be used to calculate a national measure for improper 
payments. We understand automated systems capacity varies across States 
and that some States may have more difficulty in obtaining their sample 
and associated case records. For this reason we have increased the 
burden estimate associated with the information collection forms to 
reflect additional costs faced by States to implement the sampling 
methodology.
    Comment: A number of commenters thought that accessing hard copy 
case records to conduct the record review process would require State 
staff to travel long distances in order to pick-up and/or review 
records or would require the case records to be mailed to the review 
location and require substantial postal costs. Commenters felt that 
there should be consideration in the proposed rule allowing for 
incomplete reviews due to inability to locate case records.
    Response: We recognize that States have different recordkeeping 
procedures and may face additional costs to locate records for the 
review. As previously stated, we have tried to build these costs into 
the revised annual burden estimate in the final rule. The sampling 
process requires States to select at least three alternate replacement 
cases that can be used in the event a case cannot be reviewed for some 
valid reason.
    Comment: Several commenters were unclear about the unit of 
measurement for drawing the sample. Section 98.101(a) of the proposed 
rule refers to both ``case records'' and ``child records.'' Commenters 
recommended the rule and information collection forms and instructions 
allow States flexibility to define the term ``case'' to be a child or a 
family.
    Response: For initial implementation of the error rate methodology 
we intend for the error rate review to apply to child records and this 
is stated in the information collection forms and instructions. States 
do not have the flexibility to determine whether the case record should 
be based on the child or the family. However, consistent with the 
broader intent of the final rule, the regulatory language at 98.101(a) 
continues to use the more inclusive term ``case record'' to allow for 
future adjustments of the error rate methodology. The reference to 
``child record'' also included at 98.101(a) has been changed to ``case 
record'' to eliminate any confusion.
Disallowance and Recovery of Funds
    Comment: Many commenters did not understand the reference to 
disallowed funds in the proposed rule, given that the preamble and the 
information collection forms and instructions clearly stated the focus 
of the review to be on improper authorizations for payment. Commenters 
were further concerned that interest would be owed to the Federal 
government on disallowances. Commenters thought that as long as the 
case review is limited to improper authorizations for payment it would 
be incorrect to assume that an improper payment in the amount of the 
authorization resulted, meaning States would be unjustifiably 
penalized.
    Response: In order for child care subsidies to be received by 
eligible recipients, States need to accurately authorize payment for 
child care services. It is our assumption that an improper 
authorization for payment will result in an improper payment which will 
be subject to a disallowance. However, if a State can demonstrate that 
an authorized improper payment was not actually made, that dollar 
amount would not be disallowed. Any actual improper payments related to 
specific cases in the sample are subject to disallowance in accordance 
with procedures set forth in 45 CFR 98.66 of the CCDF regulations. 
Section 98.66(3)(j) states that disallowances are subject to interest 
from the date of notification of the disallowance. When an improper 
authorization for payment is identified during the case record review 
process, the ACF regional office will work with the State to determine 
if an improper payment was made and the amount of the disallowance, if 
appropriate, using its customary procedures.
    Comment: A few commenters pointed out that if the proposed error 
rate reporting cycle concludes after the grant year for which an 
obligation is paid to a recipient, States that recover payments may be 
acting after the obligation period, and thus must return the money to 
the Federal government. Commenters recommended that any payments 
recouped through the proposed rule be committed to program reinvestment 
and error rate reduction efforts.
    Response: Pursuant to CCDF regulations at 45 CFR 98.60(i), a Lead 
Agency is required to recover child care payments that are the result 
of fraud. The Lead Agency has discretion as to whether to recover 
misspent funds that were not the result of fraud, such as in cases of 
administrative error. Improperly spent funds are subject to 
disallowance regardless of whether the State pursues recovery.
    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.
    States may act to recover improper payments as soon as they are 
identified and need not wait until the end of the Federal error rate 
reporting cycle.
    We do not have statutory authority to waive requirements related to 
funds that are recovered by Lead Agencies or mandated obligation and 
liquidation periods.
Penalties or Incentives Associated With Error Rates
    Comment: Two commenters asked whether a State would be penalized if 
a certain error rate is found or if incentives would be offered for 
high performing States.
    Response: While States are subject to disallowances for any 
identified improper payments (as they would be for any expenditures not 
made in accordance with CCDF regulations or the approved Plan 
identified outside of the error rate review process), there will not be 
penalties or incentives based on State error rates. We view the State 
error rate to be primarily useful for the States to inform quality 
control initiatives and improve program integrity. An incentive for 
States to decrease error rates and improper authorizations for payment 
is the increased availability of funds to serve CCDF eligible families.

[[Page 50896]]

Rule Undermines Existing State Efforts
    Comment: Two commenters believed the focus in the proposed rule on 
client eligibility determination would be counterproductive for States 
that have existing strategies with proven results in reducing improper 
payments. Commenters felt the proposed rule might decrease focus in 
some States on errors in CCDF provider payments.
    Response: We support existing State efforts to reduce improper 
payments and improve program integrity. States should continue to look 
at all aspects and areas in which there is risk for an improper payment 
to be made. We recognize that States are at different places in terms 
of approaches and initiatives to address program integrity. A section 
in the CCDF State Plan Pre-Print gives States an opportunity to provide 
descriptions and information related to these initiatives. We look 
forward to working with States to ensure that this final rule will 
complement, not supersede or complicate, existing State efforts.
    Comment: A number of commenters thought that establishing a State 
baseline error rate and setting future target rates does not recognize 
the present actions of States to limit their exposure to incorrect 
eligibility authorizations. Commenters thought that States with more 
stringent standards for reducing administrative errors in client 
eligibility determination may be given an incentive to reduce their 
current efforts in order to establish more feasible future target 
rates.
    Response: Section 98.102 of the final rule, Content of Error Rate 
Reports, addresses submission of baseline reports and standard reports. 
Under paragraph (a), in the initial cycle, States, the District of 
Columbia and Puerto Rico are required to 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 must submit a standard report that, in 
addition to updating the information provided in the baseline report, 
enables 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.
    Establishing a baseline error rate and setting future target rates 
is essential for measuring progress and improvement over time. Each 
State will have the ability to set its future targets based on their 
specific circumstances, including prior efforts to control improper 
payments. Additionally, the reported State error and improper 
authorizations for payment rates are not tied to any penalties. The 
State baseline and target setting should be used to inform existing 
prevention efforts and improve or validate their effectiveness.
    We have deleted the parenthetical language at Section 98.102(a)(6) 
stating that targets for errors and improper payments must be lower 
than the most recent estimated error rates. We made this change 
recognizing that it is possible for a State to achieve a zero error 
rate thereby making the requirement obsolete.
    We continue to expect States to set ambitious targets for reducing 
improper payments for each reporting cycle. As is described in the 
accompanying forms and instructions, State targets should anticipate 
continuous improvement. We intend this rule to be written broadly to 
accommodate any future efforts to revise or change the error rate 
reporting methodology. We believe it is more practical to add guidance 
on setting future target rates to the information collection forms and 
instructions rather than include it in the regulatory language.
Combining Overauthorizations and Underauthorizations
    Comment: One commenter noted that the proposed rule requires States 
to report a combined ``improper authorizations'' figure that sums 
overauthorizations and underauthorizations together. The commenter 
thought that reporting only a combined figure could be misleading and 
mask the underlying source of the error. The commenter recommended that 
we require States to report separate figures for overauthorizations and 
underauthorizations along with a combined figure, and clarify in the 
instructions what amount of actual improper payments States are to base 
an anticipated recovery amount on.
    Response: We agree with the comment and have changed the 
information collection forms and instructions to require States to 
separately report overauthorizations, underauthorizations, and the 
total combined figure. We also have clarified that States should base 
their expected recovery amounts on overauthorization amounts only.
Allowing a Threshold for Improper Authorizations
    Comment: One commenter argued that factors affecting authorized 
payment levels could fluctuate from month to month, and States have 
discretion to determine the magnitude of changes that must be reported 
and applied in calculating CCDF benefits. The commenter felt that, 
similarly, small fluctuations in a clients' financial status should not 
be considered in the calculation of the number and percentage of cases 
with an improper authorization for payment. The commenter recommended 
clarifying the regulation to stipulate that changes in circumstances 
that do not need to be reported by clients will not be counted against 
the States as administrative errors.
    Response: The initial methodology for the error rate review process 
is developed according to State-established policies and procedures in 
place to determine client eligibility for CCDF and to authorize 
payments. The process examines administrative error based on 
information in the case record that is available to the State. If a 
State does not require a client to report small changes in financial 
status this would not violate State policy and it would not be 
considered an error or improper authorization for payment, provided 
that the small change in financial status did not result in a violation 
of Federal income requirements, which cannot be waived.

C. Changes Made in Final Rule

    As discussed above, three technical changes are made to the final 
rule in response to public comment. First, the annual burden estimate 
associated with the accompanying information collection forms and 
instructions has been increased to reflect public comments regarding 
additional costs of the error rate reporting review associated with 
staff, travel, accessing records, and automated systems. Secondly, the 
word ``child''after Sec. 98.101(a) has been replaced with the word 
``case''to provide consistency in the terms used to refer to 
``record''in the regulation. Lastly, we have deleted the parenthetical 
language at Section 98.102(a)(6) stating that targets for errors and 
improper payments must be lower then the most recent estimated error 
rates. We intend this rule to be written broadly and believe it is more 
practical to add guidance on setting future target rates to the 
information collection forms and instructions rather than include it in 
the rule itself.

V. Regulatory Impact Analyses

A. Executive Order 12866

    Executive Order 12866 requires that regulations be drafted to 
ensure that

[[Page 50897]]

they are consistent with the priorities and principles set forth in 
Executive Order 12866. The Department has determined that this final 
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 and has field tested an error rate methodology in nine 
volunteer pilot States. 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 have provided a 60-day public comment period and have responded to 
comments in this final rule.
    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 final rule's 
impact on the well-being of families, as required under Section 654 of 
the Treasury and General Appropriations Act of 1999. This final 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 States receive a fixed allotment of CCDF funds 
regardless of the number of children served, 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 improving the quality and 
availability of child care.

D. Paperwork Reduction Act

    The final rule requires 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 rule and information collection forms 
and instructions. Towards this end, this rule will require States, the 
District of Columbia and Puerto Rico to submit reports to the 
Department on their findings.
    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
1320) requires that the Office of Management and Budget (OMB) approve 
all collections of information by a Federal agency from the public 
before they can be implemented. Respondents are not required to respond 
to any collection of information unless it displays a current valid OMB 
control number.
    The information collections in this rule, described below, are 
being reviewed by OMB and will not be effective until they have 
received OMB approval. Once they have received OMB approval, ACF will 
publish a notice in the Federal Register and make them available on the 
Child Care Bureau's Web page on Addressing Improper Payments at: http://www.acf.hhs.gov/programs/ccb/ccdf/ipi/ipi.htm.
    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 will 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.
Changes in Estimate of Burden
    The annual burden in the proposed rule was estimated to be $150,000 
per respondent. This estimate included the cost of drawing the sample 
of cases from 12 monthly sampling frames, training staff, conducting 
record reviews, compiling data, calculating error rates and preparing 
the final report. In estimating burden, we used information based on 
the error rate pilots and an estimation of the amount of time and cost 
required to complete various tasks associated with each of the three 
reporting forms: (1) The Record Review Worksheet, (2) the Data Entry 
Form, and (3) the State Improper Authorizations for Payment Report. In 
response to public comments, we have recalculated the burden estimate 
associated with each of these forms. The final rule increases the total 
cost estimate for case reviews and preparing the required reports to 
approximately $180,000 per respondent.
    In the proposed rule the total burden hours associated with the 
Record Review Worksheet included sampling, preparation and training, 
and record review. We have increased the burden associated with the 
preparation and training component of this estimate to account for 
additional costs of mailing hard copy records, traveling to sites where 
records are maintained, or costs to enhance automated systems to access 
case records. Additionally, we have increased the burden associated 
with the record review component for completion of the Record Review 
Worksheet. Based on public comment we felt the original estimate did 
not adequately reflect the burden of implementing quality control 
activities associated with completion of this form.
    In the proposed rule, the burden hours associated with the Data 
Entry Form primarily included the costs of consolidating information. 
The burden estimate associated with this form has been increased to 
account for public comment regarding costs of writing computer programs 
and making enhancements to automated systems to consolidate large 
quantities of data,

[[Page 50898]]

which were not considered in the original estimate.
    Finally, in the proposed rule the burden hours associated with the 
State Improper Authorizations for Payment Report included the 
calculation of the findings and discussion of findings and report 
preparation. The burden estimate for completion of these two tasks 
associated with this form was not changed. However, we have added an 
additional component necessary for completion of this report, which was 
not previously considered. This component is the calculation of the 
total amount of authorizations for payment during the review period 
needed to compute the final error measure. The burden hours associated 
with completion of this report increased with the addition of this 
task.
    The original burden estimate in the proposed rule did not account 
for States in which aggregate information on total amount of authorized 
payments was not readily available. Obtaining aggregate authorizations 
for payment information increases burden for States in which normal 
reporting requirements involve aggregate payments or total 
expenditures, not authorizations for payment. These States will 
experience increased burden for completion of this report if they are 
to generate the total for calculation of the required error measure. 
While it is important to account for the additional burden associated 
with this task, we continue to believe that reviewing authorizations 
for payment, rather than actual payments, is less burdensome for States 
when reviewing individual case records. We believe the benefits of 
focusing the individual record reviews on authorizations for payments 
outweighs any additional costs we have added here for completing the 
aggregated State Improper Authorizations for Payment Report. However, 
we encourage all States to keep track of the burden associated with 
these reporting requirements--in terms of both time and monetary cost--
and to provide us comments through the Paperwork Reduction Act 
information collection process so that we can accurately account for 
the burden and more precisely determine the benefits and costs of these 
requirements.

                               Recalculated Annual Burden Estimates for Final Rule
----------------------------------------------------------------------------------------------------------------
                                                              Average burden hours per     Total burden hours
                                 Number of        Yearly              submittal        -------------------------
  Instrument or requirement    respondents*     submittals   --------------------------
                                                                  NPRM      Final rule      NPRM      Final rule
----------------------------------------------------------------------------------------------------------------
Record Review Worksheet.....           17.33           **271        13.74        15.43       64,562       72,478
Data Entry Form.............           17.33           **271          .14          .17          652          815
State Improper Payments                17.33               1          367          627         6360       10,864
 Report.....................
                             -----------------------------------------------------------------------------------
    Estimated Total Annual    ..............  ..............  ...........  ...........       71,574      84,157
     Burden Hours...........
----------------------------------------------------------------------------------------------------------------
* 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 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.
    The total annual cost burden of having 17.33 respondents, the 
average number required in any year, to conduct error rate case reviews 
and prepare the required reports would be approximately $3.1 million. 
Thus, this final 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 final rule is not a major rule as defined in 5 U.S.C. 804.

G. Executive Order 13132

    Executive Order 13132 guarantees ``the division of governmental 
responsibilities between the national government and the States that 
was intended by the Framers of the Constitution, to ensure that the 
principles of federalism established by the Framers guide the executive 
departments and agencies in the formulation and implementation of 
policies, and to further the policies of the Unfunded Mandates Reform 
Act.''
    The Secretary certifies that this final rule does not have a 
substantial direct effect on States, on the relationship between the 
Federal government and the States, or on the distribution of power and 
responsibilities among the various levels of government. This final 
rule does not preempt State law and does not impose unfunded mandates.
    This final rule does not contain regulatory policies with 
federalism implications that would require specific consultations with 
State or local elected officials.

List of Subjects in 45 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: June 22, 2007.
Daniel C. Schneider,
Acting Assistant Secretary for Children and Families.
    Approved: July 19, 2007.
Michael O. Leavitt,
Secretary, Department of Health and Human Services.


0
For the reasons set forth in the preamble, the Administration for 
Children and Families amends part 98 of title 45 of the Code of Federal 
Regulations as follows:

PART 98--CHILD CARE AND DEVELOPMENT FUND

0
1. The authority for part 98 continues to read:

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


0
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.

[[Page 50899]]

Subpart K--Error Rate Reporting


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 Section 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 case 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 reports 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.


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;
    (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.

[[Page 50900]]

    (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. 07-4308 Filed 8-29-07; 3:01 pm]
BILLING CODE 4184-01-P