In recent years, federal and state governments have taken a number of actions to strengthen the nation’s child support system. One chief policy concern is that child support awards, over time, may not keep pace with non-custodial parent earnings or the cost associated with raising a child.

The 1988 Family Support Act (FSA) mandated that states periodically review and adjust child support orders. The rationale behind review and adjustment was to ensure that child support awards were equitable, sufficient, and commensurate with parents’ income. Child support awards are almost always expressed in fixed dollar amounts, and over time the needs of the child and the financial circumstances of both parents may change. The FSA required periodic review and adjustment of child support orders administered by state child support enforcement agencies. Specifically, state child support agencies had to review and adjust public assistance cases at least every three years; parents from non-public assistance cases could request reviews. Medical support was to be ordered if the non-custodial parent’s employer made it available.

The federal government widened the scope of the review and adjustment process in 1993. A child support provision—enacted through the Omnibus Budget Reconciliation Act (OBRA) of 1993—allowed parents to request a review and modification under the state’s guidelines at least once every three years without proving a substantial change in circumstances.

Several demonstration projects tested the effects of review and adjustment procedures. These included the Wisconsin Order Revision Project, the Oregon Child Support Updating Project, and a federal Office of Child Support Enforcement-funded study of review and adjustment demonstration projects in four states (Delaware, Colorado, Florida, and Illinois). In general, the research showed that reviews did not automatically lead to adjustments, because relatively few cases—between 4% (Florida) and 14% (Oregon) selected for review were ultimately revised. However, when cases were revised, most order adjustments were upward (81% to 92%, depending on the study). Moreover, adjustments were sizeable. Across the studies, average awards for public assistance cases (across both upward and downward adjustments) increased from 68% to 102%, while awards for non-public assistance cases increased from 54% to 66%.

Many states, however, reported difficulty in implementing review and adjustment. Caseworkers had to obtain updated financial information about one or both of the parents, and in many states, also had to explore the families’ child care costs, health insurance premiums, and other child-related costs. State IV-D directors suggested that the mandate was drawing staff away from paternity establishment and enforcement.

In 1996, Congress—through the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA)—relaxed the federal requirements for mandatory review and adjustment of child support orders. Under PRWORA, periodic reviews are no longer required. Instead, states must review orders every three years at the request of either parent, or at the request of the state child support agency. States must notify all custodial and non-custodial parents, both TANF and non-TANF cases, of their right to a review every three years. States can initiate reviews for public assistance cases. States also have the option of adjusting child support orders using the following methods:

The Department of Health and Human Services Office of Evaluations and Inspections (OEI) found that, as of 1999, 32 states had discontinued or planned to discontinue the triennial review of public assistance cases. Three states (Minnesota, Iowa, and New York) used the COLA method to adjust support orders, and no states used PRWORA’s automated review option. Four states, Alaska, Maine, Oklahoma, and Vermont, had received grants from the Office of Child Support Enforcement (OCSE) to experiment with methods for the automated review option.

There has been concern that the termination of mandatory reviews and adjustments will have an adverse effect on both custodial and non-custodial parents. OEI hypothesized that potential increases in public assistance collections could be forfeited. Also, public assistance clients whose orders are not reviewed and adjusted periodically might have more difficulty attaining self-sufficiency once they leave welfare. Non-custodial parents also could be affected. Small, periodic increases from reviews and adjustments might be easier to comply with than a larger adjustment after a long period of time. Additionally, reviews and adjustments might result in decreased awards for non-custodial parents whose income is not commensurate with the award amount.

As noted above, given the cost and complexity of traditional reviews, a number of states are considering, or have implemented, one of the two new approaches authorized in PRWORA (i.e., automated methods or a COLA). The automatic adjustment attempts to mimic a traditional review and adjustment by matching child support orders against computerized state data (e.g., tax or wage records) to determine if adjustments are appropriate. A COLA, however, is a very different process, often with different outcomes. COLAs, by definition, increase awards by some designated level of inflation (e.g., the Consumer Price Index for Urban Areas). Usually, COLAs are applied to all orders that reach a given threshold (e.g., two years since last adjustment). Thus, if the CPI increased 6%, the order would increase by that amount. Generally speaking, when compared to traditional review and adjustments, COLAs adjust more awards, the adjustments are always upward, but the increases are smaller. COLAs are not intended as a substitute for review and adjustment. Rather, they serve as a device for adjusting awards to keep pace with the increased incomes of parents and the expenses associated with raising a child. In states that adopt a COLA or automated review and adjustment, parents continue to have the right to request a traditional, manual review of an order.

This report focuses primarily on COLA adjustments. OCSE funded the Lewin Group and ECONorthwest to review automated systems already in place at the state level. We reviewed the processes involved in passing COLA legislation, the stakeholders who were involved, the steps the states took to implement their COLA systems, the fiscal outcomes both for the parents and the states, and assessments of the pros and cons of a COLA system. We also examined the proposed automated adjustment in one of the demonstration sites. Specifically, our study reviewed the policies of three states:

Our review of the three states suggested the following findings:

COLAs serve a different purpose than traditional review and modification and cannot correct an inappropriate order or a change in circumstances. Policymakers designed the traditional review and modification process to address cases in which awards no longer reflected the states’ guidelines because parents’ incomes changed substantially since the time of order establishment. Traditional reviews also served as means to apply guidelines in cases that were established before guidelines existed. The traditional review and modification process is time, resource, and data intensive. Evaluations indicated that modifications were rare, but in the limited number of cases that warranted a modification, the resulting change in the order was sizeable. Typically, modifications increased the amount of the order, but downward modifications were also possible.

By contrast, COLAs are applied to a larger share of cases and adjustments uniformly result in small, upward modifications. From an equity standpoint, COLAs best serve those cases in which a non-custodial parent’s income is increasing at about the rate of inflation and—in states that use income shares guidelines—is also outpacing the custodial parent’s income growth. COLAs are no substitute for review and adjustment in cases where there has been a substantial change in the financial circumstances of either parent. Vermont’s simulations of a COLA underscore this point. Comparing actual upward modifications to simulated COLAs for the same cases, Vermont found that the COLAs under-adjusted the orders by almost 40%. Additionally, COLAs do not address orders where a downward modification would be appropriate. Thus, having a COLA policy in place does not mean that traditional reviews and adjustments will not occur or are not necessary.

COLA appeals are rare. In the two states we observed, only a small percentage of COLA adjustments were appealed. In Minnesota, for example, 48,169 cases were selected for a COLA in 2000, and 1% were appealed. Even in 1998, when the state had an administrative process for appealing COLAs (which required less effort on the part of the non-custodial parent than does the current judicial process), the appeal rate was only 4%. The low COLA appeal rate likely is driven by a number of factors, including the small size of the adjustment, the cost and effort involved in the appeal (which can be high), and the non-custodial parent’s understanding of the process (or lack thereof).

COLA processes are inexpensive to implement and operate . Because of their strictly quantitative nature, COLA processes are automated and require very few labor resources. Consequently, direct implementation and operation costs are low. New York’s implementation period lasted about a year and required 2.5 full-time equivalent state-level staff, as well as periodic input from the IV-D and court-system directors. Minnesota and New York reported that on-going operations require minimal staff time. Frontline caseworkers devote minutes per case, verifying order dates and amounts prior to the release of the COLA notice. Staff from both Minnesota and New York estimated that at the state-level, the COLA only requires a 0.5 full year, FTE, because work is spread over a number of personnel and concentrated in the months leading up to the COLA’s effective date. Court staff likewise reported minimal workloads. In Minnesota, appeals of the COLA are rare, and the related hearings last no more than 15 minutes. In New York, COLA appeals are also rare but generate a more intensive review of the order. Staff in both states suggested that time spent on the COLA was minimal, relative to the review and adjustment process.

COLA policies are generally popular among state staff and custodial parents. Through the interviews conducted for this study in Minnesota and New York, we found almost unanimous support for the COLA policy among staff and representatives for custodial parents. Frontline caseworkers believed the process was fair, cost effective, and efficiently run by the state. Given the incremental changes involved and modest impacts on caseloads, the judicial communities in each state have endorsed the policy. In Minnesota, advocates for both custodial and non-custodial parents endorse the COLA, although the latter would propose some changes. We did hear opposition to the COLA from representatives of New York’s non-custodial parents; however, their critiques were aimed chiefly at guidelines rather than the COLA specifically.

Lack of income data may render infeasible more sophisticated efforts to automate modifications.Vermont found that the availability of on-line quarterly wage and tax data was insufficient to support its proposed automated modification process. The state was able to secure income information for both parents for only 40% of its test modification cases. Given data inadequacies, the state abandoned its original automation plan and is considering the adoption of a COLA process similar in structure to New York’s.

Guideline complexity hinders automated modifications. Vermont’s demonstration suggests that complex guidelines may not lend themselves to automated adjustments. The state’s income-shares model is one of the most complicated in the nation, and updating an order requires income and expense information from both parents. The state’s inability to automate the adjustment process has raised concerns about the complexity of its model. The IV-D agency may propose a replacement of its existing guidelines with a more simplified approach.

Additionally, the report highlights a number of considerations that policy makers should keep in mind when proposing an automated adjustment process.

What is the underlying rationale for the COLA? Before implementing a COLA, policy makers should consider the underlying rationale for the adjustment. Our interviewees identified two candidates. First, the expense of raising a child increases over time, and so one could argue that the order should as well. This is true regardless of the type of guideline employed by the state. Second, earnings and incomes typically increase over time, which may justify an upward adjustment to an order. The rationale a state adopts will be dictated by the nature of its guidelines. For example, Minnesota uses a percent-of-obligor income model, so an increase in the non-custodial parent’s earnings would directly translate into a higher order. However, in an income shares state, a rise in the non-custodial parent’s income may increase the order, but only if it outpaced the custodial parent’s income growth.

Should the COLA be mandatory or voluntary? Given the states’ continuing fiscal interest in public assistance cases, both New York and Minnesota have elected to make the COLA mandatory and automatic for those cases. However, the states treat non-public assistance cases differently. In Minnesota, the COLA adjustment is automatic for all cases; in New York, the state informs parents about eligibility, but at least one parent must request the COLA. The New York data indicate that only about one quarter of non-public assistance cases makes such a request. Proponents of the voluntary COLA argue that the government should not disrupt an established, stable order unless one of the parties requests a change. On the other hand, proponents of the mandatory COLA note that a voluntary request could ignite conflict between the parents. That is, the non-custodial parent may blame the custodial parent for the COLA. In their view, the advantage of the mandatory process is that the state—rather than the custodial parent—is responsible for the order’s change.

How often should the state apply the COLA? Child support officials in Minnesota and New York were nearly unanimous in their opinion that the COLA should not be conducted on an annual basis. They suggested that a yearly adjustment would result in very small changes to awards, would confuse parents, and would be difficult for employers to implement. Beyond that, however, the respondents tended to prefer their own state’s structure. Proponents of New York’s 10% threshold believe the policy is consistent with the notion of a substantial change in circumstances, which has been at the core of review and modification policy. Those in favor of the biennial COLAs argue that the higher (10%) threshold leads to larger single adjustments and increases the likelihood of appeals.

How easy, or inexpensive, should it be for parties to contest the COLA? As noted above, appeals rates in Minnesota and New York are low. From the non-custodial parent’s perspective, the implicit cost of contesting a COLA differs in each state. In New York, a COLA appeal generates a full review of the order (which may result in a large adjustment to the order), and in all practicality, requires costly legal representation. In contrast, Minnesota’s appeals trigger a narrow COLA-specific hearing that typically does not involve legal representation. However, Minnesota requires that a non-custodial parent serve the custodial parent, IV-D agency, and courts with the COLA appeal, which can involve trips to the local court offices, filing paperwork, and mailing forms to the appropriate parties. That requirement, the indirect result of a 1999 Minnesota Supreme Court ruling, is likely responsible for the recent decline in Minnesota’s COLA appeal rate (from 4% to 1%). The experiences in these states suggest that the cost and process associated with the appeal affects the appeal rate.

How would a COLA policy operate during a period of high inflation? COLA policies would draw more attention from parents and advocates during periods of high inflation. Since the enactment of Minnesota’s COLA in 1983, the annual inflation rate has exceeded 5% only once. Inflation has yet to exceed 3.5% since New York implemented its policy. When designing a COLA process, policy makers should carefully consider whether the program should have special provisions in the event inflation returns to the levels experienced in the late 1970s or early 1980s.