Child Care: Working Poor and Welfare Recipients Face Service Gaps (Letter
Report, 05/13/94, GAO/HEHS-94-87).

In response to the growing number of working mothers with young
children, Congress created four new child care programs for low-income
families.  These programs received more than $1.5 billion in federal
funding in fiscal year 1992.  Although states are making strides toward
coordination of federally funded child care services, some federal
requirements, coupled with resource constraints, are creating gaps in
the delivery of these services to the poor.  Specific service gaps stem
from program differences in (1) categories of clients who can be served,
(2) limits on the type of employment that clients can undertake without
compromising their benefits, (3) limits on the amount of income clients
can earn without losing their eligibility, and (4) limits on the time
during which clients can receive child care subsidies.  Despite
congressional expectations that the block grant, the largest of the four
programs, would motivate states to boost direct support to working poor
families needing child care, the existing fragmented system of
subsidized child care appears to provide little incentive for states to
do so.  In an environment of finite resources, which the child care
programs for welfare and recent welfare recipients are entitlements,
there is pressure to serve these groups while equally needy working poor
families may go unaided.  Moreover, each of the four programs
unintentionally segments the poor into categories that fail to recognize
the similarity of their economic plight and child care needs.  State
officials believe that they would be better able to deliver child care
that supports self-sufficiency if greater consistency existed across
programs and if they had greater flexibility in how they spend their
federal child care funds.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-94-87
     TITLE:  Child Care: Working Poor and Welfare Recipients Face 
             Service Gaps
      DATE:  05/13/94
   SUBJECT:  Aid to families with dependent children
             State-administered programs
             Public assistance programs
             Disadvantaged persons
             Child care programs
             Block grants
             Eligibility criteria
             Welfare services
             Welfare recipients
             Supplemental security income
IDENTIFIER:  AFDC
             Transitional Child Care Program
             HHS At-Risk Child Care Program
             Child Care and Development Block Grant
             Job Opportunities and Basic Skills Training Program
             California
             Illinois
             Massachusetts
             Michigan
             New York
             Texas
             JOBS Program
             
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Cover
================================================================ COVER


Report to Congressional Requesters

May 1994

CHILD CARE - WORKING POOR AND
WELFARE RECIPIENTS FACE SERVICE
GAPS

GAO/HEHS-94-87

Child Care Services for Working Poor


Abbreviations
=============================================================== ABBREV

  AFDC - Aid to Families with Dependent Children
  FSA - Family Support Act
  FY - fiscal year
  HHS - Department of Health and Human Services
  JOBS - Job Opportunities and Basic Skills Training Program
  TCC - Transitional Child Care

Letter
=============================================================== LETTER


B-252819

May 13, 1994

The Honorable William D.  Ford
Chairman, Committee on Education
 and Labor
House of Representatives

The Honorable Matthew G.  Martinez
Chairman, Subcommittee on Human Resources
Committee on Education and Labor
House of Representatives

In recent years, as the number of working mothers with young children
has increased, the Congress has recognized the importance of child
care to family self-sufficiency.  Between 1988 and 1990, the Congress
created four new child care programs for low-income families, and in
fiscal year 1992 more than $1.5 billion in federal funds was made
available for these programs.  Two of the programs, Aid to Families
with Dependent Children (AFDC) child care and Transitional Child Care
(TCC), were included in the Family Support Act of 1988 (FSA) to meet
the child care needs of welfare recipients attempting to become
self-sufficient through education, training, and employment.  The
other two programs, At-Risk Child Care and the Child Care and
Development Block Grant, were authorized by the Omnibus Budget
Reconciliation Act of 1990 to support working poor families. 
Although all four programs were designed to reduce the cost of child
care for low-income families, they have different objectives, target
populations, and program requirements.  Consequently, integrating
these new federal programs into existing state systems of child care
in a way that both promotes and supports self-sufficiency has been a
continuing challenge and area of concern for states. 

In preparation for reauthorization of the block grant, the largest of
these programs, you asked us to review state implementation of the
block grant to determine problems that states encounter as they
integrate the block grant and the other federal child care programs
for low-income families into their child care delivery systems.  Our
objectives were to (1) determine how states are integrating the child
care block grant program with the three other federal child care
programs for low-income families and (2) identify gaps in the
delivery of child care services to the low-income population that
could impede their achieving economic self-sufficiency through
employment. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

States are making progress toward integrating the child care programs
into seamless systems; however, different federal program
requirements, coupled with resource constraints, produce gaps in the
delivery of child care subsidies to the low-income population. 
Specific service gaps we identified stemmed from program differences
in (1) categories of clients who can be served, (2) limits on the
types of employment-related activities clients can undertake without
compromising their benefits, (3) limits on the amount of income
clients can earn without losing their eligibility, and (4) limits on
the amount of time during which clients can receive child care
subsidies. 

Some states attempt to fill the gaps in child care service with
flexible funds such as federal block grant dollars or state and local
funds, which are less restrictive than the title IV-A\1 child care
funding streams.  In addition, recognizing the important role of
subsidized child care in preventing poor families from having to
depend upon welfare, some states target block grant and state-only
child care funds to the nonwelfare, working poor.  However, with
fiscal constraints on the amount of funds that state legislatures
appropriate to child care, there is pressure to use available state
dollars to claim federal matching funds to meet the child care
entitlements established by FSA.  Further, some states that have not
claimed sufficient federal child care funds to meet the need use
block grant dollars to provide child care to entitled welfare
recipients.  Therefore, when there are limited funds, eligible
nonwelfare, working poor families may not receive child care
subsidies, placing them at greater risk of becoming dependent on
welfare. 

Despite congressional expectations that the block grant would
motivate states to significantly increase direct support to working
poor families in need of child care assistance, the current
fragmented federal system of subsidized child care appears to provide
little incentive for states to do so.  In an environment of finite
resources, where the child care programs for welfare and recent
welfare recipients are entitlements, there is pressure to serve these
groups, while equally needy working poor families may go unserved. 
Moreover, because each of the four federal child care programs we
studied was designed with a different objective, they unintentionally
segment the low-income population into categories that fail to
recognize the similarity of their economic circumstances and child
care needs.  State officials believe they would be better able to
provide child care services that support self-sufficiency efforts if
there were greater consistency across programs and if they had more
flexibility in how they spend their federal child care funds. 


--------------------
\1 AFDC child care, TCC, and At-Risk Child Care are all amendments to
title IV-A of the Social Security Act.  This act established AFDC,
which is commonly known as a welfare program. 


   BACKGROUND
------------------------------------------------------------ Letter :2

By including child care in FSA, the Congress acknowledged the
importance of child care to helping welfare recipients obtain
employment, leave welfare, and stay employed.  Thus, FSA guarantees
child care to employed AFDC recipients and to participants in the Job
Opportunities and Basic Skills Training (JOBS) program\2 as well as
other AFDC recipients in state-approved education and training.  In
addition, FSA guarantees a year of transitional child care to AFDC
recipients after they leave the welfare rolls because they have
increased their earnings from employment. 

In recognition of the importance of child care subsidies for working
poor families, the child care provided under the At-Risk Child Care
program is reserved for working families not currently receiving AFDC
that would be at risk of becoming eligible for AFDC if child care
were not provided.  Finally, the block grant was designed to provide
direct support to low-income working families that need child care to
work or to participate in education and training, and to improve the
quality and availability of child care for all consumers.  Table 1
summarizes the features and funding of these child care programs. 

As shown in table 1, AFDC child care and TCC are entitlements to
clients and require state matching funds.  Any person eligible for
TCC or AFDC child care cannot legally be denied a subsidy.  A state
can finance the subsidy to entitled individuals by putting up the
state match to claim federal funds or by using an alternative funding
source such as the block grant.  In fiscal year 1992, the states
spent $622 million in combined federal and state funds on AFDC child
care; they spent $134 million on TCC.  The At-Risk Child Care program
is an entitlement to states, not individuals; each state is allocated
a proportionate share of federal funding based on the number of
children under age 13, which must be matched in order for the state
to receive federal funds.  In fiscal year 1992, states spent $599
million in federal and state funds combined on At-Risk Child Care. 
The child care block grant, not an entitlement to individuals or
states, requires no state matching funds.  It is allocated to states
according to a formula that factors in the proportion of young
children and the number of needy children\3 in each state as well as
per capita income.  In fiscal year 1992, $798 million in federal
child care block grant funds were allocated to the states and
territories.\4



                                     Table 1
                     
                       Federal Child Care Program Features


                                            At-Risk Child
      AFDC child care    TCC                Care               Block grant
----  -----------------  -----------------  -----------------  -----------------
Purp  To assist AFDC     To provide up to   To provide child   To increase
ose   families with      12 months of       care to non-AFDC   availability and
      child care to the  child care to      working families   affordability of
      extent that it is  working AFDC       who would be at    child care for
      necessary for      recipients upon    risk of AFDC       low-income
      employment or      loss of            dependency if      families as well
      state-approved     eligibility for    child care were    as to help states
      education and      AFDC due to an     not provided       provide, expand,
      training           increase in hours                     and improve the
                         of or earnings                        quality of child
                         from employment                       care for all
                                                               families

Targ  AFDC recipient     Family that        An optional state  Families at or
et    who accepts or     received AFDC in   program for low-   below 75% of
popu  retains            3 of last 6        income families    state median
lati  employment or is   months and is no   at risk of AFDC    income, to enable
on    in state-          longer eligible    dependency and     them to work or
      approved           for AFDC due to    needing child      to participate in
      education or       increased hours    care to continue   approved
      training activity  of or earnings     working            education and
                         from employment                       training, or to
                                                               provide child
                                                               care for
                                                               protective
                                                               service cases\a

Fund  Open-ended         Open-ended         Capped             Block grant to
ing   federal            federal            entitlement to     states; no match
      entitlement to     entitlement to     states; requires   required
      recipients;        families;          state matching
      requires state     requires state     funds
      matching funds     matching funds

FY    $621,727,109\b     $133,594,923\b     $599,050,901\b     $798,249,375\c
1992

Stat  State IV-A agency  State IV-A agency  State IV-A agency  "Lead state
e                                                              agency"\d
admi
nist
rati
on
--------------------------------------------------------------------------------
\a These are children in state custody due to abuse or neglect. 

\b Combined federal and state expenditures. 

\c Total of amounts allocated to the states and the territories. 

\d The "lead agency" is designated by the governor and responsibility
can be assigned to a non-IV-A agency. 

Taken together, these program funding sources amounted to over $2
billion in 1992 and appear to be a large infusion of funds into the
subsidized child care system; however, they provided child care to
only a small portion of the eligible population.  Based on
preliminary fiscal year 1992 data reported to the Department of
Health and Human Services (HHS) by the states,\5 only between 5 and 6
percent of the AFDC caseload received AFDC child care subsidies, and
less than 30 percent of JOBS participants received child care
assistance from any funding source.\6

Before 1988, there were no major federal child care funding streams
specifically designed to provide child care subsidies as a means of
promoting economic self-sufficiency for low-income families.  Thus,
over the years, states developed their own systems of subsidized
child care, with substantially different levels of financial
commitment, reflecting diverse state philosophies toward child care. 

Currently, states are trying to integrate the new federal programs
into their existing systems of child care in a way that both responds
to federal mandates and promotes economic self-sufficiency for the
low-income population.  These efforts at integrated systems of child
care have as a goal the creation of a seamless system of care in
which the lines between eligibility limits and other rules among the
different state and federal child care programs are invisible to the
client and the child care provider. 

Seamless systems would allow families to move from one funding stream
to another with no disruption in child care services as family
economic situation and eligibility for child care change.  Seamless
systems would promote continuity of care, which is considered
important to the mother and the child, as families strive for
economic self-sufficiency.  Disruptions in child care can threaten
the sometimes fragile gains families have made in moving from welfare
to work.  Continuity of care offers emotional security to the child;
stability of care ensures the parent will be able to meet employer
expectations for timeliness and attendance. 

In recognition of the importance of continuity of care, HHS, which
administers all four federal child care programs, has encouraged
states to integrate the federal child care programs into seamless
systems at the state level.  To accomplish this, however, states must
overcome the administrative barriers imposed by multiple, and in some
cases conflicting, program requirements.  In an attempt to eliminate
some of these barriers HHS has published proposed changes to the
child care regulations. 


--------------------
\2 The employment, education, and training program for AFDC
recipients established by FSA. 

\3 Based on the number of children receiving free or reduced-price
lunches under the Department of Agriculture's school lunch program. 

\4 States have 4 fiscal years in which to spend any one year's block
grant allocation. 

\5 According to HHS, the child care data are underreported. 
Consequently, the number of families actually receiving subsidies is
likely to be somewhat higher. 

\6 Many welfare recipients rely on unpaid informal child care
arrangements.  In addition, working AFDC recipients can have a
limited amount of the money they pay for child care disregarded from
their earnings when their AFDC benefit is calculated. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To find out how states are integrating the block grant with the three
title IV-A child care programs, we reviewed federal program reports
and talked with child care program administrators at the federal and
state levels as well as with child care program operators and child
care advocates.  To obtain detailed information on program delivery
systems and gaps in services, we visited six states:  California,
Illinois, Massachusetts, Michigan, New York, and Texas.  We selected
these states because each has a substantial welfare caseload and
because they differ in their financial commitment to child care,
philosophy toward child care, administrative structure, and child
care delivery system (see app.  I for a summary of the six states'
selected characteristics).  In each state we reviewed state plans and
budgets, and we talked with state child care program administrators. 
In three states, California, Illinois, and Texas, we also visited
local child care providers funded with federal block grant and title
IV-A child care funds. 

We did our work between October 1992 and November 1993 in accordance
with generally accepted government auditing standards.  We did not,
however, verify the data or perceptions of problems reported by the
states. 


   STATES ARE MAKING PROGRESS
   TOWARD PROVIDING SEAMLESS CHILD
   CARE SERVICES, BUT GAPS REMAIN
------------------------------------------------------------ Letter :4

Although all six states we visited had made progress toward
developing seamless systems of child care delivery, they all reported
that service gaps remained that they could not fill without some
changes at the federal level.  In addition, states reported that the
patchwork of child care programs resulting from state funds and the
four separate federal funding streams, each with its own set of rules
and reporting requirements, are an administrative burden. 


      SIMILAR TECHNIQUES USED TO
      PROMOTE SEAMLESSNESS
---------------------------------------------------------- Letter :4.1

Techniques we found being used to promote seamlessness included
standardizing provider payment rates and client copayments, and
specifying the same income eligibility for receiving a child care
subsidy.  For example, Illinois paid the same rates to providers
regardless of the clients' welfare status.  Furthermore, for
nonwelfare working parents, Illinois had the same income eligibility
standards and required the same copayment regardless of whether state
or federal funds were involved.  New York made the same providers
eligible for title IV-A child care and block grant funding, so that a
client changing eligibility from one funding stream to another would
not have to change providers.  In addition, New York standardized
parent fees for all funding streams.  California is attempting to
standardize its reimbursement rates, client copayments, and the
income level for determining eligibility. 

For some states, developing a seamless system is more complicated
than for others.  For example, in California, which has had a large
state-funded system of child care for almost 50 years, the state
programs tend to be more generous than federal programs, making
integration difficult.  Moreover, states with county-administered
systems, such as New York and California, have more difficulty
integrating programs into a unified system because these states'
programs vary at the county level as well. 

The length to which states went to develop seamless systems is
exemplified by Texas, which won a Harvard University/Ford Foundation
Innovation in State and Local Government Award for having developed
an integrated automated system of child care delivery that
consolidated federal and state eligibility criteria, application
processes, and funding streams.  The Texas Child Care Management
Services system was designed to manage 8 sources of state and federal
funding and 22 client eligibility categories resulting from the
addition of federal funding to the existing child care system.  An
explicit goal of this system was to ensure that families would not
have to reapply when their eligibility status changed from one
funding source to another.  Consequently, the system is designed to
permit any provider to accept any subsidized child funded by any
funding source.  To achieve this, the Texas system links eligibility
to appropriate funding streams and seeks out alternate funds when
primary funds are depleted. 

With the advent of the block grant, Michigan formed a Unified Day
Care System to administer all child care subsidies to welfare
recipients in employment and training; low-income, nonwelfare
recipients; migrant workers; children in foster care; and child
protective service clients.  This system was designed to administer
the three title IV-A child care programs, the federal block grant,
and other state child care funds.  The intent of the Unified Day Care
System was to provide seamless services to clients.  Nevertheless,
the Michigan Director of Child Care observed that it is difficult for
a state to develop a seamless system when states still have to submit
separate plans and reports for the different federal programs. 


   GAPS IN PROVIDING SEAMLESS
   CHILD CARE SERVICES
------------------------------------------------------------ Letter :5

Despite state progress in developing seamless systems of providing
child care, gaps in services remain because of different program
requirements.  These program requirements differ in specifying (1)
the categories of clients who can be served, (2) the activities
clients are permitted to pursue while remaining eligible for child
care, (3) the ceiling on the amount of income that may be earned
while retaining program eligibility, and (4) the length of time the
child care subsidy is allowed to be paid.  States told us that these
conflicting requirements and resulting gaps can have negative
consequences for families, such as losing their child care subsidy
when they need it to remain in the labor force. 


      CATEGORICAL ELIGIBILITY
---------------------------------------------------------- Letter :5.1

The current system of child care guarantees subsidies to AFDC
recipients participating in employment or state-approved education
and training activities as well as to employed former AFDC
recipients, but not to working poor families outside the AFDC system. 
The categories specified within the federal child care programs do
not reflect the reality of the transition from welfare to economic
self-sufficiency.  Movement toward self-sufficiency tends to be
sporadic, and individuals who have worked their way off welfare
generally are still poor.  In fact, some may be economically worse
off than when they were on welfare since they now face work expenses
that can include child care. 

Moreover, the categorical nature of programs does not recognize that
disruptions in important services such as child care can cause
economically marginal families to lose jobs and, if eligible, to be
forced to rely on welfare.  Despite similarities among families in
all the programs, the patchwork of child care funding makes fine
distinctions among categories of families.  While welfare status
guarantees a child care subsidy to individuals in employment-related
activities, there may be little difference in economic status between
a welfare recipient and a low-income, nonwelfare recipient.  In fact,
there are welfare recipients who work but do not earn enough to make
them ineligible for welfare; and welfare recipients may cycle on and
off assistance a number of times before leaving welfare permanently. 
Consequently, the separate programs may be distinguishing between the
same individuals at different points in their journey from welfare to
economic self-sufficiency. 

Under the existing system, with finite resources, it may be easier
for welfare or former welfare recipients to obtain a child care
subsidy than it is for a low-income, nonwelfare working person to do
so, even though their economic situation and child care needs may be
quite similar.  For example, in Michigan, low-income working families
must be very low income to qualify for child care assistance and may
be expected to pay relatively large copayments toward the cost of
child care as their income increases.  On the other hand, welfare
recipients who work or are in state-approved education and training
are entitled to child care as are former welfare recipients who leave
the welfare rolls when they become employed.\7


--------------------
\7 We understand that some states have, consistent with HHS guidance,
limited their obligations to provide child care subsidies by
incorporating fiscal considerations into their criteria for approving
education or training programs. 


      EMPLOYMENT-RELATED
      ACTIVITIES
---------------------------------------------------------- Letter :5.2

Although At-Risk Child Care and TCC statutory language expressly
provides for child care subsidies during employment, HHS regulations
strictly interpret the statute and do not specifically allow the use
of those funds to subsidize child care during a period of job search. 
Five of the six states we visited told us that the At-Risk Child Care
program funds cannot be used to subsidize child care during a period
of job search or other break in employment unless employment is
scheduled to begin.\8 Consequently, when an employed individual whose
child care is subsidized by At-Risk Child Care or TCC funds becomes
unemployed, the child care subsidy is generally lost.  The children
then have to be pulled out of care unless the parent or another
funding source can pay the entire cost of care. 

Should the parent subsequently find employment, in many cases he or
she will go to the end of a waiting list for subsidized child care
and continue to pay the full cost of the care.  If these
circumstances force the family onto welfare, the parent would be
eligible again for some form of child care assistance once a job was
found or the parent began to participate in state-approved education
or training.  Figure 1 is a hypothetical flow of low-income families
through the subsidized child care system and demonstrates possible
outcomes of the different rules for different child care programs. 

   Figure 1:  Hypothetical Client
   Flow Through Subsidized Child
   Care System

   (See figure in printed
   edition.)

Since many of their clients frequently move in and out of employment,
program providers told us that using At-Risk Child Care dollars while
they are employed increased clients' likelihood of losing child care
upon termination of employment.  The absence of child care makes
looking for work more difficult, especially for single parents, and,
program providers fear, puts low-income families at greater risk of
becoming welfare recipients. 

In California, for example, we were told that local child care
providers who were subsidizing low-income families with state funds
did not want to use these funds to claim federal At-Risk Child Care
money, even though having that money would substantially increase the
funding pool available for child care.  Under the At-Risk Child Care
program in California, clients lose their child care subsidy within
10 days of losing their job.  In contrast, California's state child
care program permits 60 days of child care during a period of job
search. 

California child care program administrators and providers told us
that their clients regularly move in and out of employment and that
it is important to maintain the continuity of child care after they
leave a job and during periods of job search.  These providers prefer
to serve well and consistently those clients already in their system
rather than serve larger numbers of clients in a piecemeal fashion. 
Similarly, citing concerns that not providing child care subsidies
during a job search made clients more vulnerable to welfare, child
care administrators in New York and Massachusetts reported that they
use state funds to subsidize child care during periods of job search. 


--------------------
\8 The only state we visited not reporting a concern over At-Risk
Child Care was Michigan, which did not plan to participate in the
program until 1994. 


      INCOME ELIGIBILITY
---------------------------------------------------------- Letter :5.3

Because the federal block grant limits eligibility to families with
incomes at or below 75 percent of the state median income, it
produces a "cliff"\9 for clients whose income rises even $1 above
this level.  We were told, for example, by a local Department of
Social Services child care worker in Michigan that clients reduce
their hours of work as they approach the cutoff income level because
they believe they will not be able to pay for child care without the
subsidy. 

Further, the California state child care program will subsidize a
family up to 100 percent of the state median income.  Thus, two
families in the same economic situation in California may be treated
differently, depending on which funding stream subsidizes their child
care.  The family funded with federal block grant funds faces the
loss of the child care subsidy as its income increases beyond 75
percent of state median income and is at risk of not being able to
continue to support itself.  The family subsidized by state-only
money, however, will continue being subsidized up to 100 percent of
state median income. 


--------------------
\9 A "cliff" refers to a situation in which a small increase in
income results in a large decrease in spendable income because of the
abrupt termination of some benefit. 


      TIME LIMITS
---------------------------------------------------------- Letter :5.4

The TCC program also presents a service delivery dilemma.  At the end
of the 12 months of entitlement, if a state does not have any block
grant, At-Risk Child Care, or other funds to continue the subsidy to
a client, the cost of child care must be borne entirely by the
client.  This situation occurs even if there has been no increase in
the client's earnings during the 12 months.  The result could be that
the children get moved to cheaper care or that the parent quits work. 
Should the parent return to welfare and participate in employment or
state-approved education and training, the family once again would be
entitled to child care. 

All six states we visited perceived the TCC 12-month provision of
child care to be too short.  They all attempt to continue to
subsidize TCC families with another funding source after the 12-month
limit.  Three states make post-TCC clients a priority for At-Risk
Child Care funds, and three states use the block grant.  One state
uses state-only funds for these families.  However, since these
funding streams are limited, states do not always have funds to
continue the subsidy. 

When Texas ran out of funds to continue TCC, a special waiting list
for these post-TCC families was created so that they would be the
first to receive additional funds when they became available. 
However, state officials expressed concern over what clients would do
about child care in the interim.  While one Texas official would like
to see greater utilization of TCC, she is concerned that this usage
would reduce the amount of state funding available to claim At-Risk
Child Care funds.  This circumstance could serve to further limit
subsidies for the working poor with no immediate ties to welfare. 

Like Texas, Illinois officials told us that they had run out of funds
to subsidize child care for post-TCC families.  Since some former
welfare recipients may never earn enough money to afford the full
cost of child care, the 12-month limit on the TCC subsidy may not be
long enough to support such families.  Moreover, the loss of the
child care subsidy increases the likelihood that these families will
return to welfare.  Consequently, officials in three of the six
states have requested, or are considering requesting, a federal
waiver in order to be able to continue providing TCC for 12
additional months. 

Because TCC is an entitlement to clients, the 12-month extension
would allow states to claim additional federal funds to continue the
child care subsidy.  However, in recognition of the fact that there
is no guarantee that at the end of the 12-month extension families
will be any better off financially, officials in Illinois and New
York said they would like to see states have the option to base
eligibility for TCC solely on income. 


   CURRENT SYSTEM PROVIDES LITTLE
   INCENTIVE TO SERVE THE WORKING
   POOR
------------------------------------------------------------ Letter :6

Current rules for the disparate child care programs previously
described produce incentives for states to serve entitled clients
first and to form waiting lists for other eligible families. 
Although child care workers believe that the provision of child care
is important to prevent low-income working families from going on
welfare, these families are served, as funding permits, after states
provide subsidies to entitled individuals.  Clients who are entitled
by law to receive child care benefits are placed in one category, and
other eligible individuals are prioritized and served as resources
permit. 

In most states, child protective service cases, along with clients
entitled to AFDC child care and TCC, are in the category that will
receive child care subsidies.  Working poor, nonwelfare recipients
are in the group that will receive subsidies as resources permit. 
For example, in Texas the latter rank fourth in a priority list
consisting of eight major client groups.  In Massachusetts, they are
the third eligibility category out of three categories.  Illinois
reports that it serves its nonentitled caseload in the following
order:  teen parents, protective services and special needs families,
followed by low-income working families. 

The combination of program mandates and limited resources requires
states to make difficult choices that frequently result in needy
eligible families being denied services.  Decisions about who will
receive a child care subsidy depend upon the availability of funds
and the funding rules.  Eligible clients are matched with funding
streams that fit their eligibility status.  When the funding runs out
for a particular category, states terminate intake and either form
waiting lists or simply turn clients away.  Consequently, clients who
are eligible for funds but are not entitled to them may not receive
services, while individuals who are entitled to services will receive
them regardless of funding source.  Moreover, as states are required
by FSA to increase participation in the JOBS program,\10 the
competition for limited child care funds will only increase, with
greater pressure to provide child care to welfare recipients. 

Currently, some states are using federal block grant funds to meet
AFDC child care entitlements.  Although the block grant legislation
does not prohibit assisting families on welfare, the primary goal of
the block grant is to help working poor families afford child care. 
However, as states run out of money to claim federal funds, they are
compelled to use the block grant to meet their obligations to
entitled individuals.  Three of the six states we visited reported
using some federal block grant funds to provide child care
entitlements.  In a recent survey of all states by the Children's
Defense Fund, 15 states reported using block grant funds to pay for
child care for at least some AFDC families in employment, education,
or training programs. 

In a much-publicized court case in California, a federal district
court ruled that California was required by federal statute to
provide child care to "self-initiated" non-JOBS, welfare participants
in state-approved education and training.  In response, rather than
increase state funds, California transferred 1991 federal block grant
funds to meet the anticipated need for child care subsidies, thereby
reducing the amount of block grant funds available to low-income,
nonwelfare, working families.  By the end of state fiscal year 1993,
$5.2 million had been spent for these cases. 

Texas annually allocates a portion of its block grant funds to child
care for JOBS participants because the state legislature has not
appropriated enough state dollars to draw down the federal dollars to
meet the child care needs of all JOBS participants.  To the extent
that states are using federal block grant funds to meet entitlements,
there are fewer dollars for non-AFDC, low-income working families. 


--------------------
\10 The JOBS participation rate for mandatory participants was 11
percent in fiscal years 1992 and 1993 and increases to 15 percent in
fiscal year 1994 and to 20 percent in fiscal year 1995. 


   WORKING POOR ARE ON WAITING
   LISTS FOR CHILD CARE
------------------------------------------------------------ Letter :7

Limits on the amount of available child care funding result in
waiting lists of nonentitled needy families.  While not all states
maintain waiting lists, five of the six states we visited reported
that they have substantial numbers of unserved low-income families
waiting for child care subsidies.  For example, Texas reported that
there are an estimated 40,000 children waiting for child care
subsidies.  Furthermore, a 1991 survey of waiting lists for
subsidized care in California found approximately 255,000 children on
waiting lists.  In addition, during a program review of California in
1993, HHS officials visiting a provider of child care subsidies in
South Central Los Angeles were told that there were 13,000 children
waiting for subsidized care from that program alone. 

While states' commitment to continuity of care helps families already
receiving assistance, it exacerbates the problem for other eligible
families on waiting lists.  State officials told us that in many
cases the incomes of families currently receiving child care
subsidies are not rising beyond the point of eligibility;
consequently, there is little turnover in the child care caseload and
little room for additional families.  Officials in these states told
us that their commitment to continuity of care for families that
enter their system means that a large number of eligible families
cannot enter the system at all. 

Even states that make a substantial commitment of state funds to the
provision of child care indicated that they have waiting lists,
largely composed of low-income working families.  States that have a
smaller financial commitment to child care may limit the provision of
services to the very needy and require a large copayment from others. 
The result is little relief for low-income, non-AFDC working
families. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

The current fragmented child care system does not consistently meet
the needs of the low-income population attempting to become
self-sufficient.  The categorical nature of the funding streams, with
entitlements to some client categories, time limits on others, and
activity limits on still others, has the unintended consequence of
producing gaps in services.  A major contributor is differences in
federal programs and the resulting rules that create gaps in services
at the state level.  As a result, states may not be able to provide
child care services to their low-income clients in ways that promote
and support self-sufficiency. 

Since there is not sufficient government-subsidized child care for
the entire low-income population, states have to deny care to some
people in need.  Given the inadequate supply of funds, it necessarily
follows that some states will seek to satisfy their mandates in a way
that minimizes state costs.  By law, states must serve those
currently or recently on AFDC but have little incentive to serve
other low-income families in like or even worse economic
circumstances.  As a result, the well-intentioned emphasis on
providing services to assist welfare recipients in leaving welfare
has overshadowed the importance of the provision of child care to
prevent welfare dependency.  The current system may also
inadvertently create an incentive to go onto welfare for those
needing child care to become employed.  By treating welfare and
low-income working families as though distinctly different, when so
many are in similar circumstances, the current system does not
promote the goal of economic self-sufficiency in an equitable manner. 

Although states have worked to produce seamless systems of child
care, service gaps remain.  These gaps stem largely from the child
care statutes themselves, which target specific categories of need. 
Closing gaps in federal funding streams, facilitating state
flexibility in spending federal dollars, and balancing the incentives
for serving various client groups would contribute toward a child
care delivery system better able to meet the needs of low-income
families trying to achieve economic self-sufficiency through
employment. 


---------------------------------------------------------- Letter :8.1

As agreed with your offices, we did not request written agency
comments on this report.  We did, however, discuss the draft with HHS
officials in the Administration for Children and Families.  They
provided technical comments and more recent data, which we have
incorporated as appropriate. 

We are also sending this report to the Secretary of Health and Human
Services and to other interested parties.  We will make copies
available to others on request. 

Major contributors to this report are listed in appendix II.  If you
have any questions concerning this report or need additional
information, please call me on (202) 512-7215.






Jane L.  Ross
Associate Director
Income Security Issues


SELECTED CHARACTERISTICS OF SAMPLE
STATES
=========================================================== Appendix I

                                                         Number of
                                Administ        AFDC      children
                                ration      caseload       on AFDC     Number of
                    IV-A        of          (FY 1992      (FY 1992  block grant-
                    administra  child        monthly       monthly      eligible
State               tion        care        average)      average)    children\a
------------------  ----------  --------  ----------  ------------  ------------
California          County      Dept. of     806,086     1,601,785     2,322,017
                                Social     (16.9%)\b
                                Services
                                supervis
                                es AFDC
                                child
                                care and
                                TCC.
                                Dept. of
                                Ed.
                                supervis
                                es At-
                                Risk
                                Child
                                Care,
                                the
                                block
                                grant,
                                and
                                state-
                                funded
                                child
                                care
                                programs
                                .

Illinois            State       Dept. of     228,625       471,798       768,190
                                Children      (4.8%)
                                and
                                Family
                                Services
                                administ
                                ers the
                                block
                                grant
                                and
                                state-
                                funded
                                child
                                care
                                programs
                                . Dept.
                                of
                                Public
                                Aid
                                administ
                                ers AFDC
                                child
                                care,
                                TCC, and
                                At-Risk
                                Child
                                Care.

Massachusetts       State       Public       111,448       208,024       354,150
                                Welfare       (2.3%)
                                Departme
                                nt
                                administ
                                ers AFDC
                                child
                                care,
                                TCC, At-
                                Risk
                                Child
                                Care,
                                and the
                                block
                                grant.
                                Dept. of
                                Social
                                Services
                                administ
                                ers
                                state-
                                funded
                                child
                                care and
                                some At-
                                Risk
                                Child
                                Care.

Michigan            State       Dept. of     225,609       440,943       657,793
                                Social        (4.7%)
                                Services
                                ' Office
                                of Child
                                & Family
                                Services
                                administ
                                ers all
                                child
                                care
                                programs
                                .

New York            County      Dept. of     397,172       742,555     1,201,109
                                Social        (8.3%)
                                Services
                                ' Bureau
                                of Child
                                Care
                                supervis
                                es all
                                child
                                care
                                programs
                                .

Texas               State       Dept. of     265,819       528,338     1,421,157
                                Social        (5.6%)
                                Services
                                ' Office
                                of
                                Client
                                Self-
                                Support
                                Services
                                administ
                                ers all
                                child
                                care
                                programs
                                .
--------------------------------------------------------------------------------
\a Based on 1990 census data, the number of children 0 to 11 years
old in families with incomes at or below 75 percent of the state
median income. 

\b The percent of the fiscal year 1992 U.S.  total of 4,768,495 AFDC
cases. 

Source:  Data on AFDC caseload and number of children on AFDC were
obtained from HHS Office of Family Assistance, Division of Program
Evaluation, AFDC Information and Measurement Branch (Sept.  1993). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

Lynne Fender, Assistant Director, (202) 512-7229
Margaret Boeckmann, Evaluator-in-Charge
Cynthia Bascetta
Sharon Jizmejian
Janet Mascia
