Welfare Reform: Interim Report on Potential Ways to Strengthen	 
Federal Oversight of State and Local Contracting (23-APR-02,	 
GAO-02-245).							 
                                                                 
The Personal Responsibility and Work Opportunity Reconciliation  
Act (PRWORA) of 1996 changed the nation's cash assistance program
for needy families with children by replacing the Aid to Families
with Dependent Children program, with the Temporary Assistance	 
for Needy Families (TANF) block grant. As specified in PRWORA,	 
TANF's goals include ending the dependence of families receiving 
government benefits by promoting job preparation, work, and	 
marriage; preventing and reducing the incidence of non marital	 
pregnancies; and encouraging two-parent families. Contracting	 
with nongovernmental entities to provide TANF-funded services	 
occurs in most states and exceeded $1.5 billion in federal and	 
state funds in 2001. A GAO survey indicated that the most	 
commonly contracted services included education and training, job
placement, and support services to promote job entry or 	 
retention. The Department of Health and Human Services (HHS)	 
relies primarily on state single audit reports to oversee TANF	 
contracting by states and localities. HHS officials told GAO that
their regional offices follow up on the TANF deficiencies	 
identified and that HHS focuses on reported deficiencies that	 
involve unallowable or questionable costs. However, HHS officials
said that they do not know the extent and nature of problems	 
pertaining to the oversight of nongovernmental TANF contractors  
that have been cited in state singe audits. State and local	 
governments rely on third parties to help ensure compliance with 
bid solicitation and contract award procedures, including bid	 
protests, judicial processes, and external audits. They use	 
various approaches to oversee TANF contractors, but problems	 
persist in contract oversight and contractor performance.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-245 					        
    ACCNO:   A03121						        
  TITLE:     Welfare Reform: Interim Report on Potential Ways to      
Strengthen Federal Oversight of State and Local Contracting	 
     DATE:   04/23/2002 
  SUBJECT:   Block grants					 
	     Federal aid programs				 
	     Disadvantaged persons				 
	     Intergovernmental relations			 
	     Contracts						 
	     Aid to Families with Dependent Children		 
	     Program						 
                                                                 
	     Food Stamp Program 				 
	     Medicaid Program					 
	     Social Services Block Grant			 
	     Temporary Assistance for Needy Families		 
	     Block Grant					 
                                                                 


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GAO-02-245
     
WELFARE REFORM Interim Report on Potential Ways to Strengthen Federal
Oversight of State and Local Contracting

Report to Congressional Requesters

United States General Accounting Office

GAO

April 2002 GAO- 02- 245

Page i GAO- 02- 245 State and Local Welfare Contracting Letter 1

Results in Brief 3 Background 5 TANF- Funded Contracts Exceed $1.5 Billion
Nationally and Cover

an Array of Services 8 HHS Relies Primarily on State Single Audit Reports to
Oversee

TANF Contracting but Does Not Use Them Systematically 18 Different
Approaches Have Been Used To Help Ensure Compliance

with, and Identify Problems in, Implementing Bid Solicitation and Contract
Award Processes 24 Deficiencies Have Been Identified with Contract Oversight
and

Contractor Performance in the States and Localities We Reviewed 26
Conclusions 37 Recommendation for Executive Action 38

Appendix I Scope and Methodology 40

Appendix II National Survey on TANF- Funded State and Local Government
Contracting 42

Appendix III Problems Cited with TANF Subrecipient Monitoring

by State Single Audits, 1999 and 2000 49

Appendix IV Specified Performance Levels Established for TANF Contractors at
the Local Sites GAO Reviewed 53

Appendix V GAO Contacts and Staff Acknowledgments 54 GAO Contacts 54 Staff
Acknowledgments 54

Related GAO Products 55 Contents

Page ii GAO- 02- 245 State and Local Welfare Contracting Tables

Table 1: TANF Contracting Levels by State, 2001 12 Table 2: Number of State
Single Audit Reports that Cited

Subrecipient Monitoring or Procurement Problems in Six Social Service
Programs, 1999 and 2000 21 Table 3: Independent Audits Have Identified
Problems with the

Oversight of TANF Contractors in Several States that We Reviewed 27

Figures

Figure 1: Percentage of Federal and State TANF Funds and TANF Contracts with
Different Types of Contractors for StateLevel Contracting, 2001 10 Figure 2:
TANF Services Contracted Out Most Frequently by State

Governments 16 Figure 3: Types of Contracts Used for TANF Contracting by
State

Governments 18 Figure 4: Percentages of Contractors that met Performance
Levels

for Work Participation Rates 33 Figure 5: Percentages of Contractors that
met Performance Levels

for Job Placement Rates 34 Figure 6: Percentages of Job Retention
Performance Levels met by

Contractors 35

Abbreviations

AFDC Aid to Families with Dependent Children HHS Health and Human Services
OMB Office of Management and Budget PRWORA Personal Responsibility and Work
Opportunity

Reconciliation Act TANF Temporary Assistance for Needy Families WIA
Workforce Investment Act

Page 1 GAO- 02- 245 State and Local Welfare Contracting

April 23, 2002 The Honorable Tom Barrett The Honorable Jerry Kleczka The
Honorable Carolyn Maloney House of Representatives

The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA)
of 1996 dramatically changed the nation?s cash assistance program for needy
families with children. The former program, Aid to Families with Dependent
Children (AFDC), was replaced with the Temporary Assistance for Needy
Families (TANF) block grant, which provides states with $16.5 billion each
year through 2002 to serve this population. As specified in PRWORA, TANF?s
goals include ending the dependence of needy families on government benefits
by promoting job preparation, work, and marriage; preventing and reducing
the incidence of nonmarital pregnancies; and encouraging two- parent
families.

While state and local governments have contracted out welfare services for
quite some time, PRWORA expanded the scope of services that could
potentially be contracted out, such as determining eligibility for TANF,
which had traditionally been done by government employees. Moreover, with
the large drop in TANF caseloads nationally, a greater share of federal TANF
block grant funds and state funds, known as state ?maintenance- of- effort?
funds, is now devoted to various support services that are typically
contracted out. Contracting out social services can potentially result in
several benefits, such as more efficient and effective delivery of services.
While PRWORA expanded the flexibility of states to design and administer
their TANF programs, it also limited the ability of the Department of Health
and Human Services (HHS) to regulate states? TANF programs. PRWORA also
established new accountability measures, such as minimum mandated work
participation rates for states and a 5- year lifetime limit on assistance
for TANF recipients. These measures heighten the importance of holding TANF
contractors accountable for performance.

In light of the upcoming reauthorization of TANF, you asked us to review the
procedures in place to manage TANF contracting and the problems that have
been identified in this area, particularly with regard to for- profit
organizations. In this interim report, we determined (1) the extent and
nature of state and local government contracting with for- profit and

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 02- 245 State and Local Welfare Contracting

nonprofit organizations, using federal and state TANF funds to provide
services to eligible recipients; (2) what approaches are used by the federal
government to oversee TANF contracting with nongovernmental entities and
what problems have been identified in this area nationally; (3) what
approaches are used by state and local governments to ensure compliance with
bid solicitation and contract award requirements and what violations of
these requirements have been identified involving the awarding of contracts
funded by TANF in selected jurisdictions; and (4) what approaches are used
by state and local governments to ensure that organizations contracted to
provide services funded by TANF comply with the terms of their contracts and
what major instances of noncompliance with such requirements have been
identified in selected jurisdictions. We will issue our final report once we
receive comments from HHS on this report.

To respond to the first objective, we conducted a national survey of all 50
states, the District of Columbia, and the 10 counties with the largest
federal TANF- funding allocations in each of the 13 states that administer
TANF locally. To respond to the second objective, we interviewed HHS
officials in Washington, D. C., and in several regional offices and reviewed
policies and other documentation related to federal TANF oversight. We also
examined audits performed under the Single Audit Act of 1984. These
comprehensive audits of expenditures of various federal program funds by
state and local governments and nonprofit organizations conducted by
nonfederal auditors or public accounting firms assess compliance with
federal financial requirements, including those for TANF. 1 To respond to
the third and fourth objectives, we conducted state and local site visits in
California (Los Angeles County and San Diego County); the District of
Columbia; Florida (Palm Beach and Miami- Dade); New York (New York City);
Texas (Austin and Houston); and Wisconsin (Milwaukee). 2 We selected these
states because of their substantial contracts with large forprofit
organizations to provide services funded by TANF, large share of the
national TANF caseload, and geographic dispersion. In each of these states
and respective localities, we interviewed key officials, including
procurement officers, contract managers, auditors, and contractors. In
addition, we obtained and analyzed numerous documents, including

1 These organizations are required to have single audits if they expend at
least $300, 000 in federal funds in a year. For- profit organizations are
not covered under the Single Audit Act. 2 In two of these states- Florida
and Texas- our local visits were to workforce boards whose jurisdiction in
some cases extended beyond a single county or city.

Page 3 GAO- 02- 245 State and Local Welfare Contracting

reviews of contractors and contracting agencies. We conducted our review
from January 2001 through March 2002 in accordance with generally accepted
government auditing standards. (See app. I for a more detailed discussion of
our scope and methodology.)

Contracting with nongovernmental entities to provide TANF- funded services
occurs in almost every state and exceeds $1.5 billion in federal TANF and
state maintenance- of- effort funds for 2001. This level of contracting
represents at a minimum 13 percent of total federal TANF and state
maintenance- of- effort funds expended for services. About 88 percent of the
total funds contracted by state governments- and 73 percent of the
contracts- are with nonprofit providers, which include national
organizations, faith- based organizations, and community- based
organizations. The remainder of the funds and contracts are with for- profit
organizations, including several organizations that have contracts in
multiple states. Although contractors provide a wide range of services, the
most commonly contracted services reported by our survey respondents include
education and training, job placement, and support services to promote job
entry or retention. The determination of eligibility for services supported
with TANF funds has been contracted out in one or more locations in at least
18 states. In at least 4 of these states, contracting agencies contracted
out the determination of eligibility for cash assistance under TANF. Most
state TANF contracting agencies pay contractors a fixed overall contract
price or reimburse them for their costs. However, some contracts have
performance incentives, whereby contractors are paid in part or whole on the
basis of achieving program objectives for TANF recipients, such as meeting
work participation, job placement, or job retention rates.

HHS relies primarily on state single audit reports to oversee TANF
contracting by states and localities. HHS officials told us that their
regional offices follow up on the TANF deficiencies identified by these
reports and that HHS focuses on reported deficiencies that involve
unallowable or questionable costs. However, HHS officials said that they do
not know the extent and nature of problems pertaining to the oversight of
nongovernmental TANF contractors that have been cited by state single audits
because they do not analyze the reports in such a comprehensive manner.
State single audit reports have cited deficiencies with states? monitoring
of subrecipients of TANF funds for 15 different states- 9 states in 1999 and
12 states in 2000- and with states? procurement of TANF services less
frequently (3 states in 1999 and 4 states in 2000). Our review of single
audit reports found internal control weaknesses for over a Results in Brief

Page 4 GAO- 02- 245 State and Local Welfare Contracting

quarter of states nationwide that potentially affected the states? ability
to effectively oversee nongovernmental TANF contractors. The reports cited a
range of weaknesses, including inadequate state reviews of the single audits
of subrecipients, failure of states to inform subrecipients of the sources
of federal funds they received, and inadequate state fiscal and program
monitoring of local workforce boards that contract for services.

State and local governments rely on third parties to help ensure compliance
with bid solicitation and contract award procedures, including bid protests,
judicial processes, and external audits. In 2 of 10 separate TANF
procurements- specific instances in which government entities had solicited
bids and awarded one or more contracts- in the local sites that we visited,
contract award decisions were modified as the result of thirdparty
challenges. These problems affected 5 of the 58 TANF contracts awarded in
the 10 procurements. Procurement issues were raised in 2 other procurements
but did not result in the modification of contract award decisions.

State and local government agencies use various approaches to oversee TANF
contractors, and problems have been identified with both contract oversight
and contractor performance. State and local governments have primary
responsibility for overseeing TANF contractors, and they rely on various
approaches, including reviewing contractor- provided information and
performing on- site reviews. However, auditors in four of the six states we
reviewed identified deficiencies in state or local oversight of TANF
contractors, such as uneven oversight by local contracting agencies. Various
factors have contributed to such deficiencies, such as the need in some
states to create and support new local entities that contract for TANF
services and oversee contractors. With regard to contractor performance,
several contractors at two of the local sites that we visited were found to
have had certain unallowable costs. Moreover, at six of the eight local
sites that had established performance levels for contractors, most
contractors did not meet one or more of their performance measures. In light
of the extent to which single audits and other sources have identified
internal control weaknesses related to state oversight of TANF contractors,
coupled with HHS?s lack of a comprehensive perspective on the extent and
nature of these problems, we recommend that HHS strengthen its oversight of
TANF contracting. We expect to receive HHS?s comments on this interim report
soon and will issue our final report after these comments have been
incorporated.

Page 5 GAO- 02- 245 State and Local Welfare Contracting

State and local governments that receive grants from HHS must follow the
uniform administrative requirements set forth in federal regulations. 3 When
procuring property and services, these regulations require that states
follow the same policies and procedures they use for procurements supported
with nonfederal funds. Under HHS?s regulations, states must also ensure that
contracts include any clauses required by federal statutes and executive
orders. Grantees other than states and subgrantees, such as local
governments, rely on their own procurement procedures, provided that they
conform to applicable federal laws and the standards identified in the
regulations, including standards of conduct, requirements of full and open
competition in contracting, procedures for different types of procurements,
and bid protest procedures to handle and resolve disputes relating to their
procurements. Grantees and subgrantees must maintain a contract
administration system that ensures that contractors perform in accordance
with the terms, conditions, and specifications of their contracts.

The procurement of contracts typically follows a process that comprises
several phases, including bid solicitation and contract award processes. The
bid solicitation process will begin with the development of a work plan by
the contracting agency that outlines the objectives contractors will be
expected to achieve and the manner in which they will be expected to achieve
them. The state or locality will then issue a request- for- proposals to
inform potential bidders of the government?s interest in obtaining
contractors for the work specified. A request- for- proposals is a publicly
advertised document that outlines information necessary to enable
prospective contractors to prepare proposals properly. After these
activities are completed, the contract award process begins. Once proposals
have been submitted, they are evaluated to assess their relative merit.
Several key criteria are almost always considered in evaluating proposals,
including price/ cost, staffing, experience, and technical and/ or other
resources.

The environment for administering social services such as TANF has been
affected by changes to the nation?s workforce system. Through the Workforce
Investment Act (WIA) of 1998 (P. L. 105- 220), the Congress sought to
replace the fragmented training and employment system that existed under the
previous workforce system. WIA requires state and local entities that carry
out specified federal programs to participate in local

3 These requirements are specified in 45 C. F. R. 92. Background

Page 6 GAO- 02- 245 State and Local Welfare Contracting

one- stop centers- local centers offering job placement assistance for
workers and opportunities for employers to find workers- by making
employment and training- related services available. While TANF is not a
mandatory partner at one- stop centers, some states are using one- stop
centers to serve TANF recipients. WIA called for the development of
workforce investment boards to oversee WIA implementation at the state and
local levels. 4 WIA listed the types of members that should participate on
the workforce boards, such as representatives of business, education, labor,
and other segments of the workforce investment community, but did not
specify a minimum or maximum number of members. Local workforce boards can
contract for services delivered through one- stop centers.

PRWORA broadened both the types of TANF services that could be contracted
out and the types of organizations that could serve as TANF contractors. The
act authorized states to contract out the administration and provision of
TANF services, including determining program eligibility. Under the prior
AFDC program, the determination of program eligibility could not be
contracted out to nongovernmental agencies. 5 In addition, under the PRWORA
provision commonly referred to as charitable choice, states are authorized
to contract with faith- based organizations to provide TANF services on the
same basis as any other nongovernmental provider without impairing the
religious character of such organizations.

Such changes in the welfare environment have affected the involvement of
for- profit organizations in TANF contracting. Prior to PRWORA, contracting
in the welfare arena was mainly for direct service delivery such as job
training, job search instruction, and child care provision. While some for-
profit companies provided services, service providers were mostly nonprofit.
Large for- profit companies were mainly involved as contractors that
designed automated data systems. In the broader area of social services,
large for- profits were also involved in providing various services for
child support enforcement. Now that government agencies

4 For information on the implementation of WIA, see U. S. General Accounting
Office,

Workforce Investment Act: Better Guidance Needed to Address Concerns Over
New Requirements, GAO- 02- 72, (Washington, D. C.: 2001).

5 This administrative function is not allowed to be contracted out to
nongovernmental agencies in the Medicaid or Food Stamp Programs. HHS has
contracted with Mathematica Policy Research, Inc., to study state and local
contracting for case management under TANF, and the study includes plans to
assess the contracting out of eligibility determination in the TANF program.

Page 7 GAO- 02- 245 State and Local Welfare Contracting

can contract out their entire welfare systems under PRWORA, there has been
an increase in the extent to which large for- profit companies have sought
out welfare contracts, in some cases on a large scale that includes
determining eligibility and providing employment and social services. 6

Federal and state funds are used to serve TANF recipients. For federal
fiscal years 1997 to 2002, states received federal TANF block grants
totaling $16.5 billion annually. With respect to state funding, PRWORA
includes a maintenance- of- effort provision, which requires states to
provide 75 to 80 percent of their historic level of funding. 7 States that
meet federally mandated minimum participation rates must provide at least 75
percent of their historic level of funding, and states that do not meet
these rates must provide at least 80 percent. The federally mandated
participation rates specify the percentages of states? TANF caseloads that
must be participating in work or work- related activities each year.

HHS oversees states? TANF programs. In accordance with PRWORA and federal
regulations, 8 HHS has broad responsibility to oversee the proper state
expenditure of TANF funds and the achievement of related program goals.
While TANF legislation prohibits HHS from regulating states in areas that it
is not legislatively authorized to regulate, it must still oversee state
compliance with program requirements, such as mandated work participation
rates and other program requirements.

6 This historical overview of social service contracting with for- profit
organizations is from Demetra Smith Nightingale and Nancy M. Pindus,
Privatization of Public Social Services: A Background Paper, prepared for
the U. S. Department of Labor, Office of the Assistant Secretary for Policy
(Washington, D. C.: The Urban Institute, Oct. 15, 1997).

(http:// www. urban. org/ template. cfm? Template=/ TaggedContent/
ViewPublication. cfm& Publi cationID= 6213)

7 As used in this report, the term ?TANF funds? includes federal TANF block
grant funds and state maintenance- of- effort funds. 8 45 C. F. R. Part 92.

Page 8 GAO- 02- 245 State and Local Welfare Contracting

Nearly all states and the District of Columbia contract with nongovernmental
entities for the provision of TANF- funded services at the state level,
local level, or both levels of government. In 2001, state and local
governments spent more than $1. 5 billion on contracts with nongovernmental
entities, or at least 13 percent of all federal TANF and state maintenance-
of- effort expenditures (excluding those for cash assistance). The majority
of these contracts are with nonprofit organizations. Although TANF
contractors provide a wide array of services, the most commonly contracted
services reported by our survey respondents include employment and training
services, job placement services, and support services to promote job entry
or retention. In addition, eligibility determination for cash assistance
under TANF or other TANF- funded services has been contracted out in one or
more locations in some states. Most state TANF contracting agencies pay
contractors a fixed overall price or reimburse them for their costs rather
than base contract payments on achieving program objectives for TANF
recipients.

Contracting for TANF- funded services occurs in the District of Columbia and
every state except South Dakota. However, the level of government at which
contracting occurs varies, which complicates efforts to provide
comprehensive information on TANF- funded contracts. Contracting occurs only
at the state level in 24 states, only at the local level in 5 states, at
both levels in the remaining 20 states, and in the District of Columbia.
Moreover, contracting at the local level encompasses contracting by agencies
such as county departments of social or human services as well as workforce
development boards whose jurisdiction may include several counties. Our
national survey of TANF contracting provides comprehensive information on
contracting at the state level but incomplete and nonrepresentative
information on local contracting. 9

In 2001, state and local governments expended at least $1.5 billion in TANF
funds for contracted services. With respect to state- level contracting,
contracts with nonprofit organizations accounted for 88 percent of TANF
funds while contracts with for- profit organizations accounted for 13
percent of funds (see fig. 1). 10 Seventy- three percent of state- level
contracts are with nonprofit organizations and 27 percent are

9 See app. I for information on the geographic scope of the data that we
obtained on stateand local- level contracting. 10 These percentages combined
exceed 100 percent due to rounding. TANF- Funded

Contracts Exceed $1.5 Billion Nationally and Cover an Array of Services

TANF Contracting Occurs at Different Levels of Government and with Various
Types of Organizations

Page 9 GAO- 02- 245 State and Local Welfare Contracting

with for- profit organizations. Under PRWORA?s charitable choice provision,
some states have established initiatives to promote the use of faith- based
organizations. 11 Contracts with faith- based organizations constitute a
smaller proportion of all contracted TANF funds than contracts with secular
nonprofit organizations and for- profit organizations. As shown in figure 1,
contracts with faith- based organizations account for 8 percent of TANF
funds spent by state governments on contracts with nongovernmental entities
nationally.

11 Faith- based organizations include churches, congregations, and
religiously affiliated nonprofit organizations.

Page 10 GAO- 02- 245 State and Local Welfare Contracting

Figure 1: Percentage of Federal and State TANF Funds and TANF Contracts with
Different Types of Contractors for StateLevel Contracting, 2001

Note: Our national TANF contracting survey also identified 1,388 TANF
contracts at the local level, which accounted for $494 million in federal
and state funds. a The combined percentages exceed 100 percent due to
rounding.

Source: GAO?s national survey of TANF contracting.

In several states, large percentages of the funds contracted by states and
localities that were identified by our national survey are in contracts with
for- profit organizations. As shown in table 1, at least half of the
contracted funds in 8 states are with for- profit organizations. 12
Moreover, in 11 states,

12 The states are Florida, Hawaii, Nevada, New Mexico, Utah, Nebraska, and
Wyoming and the District of Columbia.

Page 11 GAO- 02- 245 State and Local Welfare Contracting

more than 15 percent of all TANF- contracted funds identified by our survey
went to faith- based organizations. 13

The proportion of TANF funds expended for contracted services with
nongovernmental entities varies considerably by state. Nationally, at least
13 percent of TANF funds expended for services other than cash assistance
have been contracted out. As shown in table 1, the proportion of funds
contracted out in 10 states in 2001 exceeded 20 percent of their fiscal year
2000 TANF fund expenditures (excluding the portion of expenditures for cash
assistance). 14 Idaho, Mississippi, New Jersey, Wisconsin, and the District
of Columbia expended more than 40 percent of their TANF funds on contracted
services. On the other hand, Iowa, Kansas, North Carolina, New Mexico, and
Oregon spent the smallest proportion (2 percent or less of their TANF funds)
on contracts with nongovernmental entities.

13 The states are Delaware, Iowa, Kansas, Michigan, New Jersey, New Mexico,
North Carolina, North Dakota, Oklahoma, and Washington and the District of
Columbia. 14 Since national data are not yet available on states? federal
TANF and maintenance- ofeffort expenditures for federal fiscal year 2001, we
used data on expenditures for fiscal year 2000. As a result, the percentages
provide an estimate of the relative levels of TANF contracting in 2001.

Page 12 GAO- 02- 245 State and Local Welfare Contracting

Table 1: TANF Contracting Levels by State, 2001

Dollars in millions

State Total value of TANF contracts, 2001 a

Total value of TANF contracts as a percentage of fiscal year 2000 federal

TANF and state maintenance- of- effort expenditures (excluding

expenditures for basic assistance) b

Percent of contracted funds with nonprofit

entities c Percent of contracted

funds with for- profit entities c

District of Columbia

$46.0 74 46 54 Mississippi 49.0 71 d 75 25 Idaho 17.3 43 83 17 Wisconsin
152.9 43 82 18 New Jersey 41.6 42 100 0 Pennsylvania 157.8 39 97 3 Montana
7.5 32 100 0 Tennessee 41.9 31 100 0 Vermont 6.6 29 100 0 Minnesota 39.3 21
100 0 Louisiana 11.5 20 74 26 Nebraska 7.1 20 50 50 Washington 44.8 20 82 18
Massachusetts 66.9 19 98 2 Illinois 111.9 18 96 4 Ohio 98.3 16 90 10 South
Carolina 15.4 16 97 3 Delaware 5. 5 15 94 6 West Virginia 10.8 13 52 48
Arkansas 9.2 11 63 37 Colorado 17.1 11 98 2 Nevada 4. 1 11 43 57 Georgia
24.0 10 57 43 Arizona 13.7 9 77 23 Indiana 23.3 9 95 5 Maine 3. 1 9 83 17
New Hampshire 3. 5 9 100 0 New York 149.5 9 75 25 Maryland 10.6 8 54 46
Rhode Island 5.3 8 86 14 Texas 37.6 8 73 27 Utah 3.9 8 25 75 California
157.9 7 64 36 Missouri 13.1 7 77 23 North Dakota 1.4 7 100 0

Page 13 GAO- 02- 245 State and Local Welfare Contracting

Dollars in millions

State Total value of TANF contracts, 2001 a

Total value of TANF contracts as a percentage of fiscal year 2000 federal

TANF and state maintenance- of- effort expenditures (excluding

expenditures for basic assistance) b

Percent of contracted funds with nonprofit

entities c Percent of contracted

funds with for- profit entities c

Michigan 52.8 6 98 2 Virginia 7.1 6 93 7 Alabama 2. 9 5 92 8 Alaska 1.3 4
100 0 Connecticut 11.7 4 94 6 Florida 21.4 4 30 70 Oklahoma 2. 6 4 79 21
Hawaii 0.7 3 0 100 Kentucky 3.2 3 52 48 Wyoming 0. 4 3 0 100 Iowa 1.8 2 100
0 Kansas 2.1 2 58 42 North Carolina 7. 1 2 75 25 New Mexico 0.5 1 40 60
Oregon 0.9 1 100 0 South Dakota e eee

a This is the amount of federal TANF and state maintenance- of- effort funds
contracted out to nongovernmental entities by states and localities and
represents the maximum amount that contractors could receive in a single
year for services provided under their TANF contracts. The amounts listed
for each of the 21 states for which we did not receive complete information
on locallevel contracting likely understate the total value of TANF
contracts. These states are Arizona, Arkansas, California, Colorado,
Florida, Georgia, Kentucky, Maryland, Massachusetts, Minnesota, Mississippi,
Nevada, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas,
Utah, Virginia, and Wisconsin. b To calculate these percentages, we used
data reported by HHS on each state?s total federal TANF and state
maintenance- of- effort expenditures for federal fiscal year 2000. We then
subtracted the portion of these expenditures that were for basic assistance,
a category used by HHS that includes benefits in the form of cash, payments,
vouchers, or other forms designed to meet recipients? ongoing basic needs.
We excluded basic assistance in our calculations of TANF contracting levels
because recipients receive these expenditures. Since national data are not
yet available on states? federal TANF and maintenance- of- effort
expenditures for federal fiscal year 2001, the percentages provide an
estimate of the relative levels of TANF contracting in 2001. The percentages
may be understated for each of the 21 states for which we did not receive
complete information on local- level contracting (see table note ?a? for a
list of these states). c These percentages are based on the TANF contracts
that were identified in the responses to our

national survey on TANF contracting. d We used data on the state?s federal
TANF and state maintenance- of- effort expenditures obtained

from Mississippi state officials to calculate this figure. e South Dakota
does not contract for TANF services.

Page 14 GAO- 02- 245 State and Local Welfare Contracting

Source: Data on states? federal TANF and maintenance- of- effort
expenditures are from HHS, and other data are from GAO?s national survey of
TANF contracting.

Several large for- profit organizations and nonprofit organizations have
large TANF contracts in multiple states. Our national survey of TANF
contracting asked state and local respondents to identify the names of the
contractors with the three largest dollar contracts in their jurisdictions.
Four for- profit organizations- Curtis & Associates, Inc.; Maximus; America
Works; and Affiliated Computer Services, Inc.- have contracts with the
highest dollar values in two or more states. 15 Among this group, Curtis &
Associates, Inc., had the TANF contracts with the highest dollar value
relative to other contractors in their respective locations. Among nonprofit
contractors, Goodwill Industries, YWCA, Catholic Charities, Lutheran Social
Services, Salvation Army, Urban League, United Way, Catholic Community
Services, American Red Cross, and Boys & Girls Clubs all have TANF- funded
contracts in two or more states. 16 Among this group, Goodwill Industries
had the TANF contracts with the highest dollar value relative to other
contractors in their respective locations.

States and localities contract with nongovernmental entities to provide
services to facilitate employment, administer program functions, and
strengthen families. Overall, states and localities rarely contract
different types of services to nonprofit and for- profit organizations.
Government entities contract out most often for services to facilitate
employment. As shown in figure 2, over 40 percent of state respondents
reported that half or more of their TANF- funded contracts ask for the
provision of education and training activities, job placement services, and
support services that address barriers to work and help clients retain
employment. These support services include substance abuse treatment,
assistance with transportation, and other services that facilitate job entry
and retention. Childcare services are less common. While the responses we
obtained from local respondents about types of services contracted out may
not be representative of local TANF contracting, they revealed a similar
overall pattern to the responses by state respondents presented in figure 2.
In some cases, states and localities have contracted with nongovernmental
entities to provide program administrative functions that were required to

15 Affiliated Computer Services, Inc., acquired Lockheed Martin IMS, a
wholly owned subsidiary of Lockheed Martin, in August 2001. 16 The names of
nonprofit contractors as listed do not necessarily include designated local
affiliations. Services Contracted Out

Typically Include Job Preparation, Placement, and Retention

Page 15 GAO- 02- 245 State and Local Welfare Contracting

be performed by government workers in the past, such as determining
eligibility. The determination of eligibility for TANF- funded services
provided to low- income families who are ineligible for cash assistance has
been contracted out in one or more locations in at least 18 states. For
example, one Ohio county, which offers a variety of services with varying
eligibility criteria to the working poor, contracts with nongovernmental
organizations to both provide and determine eligibility for the services.
Contractors in at least 4 states are contracting out eligibility for cash
assistance under TANF, an option authorized under TANF. Finally, some states
and localities are using TANF funds to contract for services related to the
TANF objectives of preventing and reducing the incidence of nonmarital
pregnancies and encouraging the formation and maintenance of two- parent
families. For example, 20 percent of state respondents reported that half or
more of their TANF contracts call for the provision of services pertaining
to stabilizing families.

Page 16 GAO- 02- 245 State and Local Welfare Contracting

Figure 2: TANF Services Contracted Out Most Frequently by State Governments

Note: Responses from state respondents in five states covered both their
state- level and local- level contracting. These states are Connecticut,
Missouri, New Jersey, New Mexico, and Washington.

Source: GAO?s national survey of TANF contracting.

We asked state and local governments about the use of four common types of
contracts for TANF services: cost- reimbursement, fixed priced, incentive,
and cost- reimbursement plus incentive. Under costreimbursement contracts,
contracting agencies pay contractors for the allowable costs they incur,
whereas under fixed- price contracts, contracting agencies pay contractors
based on a pre- established overall contract price. As figure 3 shows,
almost 60 percent of state respondents said that half or more of their TANF
contracts are cost- reimbursement. Far fewer respondents report that half or
more of their TANF contracts were incentive or cost- reimbursement plus
incentive. Under incentive Many Contracting

Agencies Pay Contractors Based on Costs Incurred, Rather Than on Program
Objectives Achieved

Page 17 GAO- 02- 245 State and Local Welfare Contracting

contracts, the amount paid to contractors is determined based on the extent
to which contractors successfully achieve specified program objectives for
TANF recipients, such as job placements and the retention of jobs. Cost-
reimbursement plus incentive contracts pay contractors for costs they incur
and provide payments above costs for the achievement of specific objectives.
While the responses we obtained from local respondents may not be
representative of local TANF contracting, they revealed a similar pattern to
the responses by state respondents. Our survey disclosed that many state and
local governments have chosen to use a contract type- cost- reimbursement-
under which the government assumes a relatively high level of financial
risk. Contracting agencies assume greater financial risk when they are
required to pay contractors for allowable costs under cost- reimbursement
contracts than when overall contract payments are limited to a pre-
established price.

Page 18 GAO- 02- 245 State and Local Welfare Contracting

Figure 3: Types of Contracts Used for TANF Contracting by State Governments

Note: Responses from state respondents in five states covered both their
state- level and local- level contracting. These states are Connecticut,
Missouri, New Jersey, New Mexico, and Washington.

Source: GAO?s national survey of TANF contracting.

HHS relies primarily on state single audit reports to oversee state and
local procurement of TANF services and monitoring of TANF contractors. State
single audit reports identified TANF procurement or subrecipient monitoring
problems for about one- third of the states for the period 1999 to 2000, and
subrecipient monitoring problems were identified more frequently. However,
HHS officials told us that they do not know the overall extent to which
state single audits have identified problems with the monitoring of
nongovernmental TANF contractors or the nature of these problems because
they do not analyze the reports in such a comprehensive manner. Our review
of state single audit reports for 1999 and 2000 found internal control
weaknesses for over a quarter of states HHS Relies Primarily

on State Single Audit Reports to Oversee TANF Contracting but Does Not Use
Them Systematically

Page 19 GAO- 02- 245 State and Local Welfare Contracting

nationwide that potentially affected the states? ability to effectively
oversee TANF contractors. 17

HHS relies primarily on state single audits to oversee TANF contracting by
states and localities. The Single Audit Act of 1984 (P. L. 98- 502), as
amended, requires federal agencies to use single audit reports in their
oversight of state- managed programs supported by federal funds. The
objectives of the act, among others, are to (1) promote sound financial
management, including effective internal controls, with respect to federal
funds administered by states and other nonfederal entities; (2) establish
uniform requirements for audits of federal awards administered by nonfederal
entities; and (3) ensure that federal agencies, to the maximum extent
practicable, rely on and use single audit reports. In addition, the act
requires federal agencies to monitor the use of federal funds by nonfederal
entities and provide technical assistance to help them implement required
single audit provisions. The results of single audits provide a tool for
federal agencies to monitor whether nonfederal entities are complying with
federal program requirements. To help meet the act?s objectives, Office Of
Management and Budget (OMB) Circular A- 133 requires federal agencies to
evaluate single audit findings and proposed corrective actions, instruct
states and other nonfederal entities on any additional actions needed to
correct reported problems, and follow up with these entities to ensure that
they take appropriate and timely corrective action. States, in turn, are
responsible for working with local governments to address deficiencies
identified in single audits of local governments. 18

Single audits assess whether audited entities have complied with
requirements in up to 14 managerial or financial areas, including allowable
activities, allowable costs, cash management, eligibility, and reporting.
Procurement and subrecipient monitoring constitute 2 of the 14 compliance
areas most relevant to TANF contracting. Audits of procurement requirements
assess the implementation of required procedures, including whether
government contracting agencies awarded

17 Internal controls are defined as management practices intended to provide
reasonable assurance that effective and efficient operations, reliable
financial reporting, and compliance with applicable laws and regulations
will be achieved.

18 For information on the implementation of the Single Audit Act, see U. S.
General Accounting Office, Single Audit: Update on the Implementation of the
Single Audit Act Amendments of 1996, GAO/ AIMD- 00- 293, (Washington, D. C.:
Sept. 29, 2000) and Single Audit: Refinements Can Improve Usefulness, GAO/
AIMD- 94- 133, (Washington, D. C: June 21, 1994). Single Audits Assess TANF

Procurement and Subrecipient Monitoring

Page 20 GAO- 02- 245 State and Local Welfare Contracting

TANF contracts in a full and open manner. Audits of subrecipient monitoring
requirements examine whether an entity has adequately monitored the entities
to whom it has distributed TANF funds. Subrecipients of TANF funds from
states can include both local governments and nongovernmental entities with
whom the state has contracted. Subrecipients of TANF funds from localities
can include nongovernmental TANF contractors.

State single audit reports identified TANF subrecipient monitoring or
procurement problems for one- third of the states. Single audits identified
subrecipient monitoring deficiencies for 9 states in 1999 and 12 states in
2000. 19 Of the 15 states that had subrecipient monitoring deficiencies in
either 1999 or 2000, 6 states were cited for deficiencies in both years.
State single audits identified procurement problems less frequently: for 3
states in 1999 and 4 states in 2000. 20

The extent to which state single audits have identified problems with
subrecipient monitoring involving TANF funds is generally equal to or
greater than for several other social service programs in which contracting
occurs with nongovernmental organizations. As shown in table 2, the number
of state single audits that identified deficiencies in subrecipient
monitoring for the 1999 to 2000 time period is similar for TANF, child care,
and the Social Services Block Grant. Fewer state audits identified such
problems for child support enforcement, Medicaid, and Food Stamps. With
regard to procurement, the frequency of identified deficiencies in state
audits for TANF was fewer than that for Medicaid but about the same as for
several other programs. 21

19 At the time of our review, single audit reports for 1999 and 2000
represented the 2 most recent years for which a complete set of such reports
was available for review through the single audit database.

20 The states were Connecticut, Michigan, and New York (1999) and
Connecticut, Kentucky, Mississippi, and New Hampshire (2000). 21 Single
audits of local governments identified TANF subrecipient monitoring problems
in 13 localities in 1999 and 6 in 2000 and identified TANF procurement
problems in 7 localities in 1999 and 2 in 2000. Over this 2- year period,
single audits cited more localities with subrecipient monitoring problems
for TANF than for each of the other five social service programs except
Medicaid. Similarly, single audits of local governments cited more
localities with procurement problems for TANF than for each of the other
five social service programs, except Medicaid and food stamps. For this
analysis, the scope of local governments included tribal organizations.
State Single Audits Have

Identified TANF Monitoring and Procurement Problems

Page 21 GAO- 02- 245 State and Local Welfare Contracting

Table 2: Number of State Single Audit Reports that Cited Subrecipient
Monitoring or Procurement Problems in Six Social Service Programs, 1999 and
2000

Numbers of reports that cited problems with subrecipient monitoring
(percentages a of audited programs that cited

problems) b Numbers of reports that cited

problems with procurement (percentages a of audited programs that cited
problems) b Social service program 1999 2000 1999 2000

TANF 9 (22 percent) 12 (29 percent) 3 (7 percent) 4 (10 percent) Child Care
8 (23) 11 (29) 4 (11) 1 (3) Child Support Enforcement

5 (15) 11 (28) 2 (6) 6 (15) Medicaid 7 (16) 7 (15) 7 (16) 7 (15) Food Stamps
2 (5) 4 (12) 2 (5) 0 (0) Social Services Block Grant

6 (21) 14 (47) 2 (7) 4 (13) a In some cases, a state?s single audit may not
cover every social service program each year. The figures in parentheses
represent the numbers of single audit reports that cited problems as a
percentage of the single audit reports in which the program was audited. b
For this analysis, the scope of state single audit reports included the 50
states and the District of Columbia but not Puerto Rico and the United
States territories. Source: GAO analysis of the single audit database.

HHS officials told us that state single audits during this time period had
identified TANF subrecipient monitoring problems in only two states- Florida
and Louisiana- that involved unallowable or questionable costs and that also
pertained to the oversight of nongovernmental TANF contractors. However, HHS
officials also said that they do not know the overall extent to which state
single audits have identified problems with the monitoring of
nongovernmental TANF contractors or the nature of these problems because
they do not analyze the reports in such a comprehensive manner. Our analysis
of the state single audit reports that cited TANF subrecipient monitoring
problems in 1999 or 2000 indicates that the reports for 14 of the 15 states
identified internal control weaknesses that potentially affected the states?
ability to adequately oversee nongovernmental TANF contractors. 22 Thus,
internal control

22 The single audit report for Missouri identified a problem that appears to
be less relevant to the monitoring of TANF contractors.

Page 22 GAO- 02- 245 State and Local Welfare Contracting

weaknesses pertaining to contractor oversight have been reported for more
than a quarter of all states nationwide. (See app. III for a summary of the
problems reported in each of the state single audits.)

The reported deficiencies in states? monitoring of subrecipients cover a
wide range of problems, including inadequate reviews of the single audits of
subrecipients, failure to inform subrecipients of the sources of federal
funds they received, and inadequate fiscal and program monitoring of local
workforce boards. The audit reports for some states, such as Alaska,
Kentucky (2000 report), and Louisiana (1999 and 2000 reports) specified that
the monitoring deficiencies involved or included subrecipients that were
nongovernmental entities. For example, the 2000 single audit for Louisiana
reported that for 7 consecutive years the state did not have an adequate
monitoring system to ensure that subrecipients and social service
contractors were properly audited, which indicates that misspent federal
funds or poor contactor performance may not be detected and corrected.

The audit reports for other states, including Arizona, Michigan, Minnesota,
and Mississippi do not specify whether the subrecipients that were
inadequately monitored were governmental or nongovernmental entities.
However, the reported internal control weaknesses potentially impaired the
ability of these states to properly oversee either their own TANF
contractors or the monitoring of TANF contractors that have contracts with
local governments. For example, the 2000 single audit report for Minnesota
found that the state agency did not have policies and procedures in place to
monitor the activities of TANF subrecipients. The 2000 audit report for
Mississippi found that the state did not review single audits of some
subrecipients in a timely manner and did not perform timely follow- up in
some cases when subrecipients did not submit their single audits on time.
Even if the subrecipients referred to in both of these audit reports were
solely local governmental entities, the deficiencies cited potentially
limited the states? abilities to identify and follow- up in a timely manner
on any problems with local monitoring of TANF contractors.

HHS follows up on a state- by- state basis on the TANF- related problems
cited in state single audits and focuses primarily on the problems that
involve monetary findings. However, HHS does not use these reports in a
systematic manner to develop a national overview of the extent and nature of
problems with states? oversight of TANF contractors. HHS officials said that
HHS regional offices review state single audits and perform follow- up
actions in cases where deficiencies were identified. These actions include
sending a letter to the state acknowledging the reported problems and any
HHS Does Not Use State

Single Audits in a Systematic Manner to Oversee TANF Contracting

Page 23 GAO- 02- 245 State and Local Welfare Contracting

plans the state may have submitted to correct the identified deficiency. HHS
officials told us that their reviews of single audit reports focus on TANF
audit findings that cited unallowable or questionable costs, and that HHS
tracks such findings in its audit resolution database. The officials
explained that their focus on monetary findings stems from the need to
recover any unallowable costs from states and from HHS?s oversight
responsibility under PRWORA to determine whether to impose penalties on
states for violating statutory TANF requirements. If the deficiency
identified by a single audit involves monetary findings, HHS takes actions
to recover the costs within the same year, according to HHS officials. HHS
officials told us that if the identified deficiency does not involve
monetary findings but pertains to a programmatic issue such as subrecipient
monitoring, HHS generally relies on the state to correct the reported
problem and would initiate corrective action if the same problem were cited
in the state?s single audit the following year. However, HHS does not use
state single audit reports in a systematic manner to oversee TANF
contracting, such as by analyzing patterns in the subrecipient monitoring
deficiencies cited by these reports.

HHS auditors and program officials also told us that inconsistent auditing
of nongovernmental entities and state monitoring of these entities affects
HHS?s use of single audits as a management tool. For example, HHS officials
said that the same nongovernmental entity might be treated as a subrecipient
by one state and as a vendor by another state, which could limit HHS?s
ability to determine whether the entity has consistently complied with all
applicable federal and state requirements. HHS officials told us that they
plan to work, in conjunction with OMB, to explore the reasons for the
inconsistencies and, where appropriate, to identify ways to better assure
compliance with audit requirements applicable to nongovernmental entities.

Page 24 GAO- 02- 245 State and Local Welfare Contracting

State and local governments rely on third parties to help ensure compliance
with procurement requirements, including bid protests, judicial processes,
and external audits. Procurement problems that resulted in the modification
of contract award decisions surfaced in 2 of the 10 TANF procurements we
reviewed. These problems affected 5 of the 58 TANF contracts awarded in the
10 procurements. Procurement issues were raised in 2 other procurements but
did not result in the modification of contract award decisions.

State and local governments have primary responsibility for overseeing
procurement procedures, and they use several approaches to identify problems
with procurement processes. In some cases, contracting agencies rely on
aggrieved third parties to identify procurement problems through bid
protests or lawsuits. In other cases, organizations outside the procurement
process may review bid solicitation and contract award procedures. A bid
protest occurs when an aggrieved party- a bidder who did not win a contract
award- protests the decision of the local or state agency to award another
bidder a contract. The process usually has several tiers, starting with a
secondary review by the agency that denied the contract award. If the
protest cannot be resolved internally, it can be brought to a higher level
of authority. Contract agency officials said that bidders frequently protest
contract award decisions. However, state and local officials also said that
many bid protests are based more on bidder disgruntlement with award
decisions than on corroborated instances of noncompliance with procurement
processes. However, these protests do occasionally result in a resolution
that favors the bid protester. Different Approaches

Have Been Used To Help Ensure Compliance with, and Identify Problems in,
Implementing Bid Solicitation and Contract Award Processes

Oversight Approaches Include External Reviews and Administrative and
Judicial Processes

Page 25 GAO- 02- 245 State and Local Welfare Contracting

We reviewed 10 separate procurements- specific instances in which government
agencies had solicited bids and awarded one or more TANF contracts- in the
local sites that we visited. 23 Procurement problems identified in San Diego
and Los Angeles resulted in contract award decisions being modified. In San
Diego, the county employees union filed a lawsuit against the county
maintaining that the county had failed to conduct a required cost analysis
to determine whether it was more or less efficient to contract out services
than it would be to provide them by county employees. The union won the
case, and the county was required to perform a cost analysis and, upon
determination that contracted services would be more cost- efficient than
publicly provided services, resolicit bids from potential contractors. In
Los Angeles County?s procurement of TANF services, one bidder filed a bid
protest, claiming that the contracting agency had failed to properly
evaluate its bid. As the final contract award authority, the County Board of
Supervisors ordered the Director of Public Social Services to negotiate
separate contracts for TANF services to the original awardee and protesting
bidder.

While procurement issues were raised in the District of Columbia and New
York City, their resolution did not result in contract award decisions being
modified. In the District of Columbia, the city Corporation Counsel raised
concerns regarding the lack of price competition and the lack of an
evaluation factor for price. For example, the District?s contracting agency
set fixed prices it would pay for TANF services and did not select
contractors based on prices they offered. District officials said that they
set fixed prices so that contractors would not submit proposals that would
unrealistically underbid other contractors. In addition, the agency did not
include price as a factor in its evaluation of proposals. As a result of
these and other factors, the Corporation Counsel concluded that the
District?s procurement of TANF services was defective and legally
insufficient. However, the city, operating under the authority of the
mayor?s office to make final contract award decisions, approved the contract
awards and subsequently implemented regulations changing the way price is
used in making contract award decisions.

23 We selected procurements in which contract awards were made to large for-
profit and nonprofit organizations. We reviewed one TANF procurement in each
of 8 localities and 2 TANF procurements in Palm Beach. In Palm Beach, one
procurement was for employment and case management services and the other
was for determining eligibility for TANF as part of a pilot project to
contract out this function in selected locations in Florida. Procurement
Problems

Were Identified in Some Cases

Page 26 GAO- 02- 245 State and Local Welfare Contracting

In New York City, the TANF contracting process was alleged to have violated
certain requirements, but these charges were not confirmed upon subsequent
legal review and a resulting appellate court decision. The New York City
Comptroller reported that the contracting agency had not disclosed the
weights assigned to evaluation criteria for assessing bids, provided
contract information to all bidders, and assessed each bid equitably. With
regard to the assessment of bids, the comptroller maintained that the city?s
Human Resources Administration (HRA) had deemed as unqualified some
proposals that clearly ranked among the most technically qualified and
recommended contract awards for other proposals that were much less
qualified. The comptroller also maintained that HRA had preliminary contact
with one of the potential contractors, reporting that HRA had held
discussions and shared financial and other information with the contractor
before other organizations had been made aware of the same information. The
comptroller concluded that these actions constituted violations of city
procurement policies. Utilizing its authority to make final contract award
decisions, the mayor?s office subsequently overruled the comptroller?s
objections and authorized the contract agency to award contracts to the
organizations it had selected. A later court appeal found in favor of the
mayor?s office. 24

State and local governments use a variety of approaches to help ensure that
TANF- funded contractors expend federal funds properly and comply with TANF
program requirements, such as on- site reviews and independent audits. Four
of the six states that we visited identified deficiencies in their oversight
of TANF contractors. Various factors have contributed to these deficiencies,
such as the need in some states to create and support local workforce boards
that contract for TANF services and oversee contractors. With regard to
contractor performance, several contractors at two local sites were found to
have had certain disallowed costs and were required to pay back the amounts
of these costs. Moreover, in six of the eight locations that established
performance levels for TANF contractors, most contractors, including both
nonprofit and for- profit contractors, did not meet one or more of their
performance levels.

24 Two judicial rulings affected New York City?s procurement of TANF
services. In the first case, Guliani v. Hevesi, the court found in favor of
the New York City Comptroller regarding the alleged violations of the city?s
procurement process. The appellate court ruling, Guliani, etc., et. al. v.
Hevesi, etc., and Maximus, Inc. (Non- Party Intervenor), overturned the
initial court decision, thereby supporting HRA?s contract award
recommendations. Deficiencies Have

Been Identified with Contract Oversight and Contractor Performance in the
States and Localities We Reviewed

Page 27 GAO- 02- 245 State and Local Welfare Contracting

State and local oversight approaches that we found being used originate from
organizations external to contracting agencies and these include independent
audits and program evaluations. State and local government auditors,
comptrollers, treasurers, or contracted certified public accounting firms
audit contractors. Independent auditors conduct financial and programmatic
audits of compliance with contract specifications. Similarly, evaluators
from outside the contracting agency generally evaluate various aspects of
program implementation, including financial, programmatic, and operational
performance by contractors and other entities responsible for achieving
program goals.

State and local government auditors in several states have identified
shortcomings in how contracting agencies oversee TANF contractors. As shown
in table 2, auditors reported oversight deficiencies in four of the six
states that we visited- Florida, New York, Texas, and Wisconsin. Audit
reports cited uneven oversight coverage of TANF contractors over time or
across local contracting agencies. We did not identify any audit reports
that assessed the oversight of TANF contractors in California or the
District of Columbia.

Table 3: Independent Audits Have Identified Problems with the Oversight of
TANF Contractors in Several States that We Reviewed

State government Audit agency (year of audit

report) Overview of problems identified

Florida State Inspector General?s Office (2000) Contract monitoring
conducted by Florida?s 24 local workforce boards was

inconsistent. Some of the boards failed to develop a monitoring plan to
document and follow- up on oversight activities. In addition, some of the
boards that were monitoring contractors did not assess financial and
programmatic performance. State Legislative Offices (2000) Lack of a fully
integrated system for reporting and resolving instances of

contractor noncompliance. State agencies primarily serve in a policy making,
administrative, support, or oversight capacity, including oversight of local
workforce boards. The boards, in turn, contract with nongovernmental
entities to provide direct services or administrative functions. To improve
oversight of contractors, the report recommended that the state develop an
integrated automated system to, among other things, generate performance
information on service providers and workforce development outcomes at both
the state and local levels.

States and Localities Use Various Approaches to Oversee TANF Contractors

Problems Have Been Cited with State and Local Oversight of TANF Contractors

Page 28 GAO- 02- 245 State and Local Welfare Contracting

State government Audit agency (year of audit

report) Overview of problems identified

New York State Comptroller?s Office (2000) The state contracting agency
devoted its limited resources to implementing welfare employment programs
and did not give appropriate priority to monitoring the outcomes of these
programs. Similarly, counties have not devoted sufficient priority or
resources to carry out their monitoring responsibilities effectively. In
addition, the state contracting agency did not have adequate information
systems to monitor and report on work participation by TANF recipients.
State Auditor?s Office (1999) The state?s financial and program monitoring
of local workforce boards did not

provide reasonable assurance that TANF funds were being spent appropriately.
The state performed only limited program monitoring of 4 of the 18 local
boards that had TANF contracts at the time. In addition, financial
monitoring procedures were inconsistent and lacked certain attributes, such
as assessing whether the boards passed funds to their contractors as
required. Local workforce boards were not meeting their responsibility to
monitor their TANF contractors. Only 5 of 15 boards contacted by the state
auditor had reviewed their TANF contractors and issued a monitoring report,
and only 1 of these 5 had performed any fiscal monitoring. Texas

State Auditor?s Office (2001) While the state has improved its oversight of
local workforce boards, the local boards audited for this report continue to
provide insufficient oversight of TANF contractors. For example, the boards
lacked knowledgeable staff to oversee contractors and did not have adequate
coverage of contractors, thus increasing the risk of not detecting or
correcting major problems. Wisconsin State Legislative Audit Bureau

(2001) The organization contracted to oversee TANF contractors in Milwaukee
County did not review case management information through monthly desk
reviews and

on- site visits for all clients reaching the 24- month time limit, as
contractually required.

Source: State government audit reports.

Evolving TANF program structures, resource constraints, and data quality
issues contributed to the deficiencies in contractor oversight. In Florida
and Texas, for example, new TANF program structures entailed establishing
local workforce boards throughout the state as the principal entity for TANF
contracting and the subsequent oversight of TANF contractors. In both
states, local workforce boards varied significantly in their capability to
oversee TANF contractors and ensure compliance with contract requirements.
According to New York State program officials, contracting agencies in the
state continue to experience ongoing shortfalls in staff resources necessary
to provide sufficient oversight of contractor performance. In addition,
Wisconsin?s Legislative Audit Bureau reported in 2001 that the Private
Industry Council had not provided the requisite oversight of five TANF-
funded contractors in Milwaukee County. In addition, state and local
officials in other states frequently told us that data quality issues
complicated efforts to monitor contractors effectively. For example,
officials told us that case file information on job placements or job
retention frequently differed from data in automated systems maintained by
state or local contracting agencies. In New York City, such

Page 29 GAO- 02- 245 State and Local Welfare Contracting

discrepancies required the Human Resources Administration to conduct time-
consuming reviews and reconciliations of the data. Such inaccuracies forced
delays in New York City?s payments to contractors, estimated by city
officials to total several million dollars.

States and localities have taken actions in response to some of the reported
contract oversight deficiencies. For example, state of Florida officials
worked with local workforce boards to integrate the operations of welfare
and employment offices to improve oversight of service providers, including
nongovernmental contractors. In Texas, the Texas Workforce Commission issued
new oversight policies and provided technical assistance and guidance to
help local workforce boards oversee the performance of TANF contractors. For
example, the commission?s prior monitoring had identified inappropriate cost
allocations across programs and other financial management problems by local
boards. The commission subsequently issued guidance on how boards and their
contractors can meet cost allocation requirements. Commission officials told
us that they use a team approach to monitor workforce boards and provide
technical assistance.

Auditors disallowed significant costs by TANF contractors at two of the
locations that we visited: Milwaukee County, Wisconsin, and Miami- Dade
County, Florida. 25 In the first location, Wisconsin?s State Legislative
Audit Bureau reported that one for- profit contractor had disallowable and
questionable costs 26 totaling $415,247 (of which 33 percent were
disallowable) and one nonprofit contractor had disallowable and questionable
costs totaling $367,401 (of which 83 percent were disallowable). 27 State
auditors reported that a large proportion of the disallowable costs resulted
from the contractors claiming reimbursement

25 Unallowable costs can involve either contractor costs expended on
prohibited activities or program costs for allowable activities that are
overstated by contractors. 26 Questionable costs relate to expenditures for
which the auditor, contracting agency, and contractor must reach a final
determination as to whether such costs are strictly prohibited, and if so,
which costs must be repaid to the contracting agency.

27 See Administration of the Wisconsin Works Program by Maximus, Inc.

(http:// www. legis. state. wi. us/ lab/ reports/ ltrmaximus. htm) and
Administration of the Wisconsin Works Program by Employment Solutions, Inc.,
and Other Selected Agencies

(http:// www. legis. state. wi. us/ lab/ reports/ ltrempsolutions. htm) for
more information on the audit findings. The latter report also identified
questionable costs totaling $76,023 for three other nonprofit TANF
contractors in Milwaukee. Contractors at Two Locations Had

Unallowable Costs

Page 30 GAO- 02- 245 State and Local Welfare Contracting

from Wisconsin for expenses incurred while attempting to obtain TANF
contracts in other states. Auditors said that generally accepted contract
restrictions prohibit the use of contract funds obtained in one state from
being used to obtain new contracts in other states. State auditors also said
they examined whether there had been any preconceived intent underlying
these prohibited contract practices, which could have led to charges of
fraud. However, the auditors could not demonstrate preconceived intent or
any related allegations of fraud.

The for- profit contractor also had costs disallowed for expenditures that
supported TANF- funded activities involving a popular entertainer who had
formerly received welfare benefits. The contractor believed the activity
would provide an innovative, motivational opportunity for TANF recipients.
While the contractor claimed that Wisconsin officials had not provided
sufficient guidance about allowable activities, state officials subsequently
found the costs associated with the entertainment activities to be
unallowable. Costs incurred by the for- profit contractor that state
auditors cited as questionable included charges for a range of promotional
advertising activities, restaurant and food purchases for which there was no
documented business purpose, and flowers for which documentation was
inadequate to justify a business purpose. Costs incurred by the nonprofit
contractor that were cited as questionable included funds spent on
advertising, restaurant meals and other food purchases that were not a
program need, and local hotel charges for which there was inadequate
documentation. At the time of our review, the contractors had repaid all
unallowable and questionable costs. In 2001, Wisconsin enacted a state law
that requires TANF contracts beginning on January 1, 2002, and ending on
December 31, 2003, to contain a provision stating that contractors that
submit unallowable expenses must pay the state a sanction equal to 50
percent of the total amount of unallowable expenses.

Auditors also disallowed some program costs claimed by several contractors
under contract with the Miami- Dade Workforce Development Board in Florida.
The auditors found instances in which several contractors had billed the
contracting agency for duplicate costs. On the basis of these findings, the
auditors recommended that the contractors repay the board about $33, 000 for
the costs that exceeded their valid claims. At the time of our review,
arrangements had been made for the contractors to repay the disallowed costs
to the contracting agency.

Page 31 GAO- 02- 245 State and Local Welfare Contracting

Many TANF contractors at the sites that we reviewed are not meeting their
established performance levels in the areas of work participation, job
placement, or job retention rates. Contracting agencies in eight of the nine
localities we reviewed (all except the District of Columbia) have
established expected levels of performance for their TANF contractors, and
these performance levels vary by locality. At two of the eight sites-
Milwaukee and Palm Beach- all contractors met all specified performance
levels. However, at each of the six other sites, most contractors did not
meet one or more of their performance levels, indicating that state and
local governments did not achieve all anticipated performance levels by
contracting for TANF services. 28 Figures 4, 5, and 6 indicate the overall
extent to which contractors met performance levels with respect to measures
for work participation, job placement, and job retention rates in each
location that had established these performance levels. 29 In contrast, at
the two local sites that either established performance measures for the
percentage of job placements that pay wages of at least a specified level
(Milwaukee and Palm Beach) or offered health benefits (Milwaukee), all
contractors met these measures.

Payments to contractors at the eight localities that established performance
levels are based either entirely or in part on whether contractors meet
their specified performance levels. The measures most often used in the
locations we visited mirror PRWORA?s emphasis on helping TANF recipients
obtain employment. The most common performance measures are work
participation, job placement, and job retention rates. Work participation
rates stipulate that contractors engage a specified percentage of TANF
recipients in work- related activities such as job search or community work
experience. Job placement rates specify that contractors place a specified
percentage of recipients in jobs and job retention rates specify that
contractors ensure that recipients retain employment (but not necessarily at
the same job) for a specified period, typically ranging from 30 to 180 days.
In addition, some localities have

28 Differences in the levels of performance achieved by contractors may
reflect variations in several factors, such as contractor capabilities and
resources, caseload characteristics, and coordination among service
providers. We did not identify any differences in the types of services that
nonprofit and for- profit providers had been contracted to provide in these
localities.

29 The numbers of nonprofit versus for- profit contractors at these sites
are as follows: Austin (0 and 1), Houston (5 and 1), Los Angeles County (0
and 2), New York City (8 and 3), Miami- Dade (16 and 3), Milwaukee County (4
and 1), Palm Beach (0 and 1), and San Diego County (1 and 2). Many TANF
Contractors at

Localities that We Reviewed Are Not Achieving Performance Levels Specified
in Contracts

Page 32 GAO- 02- 245 State and Local Welfare Contracting

established performance levels that require contractors to place TANF
recipients in certain types of jobs, such as jobs that pay wages of at least
a specified level or offer health benefits.

Page 33 GAO- 02- 245 State and Local Welfare Contracting

Figure 4: Percentages of Work Participation Performance Levels Met by
Contractors

Notes: Each of these localities established multiple work participation
measures. To calculate the extent to which contractors met performance
levels for the measures, we treated contractor performance for each measure
as a separate observation. For example, if a contractor met the performance
level for work participation by all families but not for two- parent
families, the contractor would have met 50 percent of the performance levels
for work participation. While this figure provides summary information on
whether or not contractors met established performance levels, it does not
indicate the degree to which they exceeded or failed to meet these
performance levels. a Not applicable.

Source: State and local government contract performance data.

Page 34 GAO- 02- 245 State and Local Welfare Contracting

Figure 5: Percentages of Contractors that met Performance Levels for Job
Placement Rates

Note: While this figure provides summary information on whether or not
contractors met established performance levels, it does not indicate the
degree to which they exceeded or failed to meet these performance levels. a
Not applicable.

Source: State and local government contract performance data.

Page 35 GAO- 02- 245 State and Local Welfare Contracting

Figure 6: Percentages of Job Retention Performance Levels met by Contractors

Notes: Milwaukee and San Diego Counties established multiple job retention
measures, such as for 30- day and 180- day retention. To calculate the
extent to which contractors met performance levels for the measures, we
treated contractor performance for each measure as a separate observation.
For example, if a contractor met the performance level for the 30- day but
not for the 180- day retention, the contractor would have met 50 percent of
the performance levels for job retention. While this figure provides summary
information on whether or not contractors met established performance
levels, it does not indicate the degree to which they exceeded or failed to
meet these performance levels.

Source: State and local government contract performance data.

The localities varied in the types of measures and levels of performance
they established. For example, the specified levels for job placements
ranged from 22 percent of program participants in Palm Beach to 50 percent
in Austin and Houston. Performance levels established for job retention also
varied by jurisdiction. For example, the specified performance levels for
contractors in Milwaukee County are that 75 percent of TANF recipients who
entered employment retain employment for 30 days and 50 percent retain
employment for 180 days. In comparison, contractors in San Diego County face
a 90- percent level for 30- day

Page 36 GAO- 02- 245 State and Local Welfare Contracting

employment retention and a 60- percent level for 180- day retention. 30
Appendix IV provides additional details on the performance levels
established by each locality.

In most cases, nonprofit and for- profit contractors had similar performance
levels. Across the locations we reviewed, there are eight instances in which
a local site had data on the comparable performance of nonprofit and for-
profit contractors. In five of these eight instances, the percentages of
nonprofit and for- profit contractors that met the measures were similar. In
each of the remaining three instances, for- profit contractors performed
substantially better overall. 31

In two locations we reviewed- Los Angeles County and San Diego County-
county governments also provided TANF services. Overall, the relative
performance levels of county- provided services and contracted services were
mixed. For example, in San Diego County, the county performed better than
one for- profit contractor and worse than another for- profit contractor in
meeting performance levels for certain job retention rates. In Los Angeles
County, one of two for- profit contractors performed better than the county
in placing TANF recipients in jobs while one of the two county providers
achieved higher placement rates than the other for- profit contractor.

At the remaining site, the District of Columbia, contracting officials were
unable to provide information on how well TANF contractors met expected
levels of performance. While the District has not established contractually
specified performance levels for TANF contractors, these contractors do have
performance- based contracts. 32 For example, contractors receive a
specified payment for each TANF recipient who becomes enrolled in work-
related activities, placed in a job, or who retains employment for a certain
period of time. However, District officials were unable to provide us with
an assessment of TANF contractors? performance in serving TANF recipients.

30 A San Diego County official told us that the county subsequently revised
its established performance levels for job retention and work participation
for TANF contractors when the contracts were renegotiated.

31 The three instances are work participation in Miami, job placement in
Houston, and job retention rates in New York City. 32 There are four
nonprofit and six for- profit TANF contractors in the District of Columbia.

Page 37 GAO- 02- 245 State and Local Welfare Contracting

The contracting out of TANF- funded services is an important area for
several reasons. First, the magnitude of TANF contracting is substantial,
involving at least $1.5 billion in federal and state funds in 2001, which
represents at a minimum 13 percent of the total amount states expended for
TANF programs (excluding expenditures for cash assistance). In 2001, about a
quarter of the states contracted out 20 percent or more of the amounts they
had expended for TANF programs in fiscal year 2000, ranging up to 74
percent. Second, PRWORA expanded the scope of services that could be
contracted out to nongovernmental entities, such as determining eligibility
for TANF. Third, some states are using new entities- local workforce boards-
that procure TANF services and are responsible for overseeing TANF
contractors.

Problems with the performance of TANF contractors have been identified in
some cases, but there is no clear pattern of a greater incidence of these
problems with nonprofit versus for- profit contractors. At two of the nine
localities we reviewed, auditors had disallowed certain costs by several
contractors, and arrangements had been made for the contractors to repay
unallowable costs. We found more widespread instances of contractors at the
local sites not meeting their contractually established performance levels
in areas such as work participation, job placement, and job retention rates.
Contracting agencies at the local sites had established financial incentives
for contractors by basing payments to contractors in whole or part on their
performance in such areas. While meeting the service needs of TANF
recipients can present many challenges for contractors, this has become even
more important now that these recipients face time limits on the receipt of
TANF.

Effective oversight is critical to help ensure contractor accountability for
the use of public funds, and our review identified problems in some cases
with state and local oversight of TANF contractors. At the national level,
our review of state single audit reports found internal control weaknesses
for over a quarter of the states that potentially affected the states?
ability to effectively monitor TANF contractors. The extent to which state
single audits have identified problems with subrecipient monitoring
involving TANF funds is generally equal to or greater than for several other
social service programs in which contracting occurs with nongovernmental
organizations. Moreover, in four of the six states we visited, independent
audits have identified deficiencies in state or local oversight of TANF
contractors. However, HHS officials told us that they do not know the extent
and nature of problems pertaining to the oversight of TANF contractors that
state single audit reports have cited because HHS does not analyze these
reports in such a comprehensive manner. This is due, in Conclusions

Page 38 GAO- 02- 245 State and Local Welfare Contracting

part, to HHS?s focus on those problems identified by single audit reports
that involve unallowable or questionable costs. While such problems
certainly warrant high priority, the result is that there is not adequate
assurance that identified deficiencies pertaining to the monitoring of TANF
contractors are being corrected in a strategic manner. Greater use of single
audits as a program management tool by HHS would provide greater assurance
that TANF contractors are being held accountable for the use of public
funds. For example, HHS could use state audit reports more systematically in
ways such as obtaining additional information about the extent to which
nongovernmental TANF contractors are involved in the subrecipient monitoring
deficiencies cited in these reports, identifying the most commonly reported
types of deficiencies, and tracking how often the same deficiencies are
cited recurrently for individual states.

To facilitate improved oversight of TANF contractors by all levels of
government, we recommend that the Secretary of HHS direct the Assistant
Secretary for Children and Families to use state single audit reports in a
more systematic manner to identify the extent and nature of problems related
to state oversight of nongovernmental TANF contractors and determine what
additional actions may be appropriate to help prevent and correct such
problems.

As agreed with your offices, unless you publicly release its contents
earlier, we plan no further distribution of this report until 30 days from
its issue date. Once we receive comments from HHS, the comments and our
response will be incorporated in the final report. Recommendation for

Executive Action

Page 39 GAO- 02- 245 State and Local Welfare Contracting

Please contact me on (202) 512- 7215 if you have any questions about this
report. Other GAO contacts and staff acknowledgments are listed in appendix
V.

Sigurd R. Nilsen Director, Education, Workforce, and

Income Security Issues

Appendix I: Scope and Methodology Page 40 GAO- 02- 245 State and Local
Welfare Contracting

To identify the extent and nature of Temporary Assistance for Needy Families
(TANF) contracting, we conducted a national survey of all 50 states, the
District of Columbia, and the10 counties with the largest federal TANF-
funding allocations in each of the13 states that administer their TANF
programs locally. Contracting for TANF- funded services occurs at different
levels of government- the state, the local, or both- and data on TANF-
funded contracts are maintained at various levels of government. We
developed three survey instruments to accommodate these differences. The
first survey instrument, which requested state data only, was sent to the 13
states that contract at both levels of government or locally only, but
maintain data separately. For these 13 states, a second survey instrument,
which requested data on contracts entered into at the local level, was sent
to 10 counties that receive the largest TANF allocations in each of these 13
states to determine how much contracting takes place in their larger
counties. The third survey instrument, which requested data on state- level
and local- level contracts, was sent to the remaining 37 states and the
District of Columbia (see app. II for this survey instrument). All three
survey instruments were pretested with appropriate respondents in six
states. In addition to obtaining data through our national survey, we also
obtained data from HHS on federal TANF and state maintenance- of- effort
funds for fiscal year 2000. We did not independently verify these data.

The response rate for the survey instrument sent to the counties in the 13
states was 78 percent. 1 The response rate for the remaining survey
instruments sent to state governments was 100 percent. Since our survey did
not cover all counties in the 13 states that contract for TANF services
locally, the total number of TANF- funded contracts and their dollar value
may be understated. In addition, eight states that maintain data on
locallevel contracting did not provide us with these data. We subsequently
contacted survey respondents who had indicated that the determination of
eligibility had been contracted out to confirm that this was for the TANF
program and determine whether contractors determined eligibility for cash
assistance or other TANF- funded services.

To obtain information on approaches used by the federal government to
oversee TANF contracting, we met with officials in HHS?s Administration for
Children and Families in Washington, D. C., and conducted telephone

1 This group consisted of counties in Arkansas, California, Colorado,
Florida, Georgia, Maryland, Massachusetts, Minnesota, New York, North
Carolina, Ohio, Texas, and Virginia. Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 41 GAO- 02- 245 State and Local
Welfare Contracting

interviews with staff in HHS regional offices in Atlanta, Chicago, Dallas,
New York, Philadelphia, and San Francisco. We also interviewed the director
of HHS?s National External Audit Review Center to learn how the agency uses
single audit reports to oversee procurement processes and contractor
monitoring. In addition, we analyzed the single audit database and reviewed
state single audit reports.

To obtain information on approaches used by state and local governments to
ensure compliance with bid solicitation and contract award requirements and
to oversee contractor performance, we conducted site visits to California,
the District of Columbia, Florida, New York, Texas, and Wisconsin. We met
with state TANF officials in these states. In addition, we met with
procurement officers, contract managers, auditors, and private contractors
in the following nine locations: Austin and Houston, Texas; the District of
Columbia; Los Angeles County and San Diego County, California; Miami- Dade
and Palm Beach, Florida; Milwaukee, Wisconsin; and New York City, New York.
We elected to visit these localities because they all serve a large portion
of the TANF population and have at least one large contractor providing
TANF- funded services. To obtain additional perspectives on TANF
contracting, we interviewed representatives from government associations
(American Public Human Services Association, Council of State Governments,
National Conference of State Legislatures, and the National Association of
Counties) and unions (American Federation of State, County, and Municipal
Employees at the national office and in Milwaukee County, Wisconsin). We
also reviewed various audit reports for the state governments, local
governments, and nonprofit contractors that we interviewed in the nine
locations to determine whether auditors found instances of noncompliance
with bid solicitation and contract award requirements or contract
monitoring. In addition, we selected 7 TANFfunded contracts with nonprofit
organizations and 10 TANF- funded contracts with for- profit organizations
to obtain information on their contract structure, services provided, and
other relevant information.

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Page 42 GAO- 02- 245 State and Local Welfare Contracting

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Page 43 GAO- 02- 245 State and Local Welfare Contracting

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Page 44 GAO- 02- 245 State and Local Welfare Contracting

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Page 45 GAO- 02- 245 State and Local Welfare Contracting

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Page 46 GAO- 02- 245 State and Local Welfare Contracting

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Page 47 GAO- 02- 245 State and Local Welfare Contracting

Appendix II: National Survey on TANFFunded State and Local Government
Contracting

Page 48 GAO- 02- 245 State and Local Welfare Contracting

Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000

Page 49 GAO- 02- 245 State and Local Welfare Contracting

State 1999 2000

Alaska a The state lacked procedures to ensure that subrecipient nonprofit
organizations used TANF funds only for allowable purposes as required by
TANF regulations. The state failed to inform nonprofit subrecipients of the
source and amount of TANF funds they received. As a result, the state cannot
provide assurance that nonprofit organizations are complying with federal
requirements, including TANF requirements for allowable activities,
allowable costs, and suspension and debarment of contractors. Arizona In
some cases, the state did not provide

subrecipients with information about the sources of federal funds they
received. The lack of proper notification to subrecipients of federal award
information increases the risk of the improper use and administration of
federal funds.

a Colorado a The state has not ensured that significant deficiencies related

to electronic benefit transfer cards are corrected on a timely basis. The
state did not issue monitoring reports to counties within a consistent
timeframe. Florida In some cases, the state did not notify subrecipients

that the funding they received originated from TANF. The lack of proper
notification to subrecipients of federal award information increases the
risk of the improper use and administration of federal funds, including
limited assurance that proper audits are conducted of those funds. The
single audit report references a state inspector general report that
identified inadequate state oversight of local workforce coalitions that
administer TANF funds and inadequate procurement and cash management
practices by the local coalitions.

The 1999 finding on not notifying subrecipients of the federal funding
sources from which they received funds was subsequently reported in 2000,
including the associated risks reported in the prior year.

Illinois a The state did not provide information to some subrecipients on
the sources of federal funds it distributed to them. The state did not
provide this information because it initially considered the service
providers to be vendors rather than subrecipients, and as such, the state
did not believe it was necessary to notify the service providers of the
federal award information. Failure to inform subrecipients of the federal
award information could result in subrecipients improperly reporting
expenditures of federal awards, expending federal funds for unallowable
purposes, or not receiving a single audit in accordance with federal
requirements. Kentucky The state contracts with the Kentucky

Transportation Cabinet, which subcontracts with 16 different regions to
provide transportation services to TANF recipients. However, the state
failed to monitor these subrecipients due to understaffing. As

The state did not ensure that all nongovernmental contractors submitted
their required audit reports or requested an extension. As a result, the
state cannot be assured that subrecipients expended federal awards for their
intended purpose and complied with federal requirements.

Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000

Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000

Page 50 GAO- 02- 245 State and Local Welfare Contracting

State 1999 2000

a result, the state cannot be assured that subrecipients spent grant monies
for their intended purpose and complied with federal requirements. Louisiana
The state continues to lack an adequate monitoring

system to ensure that federal subrecipients and social services contractors
are audited in accordance with federal, state, and department regulations.

For the seventh consecutive year, the state does not have an adequate
monitoring system to ensure that federal subrecipients and social services
contractors are audited in accordance with federal, state, and department
regulations. In addition, the audit identified $267,749 in questionable
costs for TANF. For 35 percent of the contracts audited, the contract did
not include required federal award information and information on applicable
compliance requirements. The state cannot determine if all required audit
reports are received and lacks review procedures to ensure that the
information entered into the audit tracking system is accurate and complete.
State policy and procedures relating to audit follow- up for subrecipient
audits need to be revised to include current official policies. The state is
not able to ensure the completeness or accuracy of its system for tracking
the total amount of funds provided to subrecipients. Michigan b The state?s
internal control mechanisms did not provide for the

proper identification, monitoring, and reporting of payments to all
subrecipients. The state?s contract management database excludes several
entities that received payments of federal funds. As a result, the state
could not be assured that all entities receiving funds were identified as
subrecipients, when appropriate, and monitored. In addition, self-
certification of entities as subrecipients or vendors increases the risk
that the state is not properly identifying and monitoring subrecipients. b
Minnesota a While OMB Circular A- 133 requires states to monitor

subrecipients to ensure compliance with laws, regulations, and provisions of
contracts, the state agency did not have policies and procedures in place to
monitor the activities of subrecipients. Mississippi a The state did not
verify the amount of federal financial

assistance expended by subrecipients, which should be done to determine
which subrecipients require an audit. The state had not implemented an
effective procedure for documenting the fiscal year- end for each new
subrecipient. 2 of 15 subrecipients tested did not submit their 1998 audit
reports in a timely manner, and the state did not perform follow up
procedures in a timely manner. For 5 of 15 subrecipients tested, the state?s
review of the audit reports was performed 6 months or more after the state
received the reports. Without adequate control over the submission of audit
reports and prompt follow- up of audit findings, noncompliance with federal
regulations by subrecipients could occur and not be detected.

Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000

Page 51 GAO- 02- 245 State and Local Welfare Contracting

State 1999 2000

Missouri Local offices of the state agency reported that they could not
locate over 6 percent of the case files requested for detailed review.
Without case files, adequate documentation is not available to verify the
eligibility of clients and the appropriateness of benefits paid.

a New Jersey The state did not properly monitor the federal funds

expended by the Essex County Welfare Board for the Public Assistance
Program. While an independent auditor issued a single audit report for Essex
County, the audit excluded the Public Assistance Program because of the lack
of internal controls related to some components of the program. Payments to
public assistance recipients are made through an electronic benefit transfer
(EBT) system administered by a contractor, but EBT account activity has not
been reconciled to the state?s automated system for the public assistance
program.

The state did not maintain sufficient documentation to adequately monitor
advance payments to, and expenditures of, contractors providing child care
services.

New York Eleven of the 58 local districts did not submit their single audit
reports within the required 13- month period.

Eleven of the 58 local districts did not submit their single audit reports
within the required 13- month period. The state does not perform an adequate
desk review of local districts? single audit reports to ensure that
submitted reports were performed in accordance with federal requirements.
North Carolina The state?s procedures for reviewing subrecipient

audit reports were inadequate. Errors and omissions in reports on
subrecipient expenditures went undetected. The state did not conduct
expenditure reviews to ensure that amounts disclosed in subrecipient audit
reports agreed with expenditure records maintained by the state. As reported
in the prior audit, the state did not perform sufficient monitoring
procedures to provide reasonable assurance that subrecipients administered
federal awards in compliance with federal requirements. The reported problem
remains unresolved, as the state did not provide reasonable assurance that
services and assistance were provided to eligible families.

The state did not always perform or document a review of the counties?
eligibility determination process to provide reasonable assurance that
services and assistance were provided to eligible families. The state did
not always monitor to ensure that sanctions were imposed on TANF recipients
who did not cooperate with the child support enforcement office. The state
did not perform monitoring procedures to provide reasonable assurance that
the counties used Social Services Block Grant funds for only eligible
individuals and allowable service activities.

Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000

Page 52 GAO- 02- 245 State and Local Welfare Contracting

State 1999 2000

Texas The state?s fiscal and program monitoring of local workforce boards
does not provide reasonable assurance that TANF funds are being spent
appropriately. Current fiscal monitoring procedures are inconsistent and
lack program- specific attributes. For example, state fiscal monitors
generally do not compare a local workforce board?s funding allocation for
specific programs to its subcontractor?s budget to ensure that the board is
passing on the funds as required. Federal and state compliance is not
ensured by the limited scope of reviews. The state conducted limited program
monitoring of only 4 of 18 boards that had TANF contracts in place.

c a No problems were cited. b Michigan prepares biennial single audit
reports, and the report prepared for 2000 covers the period October 1998
through September 2000. c While the 2000 state single audit did not report
monitoring problems, another state audit issued in March 2001 reported that
local workforce boards still needed to make significant improvements in
their contract monitoring. The audit reported that improvements are needed
to ensure proper accounting for program funds, management of contracts with
service providers, and achievement of data integrity.

Source: Single audit reports.

Appendix IV: Specified Performance Levels Established for TANF Contractors
at the Local Sites GAO Reviewed

Page 53 GAO- 02- 245 State and Local Welfare Contracting

Sites visited Work participation Job placement Job retention

Austin, Texas Participation in work activities by 45 percent of all families
90 percent of two- parent families

50 percent of program participants placed in jobs

a Houston, Texas a 50 percent of program

participants placed in jobs a

Los Angeles County, California

a At least 3 percent higher than the TANF job placement rate achieved by
county employees b

a Milwaukee County, Wisconsin

a 35 percent of program participants placed in jobs c Employment retained
for

30 days: 75 percent of program participants who entered employment 180 days:
50 percent of program participants who entered employment c

Palm Beach, Florida

a 22 percent of program participants placed in jobs

a New York City, New York

a Equal to or higher than the average job placement rate achieved by all
TANF contractors in the city

Equal to or higher than the average job retention rate achieved by all TANF
contractors in the city

San Diego County, California Participation in work activities by

75 percent of one- parent cases 90 percent of two- parent cases

a Employment retained for 30 days: 90 percent of program participants who
entered employment 90 days: 70 percent of program participants who entered
employment 180 days: 60 percent of program participants who entered
employment Miami- Dade, Florida Participation in work activities by

45 percent of all families No more than 5 percent of the caseload in no
recorded work activity No more than 1 percent of the caseload in no recorded
work activity for more than 30 days

a a a Not applicable. b Contractors in Los Angeles County can earn a bonus
if their placement rates and the average monthly entry wage of TANF
participants exceed the county?s performance by at least 3 percent.
Conversely, contractors can be penalized if their rates fall short of the
county?s performance by at least 3 percent.

c Contractors in Milwaukee County must achieve these performance levels to
be reimbursed for their costs of providing services. Contractors can earn
financial bonuses for meeting higher specified performance levels: for
example, 40 percent job placement for the first bonus level and 45 percent
for the second bonus level. With regard to the 30- day job retention, 80
percent of program participants must retain employment for 30 days for
contractors to earn the first bonus level and 85 percent for the second. To
earn bonuses for the 180- day job retention, 55 percent of program
participants must retain employment for 180 days for contractors to receive
the first bonus level and 60 percent to receive the second.

Appendix IV: Specified Performance Levels Established for TANF Contractors
at the Local Sites GAO Reviewed

Page 54 GAO- 02- 245 State and Local Welfare Contracting

Andrew Sherrill, (202) 512- 7252, sherrilla@ gao. gov Mark E. Ward, (202)
512- 7274, wardm@ gao. gov

The following individuals made important contributions to this report:
Barabara Alsip, Elizabeth Caplick, Mary Ellen Chervenic, Joel Grossman, Adam
M. Roye, Susan Pachikara, Daniel Schwimer, and Suzanne Sterling. Appendix V:
GAO Contacts and Staff

Acknowledgments GAO Contacts Staff Acknowledgments

Page 55 GAO- 02- 245 State and Local Welfare Contracting

Welfare Reform: More Coordinated Federal Effort Could Help States and
Localities Move TANF Recipients With Impairments Toward Employment. GAO- 02-
37. Washington, D. C.: 2001.

Workforce Investment Act: Better Guidance Needed to Address Concerns Over
New Requirements. GAO- 02- 72. Washington, D. C.: 2001.

Welfare Reform: Moving Hard- to- Employ Recipients Into the Workforce.

GAO/ HEHS- 01- 368. Washington, D. C.: 2001.

Welfare Reform: Progress in Meeting Work- Focused TANF Goals. GAO01- 522T.
Washington, D. C.: 2001.

Welfare Reform: Improving State Automated Systems Requires Coordinated
Federal Effort. GAO/ HEHS- 00- 48. Washington, D. C.: 2000.

Social Service Privatization: Ethics and Accountability Challenges in State
Contracting. GAO/ HEHS- 99- 41. Washington, D. C.: 1999.

Social Service Privatization: Expansion Poses Challenges in Ensuring
Accountability for Program Results. GAO/ HEHS- 98- 6. Washington, D. C.:
1997.

Managing for Results: Analytic Challenges in Measuring Performance.

GAO/ HEHS/ GGD- 97- 138. Washington, D. C.: 1997.

Privatization: Lessons Learned by State and Local Governments.

GAO/ GGD- 97- 48. Washington, D. C.: 1997.

Child Support Enforcement: Early Results on Comparability of Privatized and
Public Offices. GAO/ HEHS- 97- 4. Washington, D. C.: 1996. Related GAO
Products

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