    Foster Care and Adoption Assistance: Federal Oversight Needed to
    Safeguard Funds and Ensure Consistent Support for States'
    Administrative Costs (15-JUN-06, GAO-06-649).

    Policymakers have expressed concern over how costs to administer
    the Foster Care and Adoption Assistance programs are contributing
    to overall increased federal expenditures for these programs,
    estimated by the Congressional Budget Office to rise from about
    $6 billion in fiscal year 2003 to $8 billion in fiscal year 2008.
    The purpose of these programs is to provide financial support for
    the proper care of children who need placement outside their
    homes and find adoptive homes for children with special needs.
    They are authorized under Title IV-E of the Social Security Act
    and administered by the Department of Health and Human Services'
    Administration for Children and Families (ACF). GAO was asked to
    address (1) how the amounts and types of administrative costs
    changed from FY 2000 to FY 2004; (2) the reasons for differences
    in and among states in administrative spending and how these
    differences affect program services; and (3) whether HHS's
    oversight of administrative costs provides adequate controls over
    program spending.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-649
        ACCNO:   A55564
      TITLE:     Foster Care and Adoption Assistance: Federal Oversight
    Needed to Safeguard Funds and Ensure Consistent Support for
    States' Administrative Costs
         DATE:   06/15/2006
      SUBJECT:   Administrative costs
    	     Child adoption
    	     Child care programs
    	     Comparative analysis
    	     Cost analysis
    	     Federal/state relations
    	     Foster children
    	     Foster Care Program
    	     Adoption Assistance Program

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    GAO-06-649

         * Results in Brief
         * Background
              * Program Funding and Costs
              * The Deficit Reduction Act
              * Organization Structure and Oversight Activities
         * Title IV-E Expenditures for Administrative Costs Have Increa
              * Federal expenditures have increased 7 percent from fiscal ye
              * Inconsistencies in state reported data limit analysis of how
         * State IV-E Spending Reflects Changes in Staffing, Children S
              * State IV-E claims changed due to rising staff costs and chan
                   * Changes in Allocation, State Share of Spending, and Staffing
                   * Changes in the Proportion of IV-E Eligible Children
                   * Cost Claims for Candidates and Children Served by the Juveni
                   * Claims for Children in Ineligible Facilities
                   * Differences in Federal Funding Sources
              * States Implemented Initiatives to Improve Services, but the
         * HHS Oversight of Program Spending Has Been Compromised by an
              * HHS has not targeted its resources to high-risk regions
              * Lack of standard guidance and absence of information sharing
         * Conclusions
         * Recommendations for Executive Action
         * Agency Comments and Our Evaluation
         * GAO Contact
         * Staff Acknowledgments
         * GAO's Mission
         * Obtaining Copies of GAO Reports and Testimony
              * Order by Mail or Phone
         * To Report Fraud, Waste, and Abuse in Federal Programs
         * Congressional Relations
         * Public Affairs

    Report to the Chairman, Subcommittee on Human Resources, Committee on Ways
    and Means, House of Representatives

    United States Government Accountability Office

    GAO

    June 2006

    FOSTER CARE AND ADOPTION ASSISTANCE

    Federal Oversight Needed to Safeguard Funds and Ensure Consistent Support
    for States' Administrative Costs

    GAO-06-649

    Contents

    Letter 1

    Results in Brief 4
    Background 6
    Title IV-E Expenditures for Administrative Costs Have Increased, but Data
    Deficiencies Limit Analysis by Type of Cost 15
    State IV-E Spending Reflects Changes In Staffing, Children Served, and
    Cost Claiming Practices, but Impact On Services Is Unclear 20
    HHS Oversight of Program Spending Has Been Compromised by an Absence of
    Strategic Risk-Based Monitoring 33
    Conclusions 39
    Recommendations for Executive Action 40
    Appendix I IV-E Expenditures for Administrative Costs by State 43
    Appendix II Comments from the Department of Health and Human Services 45
    Appendix III GAO Contact and Staff Acknowledgments 48

    Tables

    Table 1: Eligibility Criteria for the Foster Care and Adoption Assistance
    Programs 6
    Table 2: State Reporting Requirements and Federal Reimbursement Rates for
    Allowable Administrative Costs under the Foster Care and Adoption
    Assistance Programs 9
    Table 3: Major Reasons Cited by 8 States for Changes in IV-E
    Administrative Costs from Fiscal Years 2000 to 2004 23
    Table 4: Change in Penetration Rate between Fiscal Years 2000 and 2004 25
    Table 5: Costs for Foster Care Candidates as an Approximate Percentage of
    Total Fiscal Year 2004 IV-E Foster Care Administrative Costs 26
    Table 6: Ineligible Facilities Used by Certain States to Claim IV- E
    Administrative Costs in Fiscal Year 2004 28
    Table 7: Foster Care Program Services Increased or Implemented Since
    Completion of CFSR Reviews for 11 States 31

    Figures

    Figure 1: HHS Entities Responsible for Oversight of IV-E Expenditures for
    Foster Care and Adoption Assistance Administrative Costs 14
    Figure 2: Change in Total Federal Expenditures for Foster Care and
    Adoption Assistance Administrative Costs 16
    Figure 3: Change in Federal Expenditures for Foster Care and Adoption
    Assistance Administrative Costs between Fiscal Years 2000 and 2004 by
    State 17
    Figure 4: Foster Care and Adoption Assistance Administrative Costs by
    Category for Fiscal Year 2004 18
    Figure 5: Changes in IV-E Administrative Expenditures for 11 States, FY
    2000- FY 2004 (Dollars in millions) 22
    Figure 6: Percentage of Fiscal Year 2004 Total Foster Care And Adoption
    Assistance Administrative Costs for States Located In HHS's 10 Regional
    Offices 34

    Abbreviations

    ACF Administration for Children and Families AFDC Aid to Families with
    Dependent Children CFSR Child and Family Services Review CMS Centers for
    Medicare & Medicaid Services DCA Division of Cost Allocation FFP Federal
    Financial Participation GATES Grants Application and Tracking and
    Evaluation System HHS Department of Health and Human Services OIG Office
    of Inspector General SACWIS Statewide Automated Child Welfare Information
    System SSBG Social Services Block Grant SSI Supplemental Security Income
    TANF Temporary Assistance to Needy Families TCM Targeted Case Management

    This is a work of the U.S. government and is not subject to copyright
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    United States Government Accountability Office

    Washington, DC 20548

    June 15, 2006 June 15, 2006

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

    Dear Mr. Chairman: Dear Mr. Chairman:

    Policymakers have expressed concern over how costs to administer the
    Foster Care and Adoption Assistance programs are contributing to overall
    increased federal expenditures for these programs, estimated by the
    Congressional Budget Office to rise from about $6 billion in fiscal year
    2004 to $8 billion in fiscal year 2008. These programs, authorized under
    Title IV-E of the Social Security Act and administered by the Department
    of Health and Human Services' Administration for Children and Families
    (ACF), help states provide care for eligible children who have been
    removed from their homes due to child abuse or neglect, and provide funds
    to adoptive parents of eligible special needs children. Policymakers have
    expressed concern over how costs to administer the Foster Care and
    Adoption Assistance programs are contributing to overall increased federal
    expenditures for these programs, estimated by the Congressional Budget
    Office to rise from about $6 billion in fiscal year 2004 to $8 billion in
    fiscal year 2008. These programs, authorized under Title IV-E of the
    Social Security Act and administered by the Department of Health and Human
    Services' Administration for Children and Families (ACF), help states
    provide care for eligible children who have been removed from their homes
    due to child abuse or neglect, and provide funds to adoptive parents of
    eligible special needs children.

    Administrative costs for these programs include all expenditures on behalf
    of Title IV-E eligible children other than payments to foster families and
    adoptive parents, such as case management. The federal government
    generally reimburses the states for 50 percent of eligible administrative
    costs with no limit. States also use funding from other federal sources
    such as Medicaid, which may provide a higher match rate for administrative
    costs.1 States must document their use of program funds in Administrative
    costs for these programs include all expenditures on behalf of Title IV-E
    eligible children other than payments to foster families and adoptive
    parents, such as case management. The federal government generally
    reimburses the states for 50 percent of eligible administrative costs with
    no limit. States also use funding from other federal sources such as
    Medicaid, which may provide a higher match rate for administrative costs.1
    States must document their use of program funds in federally approved
    state plans. At the federal level, ACF approves IV-E state plans and the
    Centers for Medicare & Medicaid (CMS) are responsible for approval of
    state Medicaid plans. In addition, some states use block grant funds from
    programs, such as Temporary Assistance to Needy Families (TANF), that do
    not require states to match funds.2 Because Title IV-E only covers costs
    associated with IV-E eligible children, states use other federal funding
    sources to help pay for administrative costs related to children that do
    not meet the IV-E requirements. IV-E eligibility criteria include among
    other requirements, having been removed from the home pursuant to a
    judicial determination and being eligible for the Aid to Families with
    Dependent Children Program as it was in effect in 1996.

    1Medicaid is a federal-state program that finances medical and health
    services for eligible individuals and provides funds to states for
    targeted case management services that help low income individuals gain
    access to needed medical, social, educational, and other services and
    coordinates individuals' use of providers. Targeted case management
    enables states to provide case management services to a defined group or
    groups of Medicaid-eligible individuals without providing the same service
    to all Medicaid beneficiaries statewide, as normally required by Medicaid
    law. Groups are targeted primarily on the basis of shared characteristics,
    such as children placed in foster care. The federal government matches
    state Medicaid spending for medical assistance according to a formula
    based on each state's per capita income. The federal share can range from
    $0.50 to $0.83 for every dollar spent; therefore, some states may receive
    a higher federal match rate for administrative costs associated with
    foster care children if these costs are charged to Medicaid rather than
    IV-E.

    In response to concerns about the growth of costs claimed under Title
    IV-E, Congress enacted legislation as part of the Omnibus Budget
    Reconciliation Act of 19903 that was intended to provide better
    information on the types of administrative costs states claim for federal
    reimbursement. As a result, HHS added separate categories to its reporting
    form that require states to distinguish costs related to placing a child
    in foster care from other program activities. In addition to reporting
    amounts for staff training and development of a statewide automated child
    welfare information system (SACWIS), HHS requires states to break out
    costs related to child placement and other activities into five types: (1)
    case management for children in foster care, (2) case management for
    children at risk of being placed into foster care, (3) eligibility
    determination, (4) information system operating costs and (5) other costs,
    such as licensing of foster homes.

    In light of more available information and the continued rise in
    administrative costs, you asked us to determine (1) how the amounts and
    types of federal expenditures for Foster Care and Adoption Assistance
    administrative costs changed between fiscal years 2000 and 2004; (2) the
    reasons for differences in and among states in administrative spending and
    how these differences affect program services; and (3) whether HHS's
    oversight of administrative expenditures provides adequate controls over
    program spending.

    2However, states are required to maintain a significant portion of their
    own historic financial commitment to their welfare programs as a condition
    of receiving their full TANF allotments.

    3Pub. L. No. 101-508 (1990).

    To determine how federal expenditures for administrative costs changed
    during fiscal years 2000 to 2004, we analyzed state claims for
    expenditures provided by ACF.4 These data distinguished expenditures by
    type of costs such as child placement services, training, and development
    of state automated systems. We determined the data were sufficiently
    reliable for this purpose. To determine the reasons for differences in and
    among states in administrative spending and how these differences affect
    program services, we (1) conducted site visits to five states-California,
    Kansas, Pennsylvania, South Carolina, and Washington; (2) conducted phone
    interviews with state officials responsible for program and fiscal
    operations in six additional states-Illinois, Maryland, Michigan, New
    York, Texas, and Wisconsin; and (3) obtained financial data and
    perspectives from these 11 states through a structured data collection
    instrument. These 11 states accounted for about 64 percent of fiscal year
    2004 federal administrative costs and represented diversity in the change
    in administrative costs, total spending on foster care and adoption
    assistance programs, geographic location, and also provided examples of
    state and county operated programs. While we did not fully assess the
    reliability of the data the state agencies reported on the instrument, we
    reviewed the data to determine that the responses were complete and
    reasonable and found the data to be sufficiently reliable for the purposes
    of this report. We also analyzed state allocation plans and financial
    reports. To assess HHS oversight of administrative expenditures, we
    reviewed Title IV of the Social Security Act, related regulations on
    allowable expenditures, guidance issued by ACF, and audit reports from
    HHS's Office of Inspector General. We also interviewed officials in HHS's
    Division of Cost Allocation, Office of Grants Management, and Centers for
    Medicare & Medicaid Services, and Office of the Inspector General, as well
    as 6 of HHS's 10 regional offices primarily responsible for oversight of
    expenditures.

    4There are some limitations in the data we used for our analysis. The data
    ACF provided represent states' claims for reimbursement rather than actual
    IV-E expenditures and reflect when the states made the claims to the
    federal government rather than when the costs were incurred. States may
    make corrections to claims within 2 years of their original filing. When
    they make such corrections, these are attributed to the year the corrected
    claim is made, rather than the year the claim was incurred. Therefore, ACF
    data can include prior quarter claims for costs incurred over the past 2
    years and not previously reported. Prior quarter claims made up about 7
    percent of 2000, 2001, and 2002 claims;17 percent of 2003 claims; and 10
    percent of 2004 claims. Claims data will differ from federal reimbursement
    reported in two ways. First, claims data includes payments that may have
    been deferred and possibly denied by HHS and reports them in the year they
    are claimed, rather than the year they are paid. Secondly, claims data
    includes claims that HHS has disallowed and will, therefore, never be
    paid; however, according to officials, this represents a very small
    portion of states' claims.

    We conducted our work from June 2005 through June 2006 in accordance with
    generally accepted government auditing standards.

                                    Results in Brief

    Total federal expenditures to help states pay for the costs of
    administering the Foster Care and Adoption Assistance Programs increased 7
    percent from fiscal years 2000 to 2004, from approximately $2.5 to $2.6
    billion,5 but analysis of changes in the types of costs incurred was
    limited due to inconsistencies in how states tracked and reported data
    over time. While over a third of the states received greater federal
    reimbursements of administrative costs in fiscal year 2004 than in fiscal
    year 2000, six states accounted for over 80 percent of the increase.
    California alone was responsible for approximately 31 percent of the total
    increase. Nearly all of the federal expenditures-89 percent in fiscal year
    2004-were for costs related to child placement services such as managing
    cases as children progress through the child welfare system and finding
    appropriate foster and adoptive homes. We were unable to use the data to
    analyze changes at a more detailed level because not all states complied
    with the criteria for reporting costs or interpreted the criteria the
    same. For example, at least one region did not require states to report
    costs as instructed on the reporting form. Some federal and state
    officials told us, however, that caseworker costs such as developing and
    reviewing case plans accounted for the bulk of the increase during this
    time period and were primarily associated with the salaries and benefits
    of caseworkers.

    Our review of state IV-E spending in 11 states between fiscal years 2000
    and 2004 showed that methods states used to identify eligible children and
    the related staff costs for serving them were two primary reasons for
    differences in federal expenditures within and among states; but it is
    unclear how these differences affected services to children. Washington
    more than doubled its costs charged to IV-E between fiscal years 2000 and
    2004 by changing the formula used to calculate the number of eligible
    children and by changing methods to determine a child's eligibility. More
    significant for some states is the extent that they claim costs for
    serving children not yet removed from their homes-known as foster care
    "candidates." Wisconsin, for example, reported that about half of its
    total fiscal year 2004 IV-E administrative costs were for candidates,
    while Michigan reported candidate costs of only 1 percent. States also
    differed in the extent that they used other federal programs instead of
    IV-E for administrative costs or had increases or decreases in their state
    budgets for social services. For example, while most states charged IV-E
    for all eligible foster care case management costs, a majority of South
    Carolina's case management costs were charged to Medicaid. Officials in
    all 11 states reported taking action to improve services, such as reducing
    ratios of caseworkers to children by hiring or reallocating staff, and
    collaborating with the court system to improve the legal processes and
    reduce the time that children spend in foster care. However, the effect of
    IV-E expenditures on program services is unclear because states use
    various funding sources and a change in IV-E funding does not necessarily
    result in a change in the funding of child welfare services.

    5These numbers have been adjusted for inflation in fiscal year 2000
    dollars. The nominal increase was 17 percent, from approximately $2.5
    billion to $2.9 billion.

    HHS's oversight of state claims is insufficient to provide adequate
    control over program spending. According to HHS officials, because of
    retirements and restructuring efforts, staff do not always have the
    qualifications or experience to fulfill oversight responsibilities. HHS
    has not redistributed its staff commensurate with the risk of states
    claiming inappropriate costs. Consistent oversight is also hindered by
    inadequate guidance, including lack of a current financial review manual.
    Regional offices have developed their own protocols for reviewing states'
    quarterly claims for reimbursement, which has resulted in inconsistent
    oversight of state costs. In addition, while HHS clarified policies on the
    allowability of certain expenditures-including costs for candidates and
    the use of Medicaid funding for services for children in foster
    care-policies were not uniformly applied across regions. For example, two
    states located in two regions, charged certain foster care costs to
    Medicaid instead of Title IV-E, while HHS officials from a third region
    required a state to discontinue this practice. Further, questionable
    claiming practices have not been systematically addressed. For example,
    although two regions and HHS headquarters officials cited problems with
    how states are documenting and allocating costs for candidates, HHS's
    Division of Cost Allocation has not systematically reviewed state
    allocation procedures to address this problem.

    In this report, we are recommending that the Secretary of Health and Human
    Services direct the Assistant Secretary for the Administration for
    Children and Families to take action to better safeguard federal resources
    and ensure consistent federal support for states' administration of foster
    care and adoption assistance programs.

    In this report, we are recommending that the Secretary of Health and Human
    Services direct the Assistant Secretary for the Administration for
    Children and Families to take several actions to better safeguard federal
    resources and ensure consistent federal support for states' administration
    of foster care and adoption assistance programs. In its written comments
    on a draft of this report, HHS did not explicitly agree or disagree with
    our five recommendations, but stated that it would implement or consider
    implementing four of them in whole or in part. A copy of the written
    comments from the Department of Health and Human Services is in appendix
    II.

                                       Background

    Title IV-E of the Social Security Act authorizes funds to states to help
    cover the costs of operating their Foster Care and Adoption Assistance
    programs. These programs primarily provide financial support for the care
    of eligible children who have been removed from their home due to abuse or
    neglect, as well as to families who adopt eligible children with special
    needs from the foster care system. Table 1 illustrates the eligibility
    criteria for the Foster Care and Adoption Assistance Programs.

    Table 1: Eligibility Criteria for the Foster Care and Adoption Assistance
    Programs

    Foster Care Program               Adoption Assistance Program
    A judicial determination has been Children must have a special need that
    made that conditions in the home  is defined as the state determining that
    from which the child was removed  a child should not or could not be
    were contrary to the child's      returned to the home of his or her
    welfare and reasonable efforts    parents, and certain factors, such as
    were made to prevent removal;     age; membership in a sibling unit or
                                         minority group; or emotional, mental, or
    A judicial determination has been physical conditions that would make
    made that the state has           finding an appropriate adoptive home
    documentation that it made        difficult.
    reasonable efforts to finalize a
    permanency plan;                  Special needs children must also meet at
                                         least one criterion from the following
    A judicial determination has been list:
    made that the state has
    responsibility for placement and  (a) the child is a dependent child who
    care of the child;                would have been eligible for AFDC, as it
                                         existed in 1996;
    But for the removal from the
    home, the child would have        (b) the child is eligible for
    qualified for the Aid to Families Supplemental Security Income (SSI);
    with Dependent Children (AFDC)
    program as it was in effect on    (c) the child is a child of a minor
    July 16, 1996; and                parent who is in foster care already and
                                         receiving foster care maintenance
    The state has verification of     payments under Title IV-E; or
    provider safety requirements.
                                         (d) the child received adoption
    If removal is the result of a     assistance previously, but the adoption
    voluntary placement agreement, a  dissolved or the adoptive parents died.
    state must obtain a judicial
    determination that continued
    placement is in the child's best
    interest.

    Source: Title IV-E of the Social Security Act.

    Although most foster care funds support children who have been placed
    outside of the home due to abuse or neglect, they may also be used to
    support placing a child in a child care institution, such as a juvenile
    justice facility not operated primarily for detention, pursuant to
    voluntary agreements or decisions made by the courts that stipulate
    removal from the home is in the best interests of the child. Title IV-E
    also authorizes financial support to states to help defray the costs of
    administering the programs. Administrative costs cover expenses states
    incur to identify eligible children, refer them for services, and plan for
    permanent placement, including administrative costs to facilitate the
    adoption of special needs children, the training of staff, and the
    development and operation of a statewide automated child welfare
    information system that helps states manage their child welfare cases as
    well as report child abuse and neglect, foster care, and adoption
    information to the federal government.

    Program Funding and Costs

    Title IV-E provides an open-ended entitlement for administrative costs on
    behalf of children who meet certain federal eligibility criteria. The
    federal government shares the cost of administration 50-50 with states.6
    Total federal expenditures, including administrative costs, for the Title
    IV-E Foster Care and Adoption Assistance programs were $6 billion in
    fiscal year 2004 and estimated to rise to $8 billion in fiscal year 2008,
    according to the Congressional Budget Office. Of the $6 billion, $2.9
    billion was for the cost of administering these programs with
    approximately 90 percent going towards administering the Foster Care
    Program.

    Title IV-E is one of many funding sources states use to provide child
    welfare services. Title IV-B of the Social Security Act authorizes funds
    to states for a broad range of services, including child protection,
    family preservation, other support services, and adoption services. The
    Child Abuse Prevention and Treatment Act authorize grants and research
    funds designed to improve child protective services, offer services aimed
    at preventing abuse and neglect, and increase the knowledge about ways to
    prevent child maltreatment. Additionally, states may use federal funds
    from other programs with a focus much broader than child welfare, such as
    Title XX's Social Services Block Grant (SSBG), Medicaid, and TANF to
    provide some support for child welfare services.

    6Training costs are the exception and reimbursed at 75 percent.

    States report their administrative costs to ACF in three main categories:
    child placement services and other administrative activities,7 training,
    and development of statewide automated child welfare information systems
    (SACWIS development). The Omnibus Budget Reconciliation Act of 19908
    required that certain foster care costs be further categorized to provide
    better information about reimbursement for administrative costs. HHS's
    current reporting form requires states to distinguish among five types of
    costs related to child placement as shown in table 2. Because this
    requirement does not apply to the Adoption Assistance program, adoption
    assistance administrative costs are only reported in two categories, child
    placement services and training.9

    7On Form ACF IV-E-1, Title IV-E Foster Care and Adoption Assistance
    Financial Report: State Quarterly Report of Expenditures and Estimates,
    this category is titled "State and Local Administration." For
    simplification and purposes of our review, we use the term, "child
    placement services," to refer to case management services for children
    placed in foster care and at risk of being placed in foster care as well
    as other administrative costs such as eligibility determination and SACWIS
    operating costs.

    8Pub. L. No. 101-508 (1990).

    9Costs for SACWIS Development are charged only to the Foster Care program.

    Table 2: State Reporting Requirements and Federal Reimbursement Rates for
    Allowable Administrative Costs under the Foster Care and Adoption
    Assistance Programs

                                    Federal
    General reporting      reimbursement
    requirements                    rate       Title IV-E allowable activities
          o  Child Placement                   o     o  Development, review, or
          Services                                   revision of case plans or
          o  Case management                         the supervision or
          for children in                            management of cases,
          foster care                                including preparation for
          o  Case management                         and participation in
          for children at                            judicial proceedings, as
          risk of placement                          well as referral to services
          into foster carea                          for children placed in
          o  Eligibility                             foster care
          determination                              o  Development, review, or
          o  Statewide                               revision of case plans or
          Automated Child                            the supervision or
          Welfare Information                        management of cases,
          Systems (SACWIS)                           including preparation for
          operation                                  and participation in
          o  Other                                   judicial proceedings, as
          administration                             well as referral to services
                                                     for children still living at
                                                     home
                                                     o  Verification and
                                                     documentation of eligibility
                                                     o  Operation of statewide
                                                     automated child welfare
                                                     information systems
                                                     o  Other costs not mentioned
                                                     above that are related to
                                                     running the program such as
                                                     setting the rates paid to
                                                     foster care institutions,
                                                     recruitment and licensing of
                                                     homes, and issuing payments
                                        50%          to families
    SACWIS development                         Establishing states' automated
    costs                                      child welfare information
                                        50%       systemsb
    State and local                            Training of personnel employed
    training                                   by state or county agencies
                                                  administering the program and
                                                  training current and
                                        75%       prospective foster parents
    Adoption Assistance
    Program
    Child placement                            All costs related to running
    services                                   the program such as conducting
                                                  adoptive home studies,
                                                  recruiting adoptive homes,
                                                  placement of a child into a
                                                  home, and the negotiation and
                                        50%       review of adoption agreements.
    State and local                            Training of personnel employed
    training                                   by state or county agencies
                                                  administering the program and
                                                  training current and
                                        75%       prospective adoptive parents

    Source: ACF Form IV-E-1 and HHS regulations.

    aOn ACF Form IV-E-1, these costs are entitled "Pre-Placement." In order
    for a child to be considered at risk of placement, or a "candidate" for
    foster care as they are commonly referred to, states must have one of the
    following documentation: (1) case plan that identifies foster care as the
    goal absent preventative services, (2) eligibility form used to document
    the child's eligibility for Title IV-E, or (3) evidence of court
    proceedings related to the child's removal from the home.

    bTo qualify for federal funding for SACWIS, states must prepare and submit
    an advance planning document (APD) to the Children's Bureau, in which they
    describe the state's plan for managing the design, development, and
    operation of a SACWIS that meets federal requirements and state needs in
    an efficient, comprehensive, and cost-effective manner.

    States report quarterly the costs of administering their Foster Care and
    Adoption Assistance programs to ACF in accordance with cost allocation
    plans they developed and ACF approved. These cost allocation plans
    describe how the state will identify, measure, and allocate administrative
    costs across federal programs such as Title IV-E, Medicaid, and TANF that
    may serve overlapping populations with overlapping state resources. States
    use a variety of methods to allocate costs among programs such as (1) the
    direct charge of costs to a specific program based on the number of
    full-time employees, or (2) use of a time study to identify how workers
    involved in multiple programs are spending their time. Most states employ
    a random moment time study, a statistical tool for estimating the amount
    of time employees spend performing specific activities, such as case
    management. By collecting a relatively few representative moments of
    employee time, an agency is able to estimate the total distribution of
    employee time statewide. This information is used to document and support
    claims for federal matching funds by program.

    In addition, states generate an eligibility statistic-often referred to as
    a penetration rate-that represents the proportion of IV-E eligible
    children (numerator) relative to all children served by the state foster
    care or adoption assistance programs (denominator). States then apply this
    rate to all IV-E allowable costs to determine how much of these costs are
    eligible for federal reimbursement.10

    The following is a simplified illustration of a state's claiming process:

    A state randomly surveys caseworkers throughout the quarter and find that
    they spend 40% of their time conducting case management work for children
    placed in foster care. The caseworker costs-salary, benefits, and a
    portion of overhead-is $200,000 for the quarter. Then 40 percent of the
    $200,000, or $80,000, might be chargeable as IV-E case management costs.
    However, the caseworkers are assisting both IV-E eligible and non-eligible
    children; only the costs for assisting the eligible children can be
    claimed. To calculate the portion of the $80,000 that can be charged to
    IV-E, the state multiples $80,000 by the eligibility statistic. If the
    eligibility statistic is 70% (70% of the children served are IV-E
    eligible) then the case management cost that can be charged to Title IV-E
    for that quarter are $80,000 times .7=$56,000. The state subsequently
    receives 50 percent of that amount, or $28,000, in reimbursement for those
    case management costs.

    In addition to claiming costs for IV-E eligible children who have been
    placed in foster care, states are permitted to also claim costs for IV-E
    eligible children who are at serious risk of removal from the home. States
    can demonstrate children are candidates for foster care by either seeking
    to remove the child from the home or determining that absent effective
    preventive services, the child would be placed in foster care. In order to
    claim costs for foster care candidates, states can either determine
    whether or not the candidates are actually IV-E eligible or use a cost
    allocation approach based on both determination of foster care candidacy
    and potential IV-E eligibility. Because states interpreted policy
    regarding candidates differently, HHS issued formal guidance in 2001
    designed to clarify at what point a child is considered a candidate, who
    has the authority to make such a determination, and the types of costs
    allowed. In addition, the guidance stipulated that states were no longer
    able to claim administrative costs for children in unlicensed facilities
    under the guise they were candidates for foster care.11

    10The penetration rate is not applied to eligibility determination costs
    because costs related to determining whether a child is eligible for Title
    IV-E reimbursement are allowable regardless of whether the child is found
    to be eligible or not.

    The Deficit Reduction Act

    The Deficit Reduction Act12 incorporated many of the provisions outlined
    in ACF guidance. The act specified the administrative costs that can be
    claimed for children who meet all eligibility criteria except placement in
    a licensed foster care setting.13 It also clarified the specific case
    management services permitted for Medicaid reimbursement including:

               o  assessment of an eligible individual to determine service needs
               by taking a client history, identifying an individual's needs, and
               gathering information to form a complete assessment;

               o  development of a specific care plan based on the information
               collected through an assessment that specifies the goals and
               action to address the medical, social, educational, and other
               services needed by the individual;

               o  referral and related activities to help an individual obtain
               needed services; and

               o  monitoring and follow-up activities, including activities and
               contacts to ensure the care plan is effectively implemented and
               adequately addresses the individual's needs.

               The act asserts that Medicaid can be charged when "there are no
               other third parties liable to pay for such services," including a
               medical, social, educational or other program that provides
               reimbursement. It also specifies that targeted case management
               services for children in foster care would not cover activities
               including but not limited to the completion of required foster
               care documentation, assessing adoption placement, and recruiting
               potential foster care parents.

               ACF is responsible for the administration and oversight of Title
               IV-E funding to states. HHS headquarters staff develop policies
               and procedures for states to obtain and use federal funds, while
               staff-financial operations specialists-in HHS's 10 regional
               offices perform frontline activities to oversee financial internal
               control processes. One key oversight activity includes verifying
               the accuracy and appropriateness of the costs states claim for
               federal reimbursement on their quarterly expenditure reports.
               Depending on resources, regional offices may conduct on-site
               reviews related to expenditure claims. Regional offices are also
               responsible for resolving any findings from the Office of
               Management and Budget Circular A-133 audit which requires
               non-federal entities that spend more than $500,000 of federal
               funds each year to obtain an audit of its financial statements
               that includes verification of compliance with federal rules.

               ACF also monitors state compliance with federal child welfare laws
               and performance through (1) Title IV-E Eligibility Reviews and (2)
               Child and Family Services Reviews (CFSR). The Title IV-E Reviews
               ensure that states are properly determining the eligibility of
               children for federal foster care support and making correct claims
               for reimbursement. Passage of the Adoption and Safe Families Act
               helped spur the creation of the CFSR by emphasizing the outcomes
               of safety, permanency, and well-being for children. Based on a
               review of statewide data, interviews with community stakeholders
               and some families receiving services, and a review of a sample of
               50 child welfare cases, HHS determines whether a state achieved
               substantial conformity with: (1) outcomes related to safety,
               permanency, and well-being, such as keeping children protected
               from abuse and neglect and achieving permanent, stable living
               situations for children; and (2) key systemic factors, such as
               having an adequate case review system and an adequate array of
               services. States are required to develop program improvement plans
               to address identified shortcomings. Since fiscal year 2000, all 50
               states have undergone at least one IV-E Eligibility Review, and
               some have had a second. ACF completed its first round of on-site
               reviews for the CFSR in all 50 states, District of Columbia, and
               Puerto Rico in March of 2004.

               Other HHS agencies have responsibility for reviewing the financial
               management of state programs and ensuring claims for expenditure
               are allowable and allocable in accordance with federal regulations
               and guidelines. HHS's Division of Cost Allocation (DCA) is
               responsible for reviewing states' public assistance cost
               allocation plans, resolving audits that involve cost allocation
               issues, and providing technical assistance and guidance to federal
               departments and agencies. DCA and ACF work together to review
               state cost allocation methods to ensure the cost distribution to
               the federal government is appropriate and accurate, in accordance
               with Office of Management and Budget guidelines. HHS's Office of
               Inspector General (OIG), Office of Audit Services, provides all
               auditing services for HHS. OIG audits examine the performance of
               HHS programs and/or its grantees and contractors in carrying out
               their respective responsibilities and are intended to provide
               independent assessments of HHS programs and operations in order to
               reduce waste, abuse, and mismanagement and to promote economy and
               efficiency throughout HHS. Figure 1 illustrates the entities
               responsible for oversight of expenditures for foster care and
               adoption assistance administrative costs.

    11While this guidance was issued in 2001, due to objections from states
    and other interested parties that HHS did not allow for public comment,
    HHS sought to codify the guidance and issued a notice of proposed
    rulemaking in January 2005.

    12Pub. L. No. 109-171 (2006).

    13The Deficit Reduction Act also effectively nullified the 9th Circuit
    U.S. Court of Appeals decision of Rosales v. Thompson, 321 F. 3rd 835
    (2003), which allowed a state to determine in some instances whether a
    foster child would have met the AFDC portion of the Title IV-E eligibility
    requirements while living in the home of a relative like a grandmother.

    Organization Structure and Oversight Activities

    Figure 1: HHS Entities Responsible for Oversight of IV-E Expenditures for
    Foster Care and Adoption Assistance Administrative Costs

    Title IV-E Expenditures for Administrative Costs Have Increased, but Data
                      Deficiencies Limit Analysis by Type of Cost

    Federal expenditures to states for administering the Foster Care and
    Adoption Assistance programs increased between fiscal years 2000 to 2004,
    but data limitations prevent a determination of how the types of federal
    expenditures changed. While federal expenditures increased in a little
    over a third of the states during this period, changes in a few states
    drove the nationwide increase and federal expenditures declined in fiscal
    year 2004. States reported incurring almost all foster care costs in one
    category: child placement services. Nationwide changes in the five types
    of costs within this category could not be analyzed, however, because
    states did not always adhere to the federal reporting criteria or
    interpreted the criteria differently. Despite the data deficiencies, some
    state and federal officials said that staff costs related to case
    management were primarily responsible for the increase in overall
    administrative expenditures.

    Federal expenditures have increased 7 percent from fiscal years 2000 to 2004
    primarily due to changes in a few states

    Federal expenditures to all states for administering the Foster Care and
    Adoption Assistance programs increased by $173 million (7 percent) from
    fiscal years 2000 to 2004, after adjusting for inflation.14 However, a
    steady increase in expenditures over the first 3 years was followed by a
    decrease in the final year as shown in figure 2.15

    14The inflation adjustment was made using 2000 as the base year. Without
    adjusting for inflation, the increase was 17 percent, or $409 million.

    15This decline may be in part due to a decline in the foster care caseload
    eligible for IV-E due to program rules that rely on 1996 income standards
    to determine eligibility. CBO projects a steady decline for nearly 10
    years.

    Figure 2: Change in Total Federal Expenditures for Foster Care and
    Adoption Assistance Administrative Costs

    Note: Figure based on data adjusted for inflation in fiscal year 2000
    dollars.

    The $173 million overall increase in federal expenditures resulted from
    increases totaling $318 million in 21 states, including the District of
    Columbia, offset by decreases totaling $145 million in the remaining
    states. Among the 21 states with increased federal expenditures, 6 states
    accounted for the majority of the increase, over 80 percent, as shown in
    figure 3. California alone was responsible for 31 percent of the total
    increase in federal expenditures. Among the 30 states reporting a decrease
    in administrative costs, the change was distributed more evenly, with 13
    states accounting for 81 percent of the decrease. (See app.I for detailed
    information on the amount of administrative costs by state for fiscal
    years 2000 and 2004.)

    Figure 3: Change in Federal Expenditures for Foster Care and Adoption
    Assistance Administrative Costs between Fiscal Years 2000 and 2004 by
    State

    Among the three broad reporting categories of administrative costs for the
    Foster Care and Adoption Assistance programs, costs for child placement
    services accounted for nearly all of the federal expenditures-89 percent
    in fiscal year 2004, followed by costs for staff training and development
    of child welfare data systems, as shown in figure 4.

    Figure 4: Foster Care and Adoption Assistance Administrative Costs by
    Category for Fiscal Year 2004

    Note: Figure based on data adjusted for inflation in fiscal year 2000
    dollars.

    Child placement costs drove the increase in overall administrative
    expenditures between fiscal years 2000 and 2004, for a total increase of
    $173 million, while costs related to the development of SACWIS increased
    by $10 million and staff training costs decreased by a similar amount.16

    Inconsistencies in state reported data limit analysis of how types of costs have
    changed, but according to officials case management services accounted for the
    majority of increased expenditures

    States have not consistently reported foster care costs by type within one
    of the three broad categories of administrative costs-the child placement
    services category-precluding a detailed analysis of how these types of
    costs have changed over time.

    ACF provides instruction to states on how to report costs. States are to
    report foster care child placement services costs by five different types:

               o  Costs to determine a child's eligibility for coverage under the
               Title IV-E Foster Care program.

               o  Case management costs for a child in foster care.

               o  Case management costs for a child at risk of placement into
               foster care.

               o  Costs to operate the Statewide Automated Child Welfare
               Information System.

               o  Other administrative costs not falling in the other categories.

               There are three primary reasons for variation among states in
               reporting child placement services by these types.

               o  Not all states complied with the reporting instructions for
               costs associated with foster care child placement services. Some
               states reported their costs by just one or two types. For example,
               Pennsylvania did not begin reporting costs among the five types
               until fiscal year 2004 after being directed to do so by its
               cognizant ACF regional office in March of 2003. Pennsylvania had
               reported nearly all costs before that time as "other
               administration." Therefore, the substantial increase in case
               management costs reported by Pennsylvania may have been primarily
               due to compliance with the reporting requirements in fiscal year
               2004 rather than actual changes in costs incurred. Over the last
               several years at least two regions have required states to report
               their child placement services costs by the five types.

               o  States interpreted the reporting instructions differently.
               Kansas, Texas, and New York use private contractors for a large
               portion of case management activities. Kansas and Texas reported
               these costs as "other administration," whereas New York reported
               them as "case management." States also vary in how they reported
               overhead and other costs not directly related to assisting a
               specific child. For example, Illinois reported costs for
               negotiating and setting the rates they pay foster care
               institutions as case management costs, while other states reported
               this cost as "other administration."

               o  States differed in how they claimed costs between the Foster
               Care and Adoption Assistance programs. For example, Kansas charged
               administrative costs such as case management for children who are
               eligible for adoption, the recruitment and study of adoptive
               homes, and licensing of adoptive homes to the Foster Care program
               while Washington, charged these activities to the Adoption
               Assistance program.

               Despite the data limitations, state officials reported that costs
               related to the salaries and benefits of staff performing foster
               care case management activities accounted for the majority of
               foster care administrative costs ranging from 50 to 96 percent of
               total program costs. In addition, some state and federal officials
               we interviewed indicated that costs for case management activities
               drove the increase in overall administrative costs between fiscal
               years 2000 and 2004.

               Our review of 11 states between fiscal years 2000 and 2004 showed
               that state Foster Care and Adoption Assistance spending within and
               among states reflected differences in methods used to identify
               eligible children and related staff costs, but these changes could
               not be linked to children's services. Among states with increased
               spending, four states hired more caseworkers, increased their
               salaries, and/or changed how caseworker time is allocated among
               foster care and other programs. In states with decreased spending,
               there were declines in the number of children for whom states
               could claim costs and state budget cuts. States differed in the
               extent that they included case management costs for children who
               are in facilities that are ineligible for foster care maintenance
               payments, or the extent that they used other funding sources to
               pay for administrative costs that could be charged to IV-E. All 11
               states reported expanding or implementing initiatives to improve
               services to children; however, the effects of IV-E funding cannot
               be separated from those of other funding sources or initiatives.

               Among the 11 states we reviewed, 6 increased their IV-E
               administrative cost claims for the Foster Care and Adoption
               Assistance Programs between fiscal years 2000 and 2004, with
               increases ranging from 3 percent in Wisconsin to 142 percent in
               Washington; another 5 states had decreased costs ranging from 2
               percent in Illinois to 24 percent in South Carolina, as shown in
               figure 5.

    16Using nominal numbers all three categories had increased costs: child
    placement services costs increased by $383 million, costs related to the
    development of SACWIS increased by $15 million, and staff training costs
    increased by $11 million.

      State IV-E Spending Reflects Changes in Staffing, Children Served, and Cost
                 Claiming Practices, but Impact on Services Is Unclear

    State IV-E claims changed due to rising staff costs and changes in eligible
    children and state budgets; states differ in cost claiming practices and use of
    alternative funding

    Figure 5: Changes in IV-E Administrative Expenditures for 11 States, FY
    2000-2004 (Dollars in millions)

    Note: Figure based on data adjusted for inflation in fiscal year 2000
    dollars.

    States provided various reasons for the increase or decrease in total
    administrative costs. For those eight states that had greater than a 5
    percent change in costs, reasons cited most frequently as contributing to
    these changes included the amount of costs claimed for candidates, changes
    in staff allocation methods, and changes in the proportion of IV-E
    eligible children, as shown in table 3.

    Table 3: Major Reasons Cited by 8 States for Changes in IV-E
    Administrative Costs from Fiscal Years 2000 to 2004

                                    Change in                             Use of
                                    proportion Costs claimed for          other
                      Revised       of IV-E    children                   federal
                      allocation of eligible   identified as     State    funding
                      staff costs   children   candidates        spending source
    States with overall increased costs
    California
    Pennsylvania
    New York
    Washington
    Texas
    States with overall decreased costs
    South Carolina
    Kansas
    Michigan

    Source: State officials.

      Changes in Allocation, State Share of Spending, and Staffing

    A common reason cited for increased administrative costs were changes
    states made to the methodology used for measuring and allocating
    caseworker time, which resulted in identifying more costs eligible for
    IV-E reimbursement. Two states-New York and Washington-reported making
    various changes in their time studies that significantly increased the
    amount of IV-E expenditures claimed from fiscal years 2000 to 2004. For
    example, Washington reported that in fiscal years 2003 and 2004, time
    studies were developed and implemented for contractors providing
    specialized IV-E allowable case management services, which enabled the
    state to claim federal funding for these activities. New York officials
    also reported that an update of their time studies for private, nonprofit
    agencies serving children in New York City lead to better identification
    of costs eligible for IV-E reimbursement and increased its amount of
    administrative costs. California officials highlighted efforts to ensure
    that staff were adequately trained resulting in an increase of its
    training costs by more than a third over this time period. California
    requires that all new and existing county program staff be trained to a
    standard statewide curriculum.

    State budget changes between fiscal years 2000 and 2004 were reported to
    also affect IV-E claims in several of the states we reviewed. For example,
    New York highlighted increases in state funding to pay for staff and
    programs to improve services, that in turn increase federal expenditures.
    However, two states-Kansas and South Carolina-reported significant
    decreases in IV-E expenditures as a result of cuts in state budgets and
    spending. South Carolina, for example, reported that the severe budget
    crisis between fiscal years 1998 and 2003 resulted in a more than 40
    percent decrease in state funding from approximately $140 million to $80
    million for the Department of Social Services, and an associated reduction
    in IV-E expenditures.17,18 Michigan also reported decreased state spending
    for foster care, but attributed the change to fewer children in the
    overall foster care system.

      Changes in the Proportion of IV-E Eligible Children

    Most states reported a change in the proportion of IV-E eligible
    children-penetration rate-between fiscal years 2000 and 2004 that
    contributed to changes in IV-E administrative costs. Washington
    substantially increased its rate by excluding children from the
    calculation that the federal government does not require be included, such
    as children in the custody of a Native American tribe or whose eligibility
    had not yet been determined. On the other hand, South Carolina's rate
    decreased by more than half in part due to problems with its SACWIS,
    according to officials. The remaining states reported a change of 10
    percentage points or less, as shown in table 4.

    17 In addition to foster care and adoption assistance, other programs
    impacted by the budget cuts included child and adult protective services,
    child care, food assistance, domestic violence prevention, and welfare.

    18 These state funding amounts were not adjusted for inflation.

    Table 4: Change in Penetration Rate between Fiscal Years 2000 and 2004

                                                Percentage
                                                point change
                                                in
                                                penetration   Reason cited for
                      Penetration  Penetration  rate between  change greater than
    State          rate in 2000 rate in 2004 2000 and 2004 5%
    Washington     37%          68%          31            Clarified which
                                                              children could be
                                                              used in calculating
                                                              the rate.

                                                              Revised and
                                                              automated the IV-E
                                                              eligibility guide
                                                              and initiated
                                                              focused training
                                                              and audits for IV-E
                                                              eligibility staff.

                                                              Worked with state
                                                              attorney general
                                                              office to
                                                              standardize state
                                                              court order
                                                              language.
    Texas          60%          67%          7             Focused training on
                                                              documenting certain
                                                              eligibility
                                                              criteria.

                                                              Developed policy
                                                              guidance for the
                                                              eligibility staff.

                                                              Upgraded the SACWIS
                                                              system with an
                                                              enhanced IV-E
                                                              eligibility
                                                              function.
    Michigana      56%          61%          5             Not applicable
                                                              (N/A)
    Illinoisa      74%          73.5%        (0.5)         N/A
    Marylanda      70%          66%          (4)           N/A
    Kansasa        58%          54%          (4)           N/A
    Californiaa,b  80%          75%          (5)           N/A
    Wisconsin      79%          71%          (8)           Fewer eligible
                                                              children due to
                                                              1996 income
                                                              standards.

                                                              State enforcement
                                                              of stricter
                                                              eligibility issued
                                                              in 2000.c
    New Yorkd      63%          53%          (10)          Fewer eligible
                                                              children due to
                                                              1996 income
                                                              standards.
    South Carolina 55%          24%          (31)          Technical problems
                                                              with SACWIS.

                                                              Issues concerning
                                                              administrative
                                                              costs for cases
                                                              where maintenance
                                                              payments are funded
                                                              from Supplemental
                                                              Security Income
                                                              instead of IV-E.e

    Source: State officials.

    Note: Pennsylvania did not provide changes in the penetration rate because
    counties calculate their own rates for IV-E reimbursement; however, state
    officials reported that the statewide rate had not changed over the past
    few years.

    aIllinois, Maryland, Michigan, Kansas, and California reported a change of
    5 percent or less, for which we did not request an explanation.

    bIn California, the statewide rate is used for budgeting purposes;
    counties calculate their own rate for IV-E reimbursement.

    cThe federal IV-E rules issued in January 2000 created stricter
    requirements for the state to prove that it is contrary to the welfare of
    a child to remain in their home and that the state had made reasonable
    efforts to prevent removal.

    dNew York provided two rates-one for upstate counties and one for New York
    City; both rates decreased about 10 percent. The rates shown in the table
    are for the upstate counties.

    eIf a child is eligible for IV-E and receives Supplemental Security Income
    (SSI), the state has the choice to fund the family's maintenance payments
    from SSI rather than IV-E funds. However, the state may claim federal
    financial participation under IV-E for administrative activities performed
    on behalf of that child.

      Cost Claims for Candidates and Children Served by the Juvenile Justice System

    The portion of total administrative costs states spend on behalf of
    candidates results in spending differences among states. Eight states
    reported that candidates were responsible for administrative costs ranging
    from 1 percent in Michigan to 73 percent in South Carolina, as shown in
    table 5. Claiming costs for candidates can help states offset declines in
    their IV-E eligible population. For example, while New York's eligible
    population decreased by almost 44 percent between fiscal years 2000 and
    2004, the costs charged for candidates more than doubled during this time
    period. In addition, South Carolina, which had an overall decline in IV-E
    administrative costs between fiscal years 2000 and 2004, reported that
    IV-E reimbursement for candidates increased from about $965,000 in fiscal
    year 2000, to more than $3.7 million in fiscal year 2004.

    Table 5: Costs for Foster Care Candidates as an Approximate Percentage of
    Total Fiscal Year 2004 IV-E Foster Care Administrative Costs

                            Percentage of IV-E administrative costs that were for
    Statea                                  foster care candidates in FY 2004b
    South Carolina                                                         73c
    Wisconsin                                                               50
    Texas                                                                  46c
    New York                                                               25d
    Illinois                                                                 9
    Washington                                                               7
    Kansas                                                                   2
    Michigan                                                                1e

    Source: State officials.

    aData for California, Pennsylvania, and Maryland were not available at the
    state level. However, Sacramento County in California, reported that about
    27 percent of costs were for such children and Delaware County in
    Pennsylvania reported that about 40 percent of costs were for candidates.

    bThese percentages represent the proportion of IV-E costs only and do not
    include the amount for costs charged to other sources such as Medicaid.

    cSouth Carolina and Texas charged some case management costs to Medicaid.

    dNew York reported that this was for local district costs.

    eMichigan used some Social Service Block Grant (SSBG) and TANF funds for
    case management costs for candidates.

    According to an ACF official, state claims for candidates vary because
    states differ in their interpretation of regulations regarding
    reimbursement of costs for these children and some states are more
    aggressive in their candidate claiming practices. Pennsylvania officials
    told us that Region III had disallowed claims related to candidates
    because the state had not appropriately applied a penetration rate to the
    pool of costs, as required by HHS. State officials commented that it had
    used the same approved allocation method since it began claiming costs for
    candidates in the last 10 to 15 years and was not told until recently that
    the method was not in accordance with HHS cost allocation principles. In
    addition, in 2005, the HHS Office of Inspector General and ACF regional
    staff recommended large disallowances of costs claimed for candidates in
    Delaware and Virginia respectively. Delaware was denied almost $6 million
    of claims for quarters from December 1999 through June 2003 for also not
    applying a penetration rate to candidate costs. For Virginia, more than
    $28 million was denied for 8 quarters in fiscal year 2003 through fiscal
    year 2005 for absence of a methodology for allocating costs for
    candidates, charging for unallowable activities, failure to demonstrate
    that the children were eligible, and other problems with documentation.
    Michigan officials told us they reduced the amount of costs claimed on
    behalf of candidates because they did not want to risk the region denying
    reimbursement for certain claims based on insufficient documentation of
    caseworker effort or candidacy status.

    States may also receive reimbursement for administrative claims for IV-E
    eligible children that receive services through the juvenile justice
    system, both children receiving services as candidates and those in
    placement settings that are not operated primarily for detention. Three
    states-California, Pennsylvania, and Texas-reported increases in IV-E
    claims for children receiving services in the juvenile justice system.
    Pennsylvania officials said that the state had reviewed the activities of
    juvenile justice workers and determined that they were conducting case
    management activities comparable to child welfare workers, such as
    developing a case plan and providing services to keep those children in
    their home. Submitting claims for administrative costs for these children
    in accordance with the state's approved cost allocation plan had resulted
    in significant increases in IV-E reimbursement. Texas officials reported
    that 165 of the state's 254 counties had agreements with the state to pass
    along a portion of their juvenile justice costs for IV-E reimbursement.
    California officials reported that their counties also had such
    agreements; Los Angeles County Probation Department officials reported
    that expenditures for these children increased from about $22 million in
    fiscal year 2001 to more than $40 million in fiscal year 2005-an increase
    of nearly 85 percent.19

      Claims for Children in Ineligible Facilities

    Most of the states we reviewed reported increasing their IV-E
    reimbursement by charging for costs related to eligible children placed in
    certain types of settings ineligible for foster care maintenance payments.
    The most commonly used ineligible setting in fiscal year 2004 was the home
    of unlicensed relatives, utilized by 6 of 11 states responding to this
    question as shown in table 6. Kansas charged costs for children in six
    different types of ineligible facilities, such as hospitals and detention
    centers. Two states, Michigan and South Carolina, reported that they did
    not charge IV-E for children in any ineligible facility.

    Table 6: Ineligible Facilities Used by Certain States to Claim IV-E
    Administrative Costs in Fiscal Year 2004a

                                                                  Facilities
                                                                  operated
                                                     Public       primarily
                                                     institutions for
                                                     that         children
                    Unlicensed Psychiatric           accommodate  determined
                    relative   or medical  Detention more than 25 to be
    State        care       hospitals   centers   children     delinquent Other
    California
    Illinois
    Kansas                                                                b
    Maryland
    Michigan
    New Yorkc
    Pennsylvania d
    South
    Carolina
    Texas
    Washington                                                            e
    Wisconsin

    Source: State officials.

    aThese kinds of facilities may provide services to foster care children
    but are ineligible for foster care maintenance payments.

    bKansas also charged for secure care facilities.

    cNew York charges for the listed facilities when a child spends at least 1
    day of the month of the time study in the above IV-E setting.

    dPennsylvania only places a child in unlicensed relative care if ordered
    by a judge.

    eWashington claims costs for "for profit foster homes."

    19 These figures were not adjusted for inflation.

    The Deficit Reduction Act of 2005,20 limiting states' ability to claim
    administrative costs for children in unlicensed foster homes or ineligible
    facilities will decrease federal expenditures to most of these states.
    Effective retroactively to October 1, 2005, states are prohibited from
    charging administrative costs for children in these facilities with one
    exception-they may charge these costs to IV-E for eligible children
    residing in an unlicensed relative home, but only for 12 months or for the
    average amount of time it takes the state to license the home, whichever
    is shorter.21 Kansas officials estimated that as a result of this rule,
    their claims could be reduced by as much as $10 million a year and Texas
    officials estimated that their claims would decrease by about $3 million
    annually.

      Differences in Federal Funding Sources

    State IV-E administrative costs differ among states based on the extent
    that states charge other federal programs instead of IV-E. Three of the 11
    states reported using one or more federal funding sources in fiscal year
    2004 to fund some services for costs reimbursable by IV-E. They used block
    grant funding under programs such as TANF and SSBG to reduce their overall
    share of costs because they do not require a match of state funds, and
    there is less restriction on their use. Additionally, two of the three
    states charged costs to Medicaid that required a state match of less than
    50 percent.

               o  South Carolina officials reported using TANF emergency
               assistance funds to cover most costs associated with a child in
               foster care for the first 12 months; using TANF eliminated the
               need of a state match. They said that IV-E program funds are used
               primarily for costs associated with preparing and participating in
               judicial proceedings, eligibility determination, licensing and
               home studies.

               o  Michigan officials said that their IV-E claims decreased when
               they began charging activities they thought would be challenged by
               the ACF regional office to another funding source, such as SSBG or
               TANF. For example, Michigan began charging about 60 percent of
               foster care training costs to SSBG because of disagreements with
               ACF in developing their allocation methodology.

               o  Washington officials said that prior to 2001, Medicaid was used
               to fund some case management services for all children that were
               eligible for Medicaid, including those that were IV-E eligible.
               However, the Center for Medicare and Medicaid Services (CMS)
               objected and negotiated with the state to no longer use Medicaid
               for these services. This change resulted in additional charges to
               IV-E and contributed to the 27 percent increase in the amount of
               case management claims from fiscal year 2000 to fiscal year 2001.

               Officials in all 11 states reported initiating efforts to improve
               services to children in their foster care and adoption assistance
               programs to address findings from federal reviews, state studies,
               or lawsuits; however, an increase or decrease in IV-E spending
               cannot be linked to changes in services for children. One reason
               is that spending may go up or down unrelated to services. For
               example, while hiring more staff has shown to improve services,
               changing methods used to track staff time and costs may have
               little or no effect on services. In addition, because states make
               extensive use of non-IV-E funding sources, the change in IV-E
               expenditures does not necessarily reflect changes in the overall
               funding of states' child welfare systems.

               All states reported taking action to improve services to children
               in their foster care programs, using funding from IV-E and other
               sources. Between fiscal years 2001 and 2004, ACF evaluated all 50
               state child welfare programs through the Child and Family Services
               Review (CFSR). 22 These reviews evaluated states on outcomes for
               children related to safety, permanency, and well-being and on
               systemic factors such as the statewide information, case review,
               and quality assurance systems. In response to any identified
               deficiencies, states developed a program improvement plan (PIP) to
               document planned corrective actions, which was reviewed and
               approved by ACF. The most common initiatives were those to
               expedite permanency planning, increase staff and training, and
               collaborate with courts to facilitate a child's permanent
               placement and improve services as shown in table 7.

    20 Deficit Reduction Act of 2005, Pub. L. No. 109-171 (2006).

    21 States may charge administrative costs for children in unlicensed homes
    only for as long as the length of the time it normally takes to license a
    home or up to 12 months-whichever is shorter. For children placed in other
    ineligible facilities, such as psychiatric or medical hospitals, claims
    may be made but only for 1 calendar month and only if they are
    subsequently moved back to an eligible setting.

    States Implemented Initiatives to Improve Services, but the Extent That
    Improvements Are Related to Changes in IV-E Expenditures Is Unclear

    22 The CFSR is a results-oriented, comprehensive monitoring review system
    designed to assist states in improving outcomes for children and families
    who come into contact with the nation's public child welfare systems. It
    was developed and implemented by HHS in response to the mandate of the
    Social Security Amendments of 1994 to promulgate regulations for reviews
    of states' child and family services.

    Table 7: Foster Care Program Services Increased or Implemented Since
    Completion of CFSR Reviews for 11 States

                                                                            Increase
                                              Increase Increase  More       monitoring
                          Training            family   in-person outreach   of         Increase
                 Recruit  foster              and      contact   to         contract   use of
                 foster   care     Licensing  support  with      biological provided   private     Collaborate
    State        families parents  activities services child     parents    services   contractors with courts Other
    California
    Illinois
    Kansas
    Maryland
    Michigan
    New York
    Pennsylvania
    South
    Carolina
    Texas
    Washington
    Wisconsin

    Source: State officials.

    While all 11 states made changes to program services in response to CFSR
    findings, some also had other reasons: the Maryland legislature provided
    resources to reduce the ratios of caseworkers to children in response to
    concerns about program deficiencies due to staff shortages, and Washington
    made changes as part of a settlement in a lawsuit. The actions states took
    to achieve program improvements varied. For example,

               o  Expediting permanency planning. Most states we studied reported
               an increased emphasis on family preservation and support services
               and more outreach to biological parents in an effort to either
               maintain children in their homes or to expedite reunification if
               the child is in foster care. Some states have implemented
               "Concurrent Planning" programs in which at the same time that
               efforts are being made for reunification, other permanency goals,
               such as adoption, are pursued should reunification fail. 23 For
               example, in California, Los Angeles County officials reported
               positive results with their concurrent planning program. Between
               fiscal years 2003 and 2005, reunification of children with their
               families within 12 months or less increased from about 36 percent
               to 45 percent. In addition, during this same time period,
               adoptions within 23 months or less increased from about 9 percent
               to 15 percent.

               o  Increased collaboration with courts to remove barriers and
               improve services. Ten states reported increased coordination or
               collaboration with the courts to improve services provided by
               either their foster care or adoption assistance programs or both.
               For example, Pennsylvania officials reported establishing a
               statewide Legal Services Initiative in which paralegals work with
               caseworkers to move cases through the system faster and reduce the
               time that a child is in foster care. Officials in one county said
               that this initiative had helped to reduce a child's time in foster
               care from an average 38 months to about 27 to 28 months between
               fiscal years 2000 and 2005.

               Some states provided new resources or reallocated existing
               resources for their PIP to address the deficiencies identified in
               their CFSR and one state reported that state budget limitations
               made it difficult to develop or implement their PIP. For example,
               the California legislature approved more than $13 million to
               develop the California Child and Family Service Review System.
               This system, a part of the state PIP, requires California's
               counties to conduct self-assessments, improvement plans, peer
               quality case reviews, and data integrity improvements. Wisconsin
               and Texas reported reallocating existing resources for new staff
               position to implement program improvement strategies. On the other
               hand budget limitations in Kansas made it difficult to maintain
               progress in all areas that were identified as needing improvement
               and lead the state agency to renegotiate their program improvement
               goals with ACF.

               HHS has not implemented a strategic approach in its monitoring
               efforts to ensure adequate control over program spending. The
               number and skills of financial specialists located in the regional
               offices are not correlated with the risk of states claiming
               inappropriate costs. In addition, according to officials, HHS does
               not have a current financial review manual, and regional offices
               have developed their own protocols resulting in inconsistent
               review of claims across states. HHS did clarify policies in
               several critical areas that affect spending-including the use of
               Medicaid funding for case management services--but these policies
               were not consistently applied across regions.

               Staffing levels and the financial expertise of regional office
               staff reviewing states' claims for reimbursement of their
               administrative costs have decreased over time, and HHS has not
               shifted or targeted its remaining resources to high-risk areas or
               states. Financial specialists in HHS's 10 regional offices are
               tasked with a variety of financial oversight responsibilities
               including:

               o  Review quarterly expenditures.

               o  Provide technical assistance to states regarding fiscal policy
               and cost allocation issues.

               o  Review and resolve findings from the Single Audit.

               o  Review cost allocation amendments and make recommendations to
               the Division of Cost Allocation.

               o  Provide support for the IV-E Eligibility Reviews.

               o  Provide support for HHS Inspector General's IV-E audits and
               inspections.

               According to officials, the number of financial specialists with
               the necessary expertise has declined since the early 1990s. This
               decline resulted primarily from retirements and a change in staff
               roles and responsibilities. Typically, the regions have 2-3
               financial specialists for oversight of ACF programs. In region
               VII, three financial specialists review 3 percent of national IV-E
               administrative costs for 4 states, while three financial
               specialists in region V review 17 percent of national IV-E costs
               for 6 states. Additionally, one financial specialist with limited
               experience with the IV-E programs, reviewed costs for California
               that amounted to more than 30 percent of national administrative
               spending in fiscal year 2004. Figure 6 illustrates the percentage
               of total administrative costs by HHS regional office.

    23 The Adoption and Safe Families Act of 1997, Pub. L. No. 105-89,
    encourages the use of Concurrent Planning, and it requires that states
    make reasonable efforts to find permanency for children who cannot return
    to their biological parents.

        HHS Oversight of Program Spending Has Been Compromised by an Absence of
                            Strategic Risk-Based Monitoring

    HHS has not targeted its resources to high-risk regions

    Figure 6: Percentage of Fiscal Year 2004 Total Foster Care and Adoption
    Assistance Administrative Costs for States Located In HHS's 10 Regional
    Offices

    Note: Percentages add to more than 100 due to rounding. Financial
    specialist positions across the country have increasingly been filled with
    staff that have a programmatic rather than a financial background, a
    concern shared by headquarters and regional staff. For example, one
    regional grants manager told us that the IV-E programs in his region are
    particularly vulnerable to unallowable state claims because, in addition
    to a significant workload, two financial specialists have little
    experience and lack the financial skills to review claims in accordance
    with cost allocation plans. In addition, officials from two regions cited
    inadequate training resources. According to ACF central office officials,
    degrees in accounting or finance are no longer required for these
    positions.

    Cognizant ACF officials cited an increased workload and competing
    responsibilities as obstacles to oversight of program spending. For
    example, due to time staff spent on quarterly expenditure reviews and
    Title IV-E eligibility reviews, according an official in one region, the
    resolution of Single Audit findings were not always accomplished in the
    required 6-month time frame and, as a result, questioned costs were not
    always promptly recovered. In addition, officials from two regions noted
    that they suspect states are not claiming training costs correctly, but
    cited a lack of resources to effectively address the problem. Of the six
    regions we spoke with, officials from three reported 0 dollars disallowed
    during fiscal years 2000 to 2004 while officials from the other three
    reported disallowances ranging from about $18 to $24 million.24

    Although ACF is aware of problematic claiming practices in some states,
    ACF has not taken a strategic approach to assess risk and target its
    resources accordingly. Effective agency control structures depend on
    assessing risk and implementing oversight activities to address those
    areas identified at greatest risk. 25 However ACF's ability to provide
    strategic oversight is complicated by regional structures that differ. In
    some regions, staff are assigned oversight responsibility by state and
    review multiple ACF programs, while in other regions, staff are assigned
    oversight responsibility by program and review multiple states. An
    additional complication is the absence of direct authority over regional
    financial specialists. In most regions, financial specialists are
    supervised by Program Office Managers who report to the Regional
    Administrator rather than the Office of Grants Management, the entity
    responsible for approving federal expenditures to states. ACF has a
    restructuring effort underway to ensure more consistent policy
    administration of ACF programs that may address this issue. The estimated
    completion date is the end of fiscal year 2006.

    24 This figure excludes disallowances that resulted from the Title IV-E
    Eligibility Reviews.

    25 See GAO 05-176. The five components of internal controls are (1)
    control environment-creating a culture of accountability within the entire
    organization-program offices, financial services, and regional offices--by
    establishing a positive and supportive attitude toward improvement and the
    achievement of established program outcomes; (2) risk
    assessment-identifying and analyzing relevant problems that might prevent
    the program from achieving its objectives. Developing processes that can
    be used to form a basis for measuring actual or potential effects of these
    problems and manage their risks; (3) control activities-establishing and
    implementing oversight processes to address risk areas and help ensure
    that management's decisions-especially about how to measure and manage
    risks-are carried out and program objectives are met; (4) information and
    communication-using and sharing relevant, reliable, and timely information
    on program-specific and general financial risks. Such information surfaces
    as a result of the processes-or control activities-used to measure and
    address risks; and (5) monitoring-tracking improvement initiatives over
    time, and identifying additional actions needed to further improve program
    efficiency and effectiveness.

    Lack of standard guidance and absence of information sharing among HHS offices
    limit financial oversight

    HHS does not have a current financial review guide to standardize
    oversight across regions, and oversight findings among various regional
    offices have not been shared to better ensure consistency and
    appropriateness of federal expenditures to states, according to regional
    and central officials we interviewed. HHS last issued a review guide over
    15 years ago, and while staff in multiple regional offices have begun an
    effort to compile a current financial review guide consisting of best
    review practices, this guide is not expected to be completed for at least
    3 years. In the interim, each region follows its own monitoring process
    and the level of oversight varies according to regional practice.

               o  Triggers for review. Some regions review changes in cost claims
               of more than 5 percent by specific category such as case
               management, while at least one region only reviews changes of 5
               percent for total claims, without determining whether there were
               larger cost changes within categories. One region took action to
               ensure states appropriately claimed their costs by category, but
               officials from another region told us they do not pay attention to
               how states categorize costs.

               o  Claims analysis. Region IX officials said they recently started
               analyzing California's claims to compare the most recent 4
               quarters of costs to the previous 4 quarters, while one method
               used in Region V is to compare costs from quarter to quarter using
               a ratio of administrative costs to the average number of children
               in foster care. Region IV officials told us they use a standard
               set of spreadsheets comparing claims across states in the region
               to analyze trends in expenditures and differences in states'
               claims.

               o  On-site reviews. Region VII officials, who were responsible for
               3 percent of 2004 expenditures, indicated that financial
               specialists visit their respective states quarterly to trace state
               expenditures to original documents or review a selected sample of
               expenditures to ensure compliance with specific regulations.
               Region IV officials, responsible for 8 percent of expenditures,
               discontinued quarterly reviews due to a reduction in resources 5
               years ago, and now have a goal for financial specialists to visit
               some of their assigned states once a year. Officials in Region V,
               responsible for 17 percent of fiscal year 2004 expenditures, noted
               that financial specialists rarely conduct on-site reviews. In
               addition to lack of standardization in review of claims,
               inadequate guidance from HHS headquarters has resulted in key
               differences in the approval of state claims.

               o  Regions vary in the technical assistance provided to states.
               According to regional officials, states did not uniformly identify
               and adequately document their processes used to classify children
               as candidates. One state official noted that its region helped the
               state develop a document that would meet requirements to claim
               candidate costs appropriately; however, other states did not
               receive similar technical assistance.

               o  Region officials allow states to treat children differently in
               calculating their penetration rate. A state in one region removed
               cases with pending eligibility from its total count of children,
               resulting in higher federal reimbursement, while this practice was
               disallowed for a state in a different region.

               o  Officials from one region with oversight responsibility for the
               Medicaid program assert that there is a wide disparity in the
               amount of costs for case management activities states submit to
               the Medicaid program for children in foster care that some medical
               costs should be charged to the IV-E program.26

               However, ACF took action in 2005 to standardize state claiming
               practices in three important areas that were subsequently included
               in the Deficit Reduction Act of 2005:

               o  administrative costs claimed for children living in facilities
               that are not eligible for maintenance payments;
               o  administrative costs claimed for children living in an
               unlicensed foster family home; and
               o  time frames for determining or re-determining a child's
               eligibility for IV-E programs.

               ACF and CMS jointly issued guidance in 2001 to clarify which
               foster care costs could be charged to Medicaid rather than IV-E,
               but according to CMS officials, this guidance contained errors
               that caused confusion regarding appropriate targeted case
               management (TCM) claims. Since 2004, CMS policy regarding the use
               of TCM services for children in foster care has been based on a
               2004 Administrator's decision that denied approval of a Medicaid
               state plan amendment requested by Maryland to provide TCM services
               to children in the state's foster care program because such
               services were available under the IV-E program.27 However, CMS has
               not consistently applied its policy for allowable TCM services.28
               The Deficit Reduction Act superseded previous policy
               clarifications and defined TCM services as well as activities that
               are not permitted for children in foster care such as assessing
               adoption placements.

               The lack of information sharing among regions further compromises
               oversight. According to central and regional officials, financial
               specialists do not routinely communicate with other regions or
               headquarters to discuss issues related to state claiming
               practices. Quarterly conference calls to discuss financial
               oversight were discontinued due to scheduling difficulties about 2
               years ago according to officials in one region. While there is a
               monthly call between headquarter and regional staff regarding the
               IV-E programs, these calls focus primarily on programmatic rather
               than fiscal concerns. Additionally, while information on the
               amount of expenditures deferred and disallowed as well as the
               reason for each quarter is collected through ACF's Grants
               Application Tracking System, this information is not summarized
               and shared across regions. ACF central office officials told us
               they could not provide reliable data on the amount of claims that
               are disallowed each year. Further, one official noted that
               financial specialists are not held accountable for updating the
               final amounts disallowed following resolution between ACF and the
               states.

               Although ACF and DCA officials both conduct reviews of the foster
               care and adoption assistance programs' administrative claiming
               practices, these offices do not routinely coordinate to share
               findings in order to prioritize areas for review in other states,
               according to officials in one region. For example, although
               officials in two regions and the HHS central office cited problems
               with how states have documented and allocated costs for
               candidates, according to one regional official, DCA has not
               systematically reviewed state allocation procedures to address
               this problem. Officials from two regional offices expressed
               frustration at the minimal level of involvement DCA has in terms
               of reviewing cost allocation practices. One official indicated
               that DCA often relied on ACF regional officials to address
               questions related to the technical aspects of claiming processes,
               though this was primarily the responsibility of DCA. According to
               HHS's Office of Inspector General, in the past, DCA staff reviewed
               state cost allocation plans annually but this no longer occurs,
               due to a reduction in staff.

               OIG audits continue to find gaps in oversight of state cost
               allocation plans and program regulations. From October 2004
               through April 2006, the OIG recommended disallowances of more than
               $20 million related to administrative costs in seven states.
               Audits found inappropriate training claims, claims made to cost
               centers not approved in the state's cost allocation plan, and
               inappropriate methods used to calculate costs for children
               identified as candidates for foster care. As of April 2006, an
               additional eight audits were in progress.

               Federal spending to support state administration of the Foster
               Care and Adoption Assistance programs increased between fiscal
               years 2000 and 2004, but a few states have accounted for most of
               this change. While federal expenditures under Title IV-E have
               reflected an increase in some states' spending for child welfare
               systems over this time period, they also reflect more concerted
               efforts by states to identify costs in the child welfare system
               that are allowable for federal reimbursement. While we could not
               link IV-E spending to changes in services, states uniformly
               reported taking action to improve services in response to federal
               oversight reviews of their overall child welfare system.

               Ensuring that the oversight environment and monitoring activities
               for foster care and adoption assistance administrative costs are
               consistent across states is a critical aspect currently missing in
               federal efforts to support state administration of the Foster Care
               and Adoption Assistance programs while maintaining control over
               program spending. The lack of updated guidance and coordination
               among HHS's oversight offices has resulted in disparate practices
               that may be causing HHS to miss opportunities for safeguarding
               federal funds and preventing HHS from providing consistent support
               for states efforts to serve Title IV-E eligible children.
               Requiring states to break out administrative costs into various
               categories was intended to provide more visibility to spending
               patterns, but this has not been achieved due to lack of
               enforcement by some ACF regional offices. Further, the absence of
               a risk-based approach in the allocation of oversight staff weakens
               ACF's control over program spending. Without consistent and
               appropriate oversight and monitoring, HHS has little assurance
               that Title IV-E resources are being safeguarded to serve eligible
               children.

               To better safeguard federal resources and ensure consistent
               federal support for state administration of foster care and
               adoption assistance, we recommend that the Secretary of the
               Department of Health and Human Services direct the Assistant
               Secretary for the Administration for Children and Families to take
               the following five actions:

               o  Expedite the development of the financial review guide regions
               use to monitor state claims for federal reimbursement and develop
               an effective means of communicating current policy and oversight
               findings across regions and states.

               o  Coordinate with other HHS offices such as the Division of Cost
               Allocation and CMS to ensure consistent policy implementation
               across regions and states.

               o  Standardize the method states use to calculate the percentage
               of children served by foster care and adoption assistance programs
               that are eligible for federal reimbursement of administrative
               costs.

               o  Through ACF regional offices, remind states that reporting
               administrative costs by certain categories is a requirement and
               provide technical assistance to help states comply with the
               requirement.

               o  Assess the relative risk of improper federal expenditures to
               states for administrative costs and redistribute oversight staff
               accordingly.

               We received written comments on a draft of this report from HHS
               that are reprinted in appendix II. HHS did not explicitly agree or
               disagree with our five recommendations, but stated that it would
               implement or consider implementing four of them in whole or in
               part. Specifically, HHS said that it would implement our
               recommendation to issue guidance to state agency staff, reminding
               them of the need to comply with federal reporting requirements and
               the availability of regional office staff to provide technical
               assistance. Regarding our recommendation that HHS standardize the
               method states use to calculate the percentage of children served
               by foster care and adoption assistance programs that are eligible
               for federal reimbursement of administrative costs, HHS said that
               this calculation is straightforward and that it would discuss the
               issue of state inconsistencies with its regional staff to
               ascertain if there is a problem and how best to address it. HHS
               said that an ongoing organizational restructuring expected to be
               completed by September 30, 2006, affected immediate implementation
               decisions for two recommendations. HHS said it would wait until
               after this restructuring to determine its ability to implement our
               recommendation to expedite the development of a financial review
               guide and implement a more effective means of sharing current
               policy and oversight findings across regions. While HHS said it
               would take our recommendation to redistribute oversight staff
               under advisement as it proceeds with its restructuring effort, HHS
               viewed its implementation as impractical because it could require
               either relocating staff across the country or reassigning fiscal
               responsibility to program staff. However, HHS also said that it
               would continue to focus on areas where there is the greatest need
               for intervention. Regarding our recommendation on coordination
               among HHS's offices, HHS described some existing coordination
               activities but did not indicate that it would ensure consistent
               policy implementation across regions and states.

               We do not believe organizational restructuring reduces HHS's
               continual responsibility to safeguard federal resources and ensure
               consistent federal support for state administration of foster care
               and adoption assistance programs. Therefore, we continue to
               recommend that HHS take action to ensure that its regional staff
               are providing consistent oversight of state implementation of
               federal policy and that the oversight results of its various
               offices are effectively coordinated to ensure consistent federal
               support for state administration of foster care and adoption
               assistance. Further, we do not believe that HHS's inability to
               immediately physically relocate staff among regional offices
               precludes redistributing oversight responsibility among regional
               staff, and we continue to recommend that HHS use a risk-based
               approach to do so.

               We will send copies of this report to congressional committees,
               the Secretary of Health and Human Services, and other interested
               parties.

               We will also make copies available to others on request. In
               addition, the report will be available at no charge on GAO's Web
               site at http://www.gao.gov .

               If you have any questions about this report, please contact me at
               (202) 512-7215 or ashbyc@gao.gov . Other contacts and
               acknowledgments are listed in appendix III.

               Sincerely yours,

               Cornelia M. Ashby Director, Education, Workforce and Income
               Security

               Source: Analysis of HHS data.

               Cornelia M. Ashby (202) 512-7215

               In addition to those named above, Lacinda Ayers, Assistant
               Director, Rebecca A. Christie (Analyst-in-Charge), Deirdre G.
               Brown, and Nancy Purvine made key contributions to this report.
               Jim Rebbe, Jerry Sandau, and Jay Smale also provided key technical
               assistance.

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    26 In June 2005, GAO reported that Georgia and Massachusetts were charging
    Medicaid for costs that appeared to be unallowable under CMS policy.
    Specifically the claims were for services that appeared to be integral
    components of non-Medicaid programs. CMS has denied claims for similar
    programs in other states. In fiscal year 2002, for example, CMS denied a
    state plan amendment proposal to cover TCM services in Illinois, and in
    fiscal year 2004 it found TCM claims in Texas unallowable, in part because
    the TCM services claimed for reimbursement were considered integral to
    other state programs. In Texas, such children were served by the state's
    child welfare and foster care system. See GAO, Medicaid Financing: States'
    Use of Contingency-Fee Consultants to Maximize Federal Reimbursements
    Highlights Need for Improved Federal Oversight, GAO-05-748 (Washington,
    D.C.: June 2005).

    27 See CMS, Disapproval of Maryland State Plan Amendment No. 02-05, Docket
    No. 2003-02 (Aug. 27, 2004). The Administrator's decision was based in
    part on a statement in the legislative history accompanying the
    legislation authorizing coverage for TCM services that payment for TCM
    services must not duplicate payments to public agencies or private
    entities under other program authorities. See H.R. Rep. No. 99-453, at 546
    (1985). We did not evaluate the bases for CMS's policy as part of this
    review.

    28 In June 2005, GAO recommended that CMS clarify and communicate its
    policies on TCM and ensure policies were consistently applied across
    states. See GAO, Medicaid Financing: States' Use of Contingency-Fee
    Consultants to Maximize Federal Reimbursements Highlights Need for
    Improved Federal Oversight, GAO-05-748 (Washington, D.C.: June 2005).

                                      Conclusions

                          Recommendations for Executive Action

                           Agency Comments and Our Evaluation

    Appendix I: IV-E Expenditures for Administrative Costs by State

                                                       Change in   Percent change
                           2000 IV-E      2004 IV-E   claims for    in claims for
                      administrative administrative expenditures     expenditures
                          claims for     claims for from FY 2000   from FY 2000 -
    State            expenditures   expenditures    - FY 2004          FY 2004
    Washington            $23,974        $58,128      $34,154            142.5
    New Hampshire           3,860          9,182        5,322            137.9
    Texas                  37,327         69,313      $31,986             85.7
    Wyoming                   828          1,370         $542             65.5
    Alaska                  8,083         13,121        5,038             62.3
    Indiana                11,352         18,360        7,008             61.7
    West Virginia           6,215          9,841        3,626             58.3
    Oregon                 18,945         26,619        7,674             40.5
    Virginia               36,627         50,859       14,232             38.9
    New Jersey             30,928         42,320       11,392             36.8
    Pennsylvania          149,289        191,708       42,419             28.4
    Arkansas               18,412         23,595        5,183             28.2
    New York              178,104        210,775       32,671             18.3
    California            713,090        812,000       98,910             13.9
    Louisiana              32,787         37,024        4,237             12.9
    Vermont                 5,192          5,765          573             11.0
    Alabama                14,972         16,544        1,572             10.5
    Ohio                  129,198        138,244        9,046              7.0
    Montana                 6,165          6,416          251              4.1
    Wisconsin              67,738         69,558        1,820              2.7
    Colorado               27,380         27,503          123              0.4
    Total increase
    of 21 states:                                    $317,779
    Tennessee              14,281          5,900      (8,381)            -58.7
    Delaware               10,388          5,443      (4,945)            -47.6
    Mississippi            10,655          6,414      (4,241)            -39.8
    D.C.                   18,869         12,225      (6,644)            -35.2
    South Carolina         12,556          8,706      (3,850)            -30.7
    Kentucky               29,420         20,757      (8,663)            -29.4
    Oklahoma               22,672         16,203      (6,469)            -28.5
    Kansas                 28,883         21,066      (7,817)            -27.1
    Missouri               45,378         35,478      (9,900)            -21.8
    Connecticut            63,860         50,351     (13,509)            -21.2
    North Carolina         36,934         29,950      (6,984)            -18.9
    Michigan               78,626         65,005     (13,621)            -17.3
    Iowa                   16,068         13,309      (2,759)            -17.2
    North Dakota            7,656          6,347      (1,309)            -17.1
    Idaho                   5,615          4,741        (874)            -15.6
    Florida               112,247         94,854     (17,393)            -15.5
    Rhode Island            9,640          8,380      (1,260)            -13.1
    Massachusetts          47,276         41,114      (6,162)            -13.0
    Nebraska               10,650          9,363      (1,287)            -12.1
    Minnesota              58,293         51,505      (6,788)            -11.6
    South Dakota            3,052          2,729        (323)            -10.6
    Arizona                29,609         26,662      (2,947)            -10.0
    New Mexico             14,248         13,105      (1,143)             -8.0
    Georgia                36,396         34,145      (2,251)             -6.2
    Nevada                 11,411         10,780        (631)             -5.5
    Utah                   17,097         16,442        (655)             -3.8
    Maryland               64,909         62,858      (2,051)             -3.2
    Maine                   8,013          7,879        (134)             -1.7
    Illinois              115,402        113,541      (1,861)             -1.6
    Hawaii                 14,521         14,507         (14)             -0.1
    Total decrease
    of 30 states:                                  ($144,866)
    Total change
    in claims for
    expenditures:                                    $172,913

    Appendix II: Comments from the Department of Health and Human Services

    Appendix III: GAO Contact and Staff Acknowledgments

    GAO Contact

    Staff Acknowledgments

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    Highlights of GAO-06-649 , a report to the Honorable Wally Herger,
    Chairman Subcommittee on Human Resources, Ways and Means Committee, House
    of Representatives

    June 2006

    FOSTER CARE AND ADOPTION ASSISTANCE

    Federal Oversight Needed To Safeguard Funds And Ensure Consistent Support
    For States' Administrative Costs

    Policymakers have expressed concern over how costs to administer the
    Foster Care and Adoption Assistance programs are contributing to overall
    increased federal expenditures for these programs, estimated by the
    Congressional Budget Office to rise from about $6 billion in fiscal year
    2003 to $8 billion in fiscal year 2008. The purpose of these programs is
    to provide financial support for the proper care of children who need
    placement outside their homes and find adoptive homes for children with
    special needs. They are authorized under Title IV-E of the Social Security
    Act and administered by the Department of Health and Human Services'
    Administration for Children and Families (ACF). GAO was asked to address
    (1) how the amounts and types of administrative costs changed from FY 2000
    to FY 2004; (2) the reasons for differences in and among states in
    administrative spending and how these differences affect program services;
    and (3) whether HHS's oversight of administrative costs provides adequate
    controls over program spending.

    What GAO Recommends

    GAO recommends a number of actions for HHS to better safeguard federal
    resources and ensure consistent federal support for state administration
    of foster care and adoption assistance. HHS did not explicitly agree or
    disagree with the recommendations.

    Total federal expenditures to help states pay for the costs of
    administering their Foster Care and Adoption Assistance programs increased
    7 percent between fiscal years 2000 and 2004 from approximately $2.5 to
    $2.6 billion, when adjusted for inflation. Over a third of states received
    increased federal assistance, but over 80 percent of the increase was
    limited to six states, as shown in the figure below. Nearly all of the
    federal expenditures- 89 percent in fiscal year 2004-were for costs
    related to child placement services. However, inconsistencies in how
    states tracked and reported data precluded analysis of the types of cost
    incurred within this category.

    Our review of spending in 11 states between fiscal years 2000 and 2004
    showed that the methods states used to identify eligible children and
    related staff costs for serving them were two primary reasons for
    differences in IV-E spending within and among states. One state changed
    how it identified eligible children and calculated the proportion of
    eligible children, resulting in higher IV-E costs. Other states varied in
    their practice of claiming costs for serving children not yet removed from
    their homes or living in places ineligible for foster care payments.
    Because states use other funding sources to supplement or supplant IV-E,
    the effect of IV-E spending on program services is unclear.

    HHS has not implemented a strategic approach in its monitoring efforts to
    ensure adequate control over program spending. Oversight staff located in
    the regional offices are not correlated with the risk of states claiming
    inappropriate costs. Oversight is also hindered by inadequate guidance,
    including lack of a current financial review manual. While HHS clarified
    policies concerning whether certain expenditures are allowable in critical
    areas, policies were not uniformly applied across regions.
    *** End of document. ***