TANF And Child Care Programs: HHS Lacks Adequate Information to Assess Risk and Assist States in Managing Improper Payments

TANF And Child Care Programs: HHS Lacks Adequate Information to
Assess Risk and Assist States in Managing Improper Payments
(18-JUN-04, GAO-04-723).

Minimizing improper payments is important given the dollar
magnitude of the Temporary Assistance for Needy Families (TANF)
and Child Care and Development Fund (CCDF) programs--about $34
billion in federal and state funds expended annually. These block
grants support millions of low-income families with cash
assistance, child care, and other services aimed at reducing
their dependence on the government. At the federal level, the
Department of Health and Human Services (HHS) oversees TANF and
CCDF. Within states, many public and private entities administer
these programs and share responsibility for financial integrity.
GAO looked at (1) what selected states have done to manage
improper payments in TANF and CCDF and (2) what HHS has done to
assess risk and assist states in managing improper payments in
these programs. To address these questions, GAO judgmentally
selected states that varied in geographic location and program
size. GAO used a survey to collect consistent information from 11
states and visited 5 states.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-723
ACCNO: A10537
TITLE: TANF And Child Care Programs: HHS Lacks Adequate
Information to Assess Risk and Assist States in Managing Improper
Payments
DATE: 06/18/2004
SUBJECT: Block grants
Child care programs
Disadvantaged persons
Erroneous payments
Federal grants
Grant administration
Grant monitoring
Program management
Risk management
State-administered programs
Welfare benefits
Welfare recipients
Workfare
Family support programs
HHS Child Care and Development Fund
HHS Temporary Assistance for Needy
Families Program

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GAO-04-723

United States General Accounting Office

GAO Report to Congressional Requesters

June 2004

TANF AND CHILD
CARE PROGRAMS

HHS Lacks Adequate Information to Assess Risk and Assist States in Managing
Improper Payments

GAO-04-723

Highlights of GAO-04-723, a report to the Chairman, Committee on Finance,
U.S Senate, and Chairman, Subcommittee on Human Resources, Committee on
Ways and Means, House of Representatives

GAO recommends that HHS do more to gather information on state internal
control systems and to partner with states to address improper payments.
In response, HHS said that its current plans are adequate, given the
legislative restrictions on its ability to regulate state TANF programs.

June 2004

TANF AND CHILD CARE PROGRAMS

HHS Lacks Adequate Information to Assess Risk and Assist States in Managing
Improper Payments

The 16 states in GAO's review reported using various strategies and tools
to manage improper payments, but their efforts were uneven. Almost all the
states in the review reported that they performed some activities to
assess whether their programs were at risk of improper payments. These
activities, however, did not always cover all payments that could be at
risk, focusing, for instance, on cash welfare payments but not on payments
for services, which were more than half of all TANF payments in certain
states. As a result, the assessments do not provide a comprehensive
picture of the level of risk in these state programs, which would be
useful to HHS as it takes steps to address requirements under the Improper
Payments Act. States also reported using a variety of prevention and
detection tools to protect against improper payments, but states reported
fewer tools in place for CCDF than for TANF, particularly in the area of
data sharing to verify eligibility. Although the states in GAO's review
recognized the importance of addressing improper payments, they cited
competing demands for staff attention and resource limitations that
constrained their efforts. While addressing improper payments does involve
costs, comprehensively assessing risks can help focus prevention and
detection efforts on areas at greatest risk.

HHS reported using information from its monitoring activities, including
single audits and state financial expenditure reporting to determine if
the TANF and CCDF programs are at risk of improper payments. We found
however, that these activities do not capture information about the
various strategies and tools that states have in place for managing
improper payments, such as those we observed in our review. In the absence
of such information, HHS cannot determine if the TANF and CCDF programs
are susceptible to significant improper payments, as required under the
Improper Payments Act. HHS officials acknowledged that they needed more
information to be in a position to carry out their responsibilities under
the act and therefore recently initiated several projects to gain a better
understanding of state control activities. However, HHS's projects do not
provide mechanisms to gather information on a recurring basis. The absence
of such mechanisms hinders HHS's ability to adequately assess the risk of
improper payments and assist states in managing improper payments in these
multibillion dollar programs on an ongoing basis. Given the statutory
framework of the TANF program, GAO recognizes that HHS may determine that
it needs legislative action to direct states to provide the information it
needs to take this approach.

www.gao.gov/cgi-bin/getrpt?GAO-04-723.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact Linda Calbom at (202)
512-9508 or [email protected].

Contents

Letter

Results in Brief
Background
States' Efforts To Manage Improper Payments Are Uneven
HHS Has Limited Information on the Risk of Improper Payments,

but Has Efforts Under Way to Improve Monitoring Activities and

Assistance to States Conclusions Recommendations for Executive Action
Agency Comments and Our Evaluation

1 4 6 17

36 46 47 47

Appendixes

Appendix I:

Appendix II: Appendix III: Appendix IV:

Objectives, Scope, and Methodology

Information on Selected States
Survey of State TANF Directors and Child Care Administrators
State Site Visits
Review of Federal Role

Comparison of Data-Sharing Sources in TANF and CCDF Programs Among
Surveyed States

Comments from the Administration for Children and Families

GAO Contacts and Staff Acknowledgments

GAO Contacts
Staff Acknowledgments

50 50 54 56 56

63 63 63

Related GAO Products

Tables Table 1: Table 2: Table 3: Table 4:

Examples of Risk Assessment Activities from States
Surveyed and Visited 19
Types of TANF Payments Covered by States' Assessment
of Risks as Reported by Surveyed States 20
Extent to Which Surveyed States Reported Estimating an
Amount of Improper Payments and the Methods Used 21
Factors ThatHave Contributed to ImproperPaymentsover
the Past 2 Fiscal Years for the TANF Program as Identified
by Surveyed States 25

Contents

Table 5: Factors That Have Contributed to Improper Payments over the Past
2 Fiscal Years for the Child Care Subsidy Program as Identified by
Surveyed States 26

Table 6: Strategies Used to Prevent and Detect Improper Payments as
Identified by the Surveyed States 28 Table 7: Activities Reported by
Surveyed States to Prevent and Detect Improper Payments 29

Table 8: Most Frequently Cited Factors That Make It Difficult to Address
Improper Payments as Reported by Surveyed States 34

Table 9: TANF Expenditures by State and as a Percentage of the U.S. Total,
Fiscal Year 2002 51

Table 10: Families Receiving TANF Monthly Cash Assistance and Percentage
of Expenditures Spent on Cash Assistance for Fiscal Year 2002 and the
Amount of Cash Assistance Benefits in January 2003 (in the 16 States) 52

Table 11: CCDF Expenditures by State and as a Percentage of the U.S.
Total, from Fiscal Year 2002 Appropriation as Expended Through September
30, 2002 53

Table 12: Number of Providers Receiving CCDF Subsidies for Selected States
and Extent of Use of Providers Operating Legally without Regulation,
Fiscal Year 2001 54

Figures Figure 1:

Figure 2:

Figure 3: Figure 4: Figure 5:

Figure 6: Figure 7:

Expenditures of TANF Funds in Fiscal Years 1997 and
2002 (in percentages) 9
Broad Array of Services and Providers Involved in TANF
Payment Processes 10
Child Care Payment Process 12
ACF's Organizational Structure 13
Extent to Which Improper Payments Are a Problem,
Based on Surveyed States' Reported Assessment or
Analysis of Risk 24
Reported Extent of Assistance from HHS on Improper
Payments from Surveyed States 43
Types of Assistance Surveyed States Said They Would
Like from HHS 45

Contents

Abbreviations

ACF Administration for Children and Families
AFDC Aid to Families With Dependent Children
APHSA American Public Human Services Association
CCDF Child Care and Development Fund
DCI Data Collection Instrument
HHS U.S. Department of Health and Human Services
IEVS Income and Eligibility Verification System
NCCIC National Child Care Information Center
NCSHS National Council of Human Services Administrators
OFA Office of Family Assistance
PARIS Public Assistance Reporting Information System
PRWORA Personal Responsibility and Work Opportunity Reconciliation

Act of 1996 SSI Supplemental Security Insurance Benefits SSN Social
Security Number TANF Temporary Assistance for Needy Families UCOWF United
Council on Welfare Fraud

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United States General Accounting Office Washington, D.C. 20548

June 18, 2004

The Honorable Charles Grassley
Chairman
Committee on Finance
United States Senate

The Honorable Wally Herger
Chairman
Subcommittee on Human Resources
Committee on Ways and Means
House of Representatives

Both the federal government and states have a strong financial interest in
minimizing improper payments in the Temporary Assistance for Needy
Families (TANF) and Child Care and Development Fund (CCDF) programs.
Through these two block grant programs, states receive a fixed amount of
federal funds each year to design and operate their own programs for
assisting families with children. For fiscal year 2002, federal and state
TANF and CCDF expenditures totaled about $34 billion, most of it federal
funds. States use these funds to design and implement their own
programs-within federal guidelines-to support millions of
predominantly low income families with cash assistance, employment,
child care, and other services aimed at reducing their dependence on the
government and promoting employment. At the federal level, the
Department of Health and Human Services (HHS) oversees states' TANF
and CCDF programs. Within states, numerous public and private sector
entities help administer these programs and share responsibility for
protecting the financial integrity of TANF and CCDF programs.

Improper payments in TANF and CCDF can include those made to
individuals who are not eligible, as well as payments made to providers
for
services that are not covered by program rules or services that were
billed
and paid for but never actually provided. Improper payments can also
result from inadvertent errors-due in part to clerical errors or a
misunderstanding of program rules-as well as from fraud-an intentional
act to deceive for gain.

Because improper payments in government programs are a long-standing,
widespread, and significant problem, Congress enacted the Improper
Payments Information Act of 2002 (the Improper Payments Act).1 The act
requires federal managers to review all agency programs and activities;
identify those that may be susceptible to significant improper payments;
and take actions to mitigate the risks identified, including actions to
estimate the amount of improper payments. Like other federal agencies, HHS
must comply with the Improper Payments Act for all of its programs
including TANF and CCDF.

Assessing the risks of improper payments in TANF and CCDF is particularly
important given changes initiated by the Personal Responsibility and Work
Opportunity Reconciliation Act of 1996 (PRWORA).2 This statute led to
states broadening the range and number of services and service providers
involved in program administration, heightening the importance of
understanding what steps the states and the federal government have taken
to address improper payments in these programs. In light of the financial
resources at stake and the importance of TANF and CCDF programs to
millions of American families, you asked us to determine (1) what selected
states have done to manage improper payments in the TANF and CCDF programs
and (2) what HHS has done to assess risk and assist states in managing
improper payments in these programs.

To guide our work, we used the Standards for Internal Control in the
Federal Government and The Executive Guide on Strategies to Manage
Improper Payments: Learning from Public and Private Sector Organizations
as a basis to obtain information about each state's internal control
structure-control environment, risk assessment procedures, control
activities, information and communications, and monitoring efforts for the
TANF and CCDF programs.3

1Pub. L. No. 107-300, 116 Stat. 2350 (Nov. 26, 2002).

2Pub. L. No. 104-193, 110 Stat. 2105 (Aug. 21, 1996).

3Internal controls are an integral component of an organization's
management that provides reasonable assurance that the organization
achieves its objectives of (1) effective and efficient operations, (2)
reliable financial reporting, and (3) compliance with laws and
regulations. For more information on internal controls see U.S. General
Accounting Office, Strategies to Manage Improper Payments, GAO-02-69G
(Washington, D.C.: October 2001), and Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).

To determine what selected states have done to manage improper payments in
these programs, we visited 5 states and surveyed 11 other states.4 We
chose these states on the basis of geographic location, level of program
expenditures, and type of program administration. These states' TANF and
CCDF expenditures totaled almost 60 percent of annual national
expenditures for these two programs.5 In our five site visits, we gathered
information on steps taken to identify and address improper payments,
including interviewing TANF and CCDF program officials, fraud officials,
and state auditors and reviewing audit reports and other relevant studies.
In addition, we observed and spoke with program officials in local TANF
and CCDF offices. We surveyed the other 11 states to obtain similar
information from TANF and CCDF program officials. In addition, we spoke
with representatives of national professional associations to discuss
state program integrity issues and their views on efforts to measure
improper payments.

To determine what HHS has done to assess risk and assist states in
managing improper payments in the TANF and CCDF programs, we identified
and reviewed guidance and policies that described HHS's oversight
activities; observed key oversight activities at an HHS regional office;
reviewed documents, plans, and strategies for identifying improper
payments; and interviewed HHS finance and program officials. We also
reviewed results of audits conducted under Office of Management and Budget
(OMB) Circular No. A-133 and the Single Audit Act.6 For additional details
of our scope and methodology, see appendix I. We provided a draft of this
report to HHS and to the American Public Human Services Association
(APHSA), the professional organization of state welfare officials; HHS's
comments are included in an appendix and technical comments from HHS and
APHSA were incorporated as appropriate. Our

4We visited Georgia, Illinois, Texas, Virginia, and Washington and sent
surveys to California, Colorado, Florida, Idaho, Kansas, Maryland,
Michigan, New Mexico, New York, Ohio, and Pennsylvania.

5 The 16 states represented 69 percent of TANF expenditures and about 57
percent of CCDF expenditures nationwide for fiscal year 2002, the most
recent year for which data were available. Due to state reporting time
frames and time required for HHS's review of statereported data, fiscal
year 2003 data are not yet available.

6 31 U.S.C. S:S: 7501-7507. Under the act and implementing guidance,
independent auditors audit federal awards to state and local governments
and nonprofit organizations to assess compliance with federal financial
requirements, including those for TANF and CCDF. Organizations are
required to have single audits if they expend at least $300,000 in federal
funds for fiscal years before December 31, 2003 and $500,000 for years
after.

work was conducted from April 2003 through May 2004 in accordance with
generally accepted government auditing standards.

Results in Brief The states in our review reported having various
strategies and tools in place for managing improper payments although
these efforts were uneven. With the flexibility provided under TANF and
CCDF, states generally retain responsibility for determining the types and
extent of internal controls to put in place, with few federal regulations
and limited guidance in this area. Of the 16 states, almost all reported
that they have performed some activities to assess the extent to which
their programs were at risk of improper payments, including reviewing
samples of cases, conducting fraud investigations, and measuring the
amount of improper payments in their programs. These assessment
activities, however, often did not cover all payments that could be at
risk. For example, some state TANF programs' risk assessments focused on
cash welfare payments but did not cover other TANF payments for services,
even though such payments accounted for more than half of all TANF
payments. As a result, while these assessments provide useful information,
they do not provide a comprehensive picture of the level of risks in these
states' programs, which would be useful to HHS as it takes steps to
address requirements under the Improper Payments Act. The 16 states also
reported using a variety of prevention and detection tools to protect
against improper payments, although states reported fewer tools in place
for CCDF than for TANF, particularly in the area of data sharing to verify
eligibility. While the states we reviewed recognized the importance of
addressing improper payments, they cited competing demands for attention
and resource limitations that constrained their efforts. Although
addressing improper payments does involve costs, comprehensively assessing
risks can help focus prevention and detection efforts on areas at greatest
risk. This in turn can help to minimize improper payments and maximize
resources that can be directed to families in need of program services.
The unevenness of the risk assessments and other control activities in
place may mean there are missed opportunities for states to better prevent
and detect improper payments.

HHS reported having monitoring activities in place, such as single audits
and state financial expenditure reporting, that they rely on to determine
if the TANF and CCDF programs are at risk of improper payments. However,
we found that these monitoring activities do not capture information about
the various strategies and tools that states have in place for managing
improper payments, such as those we observed in our review. Under the

Improper Payments Act, HHS is required to determine if the TANF and CCDF
programs are susceptible to significant improper payments and annually
report to Congress on its determination. To do so, HHS needs information
on states' internal control systems to determine the extent to which they
are sufficient to protect these programs from significant improper
payments. HHS has attempted to assess the risk of improper payments in
these programs using information from its monitoring activities, but
because this information is limited, the true risk of improper payments in
these programs has yet to be determined. Recognizing these limitations,
HHS recently initiated several projects to gain a better understanding of
state control activities. HHS has also initiated several projects to
provide additional assistance to states in managing improper payments.
Many states we surveyed reported not having received assistance from HHS
specifically related to managing improper payments and several reported
that they would like assistance in identifying effective practices in this
area. The projects that HHS has initiated should help develop a baseline
of information on the various controls that states have in place for
managing improper payments and thus improve HHS's ability to determine if
the TANF and CCDF programs are susceptible to significant improper
payments. However, HHS's projects do not provide mechanisms to gather
information from states on a recurring basis. The absence of such
mechanisms hinders HHS's ability to adequately assess the risk of improper
payments and assist states in managing improper payments in these
multibillion dollar programs on an ongoing basis.

To address these issues, this report makes recommendations to HHS to
develop mechanisms for gathering more information on state internal
control systems and to partner with states to address improper payments.
Given the statutory framework of the TANF program, we recognize that HHS
may determine it needs legislative action to direct states to provide the
information it needs to implement these recommendations. In commenting on
a draft of our report, HHS provided clarification and expanded views on
several issues. In particular, HHS commented that its current plan for
acquiring additional information and assessing risk is adequate in the
statutory context of the TANF program. While its efforts to gather
information are important, they must be expanded if they are to provide
the detail HHS needs on a recurring basis to ensure it has the relevant
information to assess risk. HHS also commented that we had not addressed
its recent initiatives with the states. We disagree. Our draft clearly
depicts the initiatives planned and underway as described to us by HHS
officials and in documents we reviewed during our fieldwork. HHS

also provided us with technical comments, which we have incorporated as
appropriate.

Background The TANF and CCDF programs are two of the nation's key federal
programs for assisting needy families with children and are an important
component of states' social services networks. These two programs each
consist of more than 50 distinct state-level programs-one for each state,
the District of Columbia, four territories, and numerous tribal entities.
Annually, the federal government makes available to each state a portion
of the (1) $16.5 billion TANF block grant that was established by PRWORA
and (2) $4.8 billion from CCDF for child care subsidies and other related
activities. Within HHS, the Administration for Children and Families (ACF)
oversees states' TANF and CCDF programs.

Changes under PRWORA- TANF

Congress created TANF in 1996 to replace the decades-old Aid to Families
With Dependent Children (AFDC) program that entitled eligible needy
families to monthly cash assistance payments. PRWORA made sweeping changes
to federal welfare policy, including ending individuals' entitlement to
aid, imposing time limits on the receipt of aid, and imposing work
requirements on most adults receiving aid. This federal framework gives
states the flexibility to design their own programs; define who will be
eligible; establish what benefits and services will be available; and
develop their own strategies for achieving program goals, including how to
help recipients move into the workforce.

PRWORA provides states substantial authority to use TANF funds in any way
that is reasonably calculated to meet the goals of the program. As
specified by 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. These broad goals represent a
significantly broader scope than AFDC. PRWORA also 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.

In addition to these programmatic changes, PRWORA dramatically changed the
fiscal structure of the program and shifted significant fiscal
responsibility for the program to states.7 Each year, the federal
government makes a fixed amount of TANF funds available to each state, and
a state may reserve some of these funds for use in the future. This
represents a significant departure from past policy, under which the
amount of federal funds received was linked to the size of each state's
welfare caseload. To receive their federal TANF funds, states must spend a
specified amount of their own funds each year, referred to as state
maintenance of effort.

Along with granting states significant flexibility, PRWORA redefined HHS's
role in administration of the nation's welfare system, limiting its
regulatory and enforcement authority and reducing its staff level for
administering TANF. Specifically, the law states: "No officer or employee
of the Federal Government may regulate the conduct of States under this
part or enforce any provision of this part, except to the extent expressly
provided in this part."8 The law also eliminated the quality control
system that HHS used to measure payment accuracy of monthly welfare
payments under AFDC. Under that system, states were required to
statistically select a sample of cash assistance cases and determine the
level of erroneous (improper) payments; if a state's improper payment rate
exceeded the targeted error rate, it faced a financial penalty.

HHS states in the preamble to TANF regulations that PRWORA reflects the
principle that the federal government should focus less attention on
eligibility determinations and place more emphasis on program results.9 To
that end, PRWORA gave HHS new responsibilities for tracking state
performance, including a set of financial penalties for states that fail
to comply with program requirements and a bonus program for states that
perform well in meeting certain program goals. Several of these penalties
reflect new expectations for states to assist recipients in making the
transition to employment. For example, states face financial penalties if

7 See U.S. General Accounting Office, Welfare Reform: Challenges in
Maintaining a Federal-State Fiscal Partnership, GAO-01-838 (Washington,
D.C.: Aug. 24, 2001).

842 U.S.C. S: 617. For more information on HHS's changed responsibilities
under PRWORA, see U.S. General Accounting Office, Welfare Reform: HHS'
Progress in Implementing Its Responsibilities, GAO/HEHS-98-44 (Washington,
D.C.: Feb. 2, 1998).

964 Fed. Reg. 17720, 17722 (Apr. 12, 1999).

they do not place a minimum specified percentage of adult TANF recipients
in work or work-related activities each year and if they provide federal
TANF funds to families who have reached the TANF time limits on receipt of
aid-60 months over a lifetime. The bonus program was to reward states for
high performance toward achieving program goals, such as moving welfare
recipients into jobs and reducing out-of-wedlock births.

At the same time, Congress, through PRWORA, emphasized the importance of
sound fiscal management for state TANF programs. One part of the new
penalty system focused on penalties for states that use funds in violation
of PRWORA, as identified through audits conducted under the Single Audit
Act. In addition, the law stated that states are to include in the TANF
plans that they file with HHS a certification that procedures are in place
to combat fraud and abuse, although the law does not require the states to
describe these procedures. Moreover, states are required to continue
participating in the Income and Eligibility Verification System (IEVS)
that provides information from various sources to help verify eligibility
information.

As state TANF programs have evolved since implementation, the nation's
welfare system now looks quite different than it did under AFDC, posing
some challenges for defining and measuring improper payments. As our
previous work has shown,10 welfare agencies now operate more like job
centers, taking steps to move recipients into work and providing aid to
help families avoid welfare. States now spend most TANF funds on a broad
array of services for families rather than on monthly cash assistance, as
shown in figure 1. These services include employment services, case
management services, support services such as child care and
transportation, and pregnancy prevention among others. In addition, states
offer various services to other low-income families not receiving welfare,
including child care and employment and training services.

10For more information on GAO's work on welfare agencies, see U.S. General
Accounting Office, Welfare Reform: Improving State Automated Systems
Requires Coordinated Federal Effort, GAO/HEHS-00-48 (Washington D.C.: Apr.
27, 2000).

Figure 1: Expenditures of TANF Funds in Fiscal Years 1997 and 2002 (in
percentages)

Work-related activities

Othera Child care

Systems and administration Work-related activities

Systems and administration Basic cash assistance

Othera

Basic cash assistance

1997 2002

Sources: HHS and Congressional Research Service.

Note: HHS data from TANF Annual Report for fiscal year 2002.

aThis category includes spending for a variety of services, such as
transportation, pregnancy prevention, and promoting family stability and
child welfare.

In addition to the broad range of services provided by TANF programs, more
entities receive and administer TANF program funds than before, posing
additional challenges for states in managing improper payments. In many
states, county or local governments receive TANF funds and are the key
TANF administrative agencies, sometimes establishing their own policies
and programs. States may also distribute TANF funds to several different
state agencies to provide services. States and localities also may
contract with a multitude of nonprofit and for-profit organizations. In
our 2002 report on TANF contracting, our survey to states identified more
than 5,000 TANF contracts with nongovernmental organizations at the state
level and at least 1,500 contracts at the local level.11 We also found
that in 2001, about a quarter of states contracted out 20 percent or more
of TANF funds expended for services in fiscal year 2000, ranging up to 74
percent. Figure 2 shows the broad range of services for which TANF
payments are made and the entities involved in the TANF payment processes.

11The survey instrument used in this report did not cover all counties in
the states examined; therefore, the total number of TANF-funded contracts
may be understated. For more information on TANF contracting, see U.S.
General Accounting Office, Welfare Reform: Federal Oversight of State and
Local Contracting Can Be Strengthened, GAO-02-661 (Washington, D.C.: June
11, 2002).

Figure 2: Broad Array of Services and Providers Involved in TANF Payment
Processes

Source: GAO.

a States, and in some cases localities, also contribute funds.

b This category includes spending for a variety of services, such as
transportation, pregnancy prevention, and promoting family stability and
child welfare.

Changes under PRWORA- CCDF

PRWORA also combined several existing child care programs into one program
designed to provide states with more flexible funding for subsidizing the
child care needs of low-income families who are working or preparing for
work. CCDF provides states funds to subsidize child care assistance for
families with incomes up to 85 percent of state median income who are
working or in education or training. Under CCDF rules, eligible
participants are to be allowed parental choice of child care providers,
including center-based, home-based, or relative care. In addition,
families are required to contribute to the cost of care, in the form of a
copayment, unless states exempt families below the poverty level from this
requirement. CCDF rules also provide some guidance on establishing
reimbursement rates for child care providers and requires that a specified
portion of funds be set aside for activities designed to enhance child
care quality.12

Within this framework, states establish their own income eligibility
criteria and determine how the program will be administered. Like TANF,
CCDF is administered through multiple agencies, including county and local
governments and nonproft and for-profit organizations. This decentralized
system can create challenges for determining what constitutes an improper
payment. Figure 3 illustrates the steps often involved in making child
care payments.13 In recent years, federal and state CCDF expenditures have
increased more than 100 percent-from $4.0 billion in 1997 to $8.6 billion
in 2002, the most recent year for which data are available.

12For Regulations on CCDF, see 45 C.F.R. Pt. 98 (2004).

13Under CCDF regulations, state or local CCDF agencies may provide
payments directly to child care providers or to parents. Payments to
parents may be in the form of a child care certificate (a check or other
disbursement) that may only be used as payment or deposit for child care
services.

Figure 3: Child Care Payment Process

Source: GAO.

HHS's Administrative At the federal level, ACF's Office of Family
Assistance (OFA) is responsible

Structure and Oversight for overseeing TANF, and the Child Care Bureau is
responsible for overseeing CCDF. Staff in the 10 ACF regional offices and
the Office of Financial Services also assist in overseeing aspects of
state TANF and CCDF programs. Figure 4 shows ACF's organizational
structure.

Figure 4: ACF's Organizational Structure

Source: GAO.

OFA is responsible for overseeing TANF and coordinating HHS efforts to
assist states in managing improper payments in the TANF program.
Specifically, the office is responsible for (1) developing and
implementing strategies to assist grantees in implementing and designing
programs to

meet TANF purposes; (2) ensuring compliance with federal laws and
regulations; (3) implementing national policy and developing regulations
to implement new laws; (4) developing regulations to implement data
collection requirements; (5) implementing and maintaining systems for the
collection and analysis of data, including participation rate information,
recipient characteristics, financial and administrative data, state
expenditures on families, work activities of noncustodial parents,
transitional services, and data used in the assessment of state
performance; and (6) identifying best practices and sharing information
through conferences, publications, and other means.

The Child Care Bureau is responsible for overseeing CCDF programs and
coordinating HHS efforts to assist states in managing improper payments in
the CCDF program. The Bureau's responsibilities include (1) tracking
grantee program implementation by collecting and analyzing information
that states are required to report through CCDF plans, financial
expenditure reports, and administrative data reports; (2) providing
technical assistance to grantees concerning CCDF through the Child Care
Technical Assistance Network where the Bureau sponsors national and
regional conferences and meetings and support the development of Technical
Assistance materials and websites; (3) developing program policy guidance
to grantees on the administration of CCDF, including questions related to
what expenditures are allowable under the program; and (4) supporting
research to disseminate findings that document emerging trends in the
child care field.

OFA and the Child Care Bureau share fiscal oversight responsibility with
the 10 regional offices that are responsible for reviewing financial
expenditure reports that states are required to submit as well as
assisting in other program responsibilities. The Office of Financial
Services is the HHS-designated lead unit for coordinating reporting on the
agency's efforts to manage improper payments in the TANF and CCDF
programs.

Improper Payments Act In November 2002, Congress passed the Improper
Payments Act. The act requires the head of each agency to annually review
all programs and activities that the agency administers and identify all
such programs and activities that may be susceptible to significant
improper payments. For each program and activity identified, the agency is
required to estimate the annual amount of improper payments and submit
those estimates to Congress before March 31 of the following applicable
year. The act further requires that for any agency program or activity
with estimated improper payments exceeding $10 million and 2.5 percent of
program payments, the head of the agency shall provide a report on the
actions the agency is taking to reduce those payments.14

The Improper Payments Act also required the Director of OMB to prescribe
guidance to implement its requirements. OMB issued guidance on May 21,
2003, that provides instructions for estimating improper payment rates,
and requires agencies to set target rates for future reductions in
improper payments, identify the types and causes of improper payments, and
highlight variances from targets or goals established. Significantly, the
May 2003 guidance also required 15 agencies to publicly report improper
payment information for 46 programs identified in OMB Circular No. A-11 in
the agencies' fiscal year 2003 Performance and Accountability Reports.
According to OMB, the programs were selected primarily because of their
large dollar volumes ($2 billion dollars or more in outlays). The TANF and
CCDF programs are included in the 46 programs.

Internal Control Framework In most cases, the cause of improper payments
can be traced to a lack of or breakdown in internal control. Our Standards
for Internal Control in the Federal Government provides a road map for
entities to establish control for all aspects of their operations and a
basis against which entities' control structures can be evaluated. Also,
our Executive Guide on Strategies to Manage Improper Payments: Learning
from Public and Private Sector

14 OMB guidance for implementing the act added the additional 2.5 percent
requirement. See OMB Memorandum M-03-13. Improper Payments Information Act
of 2002, Pub. L. No. 107-300 (May 21, 2003).

Organizations focuses on the internal control standards as they relate to
reducing improper payments.15

The five components of internal control-control environment, risk
assessment, control activities, information and communication, and
monitoring-are defined in the Executive Guide in relation to improper
payments as follows:

o Control environment-creating a culture of accountability by
establishing a positive and supportive attitude toward the achievement of
established program outcomes.

o Risk assessment-analyzing program operations to determine where risks
of improper payments exist, what those risks are, and the potential or
actual impact of those risks on program operations.

o Control activities-taking actions to address identified risk areas and
help ensure that management's decisions and plans are carried out and
program objectives are met.

o Information and communication-using and sharing relevant, reliable, and
timely financial and non-financial information in managing activities
related to improper payments.

o Monitoring-tracking improvement initiatives over time, and identifying
additional actions needed to further improve program efficiency and
effectiveness.

15Internal controls are an integral component of an organization's
management that provides reasonable assurance that the organization
achieves its objectives of (1) effective and efficient operations, (2)
reliable financial reporting, and (3) compliance with laws and
regulations. For more information on internal controls, see GAO-02-69G and
GAO/AIMD-00-21.3.1.

Improper payments in the TANF program can occur in all of the TANF payment
types: ongoing monthly cash assistance payments to individuals or
families; one-time payments to individuals or families; and payments made
to a range of for-profits, non-profits, state agencies, and contractors.
HHS has instructed states that they should recover any overpayments by
recouping them from the recipients as a reduction in future TANF cash
payments or by collecting cash repayments. It also states that the full
amount of recovered overpayments made after October 1, 1996-PRWORA was
signed into law in August 1996-is to be retained by the state and used for
TANF program costs.16 Improper payments in the CCDF program can occur in
all payment types: payments to child care providers or families.

States' Efforts To Manage Improper Payments Are Uneven

Almost all states we surveyed and visited reported taking some steps to
assess whether their TANF and CCDF programs were at risk for improper
payments or to measure the extent of improper payments. However, these
efforts were uneven--not all states had assessed risks, risk assessments
often did not cover all program payment types, and states' measures of the
amounts of improper payments did not always rely on rigorous
methodologies. While these assessments provide some valuable information,
they do not provide a comprehensive picture of the nature and extent of
improper payments in TANF and CCDF programs among the 16 states. In
addition, while the states reported they have various strategies and tools
in place to help prevent and detect improper payments, these efforts were
also uneven. While states understand the importance of addressing improper
payments, they cited several factors that make it difficult for them to
adequately manage improper payments. The unevenness of internal controls
among states may result in missed opportunities to further address
improper payments.

16ACF Program Instruction for TANF, Transmittal No. TANF-ACF-PI-2000-2.

Almost All States Reported Some Risk Assessment Activities

Almost all the states we surveyed and visited reported performing some
activities to assess whether their TANF and CCDF programs were at risk of
improper payments. We defined a risk assessment as a formal or informal
review and analysis of program operations. The purpose of a risk
assessment is to determine where risks of improper payments exist, what
those risks are, and the potential or actual impact of those risks on
program operations.17 Conducting risk assessments helps to ensure that
public funds are used appropriately and clients receive the proper
benefits. Improper payments, including fraud,18 may occur in several
different ways in the TANF and CCDF programs, involving clients,
providers, and agency personnel. For example, an inadvertent error may
result in an overpayment or underpayment when

o a client mistakenly fails to report some income,

o a provider accidentally receives payment due to a billing error, or

o a caseworker incorrectly records some information or makes an error in
calculating a benefit amount.

Improper payments due to fraudulent activity may occur, for example, when

o a client files for and receives benefits in two jurisdictions
concurrently,

o a provider claims payment for services not rendered, or

o an agency employee creates a fictitious case and collects the benefit.

In addition, a broad range of state entities may be involved in
identifying improper payments and measuring the extent to which they
occur. For

17 Risk assessments may include assessing program policies and procedures
to identify those most at risk of resulting in improper payments;
assessing the likelihood that improper payments are occurring; and
calculating the amount of any improper payments made, for example, through
a Quality Control system or program.

18For the purposes of this report, we defined a fraudulent payment,
considered a subset of improper payments, as a payment made based on a
participating household, recipient, provider, or employee intentionally
providing incorrect or insufficient information on which eligibility and
benefit determinations were made. (A full accounting of an amount of
improper payments would include those identified as fraudulently
obtained.)

overpayments and underpayments, these state entities may include frontline
workers, quality control staff, or management staff. State entities
involved in preventing and detecting fraud may include the state
inspectors general offices, state fraud units, and state auditors.

The 16 states we surveyed and visited reported a mix of risk assessment
activities. These activities include state studies conducted under the
Single Audit Act and other studies by state auditors, fraud units, and
inspectors general. States also identified other activities, including
reviews of program policies, one-time studies or pilots, and regular
reviews of client cases. States generally reported more activities for
TANF than CCDF programs. More specifically, TANF-related activities were
more likely to include regular quality control reviews than CCDF
activities, as might be expected given the requirements for the previous
AFDC program. Table 1 provides some examples of states' risk assessment
activities.

Table 1: Examples of Risk Assessment Activities from States Surveyed and Visited
State Description of Actions

Colorado CCDF officials conducted a study to determine the extent to which
child care assistance payments were supported by adequate documentationand
records. Of these payments to providers, officials determined that 14.7
percent were either errors or exceptions to payment. The study included
site visits and data collection activities in 32 of Colorado's 64
counties. The study recommended, among other things, that additional
auditing controls of provider records and case files were needed at the
local level to ensure that child care was appropriately provided and that
families were eligible for assistance.

Illinois Officials conducted an analysis of program risk by identifying
ways that improper payments occurred in the child care program and
examining current state policies to identify risk areas that could be
addressed. In order to mitigate program risk, the study recommended
several ways to improve its policies, including developing procedures and
forms to establish repayment schedules for improper payments and providing
stronger prevention mechanisms, including more sharing of data through
computers at initial application.

Texas TANF officials established work groups that assessed the risk of new
policy initiatives and considered methods to better manage these risks.
One method of risk management included developing bulletins that alert
program staff to new and revised policies to better ensure proper
implementation and reduce improper payments.

Florida TANF officials reported that quality assurance staff regularly
conduct case reviews to determine where risks exists. These reviews result
in formal reports and require district offices to prepare corrective
action plans to address the findings.

Source: GAO surveys and site visit information.

While states reported performing some risk assessment activities, these
activities did not appear to be uniformly comprehensive in their coverage
of all types of program payments. As shown in table 2, many of the states
we surveyed said they had performed some type of an assessment or analysis
of risk for three primary types of TANF payments, while others did not
cover all of these payment types. Three states said they had assessed
risks for monthly cash payments only. Data from HHS for fiscal year 2002
showed that in these three states, the percentage of TANF expenditures for
cash assistance ranged from about 25 percent to more than 50 percent. (See
app. I for each state's percentage of TANF expenditures for cash
assistance.) While fewer states reported assessing risk in payments to
service providers, states typically have procedures in place to monitor
these contracting activities, as we reported in our previous work.19

Table 2: Types of TANF Payments Covered by States' Assessment of Risks as
Reported by Surveyed States

Monthly cash Payments for other
assistance benefits or Payments to
Number of states payments services service providers
✔ ✔ ✔
✔ ✔

✔

Source: GAO.

Notes: Based on surveys of state TANF administrators in 11 states. One
state did not respond to this question.

Most of the states we surveyed and visited reported taking steps to
measure the extent of improper payments in their TANF and CCDF programs as
part of their risk assessment activities, although the extent of these
efforts was mixed. As shown in table 3, the surveyed states reported
relying on a variety of methods to calculate their measures of improper
payments. For the TANF program, four of the surveyed states (California,
Maryland, Michigan, and Pennsylvania) as well as one site visit state
(Texas) reported that they relied on a statistically representative sample
to estimate an amount of improper payments, although these generally
covered TANF monthly cash assistance payments only. Among the

19 See U.S. General Accounting Office, Welfare Reform: Federal Oversight
of State and Local Contracting Can Be Strengthened, GAO-02-661
(Washington, D.C.: June 11, 2002).

surveyed states, fewer reported estimating an amount of improper payments
for the CCDF program than for the TANF program. Compared with TANF, CCDF
measures of improper payments generally occurred on a more ad hoc basis,
such as a one-time study or pilot effort that covered one jurisdiction of
a state, and were less likely to result from regular reviews of cases. In
one state we visited, child care officials said they estimated the amount
of improper payments for the largest subsidized child care program but not
the other three programs also supported with CCDF funds.

Table 3: Extent to Which Surveyed States Reported Estimating an Amount of
Improper Payments and the Methods Used Methods Used by States to Estimate
Improper Payments

Has Findings Findings Reviews of Statistically
estimated from from Findings Reviews of sampled cases representative
other
the State's state or from service (not sample of
amount state statistically
of Single local or local provider representative cash
improper or of
State Audits auditors fraud contractor payments
payments units all payments) Othera

TANF CCDF

California Yes ✔ ✔
Colorado No
Florida Yes ✔ ✔
Idaho Yes ✔ ✔ ✔ ✔
Kansas Yes ✔
Maryland Yes ✔ ✔
Michigan Yes ✔ ✔ ✔
New Mexico Yes ✔ ✔ ✔ ✔
New York No
Ohio Nob
Pennsylvania Yes ✔

California No

Colorado Yes ✔ ✔ ✔ ✔ ✔
Florida Nob
Idaho Yes ✔ ✔
Kansas Yes ✔
Marlyand Yes ✔
Michigan No
New Mexico Yesc
New York No

(Continued From Previous Page)

Methods Used by States to Estimate Improper Payments

Has Findings Findings Reviews of Statistically
estimated from from Findings Reviews of sampled cases representative
other
the State's state or from service (not sample of
amount state statistically
of Single local or local provider representative cash
improper or of
State payments Audits auditors fraud contractor all payments) payments Othera
units
Ohio No
Pennsylvania Yes ✔ ✔

Source: GAO.

Note: Based on surveys of state TANF and CCDF administrators in 11 states.

aOther methods that states identified included annual independent program
audits, self-reviews coordinated by counties, and gathering information
from a state's automated eligibility system. States' automated systems can
help identify improper payments through programmed edits and checks on
data entered and on benefit calculations, for example.

bAlthough the state reponded that it did not calculate an amount, it
provided some information on the amount of improper payments recovered.

cDid not provide information on methods used.

Many of the states we visited and surveyed provided us data on the amount
of improper payments in their TANF and CCDF programs, but these data do
not provide a complete picture of the amount of payments in these states'
programs and cannot be used for comparisons among states. Too often,
states' assessment activities did not measure the amount of improper
payments among all types of TANF payments, and therefore do not present a
complete picture of improper payments. In addition, some state data
included amounts based on overpayments to clients only while others also
included underpayments to clients based on agency errors. In other cases,
the amount included only those payments identified as fraudulent but not
other types of improper payments based on inadvertent mistakes. As a
result, data were not comparable across states.

However, data on the amount of improper payments, can play an important
role in states' program management, helping them to identify program areas
at risk so they can be addressed and to recover funds when possible. The
following are some examples of these types of activities from the states
we visited.20

20We did not independently verify the data provided by states.

o In Texas, TANF program officials stated that the quality control unit
and the fraud unit estimate the amount of improper payments, which include
client error, agency error, and fraud. The quality control unit uses a
statistically representative sample of cash payments to calculate improper
payments and the fraud unit uses all claims established in the
investigation system to estimate improper payments. Based on these
methods, Texas officials estimated the amount of improper payments to be
$6.3 million for the TANF program during fiscal year 2002.21 Furthermore,
officials estimated that $5.7 million in improper payments were recovered
that same year.22

o In Illinois, child care program officials stated that suspected fraud
cases are sent to the state Bureau of Investigations to be examined. In
2002, the Illinois Office of Inspector General completed 114 CCDF
investigations, which identified $1,172,293 in overpayments. The office
cited several examples of fraudulently received child care benefits,
including the following:

o A client falsified her payroll information to qualify for child care
assistance. The alleged overpayment was $27,203.

o A client falsified payroll information to qualify for child care and
failed to report her true earnings. The child care overpayment totaled
$45,174.

o In Virginia, child care program officials told us that they conducted a
pilot study to assess the extent of fraud in the child care subsidy
program. The pilot focused on 3 of the state's 121 local social service
offices. During the year-long pilot, a total of 28 fraudulent claims were
identified, and based on these findings, officials determined that the
savings that would accrue to the state would justify the costs of fraud
monitoring. Child care officials identified several examples of fraudulent
activity, including the following:

o A client failed to report income from a second job, that she was living
with the child's father, and the father's earnings; the total household

21As reported to HHS for fiscal year 2002, Texas had TANF expenditures of
about $741 million, with about 28 percent of these expenditures for cash
assistance.

22 The amount of improper payments recovered in fiscal year 2002 may
include some overpayments made in previous years.

income made them ineligible for assistance. The total overpayment was
$8,944.

o A provider submitted invoices for five siblings for child care provided
during periods when the provider was not providing care and was not living
near the children. The total overpayment was $14,931.

States generally rely on information from risk assessment activities to
identify the extent of program risks and to highlight problem areas.
Officials in the states we surveyed responded that on the basis of their
risk assessments, they did not perceive improper payments to be a great
problem in either the TANF or CCDF programs. However, some CCDF officials
reported improper payments as a moderate problem while none of the TANF
officials did so, as shown in figure 5.

Figure 5: Extent to Which Improper Payments Are a Problem, Based on
Surveyed
States' Reported Assessment or Analysis of Risk
Number of States
6

0 Very Great Moderate Some Little No Don't great know

TANF

Child Care

Source: GAO.

Notes: Based on surveys of state TANF and CCDF administrators in 11
states. One state did not respond to this question for the TANF program;
two states did not respond to this question for the CCDF program.

As discussed previously, the nature and extent of states' reported risk
assessments varied greatly, and often did not cover all payment types.
This suggests their overall program risk assessments were based on a
limited perspective. While state officials did not see improper payments
as a great problem, they had identified factors that contributed to
improper payments in their programs, as shown in table 4. TANF respondents
most often identified inaccurate information on income, earnings, and
assets and clients not meeting participation requirements as factors
contributing to improper payments. Inaccurate information on income,
earning, and assets can occur, for example, when clients do not report
income from employment or changes in earnings that they are required to
report and that may affect the amount of their payments or basic
eligibility for aid.

Table 4: Factors That Have Contributed to Improper Payments over the Past
2 Fiscal Years for the TANF Program as Identified by Surveyed States

Number of states responding Factors contributing to improper Great
Moderate Little No

Don't

payments

extent extent extent extent know Related to clients

Nonreporting/underreporting of
income 4 5
Client receiving payment in more than
one state 6 3
Incorrect reporting of assets 2 4 3
Incorrect reporting of household size 5 4
Incorrect citizenship or immigration
statusa 5 4

Incorrect information on client's
compliance with program
requirements, such as participating in
required activity 3 3 2

Other

Related to providers

Overstating performance 2 3 3

Claiming for services not rendered 3 3 2

Other 2

Source: GAO.

Notes: Based on surveys of state TANF administrators in 11 states. Eleven
states responded to the survey, but not all answered each question or
item.

a To be eligible for aid, individuals must meet certain citizenship or
legal immigrant conditions.

For states' child care programs, the surveyed officials identified factors
associated with both clients and child care providers as contributing most
frequently to improper payments, as shown in table 5. Officials in the
states we visited identified examples of client-and provider-related
problems. For example, Virginia CCDF officials identified several cases in
which clients were no longer working or looking for work and therefore no
longer eligible for a child care subsidy. Illinois officials cited several
cases in which the provider gave inaccurate information on the amount of
child care received. In one case, the provider billed the state for
children she had stopped caring for, and in another case the provider
billed the state for watching children during hours when the provider was
actually working at another job.

Table 5: Factors That Have Contributed to Improper Payments over the Past
2 Fiscal Years for the Child Care Subsidy Program as Identified by
Surveyed States

Number of states responding Factors contributing to improper Great Moderate
Little No Don't payments extent extent extent extent know Related to clients
Related to providers

Nonreporting/underreporting of
income 5 1
Client receiving payment in more than
one state 1 3
Incorrect reporting of household size 2 4
Incorrect citizenship or immigration
status of child a 4
Incorrect information on client's
compliance with employment or
education and training requirements 2 2 1
Claiming subsidy for child care not
received 2 4
Other 1

Receiving subsidies for more children
than served 1 6 3
Receiving subsidies for more hours of
care than actually provided 4 3 3
Receiving subsidies when not
meeting any existing licensing
requirements 2 4 2

(Continued From Previous Page)

Number of states responding

Factors contributing to improper Great Moderate Little No Don't payments
extent extent extent extent know

Receiving subsidies when no services
rendered 3 5

Other 1

Source: GAO.

Notes: Based on surveys of state CCDF administrators in 11 states. Eleven
states responded to the survey, but not all answered each question or
item.

a To be eligible for aid, individuals must meet certain citizenship or
legal immigrant conditions.

Other: Colorado identified excessive absences of children that the
provider billed for and was paid.

States More Likely to Use Prevention and Detection Tools in TANF Than in
CCDF

In addition to assessing a program's risk of improper payments, states
reported using other key aspects of an internal control system, including
emphasizing accountability and using tools to prevent and detect fraud,
although the extent of use varied among the states and was less widespread
among CCDF programs. For example, states we surveyed sometimes used
performance goals to instill a culture of accountability by working toward
improvement and achievement of established program outcomes. Although
improper payment estimates were incomplete (as noted in the previous
section), table 6 shows that a majority of TANF programs and two CCDF
programs surveyed had established goals for reducing improper payments. In
addition, some states were required to generate reports on improper
payments to senior government officials. This was also the case in one of
the states we visited. Texas officials told us they have established
statewide performance goals for reducing the TANF rate of improper
payments and hold regional offices accountable for performance objectives.
If regions fail to meet their objectives, they must draft and implement
performance improvement plans, which are then monitored by state
officials.

Table 6: Strategies Used to Prevent and Detect Improper Payments as
Identified by the Surveyed States

Number of states reporting using strategy

Strategy TANF CCDF
Has established goals for reducing improper payments and
is required to report on improper payments to other
government entities 2
Has only established goals 6
Has only a reporting requirement 1
Neither strategy in place 2

Source: GAO.

Note: Based on surveys of state TANF and CCDF program administrators in 11
states. One state did not respond to part of this question for the CCDF
program.

Greater emphasis on reducing improper payments in state TANF programs
likely stems from states' experience under the former AFDC program in
which the federal government had more guidance and requirements
specifically related to improper payment levels. In contrast, state CCDF
assistance programs do not share that history and generally do not have
the same formal internal control elements in place as in TANF. For
example, officials in Virginia told us TANF fraud is more under control
than child care fraud because there are more institutional processes in
place to manage improper payments. They noted these processes are
holdovers from the old AFDC program, and pointed out that eligibility
workers are more aware of improper payment activities in TANF because of
the training they received under AFDC. Along these lines, CCDF officials
in Virginia told us they do not have any performance goals or measures for
reducing improper payments, and pointed out that internal controls aimed
at reducing fraud for the CCDF program are relatively new.23

In addition to performance goals and reporting requirements, each TANF and
CCDF program reviewed reported performing a variety of activities to
verify the accuracy of information to determine client eligibility and the
proper payment amount, as shown in table 7. For example, Illinois
officials told us they verify among other things: income, assets,
residency, relationship of members in household, age, school attendance,
and child

23 Although state programs that administer CCDF and TANF funds may go by
different names, we refer to them as CCDF and TANF programs in this
report.

support payments, for all appropriate household members to determine TANF
eligibility. In addition, any caseworker or member of the public who is
suspicious of welfare fraud is encouraged to complete a one-page on-line
form that is submitted to Illinois' Office of Inspector General. Fraud
investigations are then initiated, if warranted.

Table 7: Activities Reported by Surveyed States to Prevent and Detect
Improper Payments

Number of states that report listed activity

Activity TANF CCDF
Require documentation from client 11
Match automated computer files 11
Initiate a fraud investigation if warranted 10
Conduct telephone, fax, or e-mail contacts 10
Access online databases 9
Conduct program integrity or quality control review 7

Child care only:

Confirm licensing status of providers, if warranted NA

Conduct background checks of providers NA

Conduct visits to providers NA

Source: GAO.

Note: Based on surveys of state TANF and CCDF program administrators in 11
states. NA refers to "not applicable."

As the list of activities in table 7 demonstrates, many CCDF programs
report that they verify the accuracy of payments to providers as well as
clients, although this occurs in a variety of ways given the flexibility
provided to states under CCDF.24 All CCDF programs surveyed reported that
they confirm the licensing status of regulated child care providers before
payments are made and most conduct background checks for providers. For
example, in Texas, CCDF funds are monitored in a two-tier system. CCDF
funds are distributed by the state to 28 local boards that

24This flexibility allows states to choose how to structure their program,
and payment controls vary based on the structure developed. Regardless of
the program structure, state administrators are responsible for general
oversight of providers, including safety standards and appropriate
licensing.

contract out the CCDF program. Contract monitors at the state level
identify questionable costs from the boards, while contractors monitor the
individual providers' contracts at the local level.

Some child care providers are not required to be licensed, and some CCDF
officials reported having a more difficult time monitoring payments to
these types of providers.25 These legal provider arrangements (referred to
as unregulated or unlicensed providers) are generally established by
parents and frequently involve care by a family member. Under CCDF, states
are to allow parents to make their own decisions on the type of child care
used, as long as they choose a legally operating provider. CCDF officials
in Virginia told us there might be more potential for fraud among
unregulated providers because the officials have little knowledge about
unregulated providers, and do not feel they have enough tools in place to
monitor the legitimacy of all unregulated providers.

In addition to activities taken by states to help ensure initial
eligibility, all states surveyed reported requiring additional check-ins
with clients to ensure that their eligibility status has not changed
(often referred to as a redetermination). Most states surveyed said that
they require a redetermination at least once every 12 months for both
programs, although the method of check-in is generally more flexible for
the CCDF program. For example, the majority of TANF programs require
clients to visit the TANF office in order to continue receiving benefits.
Conversely, most CCDF programs allow clients to check in by phone, fax,
e-mail, or mail. This difference may be explained by state welfare
programs' long history of requiring periodic office visits for families to
continue receiving monthly checks. In contrast, the newer CCDF program can
be characterized as an important support for working families not
associated with traditional welfare and the welfare office. Virginia CCDF
officials told us redetermination methods stem from the philosophy that
clients should not have excessive requirements to meet agency
representatives face-to-face. A CCDF official in Washington echoed this
sentiment when she told us benefit interviews are never meant to interfere
with a client's work or training schedule. These views are consistent with
CCDF's objective to assist parents with child care so that they can enter
or remain in the workforce.

25The licensing and regulating of child care providers is determined at
the state level rather than the federal level. Under CCDF, any care
subsidized must meet the health and safety requirements in place in each
state.

One specific activity all the states reported relying on to help identify
accurate eligibility information was data sharing, although the extent of
use varied. Data sharing, a key control activity, allows comparison of
information from different sources to confirm initial and continuing
client or provider eligibility. All states reported performing at least
one data sharing activity; however, the amount of data sharing varies
greatly between the TANF and CCDF programs. Among the states we surveyed,
while the majority of TANF programs reported data matching with at least
10 sources, the CCDF programs reported data matching with significantly
fewer sources. For example, while all of the TANF programs we surveyed
reported sharing data with the state department of labor or employment
security to ensure that clients are correctly reporting their income
levels,26 only 3 of 11 CCDF programs reported doing the same. Appendix II
summarizes data matching results from all surveyed states.

The extent to which states reported using data sharing capabilities in
TANF and CCDF programs varied by program, in part because state TANF
programs are more likely to have automated information systems that can
help them analyze large amounts of data from other sources. Some possible
explanations for this difference may be the greater maturity of the TANF
program and the existence of data sharing requirements for TANF that do
not exist for CCDF.27 Additionally, under TANF's predecessor (AFDC), the
federal government funded a large portion of state-run automated computer
system costs in earlier years. Recognizing the importance of automated
systems in efficiently and accurately determining eligibility, Congress
acted to encourage states to develop automated systems for the AFDC
program by authorizing ACF to reimburse states for a significant
proportion of their total costs to develop and operate automated
eligibility determination systems that met federal

26State administrators may check with the state department of labor or
employment security to ensure a client has correctly reported the income
level on his or her eligibility documentation and is consequently
receiving the proper benefit amount.

27 The Social Security Act requires state TANF programs to match with IEVS
(see 42 U.S.C. S:1320b-7). Using IEVS, states routinely match TANF
applicant-and recipient-supplied information against several data sources
including (1) Internal Revenue Service data on interest, dividends, and
other types of unearned income; (2) Social Security Administration data
(Retirement, Survivors, and Disability Insurance benefits, Supplemental
Security Insurance Benefits (SSI), and annual earnings); and (3) state
quarterly wage reports and unemployment insurance benefits. All TANF
survey respondents said they perform this match.

requirements.28 Under PRWORA, states may use their TANF or CCDF funds for
their automated system needs, although no specific federal requirements
exist for these systems.

The level of sophistication of data sharing practices varied in the states
we visited. For example, CCDF officials in Washington have implemented a
complex automated system that allows them to find duplicate payments.
Another automated data sharing resource frequently used with TANF programs
is the Public Assistance Reporting Information System (PARIS). PARIS helps
states voluntarily share information on public assistance programs to
identify individuals or families who may be receiving benefit payments in
more than one state simultaneously.29 Almost half of the TANF programs
surveyed participate in PARIS. No CCDF programs surveyed participated in
PARIS because the project was designed especially for Medicaid, food
stamps, and TANF. ACF officials said they are considering the
possibilities of PARIS for the CCDF program.

Not all data matching is done with automated systems however. Georgia CCDF
officials told us they had conducted a match with Head Start to ensure
that families are not being paid twice for child care.30 To conduct this
match Head Start program officials provided CCDF administrators with a
printed list of enrolled children, and officials cross-referenced the list
to look for duplication. Officials noted that the process would have been
more efficient if it were automated, but speculated that a lack of funding
or on-going partnership may be reasons the process was not computerized.

28For more information on state automated systems under welfare reform,
see GAO/HEHS00-48.

29PARIS was initially an informal project begun by an ACF staff person,
joined voluntarily by some states, and relying on computer services
provided at no cost by Defense Manpower Data Center. Participating states
sign a uniform agreement that governs the interstate exchange of data.
Recipient lists for all participating states are matched with one another
quarterly at a central location, using individuals' SSNs. Each state
subsequently receives a list of individuals who may be receiving duplicate
TANF, Medicaid, and food stamp benefits in other states. For additional
information on the PARIS project, see the PARIS Internet site at
www.acf.hhs.gov/paris and the U.S. General Accounting Office, Public
Assistance: PARIS Project Can Help States Reduce Improper Benefit
Payments, GAO-01-935 (Washington, D.C.: Sept. 6, 2001).

30For example, a child may be in Head Start 4 hours a day, and receiving 8
hours of child care (for a total of 12 hours of care). If the parent only
works 8 hours a day, the family is receiving 4 hours of benefits to which
it is not entitled. Data matching helps ensure the proper amount of care
is being provided.

While states reported having implemented many prevention and detection
tools to manage improper payments, it is difficult to determine the
relative effectiveness of these efforts. If states routinely performed
comprehensive risk assessments or rigorously measured improper payments,
it would be easier to understand the effect of these efforts. Without such
strategies, success of these initiatives cannot be quantitatively
determined, and the return on investment is unknown.

States Cited Factors That Make It Difficult to Adequately Address Improper
Payments

While the states visited and surveyed understand the importance of
addressing improper payments, many cited factors that make it difficult
for them to address improper payments. Table 8 highlights the most
frequently cited factors and demonstrates that many concerns were similar
for the TANF and CCDF programs. Factors frequently cited in both programs
include competing demands for staff attention and the lack of staff
working specifically on improper payments. Based on their survey
responses, one reason states often face competing demands is because they
place their greatest focus on key mission goals, such as moving TANF
clients into employment and meeting clients' child care needs. This is
consistent with the transformation in the federal welfare program from a
cash welfare entitlement program to an employment program. Officials in
some of our site visit states noted that the shift from AFDC to TANF
changed the focus of the program. For example, Washington state officials
said the TANF program emphasizes assisting the recipient with the tools
needed to obtain and maintain employment. Illinois state officials also
identified activities other than payment accuracy as their primary focus
in meeting TANF program goals, such as providing income supports including
child care assistance and transportation. Related to these factors are
states' concerns about insufficient funding, with about half of the states
citing this as a factor for TANF and CCDF. We also heard this concern from
some of the state auditors we spoke with in site visit states; the auditor
general in one state said that his office has not conducted any reviews of
the TANF and CCDF programs outside of the single audit within the past few
years, in part due to resource limitations and the loss of staff within
the department.

Table 8: Most Frequently Cited Factors That Make It Difficult to Address
Improper Payments as Reported by Surveyed States

Number of states that cited factor as a problem

Factors that make it difficult to address improper
payments TANF CCDF

Insufficient policies, procedures, and regulations in place 1

Insufficient expertise available 4

Difficulty obtaining valid or reliable data 1

Difficulty obtaining data in time to be useful 4

Automated data systems do not provide needed data 2

Limited ability to use SSNs for data sharing 0

Insufficient funding 5

Limit on proportion of funds that can be spent on
administration 4

Competing demands for eligibility caseworkers' or management's attention 9

Insufficient staff working specifically on improper
payments 8

Concerns about "going after" families in need 5

Costs of pursuing improper payments perceived to outweigh potential
benefits 5

Reluctance of law enforcement to prosecute 6

Source: GAO.

Note: Based on surveys of state TANF and CCDF program administrators in 11
states.

Among CCDF officials, survey respondents were also less likely to have
focused on managing improper payments and more likely to have focused on
other aspects of their program, such as matching clients with providers.
For example, Kansas CCDF officials were concerned that policies and
monitoring activities developed to prevent improper payments and fraud
could become overly burdensome, thereby possibly limiting the quality of
services they provide to the children and families they serve. Officials
also cited a lack of staff dedicated solely to addressing improper
payments as problematic for both the TANF and CCDF programs. For example,
Illinois officials said they have fraud cases that are not investigated
due to small staff ratios per case or loss of staff. Likewise, Virginia
officials stated that there is a lack of investigator staff to pursue
fraud cases.

States' concerns about how best to use limited resources highlight the
importance of risk assessment as a key element of sound internal control
systems. Risk assessment activities allow an organization to focus often
limited resources on the most significant problem areas and determine
where risks exist, what those risks are, and what needs to be done to
address the identified risks. This helps to ensure that public funds are
used appropriately and clients receive the proper benefits, thereby
helping meet the program's mission and goals.

Officials also cited problems that were more prevalent in one program than
the other. In the TANF program, officials expressed more concern about the
reluctance of law enforcement to prosecute low dollar value cases. For
example, TANF officials in Virginia told us about law enforcement
officials' reluctance to prosecute improper payment cases unless they
reach a certain dollar amount. The commonwealth attorney in each county
determines the threshold for prosecuting these cases.

On the other hand, CCDF officials frequently cited their limited ability
to use SSNs for data sharing as a problem. While the Social Security Act
and implementing regulations require SSNs as a condition of eligibility
for the TANF program, no such law exists for the CCDF program. States may
not require SSNs for the CCDF program without violating the Privacy Act of
1974. States may request that applicants provide their SSNs but must make
clear that supplying the numbers is not required as a condition of
receiving services.31 HHS has told states they may use alternatives (such
as a unique case identifier) to the SSN to verify non-applicant income and
resources when determining eligibility and benefit levels of applicants.
Regardless of HHS's position on this issue, CCDF officials in Illinois
reported that the inability to require SSNs presents the potential for
fraudulent payments. Similarly, CCDF officials in Florida reported that
they would like SSNs to be required at the federal level, because they
believe the effectiveness of data sharing is limited when parents are
allowed to report them voluntarily. On the other hand, at least one state
we reviewed addressed this issue in its CCDF program by asking for SSNs,
but noting that the provision of them is voluntary. This state said that
clients provided SSNs in all but 2 percent of cases.

In addition to the SSN issue, CCDF officials often cited insufficient
funding as a factor that hinders their efforts to address improper
payments. For

31See section 7 of the Privacy Act of 1974, 5 U.S.C. S: 552a note.

example, Washington state CCDF officials said they do not have enough
money to improve improper payment identifications and recoveries because
CCDF rules cap administrative costs at 5 percent of the grant, and
improper payment identification is a very labor-intensive process.
Similarly, Virginia CCDF officials told us the reason they do not have
enough staff dedicated to addressing improper payments is a result of the
funding restrictions imposed by the CCDF's administrative cap. While some
states saw the administrative cap as a limitation, others did not.
Nationwide, the average portion of total funds spent on administrative
costs in the CCDF program is about 3 percent. In addition, states may
structure their programs to use state maintenance of effort funds
(required to receive a portion of their CCDF funds) for these costs
because no administrative cap exists on these state funds.

ACF officials explained that some activities related to identifying and
addressing improper payments may not be considered administrative
activities to be included under the cap. For example, eligibility
determination and redetermination, training of child care staff, and the
establishment and maintenance of computerized child care information
systems are not to be considered administrative activities, and these
activities can play an important role in states' efforts to combat
improper payments. At the same time, CCDF regulations state that
activities such as program monitoring; audit services, including
coordinating the resolution of audit and monitoring findings; and program
evaluation are considered administrative. States' choices about how they
design and structure their internal control activities affect the extent
to which the administrative cap may limit their efforts.

HHS Has Limited Information on the Risk of Improper Payments, but Has
Efforts Under Way to Improve Monitoring Activities and Assistance to
States

HHS relies on the single audit process and financial expenditure reporting
to monitor state compliance with federal guidelines and oversee whether
states expend federal funds properly. These mechanisms, however, do not
capture information on the various strategies and tools that states have
in place for managing improper payments. In the absence of such
information, HHS cannot adequately determine if the TANF and CCDF programs
are susceptible to significant improper payments, as required by the
Improper Payments Act. HHS officials acknowledge that they will need
information on state activities to manage improper payments if they are to
comply with the Improper Payments Act. As a result, HHS recently started
several projects to collect information from selected states. HHS also
initiated several projects to encourage state use of certain tools in
managing improper payments, such as data matching capabilities. Several

states in our review reported that they would like additional assistance
from HHS in identifying effective practices for managing improper
payments. While HHS's projects are a good start, they do not provide
mechanisms to gather information on state control activities on a
recurring basis. The absence of such mechanisms could hinder HHS's ability
to assess the extent to which program payments may be at risk and comply
with the Improper Payments Act.

HHS Monitoring Activities Do Not Provide Information That HHS Needs to
Adequately Assess the Risk of Improper Payments

HHS is required to annually review the TANF and CCDF programs to determine
if they are susceptible to significant improper payments. The Improper
Payments Act also requires agencies to estimate the amount of improper
payments if a program is determined to be susceptible to significant
improper payments. HHS needs information on the various controls that
states have in place to minimize improper payments in order to adequately
assess risk. In preparing its 2004 review of TANF and CCDF, HHS used
findings from single audit reports, the key activity that HHS relies on to
monitor state fiscal activities.

Single audits assess whether states have complied with requirements in up
to 14 managerial or financial areas, including allowable activities,
allowable costs, cash management, eligibility, reporting, period of
availability of funds, procurement and subrecipient monitoring.32 Audit
findings in many of these areas often identify control weaknesses that can
lead to improper payments. Based on an analysis of single audit findings,
particularly findings related to eligibility and allowable cost, HHS
concluded in its January 2004 review that there were no systemic problems
or improper payment trends in the TANF and CCDF programs. HHS also
concluded that only a very small percentage of program costs have been
classified as misspent funds based on the rate of questioned costs
included in the Single Audit reports, which according to HHS, has been
less than .1 percent of program costs in recent years. While single audit
findings as well as the amounts of unallowable or questioned costs that
the audits identify are useful in determining the potential for improper
payments in the TANF and CCDF programs, the audits are not designed to
provided a complete

32A previous GAO study on TANF contracting reported that single audits
identified numerous findings on subrecipient monitoring, including
inadequate fiscal and program monitoring of local workforce boards and the
lack of state procedures to monitor activities of TANF subrecipients.
Subrecipients for TANF are for-profit, nonprofit, and nongovernmental
entities that states and localities contract with to provide services. See
GAO-02-661.

description of the methods and activities that the states use to minimize
improper payments. Questioned costs identified in single audits are also
not intended to provide an estimate of the total amount of improper
payments, and the methods used to derive questioned costs are not
consistent among state auditors. For example, we observed variation in the
methods that auditors used to identify questioned costs when testing
whether TANF payments are accurate according to states' eligibility and
payment criteria. In reviewing the fiscal year 2002 and 2001 single audit
reports for the five states we visited, we noted that some samples were
selected statistically so that any questioned costs could be projected to
all TANF payments and others were not. Also, some auditors determined that
payments were improper if case files were missing or incomplete while
others identified improper payments based on the specific eligibility
criteria that clients failed to meet.

HHS also reported that it considered information from its reviews of state
expenditure reports in determining if TANF and CCDF payments were
susceptible to significant improper payments. Federal guidelines require
states to report on the expenditure of TANF and CCDF funds on a quarterly
basis. HHS reported that its review of these reports helps to ensure that
states are properly expending TANF and CCDF funds. However, regional
office staff said that few resources are devoted to financial expenditure
reviews and that the reviews are limited in identifying improper payments
because expenditures are reported on a summary level and states are not
required to submit detailed financial reports that they would need to
identify improper payments. As a result, these reviews provide little
useful information in assessing the risk of improper payments.

Also, HHS reported that it gains access to information about state
practices and activities from the TANF and CCDF plans that PRWORA requires
states to submit to HHS, although this information is not used directly to
monitor state fiscal activities. The state plans describe the practices
that states use to meet the key objectives and federal requirements of the
TANF and CCDF programs. Further for TANF plans, states are required to
certify that they have procedures in place to combat fraud and abuse.
However, states are not required to describe these procedures in their
TANF plans. Similarly, CCDF plans do not require states to describe the
procedures that they have in place to combat fraud and abuse but HHS
officials report that they often gain an understanding of state procedures
in reviewing and approving these plans.

HHS Has Some Efforts Under Way to Improve Monitoring Activities and
Assistance to States

CCDF Initiative

HHS officials acknowledged that HHS's monitoring activities do not provide
enough information to determine if TANF and CCDF programs are susceptible
to significant improper payments. In our most recent report on
governmentwide improper payments initiatives, we reported that HHS did not
include information on TANF and CCDF improper payments in its Performance
and Accountability Reports for fiscal year 2003, as required by OMB
guidance for implementing the Improper Payments Act.33 The TANF and CCDF
programs are among the 46 programs that OMB required agencies to report
the results of their improper payment efforts in the Management Discussion
and Analysis section of their accountability reports for fiscal year 2003.
Specifically, we reported that HHS did not report improper payment
amounts, initiatives to prevent and reduce improper payments, or
impediments to preventing or reducing them.

HHS has started several initiatives intended to collect more information
on state efforts to control TANF and CCDF improper payments. HHS has also
started several initiatives to assist states in managing improper payments
and to encourage state use of certain tools to minimize improper payments,
such as data matching capabilities. These initiatives should help HHS
begin to assess the risk of improper payments and send a strong signal to
states that managing improper payments is an important issue. They should
also help states understand that the information they provide HHS on the
strategies and tools that they have in place to manage improper payments
is critical to determining whether these programs are susceptible to
significant improper payments.

HHS's initiatives to collect more information on state CCDF programs are
under way, and HHS is already starting to compile the results.

HHS officials developed the CCDF initiative in September 2003. The overall
goals of the initiative are to improve monitoring and administration
regarding improper payments and fraud, provide better definitions of child
care errors and child care fraud, and gather documented "best practices."
HHS officials also expect to identify other technical assistance materials
and any new information reporting needs for the states. As part of the
CCDF initiative, HHS recruited a state agency official with experience in

33U.S. General Accounting Office, Financial Management: Fiscal 2003
Performance and Accountability Reports Provide Limited Information on
Governmentwide Improper Payments, GAO-04-631T (Washington, D.C.: Apr. 15,
2004).

program integrity to help the Child Care Bureau oversee the initiative.
According to HHS officials, key actions for completing the initiative
include:

o Working with selected states to determine whether there is an effective
and cost efficient approach or methodology for estimating improper payment
amounts in the CCDF program.

o Conducting visits to some of the selected states to observe the
internal control and other activities they have in place to manage
improper payments.

o Coordinating with the HHS Office of the Inspector General to provide
training and technical assistance on improper payments and fraud to state
CCDF officials.

o Coordinating with the United Council on Welfare Fraud and the American
Public Human Services Association to discuss child care fraud and other
issues.

HHS is working with 11 states (Arkansas, Connecticut, Georgia, Indiana,
Maryland, Ohio, Oklahoma, Oregon, South Carolina, Virginia, and Wisconsin)
on the project. According to HHS officials, these 11 states provide
experience in dealing with erroneous payments, knowledge of the capacity
of their automated systems, and strong working relationships among key
state agencies. In addition, both centralized and county-based
organizational structures are represented in the 11 states.

HHS held initial meetings with the 11 states during November 2003, in
Washington, D.C. State officials such as child care administrators, fraud
directors, quality assurance directors, auditors, and investigators
participated in the meetings along with HHS Child Care Bureau and regional
office staff. During the meetings, states discussed various approaches to
controlling errors and fraud. In addition, the Child Care Bureau has
conducted a number of conference calls with states, including one on
PARIS.

Since the November meeting, HHS has completed site visits to two states,
Connecticut and Arkansas, and plans to complete visits to three other
states-Indiana, Ohio, and Oklahoma-by the end of June 2004. HHS officials
told us that they would compile all of the information from their visits
into a report to analyze and identify possible options for estimating

payment errors in the CCDF program and for improving program integrity.
HHS expects to issue its report by September 2004.

TANF Initiatives HHS has developed plans to implement three projects aimed
at improving its monitoring activities for TANF and assistance to states.
HHS is actively working with OMB on its implementation plans for the TANF
projects to ensure that they strike the right balance between the
authority that HHS has to oversee TANF, as set forth by PRWORA, and the
requirements of the Improper Payments Act.

The first project involves asking two states to volunteer for an expanded
single audit review of their TANF programs by state auditors. Auditors are
expected to conduct more detailed examinations of certain state controls,
such as those used to determine that payments are in accordance with
eligibility criteria and those controls used to oversee payments to
entities that states contract with to provide TANF services. While this
project only includes two states, HHS hopes to gain detailed knowledge of
the adequacy of controls that states have in place to identify improper
payments in all payment types. HHS said it plans to evaluate the
first-year results of the project, report the information to OMB, and then
decide upon second-year initiatives based on the initial results.
According to HHS, it must still secure funding for these audits and obtain
agreement from state auditors to perform the additional work. HHS is
working with its Office of Inspector General to identify states to
participate in the pilot project.

The second TANF project involves collecting and sharing information on
state activities to address improper payments. HHS is drafting a letter to
states asking them for information on their "best practices" for
addressing improper payments. HHS says the letter will request that states
describe how they define improper payments in the state, the process used
to identify such payments, and what actions are taken to reduce improper
payments. HHS noted that the letter will make clear that a state's
submission is voluntary. HHS also said it is working with OMB to ensure
that the letter is in accordance with the oversight authority that HHS has
under PRWORA and requirements under the Paperwork Reduction Act of 1995.34
According to HHS, it plans to establish a repository for the state
submissions, which would be available to all states for viewing on an HHS
Web site.

34Pub. L. No. 104-13, 109 Stat. 163 (May 22, 1995).

The third project involves encouraging more states to use PARIS. PARIS is
the interstate match program that was initiated to help state public
assistance agencies share information to identify individuals or families
who may be receiving or may have duplicate payments improperly made on
their behalf in more than one state. In 2001, we reported on the
usefulness of PARIS in identifying improper payments in the TANF program
along with other programs for low-income individuals, such as food stamps
and Medicaid.35 Currently only 22 states participate in PARIS. Other
states reported that they do not participate in PARIS for various reasons,
including the lack of data showing that participating would produce
savings for their state.

ACF officials say they have promoted state awareness of PARIS at
conferences and ACF staff currently participate as members of the PARIS
board of directors. In addition, HHS's proposed fiscal year 2005 budget
includes $2 million for PARIS activities. HHS plans to use $500,000 of the
$2 million for contractor support to conduct an evaluation of participant
states' PARIS activities to (1) establish a valid and reliable method for
calculating the costs and benefits of participating in PARIS and (2)
disseminate data on cost and benefits to other states. HHS also plans to
devote a full-time equivalent position to manage the PARIS project.

In carrying out these projects for TANF and CCDF, HHS expects to also
provide more assistance to states in managing improper payments. Several
states that we surveyed said they would like additional assistance from
HHS in this area. We specifically asked states the following: To what
extent, if any, have you received assistance from HHS (regional or
headquarters) regarding identifying and managing improper payments in your
state's TANF and CCDF programs--assistance such as responses to state
queries, any written guidance, any Web-based HHS information, conference,
presentation, etc.?

35GAO-01-935.

Many of the states we surveyed reported that they did not receive
assistance from HHS regarding managing improper payments. As figure 7
shows, states reported that HHS generally provided little to no assistance
for the CCDF program and moderate to some assistance for the TANF program
on this topic.36

Figure 6: Reported Extent of Assistance from HHS on Improper Payments from
Surveyed States
Number of states

Very great Great Moderate Some Little No Don't extent extent extent extent
extent extent know

TANF

CCDF

Source: GAO.

Notes: Based on surveys of state TANF and CCDF program administrators in
11 states. For the CCDF program, one state did not respond to this
question.

36HHS reported that it provides guidance and technical assistance to the
states on matters that affect the appropriateness of TANF expenditures
such as income requirements for TANF eligibility.

Several states said they would like additional assistance from HHS in
managing improper payments. We also asked states if they would like
assistance from a variety of national organizations, recognizing that
other organizations play an important role in advising states on how to
operate their TANF and CCDF programs. TANF officials most frequently
indicated they would like assistance from the National Council of State
Human Services Administrators (NCSHS) and the United Council on Welfare
Fraud (UCOWF), while the CCDF officials primarily wanted assistance from
the National Child Care Information Center (NCCIC).37 Regarding assistance
from HHS, most states indicated that they would like additional assistance
identifying and disseminating promising practices for managing improper
payments, as figure 8 illustrates. Additionally, most CCDF programs
reported that they would like HHS to provide guidance on what the federal
law requires and allows with respect to improper payments.

37NCSHS represents state and local government, as well as territorial,
public human service professionals and is associated with APHSA. UCOWF is
an organization of investigators, administrators, prosecutors, eligibility
workers, and claims writers from local, state, and federal agencies from
the United States and Canada who fight fraud, waste, and abuse in social
service programs. NCCIC, a project of HHS's Child Care Bureau, is a
national clearinghouse and technical assistance center that links parents,
providers, policymakers, researchers, and the public to early care and
education information.

Figure 7: Types of Assistance Surveyed States Said They Would Like from
HHS

Guidance on what the federal law requires

Guidance on what federal law allows

Assessing the risks of improper payments

Guidance on calculating or estimating an error rate

Policies or procedures needed to identify and collect improper payments

Identifying and disseminating promising practices in other states

01234567 Number of states

TANF

CCDF Source: GAO.

Note: Based on surveys of state TANF and CCDF program administrators in 11
states.

The projects for TANF and CCDF should help improve HHS monitoring
activities as well as assistance to states. If successfully implemented,
the projects will begin to provide HHS with a baseline of information on
the various controls that states have in place for managing improper
payments and thus improve HHS's ability to determine if the TANF and CCDF
programs are susceptible to significant improper payments. However, HHS
projects do not provide mechanisms to gather information on state control
activities on a recurring basis. The absence of such mechanisms hinders
HHS's ability to adequately assess the risk of improper payments and
assist states in managing improper payments in these multi-billion dollar
programs on an ongoing basis.

Conclusions The extent to which the TANF and CCDF programs are vulnerable
to improper payments cannot be determined given the information currently
available nationwide and in the 16 states we reviewed. Given the dollar
magnitude of these programs-about $34 billion in federal and state
funds-and the nature of their activities, we know that potential risks
exist. We also know-based on our review of the 16 states--that states have
some prevention and detection tools in place and at least some
understanding of the extent of program risks, although some unevenness
exists among states and between the TANF and CCDF programs in these areas.

What is not known, however, is the extent to which states' internal
control systems are sufficient to protect these programs against an
unnecessarily high level of improper payments. While we acknowledge that
states have a great deal of discretion in TANF and CCDF, HHS continues to
have a fiduciary responsibility to ensure that states properly account for
their use of federal funds and maintain adequate internal controls over
the use of funds. In addition, it has requirements under the Improper
Payments Act to assess the significance of risks for improper payments,
which it cannot do with the information currently available. As a result,
HHS needs mechanisms to gather information on state control activities on
a recurring basis.

HHS may determine that it needs legislative action in obtaining
information from states. HHS may also require a shift in resources or
additional resources to implement its efforts. It is essential that HHS
move ahead with and expand its actions to better understand the internal
control systems that states have in place and the extent to which program
payments may be at risk. It can also play an important role in exploring
the usefulness of expanding data sharing systems like PARIS to state CCDF
programs.

In the short term, program funds lost to fraud and abuse or used to
support ineligible families mean other needy families cannot be helped. In
the longer term, it means that federal resources may not be used as
effectively and efficiently as possible to meet important federal goals.
Insufficient attention to addressing improper payments can erode public
confidence in and support for these programs. As HHS moves forward,
attention must be paid to carefully balancing the flexibility allowed
states under law and the need for accountability for federal funds.

Recommendations for Executive Action

To better assist states in managing improper payments in the TANF and CCDF
programs and comply with the Improper Payments Act, we recommend that the
Secretary of Health and Human Services direct the Assistant Secretary of
ACF to take the following four actions:

o Develop mechanisms to gather information on a recurring basis from all
states on their internal control systems for measuring and minimizing
improper payments.

o Follow through on efforts to identify practices that states think are
effective in minimizing improper payments and facilitate sharing of these
with other states.

o Where appropriate, partner with states to assess the cost-effectiveness
of selected practices.

o Explore the feasibility of expanding PARIS to include CCDF, in addition
to TANF, including a study of the cost-effectiveness of such a plan.

In recommending these approaches, we recognize that HHS may determine that
it needs legislative action to direct states to provide the information.
We also recognize that these approaches may require a shift in resources
or additional resources.

Agency Comments and Our Evaluation

ACF provided written comments on a draft of this report; these comments
appear in appendix III. It also provided technical comments that we
incorporated as appropriate. We also provided a draft of the report to the
American Public Human Services Association, the professional organization
of state welfare officials, which provided technical comments that we also
incorporated as appropriate. In its comments, ACF said that the report
provides HHS with new and useful information. It also expressed concerns
about our recommendation for collecting information on state internal
controls as it relates to the TANF program and said we did not address its
ongoing initiatives.

Regarding CCDF, ACF said it welcomed our examination of improper payments
in CCDF and added that our work complements its ongoing initiative to
examine state efforts to address improper payments. While it did not
specifically state that it agreed with our recommendations as they pertain
to CCDF, it noted that its new efforts to examine child care

improper payments are still in the early stages and it is committed to
considering a wide range of options for possible next steps. ACF also
noted that our findings on states' views about the level and usefulness of
ACF technical assistance related to improper payments may not reflect its
recent and growing level of effort it provides states in this area. We
generally spoke with and surveyed states between December 2003 and
February 2004. As a result, the time period of our review would not cover
ACF's most recent efforts.

Regarding TANF, ACF agreed that new and improved information from states
would enable HHS to better help states address improper payments. It also
stated, however, that it believed that the assessment of risk called for
under the Improper Payments Act must be made within the statutory
framework of the TANF program, which places constraints on ACF to regulate
state TANF programs. Within this statutory framework, ACF thinks its plan
for acquiring additional information and assessing risk is adequate. It
also expressed concern that the draft report did not adequately portray
the regulatory constraints, particularly in its summary sections. In the
draft report, we clearly stated the regulatory restrictions and noted that
HHS may need to pursue additional legislative authority to collect the
information needed on state internal control systems to assess program
risk levels. We have added more of this information to our summary
sections.

We also recognize, and discuss in the draft report, that ACF has plans to
ask states to provide voluntarily more information on their efforts to
address improper payments in order to share that information with all
states. We agree that this is an important effort; we found that states in
our review often reported wanting more assistance from HHS on identifying
promising practices in this area. However, ACF will need to expand upon
this effort or pursue additional strategies to ensure it has information
of sufficient detail to gain an understanding of states' internal control
systems. Its current data collection strategy is not likely to lead to
information of sufficient detail to adequately assess the risk of improper
payments on a recurring basis.

In addition, ACF said the draft did not address the relevant initiatives
it has undertaken or will undertake during fiscal years 2004 and 2005 and
it provided information on these initiatives. We disagree. Our draft
discussed all of the initiatives for the CCDF and TANF programs that ACF

noted in its comments. We did, however, enhance portions of the discussion
based on information provided by ACF in its comment letter.

As agreed with your offices, unless you publicly announce the contents of
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from its date. At that time, we will send copies of this report to the
Secretary of Health and Human Services and others who are interested. In
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If you or your staff have any questions about this report, please contact
Linda M. Calbom on (202) 512-9508 or [email protected] or Cynthia M. Fagnoni
on (202) 512-7215 or [email protected]. Additional GAO contacts and
acknowledgments are provided in appendix IV.

Linda M Calbom Director, Financial Management and Assurance

Cynthia M. Fagnoni Managing Director, Education, Workforce, and Income
Security

Appendix I

Objectives, Scope, and Methodology

We designed our study to provide information on (1) what selected states
have done to manage improper payments in the Temporary Assistance for
Needy Families (TANF) and Child Care and Development Fund (CCDF) programs,
and (2) what the Department of Health and Human Services (HHS) has done to
assess risk and assist states in managing improper payments in these
programs. To obtain information about these objectives, we developed a
data collection instrument for state TANF directors and a separate one for
state CCDF administrators, conducted in-person interviews with state TANF
and CCDF program officials and state fraud officials, conducted telephone
interviews with state auditors, reviewed information from our prior work,
and conducted work at the federal level. In addition, we interviewed or
consulted officials with professional associations including the American
Public Human Services Association and the United Council on Welfare Fraud.
We provided a draft of this report to APHSA and HHS. HHS's comments are
included in appendix III and technical comments from HHS and APHSA were
incorporated as appropriate.

We conducted our work from April 2003 through May 2004 in accordance with
generally accepted government auditing standards.

Information on
Selected States

To obtain information for this report, we judgmentally selected 16 states
that reflect variations in the following characteristics: geographic
location, level of TANF and CCDF program expenditures, and size of
population. As part of our analysis, we sent data collection instruments
to 11 states: California, Colorado, Florida, Idaho, Kansas, Maryland,
Michigan, New Mexico, New York, Ohio, and Pennsylvania. We also visited 5
other states: Georgia, Illinois, Texas, Virginia, and Washington. Table 9
provides information on the amount of TANF expenditures for the 16 states
in our review and each state's TANF expenditure as a percentage of the
U.S. total. The table also shows that together these states represent
about 70 percent of total U.S. TANF expenditures.

Appendix I
Objectives, Scope, and Methodology

Table 9: TANF Expenditures by State and as a Percentage of the U.S. Total,
Fiscal Year 2002

Total TANF expenditures State's TANF expenditures State (dollars in
millions) as a percentage of U.S. total

California $ 5,477.3 21.6

Colorado 233.2

Florida 992.5

Georgia 510.7

Idaho 39.3

Illinois 971.2

Kansas 137.1

Maryland 427.7

Michigan 1,266.8

New Mexico 123.1

New York 3,851.5 15.2

Ohio 901.1

Pennsylvania 1,062.9

Texas 740.8

Virginia 264.4

Washington 627.9

Total for the states $17,628.1 69.40

Nationwide total $25,414.3 100

Source: GAO analysis of HHS data.

Note: Information from HHS's Administration for Children and Families.
Numbers may not add to totals due to rounding.

Table 10 provides information on the number of families and children
served by the TANF program and the percentage of TANF expenditures
attributed to cash assistance payments for the 16 states in our review.

Appendix I
Objectives, Scope, and Methodology

Average monthly number Percentage
of TANF families Maximum monthly of TANF
receiving monthly cash TANF benefits for expenditures on
State assistance three-person family cash assistance

California 462,328 $ 679a 48.4
Colorado 12,086 356 22.7
Florida 59,013 303 26.7
Georgia 53,678 280 22.4
Idaho 1,369 309 12.9
Illinois 48,091 396 16.0
Kansas 13,958 429 38.4
Maryland 27,132 473 54.4
Michigan 74,338 489b 26.2
New Mexico 17,015 389 68.3
New York 170,430 577c 39.1
Ohio 84,031 373 39.3
Pennsylvania 80,624 421 33.2
Texas 129,937 201 28.4
Virginia 30,051 389 41.6
Washington 54,188 546 49.6

Nationwide total 2,064,373

Source: HHS and the Congressional Research Service.

Notes: Information for HHS's Administration for Children and Families and
Gene Falk and Meridith Walters, "Cash Welfare Benefit Amounts," Welfare
Reform Briefing Book (Washington, D.C.: Congressional Research Service,
updated 2003). Numbers may not add to totals due to rounding.

aCalifornia - (Region 1) benefits.

bWashtenaw County benefits.

cNew York City benefits.

Table 11 provides information on the amount of CCDF expenditures, average
number of children served, and the state CCDF expenditure as a percentage
of the U.S. total for the 16 states in our review. The table also shows
that together these 16 states represent almost 60 percent of total U.S.
CCDF expenditures.

Appendix I
Objectives, Scope, and Methodology

Table 11: CCDF Expenditures by State and as a Percentage of the U.S.
Total, from Fiscal Year 2002 Appropriation as Expended Through September
30, 2002

Average monthly
number of children
State's CCDF receiving CCDF
Total federal and expenditures as a subsidies in fiscal
state expenditures percentage of year 2001a
State (dollars in millions) U.S. total (in thousands)

California $592.9 9.6 202.0
Colorado 63.1 1.0 24.5
Florida 287.8 4.7 80.5
Georgia 167.4 2.7 57.8
Idaho 31.0 0.5
Illinois 332.7 5.4 103.0
Kansas 73.7 1.2 14.9
Maryland 143.8 2.3 21.2
Michigan 122.8 2.0 50.1
New Mexico 61.8 1.0 22.8
New Yorkb 277.7 4.5 180.8
Ohio 438.9 7.1 84.0
Pennsylvania 224.2 3.6 65.1
Texas 371.6 6.0 105.5
Virginia 50.8 0.8 15.9
Washington 282.5 4.6 51.2

Total for the states $3,522.7 57.0 1,089.0 Nationwide total $6,159.7
1,813.8

Source: HHS's Administration for Children and Families.

Note: These data represent states' expenditures from their fiscal year
2002 CCDF appropriations only and do not reflect expenditures made from
previous years' appropriations. As a result, these data do not represent
total expenditures for fiscal year 2002. The total amount of CCDF
expenditures by state is not yet available for fiscal year 2002. Numbers
may not add to totals due to rounding.

aRepresents most recent data available.

bData reported in New York for fiscal year 2002 are incomplete.

Table 12 provides information on the number of providers operating in the
selected states we reviewed and the percentage of those providers
operating without regulation.

Appendix I
Objectives, Scope, and Methodology

Table 12: Number of Providers Receiving CCDF Subsidies for Selected States and
Extent of Use of Providers Operating Legally without Regulation, Fiscal Year
2001

Total number of child Percentage of children served
care providers who were in child care settings
State receiving subsidies operating without regulation
California 91,982
Colorado 10,914
Florida 13,958
Georgia 13,566
Idaho 5,191
Illinois 98,659
Kansas 5,306
Maryland 12,694
Michigan 87,757
New Mexico 9,499
New York 53,553
Ohio 18,415
Pennsylvania 30,866
Texas 29,904
Virginia 0a
Washington 38,451

Source: HHS's Administration for Children and Families.

Note: These data are the most recent available.

aVirginia did not report the number of providers by setting type.

Some limitations exist in any methodology that gathers information about
programs undergoing change, such as those included in this review.
Although we did not collect information on the entire population of states
and therefore cannot generalize our findings beyond the 16 states in our
review, we have used the information for descriptive/illustrative
purposes.

Survey of State TANF To obtain information on what selected states have
done to manage

improper payments in the TANF and CCDF programs, we surveyed
statesDirectors and Child using a data collection instrument (DCI) for
each program in 11 states. Care Administrators These DCIs were identical
in many respects to allow comparisons between

the two programs; the instruments differed to the extent necessary to
capture different conditions and factors in each program. We pretested the
instruments in two states with the key TANF and CCDF officials

Appendix I
Objectives, Scope, and Methodology

responsible for program administration and program integrity. In addition,
we showed the instruments to and received input from Administration for
Children and Families (ACF) officials at HHS.

Separate data collection instruments were mailed to TANF directors and
Child Care administrators in December 2003, and follow-up phone calls were
made to state TANF and CCDF officials whose DCIs were not received by
January 9, 2004. We addressed DCIs to each state TANF director and child
care administrator and requested he or she to consult with other state
officials who were most familiar with efforts taken to manage and identify
improper payments to complete the DCI. We received responses from all 11
of the state TANF directors and 11 child care administrators, although
each state did not respond to all questions. We did not independently
verify the information obtained through the DCI, other than for specific
dollar amounts for which we asked states to provide documentation. Data
from the DCIs were double-keyed to ensure data entry accuracy and were
independently verified. In addition, the information was analyzed using
approved GAO statistical software (SAS). The DCIs included questions on an
assessment of risk to decide the nature and extent of improper payments in
the TANF and CCDF programs; other actions taken to prevent, identify, and
reduce improper payments, including fraudulent payments in the TANF and
CCDF programs; and assistance and guidance from HHS and other sources.

The practical difficulties of conducting any survey may introduce errors,
commonly referred to as nonsampling errors. For example, difficulties in
how a particular question is interpreted, in the sources of information
that are available to respondents, or in how the data are entered into a
database or were analyzed can introduce unwanted variability into the
survey results. We took steps in the development of the survey instrument,
the data collection, and the data analysis to minimize these nonsampling
errors. For example, a survey specialist designed the survey instrument in
collaboration with GAO staff with subject matter expertise. Then, as
stated earlier, it was pretested to ensure that the questions were
relevant, clearly stated, and easy to comprehend. When the data were
analyzed, a second, independent analyst checked all computer programs.

Appendix I
Objectives, Scope, and Methodology

State Site Visits To obtain information about each assignment objective
and, in particular, an understanding of the steps states have taken to
identify and address improper payments, we interviewed state officials in
Georgia, Virginia, Illinois, Texas, and Washington. We met with state
TANF, CCDF, and fraud officials in these states. The interviews were
administered using an interview guide that included questions similar to
those on the DCIs. To obtain additional perspectives on TANF and CCDF
mechanisms to manage improper payments, we conducted observations at local
offices in the following locations: Springfield, Illinois; Austin, Texas;
and Tumwater, Washington. In addition, we interviewed state auditors in
the 5 states we visited and we analyzed state single audit reports
conducted under Office of Management and Budget's (OMB) Circular A-133 for
15 of the 16 states in our review.1 We also reviewed documents provided by
states that described their programs and internal control systems and that
corroborated any data officials provided on the amounts of improper
payments.

Review of Federal Role To identify steps HHS has taken to assess risk and
assist states in managing improper payments in the TANF and CCDF programs,
we identified and reviewed policies and procedures that described HHS's
oversight activities; observed key oversight activities at an HHS regional
office; reviewed documents, plans, and strategies for identifying improper
payments; and interviewed ACF finance and program officials. We also
reviewed results of audits done under OMB's Circular No. A-133 and the
Single Audit Act.

1According to a Michigan audit division administrator, audits of the
Michigan TANF and CCDF programs for 2001 and 2002 have not been completed.
Michigan performs a separate single audit for each department rather than
a state-wide single audit.

Appendix II

Comparison of Data-Sharing Sources in TANF
and CCDF Programs Among Surveyed States

Number of states that report sharing with listed data source

Data source TANF CCDF
Income Eligibility Verification System 11
Other human services programs in agency/ state 9
State department of labor or employment security 11
State directory of new hires 8
State department of motor vehicles 10
Public Assistance Reporting Information System 5
Lottery agencies 6
Prisons and criminal justice agencies at state level 8
National Criminal Information Center 4
Local jails 5
Credit bureaus 4
Financial institutions 5
State tax intercepts 7
Immigration and Naturalization Service 8
K-12 school system 6
Community colleges 3

Other providers of services, education, and training 4 4
Child support 9 8
Social Security Administration (SSA) form W-2 (wage
statements) 6 5
SSA Social Security number verification 11 2
SSA Supplemental Security Income data 11 6
SSA death information 7 2
State data (from other states) on length of TANF receipt 8
State data (from other states) on potential concurrent TANF
receipt 9
State child care licensing data 9
Head Start agencies 2

Source: GAO.

Note: Based on surveys of state TANF and CCDF administrators in 11 states.

Appendix III

Comments from the Administration for Children and Families

Appendix III
Comments from the Administration for
Children and Families

Appendix IV

GAO Contacts and Staff Acknowledgments

GAO Contacts
Kimberly Brooks, (202) 512-9038, [email protected] Gale Harris, (202)
512-7235, [email protected]

Staff
Elspeth Grindstaff, Amanda Mackison, Kathryn Peterson, Cynthia Teddleton,
and Kris Trueblood made major contributions to this report.

Acknowledgments Jerry Sandau provided technical assistance in analyzing
data.

Related GAO Products

Financial Management: Fiscal Year 2003 Performance and Accountability
Reports Provide Limited Information on Governmentwide Improper Payments.
GAO-04-631T. Washington, D.C.: April 15, 2004.

Financial Management: Effective Implementation of the Improper Payments
Information Act of 2002 Is Key to Reducing the Government's Improper
Payments. GAO-03-991T. Washington, D.C: July 14, 2003.

Single Audit: Single Audit Act Effectiveness Issues. GAO-02-877T.
Washington, D.C.: June 26, 2002.

Welfare Reform: Federal Oversight of State and Local Contracting Can Be
Strengthened. GAO-02-661. Washington, D.C.: June 11, 2002.

Welfare Reform: States Provide TANF-Funded Work Support Services to Many
Low-Income Families Who Do Not Receive Cash Assistance. GAO02-615T.
Washington, D.C.: April 10, 2002.

Single Audit: Survey of CFO Act Agencies. GAO-02-376. Washington, D.C.:
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Human Services Integration: Results of a GAO Cosponsored Conference on
Modernizing Information Systems. GAO-02-121. Washington, D.C.: January 31,
2002.

Means-Tested Programs: Determining Financial Eligibility Is Cumbersome and
Can Be Simplified. GAO-02-58. Washington, D.C.: November 2, 2001.

Strategies to Manage Improper Payments: Learning From Public and Private
Sector Organizations. GAO-02-69G. Washington, D.C.: October 2001.

Public Assistance: PARIS Project Can Help States Reduce Improper Benefit
Payments. GAO-01-935. Washington, D.C.: September 6, 2001.

Welfare Reform: Challenges in Maintaining a Federal-State Fiscal
Partnership. GAO-01-828. Washington, D.C.: August 10, 2001.

Medicaid: State Efforts to Control Improper Payments Vary. GAO-01-662.
Washington, D.C.: June 7, 2001.

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The Challenge of Data Sharing: Results of a GAO-Sponsored Symposium on
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Benefit and Loan Programs: Improved Data Sharing Could Enhance Program
Integrity. GAO/HEHS-00-119. Washington, D.C.: September 13, 2000.

Standards for Internal Control in the Federal Government.
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