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Final Rule: Revision of the Child Support Enforcement Program Audit Regulations

AT-85-15

Published: October 1, 1985
Information About:
State/Local Child Support Agencies
Topics:
Program Audit
Types:
Policy, Action Transmittals (AT), Regulations

Revision of the Child Support Enforcement Program Audit Regulations

FINAL REGULATION

ACTION TRANSMITTAL

OCSE-AT-85-15

October 1, 1985

SUBJECT: Revision of the Child Support Enforcement Program Audit Regulations

ATTACHMENT: Attached are final regulations that amend Office

of Family Assistance (OFA) regulations at 45 CFR 205.146(d) and OCSE regulations at 45 CFR Part 305 to implement Section 9 of P. L. 98-378, the Child Support Enforcement Amendments of 1984. Section 9 amends titles IV-A and IV-D of the Social Security Act to modify the Child Support Enforcement program audit and related penalty. This regulation will strengthen the Child Support Enforcement program by providing the States with audit and penalty provisions that will encourage program improvement.

EFFECTIVE DATE: October 1, 1985.

REGULATIONS REFERENCE: 45 CFR 205.146(d) and Part 305.

SUPERSEDED MATERIAL: OCSE-AT-84-11, dated October 4, 1984.

RELATED REFERENCE: OCSE-AT-85-6, dated May 9, 1985.

INQUIRIES TO: OCSE Regional Representatives.

Director Office of Child Support Enforcement

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Child Support Enforcement

Social Security Administration

45 CFR Parts 205 and 305

Child Support Enforcement Program; Aid to Families With Dependent Children; Revision of Child Support Enforcement Program Audit Regulations

Agency: Office of Child Support Enforcement (OCSE) and Social Security Administration (SSA), HHS.

Action: Final rule.

SUMMARY: These final rules amend Office of Family Assistance (OFA) and OCSE regulations at 45 CFR 205.146(d) and Part 305 to implement section 9 of Pub. L. 98-378, the Child Support Enforcement Amendments of 1984. The rules will strengthen the Child Support Enforcement Program by providing the States with audit and penalty provisions that will encourage program improvement. For a detailed discussion of the changes see Supplementary Information. Also, see the discussion under the heading "Paperwork Reduction Act" regarding information collection requirements.

Effective Dates: Section 9 of Pub. L. 98-378 is effective on and after October 1, 1983. These regulations are effective October 1, 1985.

FOR FURTHER INFORMATION CONTACT:

Michael Fitzgerald, Policy Branch, OCSE, (301)443-5350.

SUPPLEMENTARY INFORMATION:

Statutory Requirements:

Section 9 of Pub. L. 98-378 amends sections 403(h) and 452(a)(4) of the Act regarding the Child Support Enforcement program audit requirements. Section 452(a)(4) of the Act was amended by replacing the requirement for an annual review of State IV-D programs with a requirement for a review at least once every three years (or not less than annually in the case of any State which is being penalized, or is operating under a corrective action plan in accordance with section 403(h). Section 403(h)(1) of the Act was amended by substituting a "substantial compliance" standard for the existing "full compliance" test used to determine whether a State has an effective IV-D program meeting the requirements of title IV-D of the Act. Section 403(h)(3) now specifies that a State which is not in full compliance with the title IV-D requirements shall be determined to be in substantial compliance with the requirements only if the Secretary determines that any noncompliance with the requirements is of a technical nature which does not adversely affect the performance of the program.

Section 403(h) was further amended to provide for a corrective action period and to substitute a graduated penalty for the flat five percent reduction of a State's AFDC funds for any quarter beginning after September 30, 1983. Section 403(h)(1) provides for a reduction of not less than one nor more than two percent in an initial finding, not less than two nor more than three percent if the finding is the second consecutive such finding made as a result of a review, or not less than three nor more than five percent if the finding is the third or subsequent finding made as a result of a review. Under section 403(h)(2)(A), a reduction will be suspended for a quarter if: (1) The State submits a corrective action plan within a period specified by the Secretary which contains steps necessary to achieve substantial compliance within a time period the Secretary finds appropriate; (2) the Secretary approved the plan and amendments thereto; and (3) the Secretary finds that the corrective action plan (or any amendment that is approved) is being fully implemented and the State is progressing towards substantial compliance in accordance with the timetable in the plan. Under paragraph (h)(2)(B), the penalty shall be suspended until the Secretary determines that: (1) The State has achieved substantial compliance; (2) the State is no longer implementing its corrective action plan; or (3) the State is implementing or has implemented its corrective action plan but has failed to achieve substantial compliance within the appropriate time period. Under paragraph (h)(2)(C), a penalty shall not be applied to any quarter during a suspension period if the State achieves substantial compliance. If a State is implementing its corrective action plan but fails to achieve substantial compliance within the time period allowed, the penalty will be applied to all quarters ending after the expiration of the suspension period until the first quarter throughout which the State IV-D program is in substantial compliance. If a State is not implementing its corrective action plan, the penalty will be applied as if the suspension had not occurred.

Although these statutory changes are effective beginning October 1, 1983, these proposed regulations have varying effective dates for different provisions as discussed below.

Under the existing section 452(a)(1) of the Act, the Director, OCSE, may establish standards for locating absent parents, establishing paternity and obtaining child support and support for the spouse (or former spouse) with whom the absent parent's child is living as he determines to be necessary to assure that State programs will be effective. The performance indicators in these regulations are established under the authority of section 452(a)(1).

Regulatory Provisions

Frequency Of Audit

Previous regulations at 45 CFR 305.10 required OCSE to conduct an annual audit of State Child Support Enforcement programs to determine whether each State has an effective IV-D program. To implement the provision of the amended section 452(a)(4) of the Act regarding the frequency of audit, the regulations at 305.10, Audit, require OCSE to conduct an audit of State IV-D programs, at least once every three years, or at least annually in the case of any State which is being penalized to evaluate the effectiveness of the programs and determine that they meet the requirements of title IV-D of the Act.

Under this provision, OCSE has flexibility regarding the frequency of audit during the three-year period. OCSE may conduct an audit of each State's IV-D program once every two years, continue to conduct annual audit or vary the audit frequency among States (e.g., audit some States twice a year and others every 2 years). OCSE plans to conduct an audit, at least once a year, in any State that is not meeting the performance-related criteria in effect for fiscal year 1986 and any subsequent fiscal year. Nonetheless, we will conduct an audit of each State's IV-D program at least once every three years. We will conduct an audit more frequently than on an annual basis at the request of any State that is being penalized for not meeting State plan-related criteria. States should be aware that any audit conducted in this situation may result in an increased penalty for the State if the State is not found in substantial compliance. The audit will cover a one-year or shorter period (see 45 CFR 305.11).

Current Measurement of Program Effectiveness

Previous audit and penalty regulation at 45 CFR Part 305 prescribed audit criteria for an effective IV-D program and provided for an annual audit and imposition of the penalty

if a State was found not to have an effective program. Those regulations defined an effective program as one that is in compliance with each of several specified IV-D State plan requirements. In order to be in compliance with a particular State plan requirement, the State had to meet specific regulatory criteria which, for the most part, required States to have and use written procedures to carry out the requirement. Thus, if a determination was made that a State had and used written procedures and/or met other criteria with regard to each State plan requirement, the State was not subject to the penalty.

OCSE has completed annual audits during the past few years. After reviewing the findings, we believe that the audits have encouraged States to establish Child Support Enforcement programs that carry out the activities described in the IV-D State plan. Nevertheless, a State may have and be using procedures for each State plan requirement and not be operating its program in an effective manner. The House of Representatives, Committee on Ways and Means, in House Report No. 98-527, page 44, indicates that the audit should focus on program effectiveness rather than on simple compliance with processes. The Senate, Committee on Finance, in Senate Report No. 98-387, page 32, indicates that the Department should be developing performance measures which will enable OCSE auditors to determine whether States are effectively attaining each of the important objectives of the program. The Report further indicates that, based on the experience in the program to date, it should be possible to set standards which represent minimum acceptable levels of success in carrying out the various objectives of the Child Support Enforcement program. We agree that, because State IV-D programs have been in operation for ten years, sufficient time has passed to allow States to reach a degree of maturity where it is no longer necessary to focus solely on compliance with the IV-D State plan.

Having reviewed the results of the audits for the first four periods, we have concluded that the current audit regulations do not enable us to adequately measure program effectiveness. We therefore have revised 45 CFR Part 305, Audit and Penalty, as described below.

Substantial Compliance Standard

In these regulations, a State must meet both State plan-related audit criteria and performance-related audit criteria to be found to have an effective program.

To implement the provisions of the amended section 403(h)(1) of the Act regarding the use of a substantial compliance standard and section 304(h)(3) of the Act regarding the determination OCSE will make as to whether noncompliance with requirements is of a technical nature that does not adversely affect program performance, we amended the regulations at § 305.20, Audit criteria.

Previously, OCSE regulations at § 305.20(a) listed IV-D State plan requirements that a State must satisfy to have an effective IV-D program. To implement substantial compliance, the new § 305.20(a)(1) lists ten selected criteria that must be fully met in order for a State to be found to meet the corresponding IV-D State plan requirements. The new § 305.20(a)(2) contains nine selected criteria and specifies that the procedures required by each criterion must be used in 75 percent of the cases reviewed in order for the State to be found to meet the corresponding IV-D State plan requirements. These provisions are effective beginning with fiscal year 1984. We consider the 75 percent standard to be rigorous because prior audit findings indicate that many States were not meeting that audit criteria in 75 percent of the cases reviewed. However, we believe that the 75 percent standard is attainable by all States and will strengthen the program by providing the States with a measure of program activity that will encourage improvement. In addition, we believe that the use of a 75 percent standard is reasonable because the audit criteria listed in § 305.20(a)(2) relate to program activities that have been IV-D State plan requirements applicable to all IV-D cases since the inception of the IV-D program in July, 1975.

The revised § 305.20(b) contains additional audit criteria OCSE will use, beginning with the October 1, 1984 through September 30, 1985 audit period, to determine whether the State meets the IV-D State plan requirements contained in 45 CFR Part 302. The new § 305.20(b)(1) incorporates the criteria listed in § 305.20(a)(1) and lists seven additional criteria, all of which must be fully met in order for the State to be found to meet the corresponding IV-D State plan requirements. The criteria added beginning in fiscal year 1985 apply only to State plan requirements that were effective before fiscal year 1985. Thus, States were aware of these requirements prior to fiscal year 1985 and we have merely added audit criteria to measure requirements which were effective for that fiscal year.

The new § 305.20(b)(2) incorporates the criteria listed in § 305.20(a)(2), lists six additional criteria, and specifies that the procedures required by each criterion must be used in 75 percent of the cases reviewed. As already noted, we believe that the use of a 75 percent standard is both rigorous and reasonable because the audit criteria referred to and listed in §305.20(b)(2) relate to case activities that have been IV-D State plan requirements since the inception of the IV-D program, or for several years.

The new § 305.20(c) contains additional State plan-related audit criteria and new performance-related audit criteria OCSE will use for the period October 1, 1985 through September 30, 1987 to determine whether the State is in substantial compliance with the requirements of title IV-D of the Act. The new § 305.20(c)(1) incorporates the criteria listed in § 305.20(a)(1) and (b)(1) and lists twelve additional criteria, all of which must be fully met in order for the State to be found to meet the corresponding IV-D State plan requirements. The new § 305.20(c)(2) incorporates the criteria listed in § 305.20 (a)(2) and (b)(2), lists ten additional criteria, and specifies that the procedures required by each criterion must be used in 75 percent of the cases reviewed.

The new § 305.20(c)(3) requires the State to meet the performance-related audit criteria prescribed in the new 45 CFR 305.98(c).

The new § 305.20(d) contains State plan-related audit criteria and new performance-related audit criteria OCSE will use, for the period October 1, 1987 through September 30, 1988 and all subsequent audit periods, to determine whether the State has an effective IV-D program in substantial compliance with the requirements of title IV-D of the Act. The new § 305.20(d)(1) incorporates the criteria listed in § 305.20(a)(1), (b)(1) and (c)(1), all of which must be met in order for the State to be found to meet the corresponding IV-D State plan requirements. In addition, the new § 305.20(d)(2) incorporates the criteria listed in § 305.20(a)(2), (b)(2) and (c)(2), each of which must be met for 75 percent of the cases reviewed. The new §305.20(d)(3) lists one additional criterion which must be met in order for the State to be found to meet the corresponding IV-D State plan requirement.

The new § 305.20(d)(4) requires the State to meet the audit criteria referred to in § 305.98(d) relating to the performance indicators in § 305.98(a) and(b).

The new § 305.20(a), (b) and (c) do not include all of the State plan-related audit criteria in 45 CFR Part 305. However, they do cover each of the IV-D State plan requirements prescribed in section 454 of the Act. The criteria addressed in 305.20 involve IV-D functions and activities that we consider to be essential to an effective IV-D program. The criteria that were left out include having staff to perform IV-D functions covered in § 305.20, performing functions and activities that are otherwise covered by criteria in § 305.20, and performing functions and activities we do not consider to be essential to effective program performance. Nonetheless, we may at some later date, as discussed below, revise the criteria addressed in § 305.20 as a result of future audit findings.

OCSE will use only the State plan-related audit criteria listed or referred to in § 305.20(a), (b), (c) and (d) in determining whether a State has an effective program in substantial compliance with the requirements of title IV-D of the Act. Nonetheless, audits of State IV-D programs will cover all of the State plan-related criteria in Part 305 (i.e., §§ 305.21 through 305.36 for the period October 1, 1983 through September 30, 1984, and §§ 305.21 through 305.43 for the period October 1, 1984 through September 30, 1985, and §§ 305.21 through 305.56 for all subsequent periods.) The audit reports will include audit findings on each criterion. After reviewing future audit findings, OCSE may revise § 305.20(c) to include additional audit criteria.

Beginning with the fiscal year 1986 audit period, a State must substantially comply with both State plan-related audit criteria and performance-related audit criteria to be found to have an effective IV-D program. A failure to comply under either set of criteria may result in imposition of the penalty. (See the discussion below under the headings: "Technical Changes to 45 CFR Part 305," for details regarding the deletion of the current § 305.20(b); "Performance Indicators," for details regarding the new performance indicators; and "Audit Criteria Relating to Performance Indicators," for details regarding scoring based on the performance indicators.)

The effect of these revisions in the audit and penalty regulations is that a substantial compliance standard as defined in section 403(h)(3) of the Act and § 305.20 will be the basis for determining whether States have effective IV-D programs. Under this standard, the State must, beginning with the fiscal year 1984 audit period, meet selected State plan-related criteria and, beginning with the fiscal year 1986 audit period, meet both selected State plan-related and performance-related criteria to be found to have an effective IV-D program. No failure to meet these criteria may be construed as noncompliance of a technical nature. A State will be subject to the penalty if it fails to meet either the selected plan-related or performance-related audit criteria prescribed in § 305.20.

Audit Criteria Relating to IV-D State Plan Requirements

Previously, OCSE regulations at § 305.21 through 305.36 prescribed audit criteria for determining program effectiveness. The criteria were based on the statutory IV-D State plan requirements prescribed in section 454 of the Act at the inception of the IV-D program in July, 1975. Since then, several mandatory and optional IV-D State plan provisions, including provisions added by the Child Support Enforcement Amendments of 1984, have been added to section 454 of the Act. To measure program effectiveness under section 403(h) of the Act, OSCE must determine whether the State is in substantial compliance with the requirements of title IV-D of the Act. Therefore, we have added new § 305.37 through 305.43 to the audit regulations to specify additional audit criteria OCSE will use to determine whether the State is in substantial compliance with the requirements of title IV-D of the Act as of the fiscal year 1985 audit period. We have also added new § 305.44 through 305.55 to the audit regulations to specify audit criteria OCSE will use to determine whether the State is in substantial compliance with the requirements of title IV-D of the Act as of the fiscal year 1986 audit period. The criteria prescribed in § 305.21 through 305.42, § 305.44 through 305.47 and § 305.49 through 305.54 apply to all States. However, the criteria prescribed in § 305.43, 305.48 and 305.55 only apply to States that have elected to implement the corresponding State plan provision. In addition, the criteria prescribed in § 305.42 only apply to States for fiscal year 1985 that elect to implement the corresponding State plan provision and will apply to all States effective October 1, 1985. Thus, OCSE will use audit criteria to determine whether a State is in compliance only with IV-D State plan requirements that apply to the State.

Finally, we issued proposed regulations in the Federal Register (48 FR 35468) on August 4, 1983 that amend the non-statutory State plan requirement at § 302.80 to specify that the IV-D agency shall perform certain medical support activities. States will be required, in order to be in compliance, to have and use written procedures which meet the requirements for medical support as published in the final regulations. Audit criteria will be effective upon publication of the final regulations. At the time that final medical support regulations are published, specific audit criteria will be published as interim final regulations.

Performance Indicator

In November, 1981, the Deputy Director, OCSE, established a task group to develop specific performance indicators to be used to evaluate State IV-D programs. During the development of these indicators, the task group reviewed the performance indicators used in several States. This review helped to identify indicators that are appropriate for evaluating all State IV-D programs. Also, contacts were made with other Federal agencies to identify systems and methodologies which could be used in conjunction with a performance indicator system; however, the agencies contacted did not run programs similar to the IV-D program. In addition, the task group solicited and received extensive input from State Child Support Enforcement agencies during the development of the performance indicators. In February, 1982, the proposed performance indicators were presented to the Executive Board of the National Council of State Child Support Enforcement Administrators at a meeting held in Alexandria, Virginia. In May, 1982, a revision of the proposed performance indicators were distributed to State IV-D Directors at the National Council of State Child Support Enforcement Administrators meeting held in Chevy Chase, Maryland. After that meeting, the Council conducted a survey of State IV-D Directors to determine their views on the proposed performance indicators. In July, 1982, the Executive Board of the IV-D Directors Council and OCSE representatives discussed the results of the survey at a meeting held in Kansas City, Missouri. In May, 1983, the IV-D Directors were again briefed on the proposed performance indicators at the National Council of State Child Support Enforcement Administrators meeting held in Crystal City, Virginia. Lastly, in August, 1983, the IV-D Directors were briefed at a National Reciprocal and Family Support Enforcement Association meeting in St. Louis. Several changes were made to the proposed performance indicators as a result of this meeting. The indicators prescribed in this regulation are similar to those agreed to by the IV-D Directors.

In developing the seven performance indicators prescribed in the new § 305.98(a) and (b) we took the following factors into consideration. First, the data necessary to use each performance indicator reflect State IV-D operations and are not overly burdensome to collect. Second, performance indicators are as objective as possible at this point in time.

The House of Representatives, Committee on Appropriations, in House Report No. 97-894, page 83, indicates that the concept of child support enforcement is good social and fiscal policy. However, it (the committee) cannot indefinitely support a program with such a negative cost-benefit ratio. The Committee also indicates in House Report No. 98-357, page 93, that it remains concerned over the cost effectiveness of the Child Support Enforcement program. In addition, the House of Representatives, Committee on Ways and Means, in House Report No. 98-527, page 44, indicates that the Federal Government pays 70 percent of the States' child support enforcement administrative costs and ought to be getting its money's worth in terms of firm and effective establishment and enforcement of AFDC and non-AFDC support obligations. OCSE also believes that the cost effectiveness of the IV-D program is an important aspect of program operations. Therefore, we have added a new § 305.98(a)(1) and (2) to prescribe two performance indicators OCSE will use to evaluate the cost effectiveness of State IV-D programs as of fiscal year 1986. These indicators are: (1) AFDC IV-D collections over total IV-D expenditures (less laboratory costs incurred in determining paternity at State option); and (2) non-AFDC IV-D collections over total IV-D expenditures (less laboratory costs incurred in determining paternity at State option). We believe that the use of these indicators will help to improve the cost effectiveness of State IV-D programs. The collection and expenditure data necessary to compute these indicators are currently submitted to the Federal Government on the OCSE-34 and OCSE-41 reports. The States have been submitting these data to us since 1975. Thus, these performance indicators will not impose an additional burden on the States. In addition the new performance indicators are as objective as possible at this point in time.

OCSE believes that the collection of support to reimburse assistance payments made to the family is an important aspect of the IV-D program. This is consistent with section 457 of the Act which provides for using support collections made with respect to AFDC recipients to reimburse both the State and Federal share of the current assistance payment. Therefore, we have added a new performance indicator at § 305.98(a)(3) to evaluate the reimbursement rate of assistance payments made to those receiving AFDC for reasons other than unemployment. This indicator will be used beginning in fiscal year 1986. We believe that the use of this performance indicator will help to increase the percentage of assistance payments made to those receiving AFDC for reasons other than unemployment that are reimbursed via AFDC support collections. It should be noted that section 2640 of Pub. L. 98-369 requires the first $50 of support collected periodically which represents monthly support payments to be paid to the AFDC family. These payments will be treated and reported as AFDC IV-D collections. The collection and assistance payments data necessary to compute this indicator are submitted to the Federal government on the OCSE-34 and the SSA-41 reports. The States have been submitting both AFDC IV-D collection and AFDC assistance payment data to the Federal government since 1975. Thus, the new performance indicator will not place an additional burden on the States. We believe this indicator is also as objective as possible.

One basic purpose of the Child Support Enforcement program is to reduce or avert welfare costs by increasing the collection of support from absent parents. Since the collection of support is an important aspect of the IV-D program, we believe that State collection activity should be considered in determining whether a State has an effective IV-D program. Therefore, we have added a new § 305.98(b) to prescribe four performance indicators OCSE will use to evaluate the collection of support as of fiscal year 1988. The indicators are: (1) Ratios designating either AFDC or non-AFDC collections on support due (for a fiscal year) as the numerator and either total AFDC or non-AFDC support due (for the same fiscal year) as the denominator; and (2) ratios designating either AFDC or non-AFDC collections on support due (for prior periods) as the numerator and either total AFDC or non-AFDC support due (for the same periods) as the denominator. Beginning with fiscal year 1986, section 13 of Pub. L. 98-378 requires the Secretary to report to Congress for each fiscal year the data necessary to compute these indicators. Since these indicators will not be effective until the audit period beginning October 1, 1987 (fiscal year 1988), States will have sufficient time to prepare and report the necessary data (i.e., the amount of current support due during the fiscal year). We will amend the OCSE-34 report to accomplish this.

The performance indicators discussed above measure certain aspects of the IV-D program. We recognize that these indicators do not address IV-D functions such as cost avoidance and establishing paternity. We have not developed performance indicators that address all IV-D functions at this time because many of the States cannot easily collect and maintain the data necessary to use performance indicators other than the indicators we have developed. As State data collection systems and techniques improve and we evaluate results from research projects currently underway, we intend to propose additional performance indicators, including those measuring paternity establishment and cost avoidance. Nonetheless, we believe that the new performance indicators will better enable us to determine whether each State has an effective IV-D program. The indicators are consistent with section 452(a)(1) of the Act which requires the Director, OCSE to establish standards to assure that State programs will be effective.

Audit Criteria Relating to Performance Indicators

In developing these regulations, we considered two options regarding the use of performance indicators to evaluate State IV-D programs. In considering these options, we focused on identifying a system that would ensure that the AFDC and non-AFDC portions of the IV-D program be given equal weight. Under the first option considered. a national standard would be developed for the AFDC portion of the IV-D program and a second standard would be developed for the non-AFDC portion of the program. Under this dual standard system, States could not compensate for unacceptable performance in one portion of the IV-D program with excellent performance in the other portion of the program. Nonetheless, we have decided to use a single standard system in which AFDC and non-AFDC indicators are given equal weight rather than the dual standard system for the following reasons. First, States, in general, do not have functioning cost accounting systems to allocate costs between the AFDC and non-AFDC portions of the IV-D program. Therefore, we cannot compare AFDC collections with actual AFDC expenditures or non-AFDC collections with actual non-AFDC expenditures. Our only meaningful expenditure data are for total expenditure. Second, we believe that there would be little difference in the States at risk under a dual standard system and under a single standard.

We will combine the scores on the performance indicators into a single composite score for each State and use a single national standard by which to assess program performance. We have added a new § 305.98(c)(1) to evaluate the ratios of the performance indicators in paragraph (a) of this section on the basis of a 100 point scoring system. The tables in § 305.98(c)(1) (i) through (iii) show the scores States will receive for different levels of performance on each performance indicator. Under this scoring system, equal weight is given to the AFDC and non-AFDC components of the IV-D program. A maximum of 50 points can be scored on the two AFDC related performance indicators in 305.98(a)(1) and (3) (25 points for each indicator). Similarly, a maximum of 50 points can be achieved on the single non-AFDC performance indicator in § 305.98(a)(2).

The regulations at § 305.98(c)(2) specify that to be found to meet the audit criteria, a State's total score must equal or exceed 70, as illustrated by the examples in the regulation. In developing this standard, our goal was to define a minimum level of acceptable performance. We believe that achievement of a score of 70 on these three performance indicators represents the minimum level of acceptable performance at this time. However, because of the changing and evolving nature of the program, we intend to revise this scoring system for fiscal year 1988 to reflect anticipated improvements in State program performance.

The new § 305.98(d) indicates that we will evaluate State performance according to the indicators in § 305.98(a) and (b) on the basis of a scoring system we will describe and update by regulation once every two years. In fiscal year 1987, we will publish the scoring system to be used during the following two fiscal years.

Table 1 shows the results of applying this scoring system to the States for fiscal year 1983. The table indicates the level of performance achieved by the States in each of the performance indicators in § 305.98(a), the scores which would be awarded for each of the performance indicators and the total score which would be used to determine whether a State meets the audit criteria.

The table also shows the level of performance of the nation as a whole. In fiscal year 1983, the national averages were $1.27, $1.65 and 6.6 percent on each of the three performance indicators in 305.98(a). This would result in individual scores of 24, 50 and 20, for a total score of 94. The table indicates that 18 States would have achieved scores of less than 70 in fiscal year 1983. These States are marked by an asterisk. Finally, we note that a score of 70 can be achieved by levels of performance as low as $.90, $.90 and 4.0 percent on the three performance indicators in 305.98(a). Thus, we feel that a score of 70 is clearly achievable.

Table 1

State Indicator 1ScoreIndicat or 2 Score Indicator 3ScoreTotal Score

Alabama*0.85180.09 410.62547

Alaska0.44101.97505.91575

Arizona*0.25 61.55502.3561

Arkansas1.01220.622813.32575

California1.08220.92404.61072

Colorado1.17220.98409.42587

Connecticut1.73251.565012.725100

Delaware0.69141.76508.42589

DC*0.49100.22.123.0527

Florida*0.66140.55244.31048

Georgia*1.38240.25126.02056

Guam*0.821180.42206.12058

Hawaii1.21241.51505.31589

Idaho1.76250.412017.82570

Illinois*1.16220.80362.3563

Indiana2.61250.462012.12570

Iowa3.29251.645013.525100

Kansas1.5250.41208.62570

Kentucky0.82181.74505.01583

Louisiana0.75161.25487.22589

Maine2.86250.622813.32578

Maryland1.70253.025012.425100

Massachusetts2.04251.615013.625100

Michigan2.36254.26508.625100

Minnesota1.48251.114410.02594

Mississippi*1.55250.1288.02558

Missouri1.27240.73326.12076

Montana1.63250.52247.72574

Nebraska1.12224.62507.32597

Nevada0.53121.094416.82581

New Hampshire1.21244.085011.22599

New Jersey1.14222.83508.12597

New Mexico*0.90200.53256.72064

New York*0.79161.22483.9569

North Carolina1.53250.984016.32590

North Dakota1.55250.552413.52574

Ohio*1.68250.0745.11544

Oklahoma*0.60140.26124.71036

Oregon1.15222.105012.62597

Pennsylvania1.10225.56506.42092

Puerto Rico*0.2769.21502.9561

Rhode Island1.97251.39486.32093

South Carolina2.08250.50247.92574

South Dakota1.81250.562412.42574

Tennessee0.79161.92506.92086

Texas*0.72160.47207.02561

Utah*1.75250.291221.62562

Vermont*2.74250.21127.22562

Virgin Islands0.44101.70504.71070

Virginia*1.53250.24127.02562

Washington1.56250.893610.12586

West Virginia*1.30240.0545.81543

Wisconsin1.92250.80368.82586

Wyoming2.12250.61287.12573

National Average1.27241.65506.62094

Data as reported by States as of June 1, 1984.

*States that would have achieved a score less than 70 in fiscal year 1983.

Notice and Corrective Action Period

Previous regulations at 45 CFR 305.50 provided that a State is subject to an immediate five percent reduction of its AFDC funds if, on the basis of an audit, a determination is made that the State failed to have an effective program meeting the requirements of section 402(a)(27) of the Act. Under this requirement, the Secretary could not suspend penalties during corrective action periods or take into account subsequent improvements before imposing the penalty.

To implement the provision of the amended section 403(h)(2) of the Act regarding the corrective action period provided to the State, we have added a new regulation at § 305.99. Notice and corrective action period, to specify that, if a State is found by the Secretary on the basis of the results of the audit described in Part 305 not to comply substantially with the requirements of title IV-D of the Act, OCSE will notify the State in writing of such finding. The regulation further requires the notice to cite the State for noncompliance, list the unmet audit criteria, apply the penalty and give the reasons for the Secretary's findings. The notice must also identify any audit criteria listed in

§ 305.20(a)(2), (b)(2) or (c)(2) that the State met only marginally (that is, in 75 to 80 percent of the cases reviewed), specify that the penalty may be suspended if the State meets the conditions specified in § 305.99(c) and specify the conditions prescribed in § 305.99(d) that result in terminating the suspension of the penalty. The regulations at § 305.99(c) specify that the penalty will be suspended for a period of time not to exceed one year from the date of notice, if the following conditions are met: (1) The State submits a corrective action plan to the appropriate Regional Office within 80 days of the date of the notice, which contains a corrective action period not to exceed one year from the date of the notice and which contains steps necessary to achieve substantial compliance with the requirements of title IV-D of the Act; (2) the corrective action plan and any amendments are approved by the Secretary within 30 days of receipt of the plan, or approved automatically because the Secretary took no action within the 30-day period; and (3) the Secretary finds that the plan (or any amendment approved by the Secretary) is being fully implemented by the State and that the State is progressing to achieve substantial compliance with the unmet criteria cited in the notice. The regulations at § 305.98(d) specify that the penalty will remain suspended until the Secretary determines that the State has achieved substantial compliance with the unmet criteria cited in the notice and maintained substantial compliance with any marginally-met criteria cited in the notice, the State is no longer implementing its corrective action plan, or the State has implemented its corrective action plan but has failed to achieve substantial compliance with the unmet criteria cited in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice. In the event that a State fails to meet audit criteria relating to the performance indicators prescribed in § 305.98, the State must meet those criteria as of the first full fiscal year after the corrective action period. This is necessary because these criteria must be measured on a fiscal year basis. If the State achieves substantial compliance within the corrective action period, the State will not be subject to a reduction of its Federal AFDC funds. However, if the State is no longer implementing its corrective action plan or has implemented its corrective action plan but failed to achieve substantial compliance with the unmet criteria cited in the notice, and maintain substantial compliance with any marginally-met criteria cited in the notice, the State will be subject to a reduction of its Federal AFDC funds in accordance with § 305.100. For State plan-related criteria, this determination will be made as of the first full quarter after the end of the corrective action period. For performance-related criteria, this determination will be made as of the first full fiscal year after the corrective action period.

The regulations at § 305.99(e) specify that a corrective action plan disapproved under § 305.99(b) is not subject to appeal. Because the Congress has given the Secretary discretion to determine whether or not to approve a corrective action plan disapproval of a corrective action plan is not subject to appeal.

The regulations at § 305.99(f) specify that only one corrective action period is provided to a State in relation to a given criterion when consecutive findings of noncompliance are made on that criterion.

We believe that any State found to be operating a IV-D program which does not substantially comply with one or more of the requirements in the Act could, with diligent effort, develop and carry out a plan for bringing the program into substantial compliance within the specified period.

Imposition of the Penalty

Previous regulations at 45 CFR 305.50 provided that if, on the basis of the audit, a determination is made that a State does not have an effective program meeting the requirements of section 402(a)(27) of the Act, the State is subject to a five percent reduction of its Federal AFDC funds. Under that provision, a State found not to have an effective IV-D program was subject to the flat percent penalty regardless of whether it was the first or a subsequent occasion that such determination was made.

Under the new statute a State found not to have an effective IV-D program is subject to a penalty only if the State fails to achieve substantial compliance with unmet criteria cited in the notice, or fails to maintain substantial compliance with any marginally-met criteria cited in the notice.

To implement the provision of the amended section 403(h) of the Act regarding the graduated penalty, we have amended § 305.50, Penalty for failure to have an effective Child Support Enforcement program by redesignating the regulation as 305.100, revising paragraph (a), redesignating paragraphs (b) and (c) as (e) and (f) and adding new paragraphs (b), (c) and (d). Section 305.100(a) specifies that if the Secretary determines, on the basis of the results of the audit conducted under Part 305 that a State does not substantially meet the requirements in title IV-D of the Act and failed to achieve substantial compliance with such requirements within the corrective action period approved by the Secretary under § 305.99, payments to the State under title IV-A of the Act must be reduced for the period prescribed in the new § 305.100(c) and (d) by: (1) not less than one nor more than two percent for a period beginning in accordance with paragraph (c) or (d) of this section and not to exceed the one-year period following the end of the suspension period; (2) not less than two nor more than three percent if it is the second consecutive finding made as a result of an audit for a period beginning as of the second one-year period following the suspension period and not to exceed one year; or (3) not less than three nor more than five percent if it is the third or a subsequent consecutive finding as a result of an audit for a period beginning as of the third one-year period following the suspension period.

Under paragraph (b), the penalty will not be applied if the State achieves substantial compliance with the unmet criteria identified in the notice and maintains substantial compliance with any marginally-met criteria cited in the notice within the corrective action period approved by the Secretary under § 305.99. Under paragraph (c), if the penalty suspension ends because the State is no longer implementing the corrective action plan, the penalty will be applied as if the suspension had not occurred. Under paragraph (d), if the penalty suspension ends because the State is implementing its corrective action plan but has failed to achieve substantial compliance with the unmet criteria identified in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice within the corrective action period approved by the Secretary under § 305.99, the penalty will be effective for any quarter that ends after the expiration of the suspension period until the first quarter throughout which the state IV-D program is in substantial compliance with the requirements of title IV-D of the Act.

This is illustrated by the following examples. OCSE conducts an audit of a State Child Support Enforcement program for fiscal year 1984 in the spring of 1985. After reviewing the audit findings, a determination is made that the State did not substantially comply with the requirements of title IV-D of the Act because it did not meet two of the audit criteria prescribed in § 305.20(a)(1). A notice dated July 1, 1985 is sent to the State in accordance with § 305.99. The notice indicates the criteria that resulted in the finding of noncompliance and the criteria that the State only marginally met, indicates that the penalty is in effect, specifies the conditions under which the penalty may be suspended and specifies the conditions that result in termination of suspension of the penalty. The State submits an approved corrective action plan which specifies a 10-month corrective action period (July 1, 1985 through April 30, 1986). After the corrective action period, OCSE conducts a follow-up on the initial audit, to determine whether the State is now in substantial compliance with respect to the criteria identified in the notice. Based on the findings, a determination is made that the State implemented its corrective action plan but failed to achieve substantial compliance with the unmet criteria identified in the notice during the suspension period. The State's Federal AFDC payments will be reduced by not less than one nor more than two percent of such payments from the beginning of the quarter in which the corrective action period expires (in this case, from April 1, 1986) and up to a year from the end of the corrective action period (April 30, 1987).

An audit will be conducted at least once a year in the case of a State that is being penalized. Suppose OCSE conducts a second consecutive audit in May, 1987 and a determination is made that the State has continued to fail to achieve substantial compliance during the audit period with those unmet criteria specified in the initial notice. The State's Federal AFDC payments will be reduced between two and three percent as of May 1, 1987 for a period not to exceed one year.

Suppose OCSE conducts a third consecutive audit in May, 1988. After reviewing the audit findings, a determination is made that the State was in substantial compliance as of August 1, 1987 with the criteria on which it is being penalized. The reduction in Federal AFDC funds will cease as of October 1, 1987. The State's Federal AFDC payments were reduced between two and three percent from May 1, 1987 until October 1, 1987.

Since the penalty would be taken against the AFDC program administered by States under title IV-A of the Act, the Social Security Administration's Office of Family Assistance would assume responsibility for making the appropriate penalty reductions. Revisions to the penalty provisions at 45 CFR 205.146(d) are included in this document to implement amendments to section 403(h) of the Act.

In the second example, OCSE conducts an audit of a State Child Support Enforcement program for fiscal year 1984 in the spring of 1985. After reviewing the audit findings, a determination is made that the State did not substantially comply with the requirements of title IV-D of the Act because it did not meet two of the audit criteria listed in § 305.20(a)(1). The finding also identifies two of the audit criteria listed in § 305.20(a)(2) that the State met only marginally (that is, in 75 to 80 percent of the cases reviewed). A notice dated July 1, 1985 is sent to the State in accordance with § 305.99. The notice lists the criteria that resulted in the finding of noncompliance and the criteria that the State marginally met, indicates that the penalty is in effect, specifies the conditions under which the penalty may be suspended, and specifies the conditions that result in termination of suspension of the penalty The State submits an approved corrective action plan which specifies a 10-month corrective action period (July 1, 1985 through April 30, 1986). After the corrective action period, OCSE conducts a follow-up on the initial audit to determine whether the State is now in substantial compliance with respect to the criteria identified in the notice. Based on the findings, a determination is made that the State implemented its corrective action plan but is not in substantial compliance because, although it met the criteria in the notice that resulted in a finding of noncompliance, it failed to meet the criteria in the notice that it had previously met on a marginal basis. The State's Federal AFDC payments will be reduced by not less than one nor more than two percent of such payments from the beginning of the quarter in which the corrective action period expires (in this case, from April 1, 1986 and up to a year from the end of the corrective action period (April 30, 1987).

OCSE immediately conducts a complete audit of the State Child Support Enforcement program for fiscal year 1985. Based on the findings, a determination is made than the State did not achieve substantial compliance with one of the audit criteria listed in § 305.20(b)(1). A noticed dated July 1, 1985 is sent to the State in accordance with § 305.99. The notice indicates the criterion that resulted in the findings of noncompliance, indicates that the penalty is in effect, specifies the conditions under which the penalty maybe suspended and specifies the conditions that result in termination of suspension of the penalty. After the corrective action period, OCSE conducts an audit to determine whether the State is now in substantial compliance with the one audit criterion listed in § 305.20(b)(1) in the second notice. At the same time, OCSE conducts an audit in accordance with § 305.10(b) to determine whether the State is in substantial compliance with the requirements of title of IV-D of the Act, including the two criteria listed in § 305.20(a)(2) on which it is being penalized. After reviewing the audit findings, a determination is made that the State was in substantial compliance as of November 1, 1986 with the two criteria specified in the initial notice on which it is being penalized. The reduction in Federal AFDC funds will cease as of January 1, 1987. The State's Federal AFDC payments were reduced between one and two percent from April 1, 1986 through December 31, 1986. A determination is subsequently made that the State achieved substantial compliance with respect to the one audit criterion listed in § 305.20(b)(1) in the second notice. The increased penalty due to a subsequent audit findings is not applied.

Application of the Regulations

For program audits for any fiscal year beginning after October 1, 1983, OCSE will: (1) Conduct an audit of the effectiveness of State Child Support Enforcement programs at least once every three years (see § 305.10): (2) use the substantial compliance standard specified in § 305.20 to determine whether each State has an effective IV-D program; (3) provide any State found not to have an effective program in substantial compliance with the requirements of title IV-D of the Act with a corrective action period in accordance with § 305.99; (4) provide for the use of the graduated penalty prescribed in §

305.100; and (5) specify in accordance with § 305.100 the period during which the penalty is to be imposed.

OCSE will use the new audit criteria specified in §§ 305.37 through 305.43 for program audits beginning with the October 1, 1984 through September 30, 1985 audit period. The new audit criteria specified in §§ 305.44 through 305.46, 305.48 through 305.56 and § 305.98(c) will be effective for fiscal years beginning after September 30, 1985. The audit criteria referred to in § 305.47 and § 305.98(d) will be effective for fiscal years beginning after September 30, 1987. OCSE has been conducting financial and statistical systems reviews in the States to determine whether State systems for recording, summarizing and reporting financial and statistical data are reliable in terms of accuracy, completeness and timeliness. Although these audit regulations do not address the review of State financial and statistical systems, OCSE, as part of the audit process, will review these systems during any audit conducted for a period beginning on or after October 1, 1983 to ensure that the data used to determine whether a State meets the performance-related audit criteria are reliable. The States are using these results to take corrective action. OCSE will continue to apply the previous audit regulations to all program audits for fiscal years beginning prior to October 1, 1983.

Technical Changes to 45 CFR Part 305

We have made the following technical changes to the audit and penalty regulations to conform with the revisions discussed above. We have revised § 305.0, Scope, by substituting descriptions of the new § 305.10, § 305.20, § 305.21 through § 305.56, § 305.98 and 305.100 for the descriptions of the current § 305.10, §§ 305.20 through 305.36 and § 305.50. In addition, we added a description of the new § 305.99. We have amended § 305.10, Timing and scope of audit, by making reference to criteria specified in §§ 305.21 through 305.56 and § 305.98 instead of §§ 305.20 through 305.36.

We have also revised § 305.11, audit period, by deleting the description of the first audit period (January 1, 1977 through September 30, 1977) and the reference to an annual audit. Since the first compliance audit has been conducted, it is no longer necessary to describe the first audit period in the regulation. In addition, we have revised § 305.11 to specify that any audit conducted when the State is being penalized under § 305.100 may cover a period of less than one year.

We have revised the title of § 305.20 because the current title "Audit criteria" does not reflect the content of the regulation. We believe that the title "Effective support enforcement program" better reflects the content of the regulation. Previously, OCSE regulations at § 305.20(b) required the IV-D agency to be receiving notice from the IV-A agency pursuant to 45 CFR 235.70 and the State to be obtaining assignment of support rights in accordance with 45 CFR 232.11 in order for the State to be found to have an effective IV-D program. However, the corresponding audit criteria were deleted from 45 CFR Part 305 via final regulations published in the Federal Register (47 FR 24716) on June 8, 1982. Therefore, we have deleted the previous § 305.20(b).

We have amended the audit regulations at 45 CFR 305.24(b) to reflect the requirement in Pub. L. 98-378 that States have in effect procedures for the establishment of paternity for any child at any time prior to the child's 18th birthday. We have also amended the audit regulations at 45 CFR 305.24(c) and

305.25(a)(1) to reflect the requirement in Pub. L. 98-378 that States provide support enforcement services to recipients of foster care maintenance assistance under title IV-E of the Act.

OCSE regulations at 45 CFR 305.33(f) require the States to have and use written procedures for collecting any fees required by 45 CFR 302.35(e). In final regulations published in the Federal Register (48 FR 54554) on November 3, 1981, OCSE moved the fee provision at 45 CFR 302.35(e) to 45 CFR 303.70(e)(2). Therefore, we have amended 45 CFR 305.33(f) to reflect this change.

Previously, OCSE regulations at § 305.34 indicated that OCSE would not audit to determine whether the State has entered into written cooperative agreements with appropriate courts and law enforcement officials when necessary to provide IV-D services. To enable OCSE to audit all requirements under the Act, we have revised §305.34 to permit OCSE to use State plan-related audit criteria to determine whether the State has entered into written cooperative agreements with appropriate courts and law enforcement officials when necessary to provide IV-D services.

45 CFR 305.12 and 305.13 are not amended by these proposed rules.

Public Comment

A notice of proposed rulemaking was published on October 5, 1984 (see 49 FR 39488). The comment period ended on December 4, 1984. In addition, four public hearings were held on the following dates and at the locations listed to obtain the broadest public participation possible: October 10-Chicago; October 12-Dallas; October 15-Seattle; October 17-Washington,

D.C.

We also received 21 written comments from State and local agencies and one from an organization.

Meetings to discuss the proposed regulations were held with the following groups: the National Child Support Enforcement Legislative Committee of the National Child Support Enforcement Association; the National Conference of State Legislatures: the National Governors Association; the National Council of State Child Support Enforcement Administrators; the American Public Welfare Association; the National District Attorneys Association; the National Council of Juvenile and Family Court Judges; and staff of the Senate Committee on Finance and the House of Representatives Committee on Ways and Means.

We have grouped the comments by subject and discuss them below along with our responses.

General Comments

1. Comment: One commenter indicated that the establishment of audit criteria by one branch of HHS will promote the use of multiple audit guides and complicate single concept auditing as prescribed in the "Single Audit Act of 1984." The commenter also indicated that Attachment P of Office of Management and Budget (OMB) Circular A-102 prohibits Federal agencies from imposing additional requirements for audit unless required by Federal law or approved by OMB.

Response: We agree that Attachment P of OMB Circular A-102 prohibited Federal agencies from adding requirements for audit except when added by law or approved by OMB. Title IV-D of the Act requires the Secretary to establish within the Department of Health and Human Services a separate organizational unit under the direction of a designee of the Secretary who shall perform all the functions related to the administration of the Federal Child Support Enforcement program. The statute specifically requires the Secretary's designee to conduct a complete audit of each State IV-D program and determine for the purposes of the penalty provision in title IV-D of the Act whether the actual operation of the program conforms to the requirements of title IV-D of the Act. The audit must be conducted not less often than once every three years or not less often than annually in the case of any State whose Federal Aid to Families with Dependent Children (AFDC) funds are being reduced as the result of an audit finding or which is operating under a corrective action plan. These audits are performed by the Audit Division, OCSE.

Section 9 of Pub. L. 98-378 made several changes to the provisions in titles IV-A and IV-D of the Act which govern the audit of State Child Support Enforcement programs. To implement these changes, we published proposed regulations in the Federal Register on October 5, 1984. The proposed regulations and the final regulations in this document were both approved by OMB.

On October 5, 1984, the President signed into law Pub. L. 98-502, the Single Audit Act of 1984. Under the new law, a State or local government shall have a financial or financial and compliance audit made in accordance with the requirements of the new law and implementing regulations that covers any fiscal year which begins after December 31, 1984 in which it receives $100,000 or more in Federal financial assistance. In addition, a State or local government shall have a financial or financial and compliance audit made in accordance with the requirements of the new law and implementing regulations, or in accordance with the laws and regulations governing the programs it participates in, that covers any fiscal year beginning after December 31,1984 in which it receives an amount equal to or more than $25,000 but less than $100,000 in Federal financial assistance. The new law indicates that an audit conducted in accordance with the requirements of the law shall replace any financial or financial and compliance audit of an individual financial assistance program which a State or local government is required to conduct under any other Federal law or regulations. However, economy and efficiency audits, program results audits and program evaluations are not required to be conducted in accordance with the provisions of the new law. In addition, the new law provides that a Federal agency may conduct any additional audits necessary to carry out its responsibilities under Federal law or regulation. Audits conducted by OCSE to evaluate State IV-D programs in accordance with the regulations in this document are necessary to meet the requirements in titles IV-A and IV-D of the Act. The OCSE audit described in this document is not a financial or financial and compliance audit as described in the new law. The General Accounting Office (GAO) document entitled "Standards for Audit of Governmental Organizations, Programs, Activities and Functions" defines financial and compliance audits, economy and efficiency audits and program results audits. We believe that audits conducted by OCSE in accordance with these final regulations fall within the scope of "program results audits" as defined in the GAO standards. In accordance with the Single Audit Act of 1984, OCSE will, to the extent feasible, rely upon and not duplicate the financial or financial and compliance audit and any other audit conducted in accordance with the new law.

OMB has published a new Circular A-128, "Audits of State and Local Governments", in the Federal Register (50 FR 19114) to implement the Single Audit Act of 1984. The Circular supersedes Attachment P of OMB Circular A-102. HHS is in the process of formally implementing the circular.

2. Comment: One commenter indicated that the audit and penalty provisions of section 9 of Pub. L. 98-378 may be unconstitutional because they have a retroactive effective date.

Response: We believe that the retroactive effective date of section 9 will not make it more difficult for the States to meet the audit standards and that there is no constitutional impediment. Under prior Federal law, OCSE was required to conduct an audit using audit criteria based on IV-D State plan requirements to determine whether a State had an effective IV-D program. For the fiscal year 1984 audit period, OCSE will use the same audit criteria that were used under prior Federal law in determining whether a State has an effective IV-D program. For the fiscal year 1985 audit period, we plan to use seven additional audit criteria to evaluate State IV-D programs because Federal law requires the audit to cover all State plan requirements under title IV-D of the Act. We believe that the new audit criteria are no more stringent than the audit criteria used under prior Federal law because the new criteria are based on corresponding State plan requirements that were in effect as of fiscal year 1983, except the recovery of direct payments provisions that became effective as of the fifth day (October 5, 1982) of fiscal year 1983.

3. Comment: One commenter recommended that, in a county-administered State, the case sample be drawn from at least 75 percent of all local jurisdictions during the audit period because the results are projected as statewide. A second commenter indicated that a probe sample is invalid. Two other commenters indicated that, because we have increased the number of criteria to be reviewed, a large sample of cases will have to he pulled to come up with a statistically significant number of cases for each criterion. Another commenter asked whether cases to be audited will be chosen from those which were active at some point during the audit period. The commenter also asked about the treatment of cases opened near the end of the audit period.

Response: The sampling methodology used by OCSE will provide statistically reliable results for each criterion measured. OCSE agrees that sometimes the case sample will have to be drawn from a number of jurisdictions. However, the precise number of jurisdictions to be selected will vary depending on the circumstances in each State. Representative samples of cases can be selected for review without the necessity of always visiting at least 75 percent of the jurisdictions within States. OCSE believes that the use of an initial probe sample is both valid and appropriate. By probe sample we mean OCSE's current sampling approach in which a small initial sample (the probe sample) of cases is reviewed. If the results of the probe sample indicate that a State meets each audit criterion, no further cases are reviewed. If the results of the probe sample indicate that a State may not meet each audit criterion, then a larger sample of cases is chosen and reviewed. Thus, in many instances, the results of the probe sample will be sufficiently reliable to determine if a State meets each audit criterion. In all instances, the probe sample will enable OCSE to determine when an expanded sample will be necessary and the size of that expanded sample. This will result in a much more efficient use of audit resources without sacrificing validity and reliability. OCSE agrees that as the number of criteria increase the sample may have to be increased in order to ensure there will be a statistically significant number of cases for each criterion.

Beginning with the fiscal year 1984 audit period, the auditors will exclude from the sample cases closed prior to the audit period. Cases improperly referred by the IV-A agency and cases opened near the end of the audit period such that time was insufficient to take an action related to the necessary services during that period will also be excluded. The State will be evaluated on whether it took some action related to the required service on all cases not excluded from the sample.

4. Comment: One commenter asked about the possible conflict between requiring appropriate action on all cases and the regulations that permit case prioritization. Two other commenters suggested that the regulations address and recognize the prioritization procedures in caseload management. Another commenter suggested that cases identified as low priority not result in an audit exception when selected by the auditors for review because they are not representative of the State's normal casework procedures.

Response: OCSE regulations on case management and prioritization offer States a means of enhancing the effectiveness and efficiency of their operations by improving the management of cases. Under those regulations, the State must ensure that no program services (e.g. locating absent parents) required to be performed under the IV-D State plan are systematically excluded by the priorization system. In addition, a State cannot neglect or ignore certain cases or classes of cases. As indicated above, any case selected for audit and not excluded from the sample will be evaluated to determine whether the State took some action during the audit period related to the services needed on the case during that period. A State cannot use case prioritization to justify its failure to take appropriate action on a case beyond the period normally required to take such action.

5. Comment: One commenter asked whether audits are more stringent in States where more data are available.

Response: Each case selected for audit and not excluded from the sample will be reviewed to determine whether the State took action during the audit period to provide the services needed during that period. The auditors will find it easier to determine when an action related to a necessary service was taken in States that maintain detailed case records. Therefore, we believe that these States will be better able to withstand the audit because they have better records.

6. Comment: Several commenters asked about the maintenance of consistency from one audit office to another so that States are evaluated in an equitable manner.

Response: As indicated in the regulations, the auditors will conduct the audits in accordance with the audit standards promulgated by the Comptroller General of the United States in the "Standards for Audits of Governmental Organizations, Programs, Activities, and Functions." In addition, the auditors will conduct the audits using the Program Compliance Audit Guide developed by the OCSE Audit Division. The Audit Guide and audit regulations describe the requirements a State must meet for each audit criterion. The auditors will also prepare their findings in accordance with a uniform compliance audit report format. OCSE staff will visit various audit sites to monitor and evaluate audit activity to ensure consistency and accuracy. Interim audit reports will all be reviewed by the OCSE "Penalty Evaluation Committee." Lastly, OCSE staff will perform a selective quality control review of audit reports to consistency and accuracy.

7. Comment: Several commenters suggested that the audit report indicate the percentage of cases reviewed for each criterion that must be met in 75 percent of the cases reviewed. A commenter also suggested that the audit report should include the percentage of cases reviewed for each criterion that was met marginally, and a plus or minus standard deviation so that States know where they stand.

Response: For each audit criterion covered by the 75 percent standard, the audit report will specify the total number of cases reviewed for the criterion and the number of cases in which the criterion was met. The audit report will take into account the sampling error of the cases reviewed, and will clearly indicate which criteria were not met (that is, needed services were provided in less than 75 percent of the cases reviewed); which criteria were met only marginally (that is, needed services were provided in 75 to 80 percent of the cases reviewed); and which criteria were met in over 80 percent of the cases reviewed.

Frequency of Audit

8. Comment: One commenter suggested that the regulations be revised to specify that if a State, as the result of an audit, is found to be in substantial compliance with the requirements of title IV-D of the Act, the State will not be audited again until all the other States are audited.

Response: Federal law and the implementing audit regulations in this document require OCSE to conduct an audit of State IV-D programs, at least once every three years, to evaluate the effectiveness of the programs and determine whether they meet the requirements of title IV-D of the Act. Under these provisions, OCSE has discretion regarding the frequency of audit during the three-year period and is not prepared to say that under no condition will a State found to be in substantial compliance by an audit be audited again until all other States have been audited. OCSE may perform more frequent audits due to the size of the State, indications that the State may not be operating an effective IV-D program or some other reason.

Substantial Compliance Standard

9. Comment: The preamble to the proposed regulations indicated that current audit regulations do not enable OCSE to fully measure program effectiveness at this time. Several commenters indicated that, because the regulations continue to require the States to meet State plan-related audit criteria, including many additional State plan-related criteria, they still do not adequately measure program effectiveness. The commenters also indicated that the focus in the proposed regulations on "simple compliance with process" is contrary to Federal law and the intent of Congress as expressed in the House and Senate Reports quoted in the proposed regulations. Lastly, the commenters asked how will the new regulations enable HHS to measure program effectiveness better than under prior regulations.

Response: Since 1976, the audit and penalty regulations have included process-oriented audit criteria for determining program effectiveness based on State plan requirements. Federal law requires the audit to cover all of the State plan requirements under title IV-D of the Act. Since the inception of the IV-D program, several mandatory and optional State plan provisions, including provisions added by Pub. L. 98-378, have been added to title IV-D of the Act. We have added new audit criteria based on these State plan provisions. We recognize that the State plan-related audit criteria only measure one aspect of program effectiveness. However, we believe that these audit criteria represent good measures of compliance with State plan provisions. The Senate Report on H.R. 4325 indicates that audits conducted by OCSE should continue to measure compliance with process-related Federal requirements.

The Senate report on H.R. 4325 indicates that the audits must now focus on substantial compliance with both process-related Federal requirements and performance-related indicators. The Senate report in a lengthy discussion encourages the development and use of the performance indicators. Beginning with the fiscal year 1986 audit period, the regulations provide for the use of two performance indicators to measure the cost effectiveness of State IV-D programs and a third indicator to measure the reimbursement rate of assistance payments. Beginning with the fiscal year 1988 audit period, OCSE will use four additional performance indicators based on collection of accounts receivable to evaluate State program effectiveness. We believe that these performance indicators adequately measure program effectiveness. As State programs continue to mature, we will develop and adjust performance indicators to reflect this maturation.

10. Comment: One commenter asked about the Federal course of action when a State is found to be in substantial compliance under the regulations but fails to meet the national standard of 70 on the performance-related criteria.

Response: Beginning with the fiscal year 1986 audit period, the regulations specify that, on the basis of the results of an audit, a State must be found to substantially comply with both State plan-related audit criteria and performance-related audit criteria to be found to have an effective IV-D program. A State's failure to score 70 or above on the performance-related audit criteria will result in an audit finding that the State did not substantially comply with the requirement of title IV-D of the Act which will lead to imposition of the penalty. If the score does not reach 70 by the end of the fiscal year following the fiscal year in which the audit report was issued financial sanctions will be imposed.

11. Comment: One commenter suggested that we permit the waiver of a finding that the State did not substantially comply with the requirements of the title IV-D of the Act when the State can demonstrate that socio-economic factors beyond its control directly influenced its expenditures or collections.

Response: Revised Federal law and regulations do not provide for the waiver of any finding that the State did not substantially comply with the requirements of title IV-D of the Act, regardless of the reason for the finding. We believe that the performance-related criteria the State must meet during the fiscal year 1986 and 1987 audit periods represent the minimum level of acceptable performance at this time. Nonetheless, a State found not to have an effective IV-D program is given the opportunity to take the corrective action necessary to be in substantial compliance with the requirements of title IV-D of the Act prior to the loss of Federal AFDC funds.

12. Comment: Several commenters asked us to explain and provide examples of: "noncompliance of a technical nature." A commenter also asked that we explain the statement: "No failure to meet these criteria may be construed as noncompliance of a technical nature," on page 39491 of the proposed regulations.

Response: Section 403(h) of the Act specifies that a State which is not in full compliance with the requirements of title IV-D of the Act shall be determined to be in substantial compliance only if the Secretary determines that any noncompliance with the requirements is of a technical nature which does not adversely affect the performance of the program.

The regulations require the State to meet both State plan-related audit criteria and performance-related audit criteria to be found to have an effective program in substantial compliance with the requirements of title IV-D of the Act. The substantial compliance provisions do not include all of the State plan-related criteria in 45 CFR Part 305. However, they do cover each of the IV-D State plan requirements prescribed in title IV-D of the Act because Federal law requires the audit to cover all such requirements. The criteria addressed in the substantial compliance provisions also cover IV-D functions and activities that we consider to be essential to an effective IV-D program. The State must meet each criterion. Failure to meet any of these criteria or the performance-related criteria cannot be considered "noncompliance of a technical nature".

The substantial compliance provisions exclude criteria that involves staffing requirements, functions and activities that are covered by other audit criteria, and functions and activities we do not consider to be essential to an effective IV-D program. We consider these criteria to be technical in nature because they do not focus on program results. Although these criteria will be addressed in the audit report, a determination that a State failed to meet one or more of these criteria will not affect whether a State is found to have an effective IV-D program.

13. Comment: Several commenters also listed several State plan-related audit criteria, such as publicizing the availability of support enforcement services and incentive payments to States and political subdivisions, covered by the "substantial compliance" provisions that they suggested be treated as "noncompliance of a technical nature."

Response: Sections 5 and 14 of Pub. L. 98-378 add several new State plan requirements to title IV-D of the Act. Section 5 and the implementing program regulations prescribe the payment of incentive payments to political subdivisions. Section 14 and the implementing program regulation require the States to publicize the availability of support enforcement services. The audit criteria on publicizing the availability of support enforcement services, and payments of incentives to States and political subdivisions are based on the corresponding State plan requirements. We believe that the requirement to publicize the availability of support enforcement services is essential to an effective IV-D program because many families in need of child support are unaware that support enforcement services are available which they can afford. We also believe that the new incentive payment requirements are essential to the development of IV-D programs that emphasize the provision of support enforcement services to both AFDC and non-AFDC families and encourage the participation of political subdivisions in the IV-D program.

14. Comment: One commenter suggested that we delay the use of the seven additional State plan-related criteria we propose to add as of the fiscal year 1985 audit period to give the States time to bring their programs into compliance.

Response: The final regulations retain the seven additional audit criteria because Federal law requires the audit to cover all State plan requirements under title IV-D of the Act. The criteria added beginning in fiscal year 1985 apply only to State plan requirements that were in effect as of fiscal year 1983, except the recovery of direct payments provisions which became effective as of the fifth day (October 5, 1982) of fiscal year 1983. We believe that a delay in using these additional audit criteria is unwarranted because the States should already be meeting the corresponding State plan requirements.

15. Comment: One commenter objected to the provisions in the proposed regulations that require OCSE, beginning with the fiscal year 1986 audit period, to use audit criteria based on procedures that become effective as of that period because it is unrealistic to expect the States to have laws passed and procedures implemented immediately in 75 percent of the cases reviewed. The commenter suggested we postpone auditing these procedures for one year.

Response: Effective October 1, 1985, Pub. L. 98-378 requires the States to have State laws passed and implemented regarding certain mandatory procedures and requirements. However, section 3 of the new law and the implementing regulations at 45 CFR 302.70 permit the Secretary of Health and Human Services (HHS) to exempt a State from having to implement one or more of the mandatory procedures if the State can demonstrate that such procedure or procedures will not improve the effectiveness and efficiency of the State IV-D program. In addition, section 3 of the new law permits the Secretary of HHS to grant a State a delay in implementation of one or more of the mandatory procedures until the beginning of the fourth month beginning after the end of the first session of the State legislature which ends on or after October 1, 1985, if the Secretary determines that a State needs legislation to implement these procedures.

Pub. L. 98-378 gives the States over a year to implement the new State plan requirements with an effective date of October 1, 1985. Therefore, since Pub. L. 98-378 added new State plan requirements with an effective date of October 1, 1985, the audit regulations contain corresponding State plan-related audit criteria that become effective as of the fiscal year 1986 audit period. Nonetheless, OCSE will exclude from the audit of a State's IV-D program any procedure covered by an exemption or delay in implementation granted by the Secretary during the period that such exemption or delayed implementation is in effect.

16. Comment: Several Commenters suggested that, because prior audits indicated that many States were not meeting the audit criteria in 75 percent of the cases reviewed, the regulations should begin with a lower standard with a gradual increase to 75 percent. Several other commenters indicated that the 75 percent standard is too rigorous for the fiscal year 1984 audit period. Several commenters also suggested that, because it is impossible to bring a past period into compliance with rules issued after that period, we postpone use of the 75 percent standard.

Response: Prior to October 1, 1983, effective date of the audit and penalty provisions of section 9 of Pub. L. 98-378, Federal law and the audit regulations required the States to be in full compliance with the requirements of title IV-D of the Act to avoid imposition of a penalty. In addition, OCSE conducted audits and issued audit reports for each of five prior periods. The audits covered the same State plan-related audit criteria during each of these periods. Effective October 1,1983, section 9 of the new law requires the States to be in substantial compliance with the requirements of title IV-D of the Act to avoid imposition of the penalty. Under the implementing audit regulations in this document, a less stringent 75 percent standard is used with respect to certain functional criteria in determining whether the State is in substantial compliance with the requirements of title IV-D of the Act.

17. Comment: One commenter indicated that, because of the large number of cases with arrearages, it is impossible for States to comply with the 75 percent standard for wage withholding during fiscal year 1986. The commenter suggested that we begin with a 25 percent standard for wage withholding in fiscal year 1986 and raise the standard in 25 percent increments until the 75 percent level is reached.

Response: The new law gives the States over a year to implement the wage withholding process. Thus, effective October 1, 1985, the States must initiate the wage withholding process in all cases in which there is a one-month arrearage. Beginning with the fiscal year 1986 audit period, all IV-D cases that require wage withholding will be subject to review under the wage and income withholding audit criteria. Although we agree the implementation will require a major effort on the part of most States, we believe it would be inappropriate to allow the low standards proposed by the commenter since that would effectively result in delaying the legislated implementation date.

18. Comment: Two commenters indicated that the regulations specify the use of both a 75 and an 80 percent standard in evaluating functional criteria.

Response: The regulations indicate that in order to be found in substantial compliance with the requirements of title IV-D of the Act, a State must have and use written procedures in 75 percent of the cases reviewed for each functional criterion. The regulations also indicate that the notice OCSE sends to a State found not to substantially comply with the requirements of title IV-D of the Act will list any audit criteria, including criteria covered by the 75 percent standard, that the State did not meet. The notice also will specify any functional audit criteria that the State met, but only marginally (that is, in 75 to 80 percent of the cases reviewed). Although the audit criteria the State marginally met cannot result in a finding of noncompliance or application of the penalty at the time of notice, the State must, during the corrective action period, maintain substantial compliance in the areas cited in the notice as marginally acceptable to avoid losing funds under the penalty. The regulations require the notice to indicate the functional audit criteria that the State only marginally met because we want to discourage the States from placing less emphasis on the marginal areas in order to improve their performance in areas that resulted in the finding of noncompliance. We encourage the States to improve their performance in all areas addressed in the notice.

19. Comment: One commenter indicated that it would not be appropriate to use audit criteria such as imposition of liens or posting security in 75 percent of all cases. A second commenter indicated that the regulations are unclear as to whether, for example, liens on personal property must be used in 75 percent of all cases with arrearages, be available for use in 75 percent of the cases with arrearages, or be used in 75 percent of the cases where liens are required, by State procedure. A third commenter suggested that, if a determination that an action should not or cannot be taken in a case is properly documented, the case meets the substantial compliance requirements. A fourth commenter asked whether there can be cases in which no action was taken during the audit period, yet this nonaction will be considered as the "appropriate action." Another commenter indicated that it will be difficult to take an appropriate action on 75 percent of its cases without a great increase in personnel. The commenter also asked, if an appropriate action was taken in a prior fiscal year and no action was taken on a case during the audit period, would the case count against the State. Lastly, the commenter asked how often cases should be reviewed to assure appropriate action is taken. Another commenter asked whether a systems review of sources for address and other information on a case constitutes an appropriate action, in a case requiring location of the absent parent.

Response: The regulations specify that the procedures required by certain audit criteria must be used in 75 percent of the cases reviewed for each criterion in order for the State to be found to meet the corresponding IV-D State plan requirements. After the auditors have selected a sample of cases, the cases not excluded will be evaluated by criterion. This is illustrated by the following examples. If a review of the case record for the audit period indicated that action should be taken to establish paternity, the case would be reviewed under the establishing paternity criterion. In a second example, if a review of a case record for the audit period indicated that action should be taken to enforce the support obligation, the case would be reviewed under the enforcement of support obligation criterion. If the audit is for the fiscal year 1986 or a later audit period and the State in accordance with statewide guidelines generally available to the public is required to impose a lien against the real or personal property of the absent parent the case also would be reviewed under the imposition of liens criterion. A case will be reviewed under criteria related to any services (e.g. enforcement of support obligation) that, based on the case record and any statewide guidelines, were necessary during the audit period. Beginning with the fiscal year 1984 audit period, unless the case was closed during a prior audit period, closed during the current audit period and an action related to services was not necessary, improperly referred by the IV-A agency, or opened near the end of the audit period such that time was insufficient to take an action related to necessary services during the period, the State must take some action during the audit related to services necessary during that period. Under this requirement, a State must take action with respect to each criterion under which a case is reviewed. For example, if a case is reviewed under the establishing paternity criterion and the support obligations criterion, the State must take an action related to the services covered by each criterion. However, if time was insufficient to take an action to establish a support obligation before the end of the audit period, the case would be excluded from review under the support obligations criterion.

OCSE leaves to State discretion the determination of action to be taken in a given case in accordance with State guidelines so long as the action is an activity directly related to performing the necessary child support enforcement services during the audit period. We believe that the States should, at least once a year, take some action related to providing the necessary services on each case which is not otherwise excluded. The States should document in the case record any action taken. We encourage the States to obtain whatever resources are necessary to provide IV-D services to all cases in an efficient and effective manner. This includes the development of automated systems and the use of other techniques to improve program operations.

Except as indicated above, the States must take some action on the cases in their caseloads during each audit period (Federal fiscal year). If the State, through use of an automated system, checked one or more sources of locate information for a case that needs location services during the audit period, we believe that would constitute a locate action. In addition, we will count an action taken by a State during the audit period related to necessary services on a case even when the action does not result in successful performance of the service. However, if an action was taken on a case during a prior audit period, but no required action was taken during the audit period, the case would count against the State.

20. Comment: Two commenters suggested that we eliminate from the substantial compliance provisions the need to have written procedures.

Response: OCSE regulations require each State to operate a IV-D program on a statewide basis in accordance with standards for administration that are mandatory throughout the State. Under this requirement, the State must develop written procedures for the performance of each IV-D function and ensure that these procedures are used throughout the State. We believe that the development and use of written procedures helps to ensure that IV-D functions are carried out properly, efficiently, effectively and in a consistent manner in the State.

21. Comment: Two commenters recommended that the cooperative arrangement audit criteria be deleted from the list of criteria States must meet beginning with the fiscal year 1984 audit period because the audit regulation on cooperative arrangements indicates that OCSE will not separately audit cooperative agreements.

Response: Since the audit determines whether each State is in substantial compliance with the requirements of title IV-D of the Act, OCSE will use audit criteria to evaluate State performance separately on each State plan requirement. We believe that the audit criteria based on the State plan requirement on cooperative arrangements should not be deleted, but strengthened to better enable us to evaluate State performance. Therefore, we have revised the audit regulation on cooperative arrangements to permit OCSE to use State plan-related audit criteria to separately determine whether the State has entered into written cooperative agreements with appropriate courts and law enforcement officials when necessary to provide IV-D services.

Audit Criteria Relating to IV-D State Plan Requirements

22. Comment: One commenter asked that we address in the regulations the meaning of the term "written procedures."

Response: The regulations at 45 CFR 305.1(b) define the term "procedures" for purposes of the audit regulations as a written set of instructions which describe in detail the step-by-step actions to be taken by child support enforcement personnel in the performance of specific functions under the State's IV-D plan. The IV-D agency may issue general instructions on one or more functions, and delegate responsibility for the detailed procedures to the office, agency or political subdivision actually performing the function.

23. Comment: One commenter objected to the proposed change to the audit criteria on establishing paternity which requires an acknowledgement of paternity to have the same force and effect as a court finding of paternity because the State has been effectively using voluntary acknowledgements of paternity as the basis for establishing support obligations and State laws does not permit administrative establishment of paternity.

Response: Since the inception of the IV-D program in July 1975, OCSE regulations have required the IV-D agency to: (1) Attempt to establish paternity by court order or other legal process established under State law; or (2) establish paternity by acknowledgement if under State law such acknowledgement has the same legal effect as court-ordered paternity, including the right to benefits other than child support. In December, 1976, OCSE published corresponding audit criteria on this subject that became effective as of the fiscal year 1977 audit period. We are now revising the audit criteria on establishing paternity only to reflect the requirements in Pub. L. 98-378 that States have in effect laws providing for establishing paternity up to the child's 18th birthday. This change is effective as of the fiscal year 1986 audit period.

24. Comment: One commenter recommended that we define the phrase "sparsely populated geographical area" as used in the audit regulation on separation of cash handling and accounting functions so that States know when to apply for a waiver.

Response: The audit regulation on separation of cash handling and accounting functions indicates that the audit criteria do not apply sparsely populated geographical areas within the State if the State is granted a waiver by the Regional Office. The State plan provision on separation of cash handling and accounting functions permits the Regional Office to grant a waiver to sparsely populated geographical areas, where the separation of cash handling and accounting functions requirements would necessitate the hiring of an unreasonable number of additional staff. The IV-D agency must document the administrative infeasibility and provide an alternative system of controls that reasonably ensures that support collections will not be misused. Under this provision, the Regional Office will determine, on a case-by-case basis, whether to grant a waiver based on the current circumstances within the State. We have not defined the phrase "sparsely populated geographical area" because it is not possible to do so in a consistent and fair manner on a national basis. However, since the circumstances in a State often change and may be unique to a particular State, the Regional Office will, on a case-by-case basis, develop criteria for determining what jurisdictions, if any, constitute a "sparsely populated geographical area."

25. Comment: Two commenters suggested that, because the collection of spousal support is an optional State plan provision through fiscal year 1985, the regulations be revised to indicate that spousal support will not be audited until fiscal year 1986.

Response: OCSE will use audit criteria based on optional State plan provisions only in States that have elected to implement the corresponding State plan provision. The audit criteria on spousal support only apply to States for fiscal year 1985 that elect to implement the corresponding State plan provision and will apply to all States effective October 1,1985.

26. Comment: Two commenters recommended that we define the terms "regularly" and "frequently" as used in the audit regulation on publicizing the availability of support enforcement services so that States know what standard they must meet.

Response: The audit criteria on publicizing the availability of support enforcement services is based on a corresponding State plan provision that does not define the terms "regularly" and "frequently" as used in the provision. Since Federal law and the implementing program regulation do not define these terms, the auditors will use the meanings given to these terms in State guidelines and procedures in evaluating State performances based on the audit criteria.

27. Comment: One commenter objected to the regulation on medical support because it indicates that the audit criteria on medical support will become effective immediately upon publication without giving the States any lead time or opportunity to comment on the audit criteria.

Response: OCSE will publish final regulations on medical support and corresponding audit criteria in the same document. The audit criteria will be published as interim final regulations and be used by OCSE to evaluate State IV-D programs as of the first full fiscal year following the date the audit criteria are published. Since the criteria will be published as interim final rules, the public will be given a 60-day period to submit to us, in writing, any comments they have on the criteria. We will review any comments received and determine whether the audit criteria on medical support should be revised.

Performance Indicators

28. Comment Several commenters stated that the indicators established by OCSE to determine the performance of a State are only indicators and should not be used to impose a penalty upon the States. The commenters said that the performance indicators are not actual measures of a State's performance during the audit period because: (1) The performance indicators do not reflect actual collections and expenditures for the year audited; (2)collections made during an audit period do not reflect expenditures incurred during that period and such expenditures result in collections during a subsequent period; (3) the two cost effectiveness performance indicators do not accurately reflect a State's performance in collecting AFDC or non-AFDC payments since non-AFDC expenditures are used in the AFDC indicator and AFDC expenditures are used in the non-AFDC indicator; and (4) the assistance payment factor in the reimbursement rate of assistance payments indicator is out of the control of the IV-D agency. Another commenter indicated that, because the two cost-effectiveness performance indicators each use total IV-D expenditures, they do not account for the difference in State economic demographic and social welfare structures. Lastly, a commenter indicated that the reimbursement rate of assistance payments performance indicator is not consistent with the provision in Federal law which requires the Director, OCSE, to establish standards to assure that State programs are effective because factors controlling IV-A assistance payments are not standardized.

Response: Federal law gives OCSE flexibility regarding the criteria that are used to determine whether the State has an effective IV-D program in substantial compliance with the requirements of title IV-D of the Act and the Congress has urged OCSE to measure performance. The two cost-effectiveness indicators and the reimbursement rate of assistance payments indicator we plan to use beginning with the fiscal year 1986 audit period are based on data the States currently collect and report to OCSE. The four accounts receivable performance indicators we plan to use beginning with the fiscal year 1988 audit period are based on data the States will collect and report to OCSE as of fiscal year 1986. We recognize that these performance indicators do not address all aspects of the IV-D program. We are not proposing performance indicators that address all IV-D functions at this time because many of the States cannot easily collect and maintain the data necessary to use performance indicators other than the indicators we are proposing. As State data collection systems and techniques improve and we evaluate results from research projects currently underway, we intend to propose additional performance indicators.

We believe that adjustments to collection and expenditure data are cyclical in nature and even out over a period of time. States can keep adjustments to a minimum by submitting full and complete reports to OCSE in a timely manner. Under OCSE policy, any adjustment to collection or expenditure data for any prior period is combined with current quarter collection or expenditure data reported to OCSE. Departmental regulations limit adjustments to expenditures for a quarter to a two year period which ends 2 years following the quarter in which the expenditure was made. We recognize that some portion of collections made during an audit period may result from expenditures made during a prior audit period and that expenditures made during an audit period are likely to result in recurring or some non-recurring collections during subsequent periods. Nonetheless, we believe that the States would find it difficult and expensive to collect and maintain the data necessary to compare a given collection to the amounts actually expended to make the collection.

We believe that the two cost-effectiveness performance indicators measure as well as possible the cost-effectiveness of State IV-D programs. Presently, because of State accounting systems and State reporting requirements, we cannot obtain a precise allocation of expenditures between the AFDC and non-AFDC portions of the IV-D program. Our only meaningful expenditure data are for total expenditures. We encourage the States to develop cost accounting systems for allocating expenditures between the AFDC and non-AFDC portions of the IV-D program. We will revise the performance indicators to replace total expenditures with AFDC and non-AFDC expenditures once States are reporting their data to us in an accurate manner. The collection of support to reimburse assistance payments made to the family is one of the primary objectives of the IV-D program. Although the size of the AFDC grant made to the family is not under the control of the IV-D agency, we have in-house statistical evidence that performance on the reimbursement rate of assistance payments performance indicator is not related to the size of the AFDC grant. Therefore, we believe that the reimbursement rate of assistance payments performance indicator is consistent with the provision in Federal law that requires the Director, OCSE, to establish standards to assure that State programs are effective, and that high AFDC grant States will not be systematically prejudiced.

We recognize that there are differences in AFDC caseload size from State to State, however, the reimbursement rate of assistance payments performance indicator measures a rate of recoupment and we expect that State IV-D agencies will commit resources commensurate to work requirements.

29. Comment: One commenter asked us to specify how the cost-effectiveness indicators and reimbursement rate of assistance payments indicator will be used in fiscal years 1986 and 1987.

Response: The regulations specify the procedures and criteria OCSE will use to evaluate State performance according to the two cost-effectiveness indicators and the reimbursement rate of assistance payments indicator in fiscal years 1986 and 1987. The procedures and criteria include using a 100-point scoring system that gives equal weight to the AFDC and non-AFDC components of the IV-D program, combining the scores on each performance indicator into a single composite score for each State and using a single national standard by which to assess program performance.

30. Comment: One commenter suggested that the regulations be revised to specify that the first $50 of support collected in public assistance cases will be reported as AFDC collections.

Response: Section 2640 of Pub. L. 98-369, the Deficit Reduction Act of 1984, amended titles IV-A and IV-D of the Act to require that the first $50 of support collected periodically for AFDC recipients which represents monthly support payments be paid to the family. Since these payments come out of AFDC IV-D collections, they are treated and reported as AFDC IV-D collections. We will amend the "Quarterly

Report of Collections" to clearly indicate this. The two AFDC-related performance indicators each include AFDC IV-D collections as a variable. The indicators will include all amounts reported on the "Quarterly Report of Collections" as AFDC IV-D collections.

31. Comment: One commenter asked us to specify how the cost-effectiveness indicators treat expenditures incurred and collections made in interstate cases.

Response: The "Quarterly Report of Collections" and reporting instructions describe what constitutes AFDC IV-D collections and non-AFDC IV-D collections.. The "Financial Status Report" used by the States to submit expenditures to OCSE and reporting instructions describe what constitutes IV-D expenditures. In evaluating State performance based on the cost-effectiveness indicators, OCSE will use these instructions.

32. Comment: One commenter suggested that the cost effectiveness performance indicators be revised to exclude from IV-D expenditures systems development cost, interstate grant project costs and laboratory costs for determining paternity.

Response: The cost-effectiveness performance indicators are the same ratios OCSE will use in computing incentive payments to States beginning in fiscal year 1986. Under the new incentive payment regulations, the States may exclude laboratory costs from total IV-D expenditures. However the States cannot exclude systems development, interstate project, or any other costs from total IV-D expenditures for purposes of computing State incentive payments in accordance with section 5 of Pub. L. 96-378 and the implementing incentive payment regulations. Since the cost-effectiveness performance indicators are identical to the cost-effectiveness ratios used in the new incentive payment system, we believe that the cost-effectiveness performance indicators can only be revised to exclude laboratory costs for determining paternity. Therefore, we have revised the denominator of these performance indicators to exclude laboratory costs from total IV-D expenditures if the State computes and reports such costs to OCSE.

33. Comment: One commenter suggested that, because the high costs associated with establishing paternity may skew the results of dollars collected to dollars spent on a paternity case, the cost-effectiveness performance indicators should be "weighted" to allow for increased effort and costs in paternity cases.

Response: The Center for Health and Social Service Research, Inc., is studying the costs and benefits of establishing paternity under a grant awarded by OCSE. The project involves the development of a model for assessing the costs and benefits of paternity establishment systems and applying the model to systems in several jurisdictions. After we have received and evaluated the final report on this project, we intend to propose additional performance indicators for measuring the establishment of paternity. We also will determine whether the cost

effectiveness performance indicators should be "weighted" as suggested by the commenter. In the interim, the optional deletion of laboratory costs for establishing paternity from the denominator of the cost effectiveness performance indicators should help to minimize any skewing of the scores on these indicators.

34. Comment: One commenter indicated that the cost effectiveness performance indicators are unfair to high cost-of-living States because these States have high administrative costs and find it difficult to obtain high support orders.

Response: We are not aware of any data that supports or refutes the commenter's position that the cost-effective performance indicators are unfair to high cost-of-living States. Nonetheless, we believe that the cost-effectiveness performance indicators measure as well as possible the cost effectiveness of State IV-D programs.

35. Comment: One commenter indicated that the cost effectiveness performance indicator that measures the non-AFDC aspect of the IV-D program favors States where all non-AFDC child support payments are funneled through the IV-D agency.

Response: We do not believe that the non-AFDC cost effectiveness performance indicator favors States that funnel all non-AFDC support payments through the IV-D agency because there is a maximum performance score on the non-AFDC performance indicator that can be obtained by States even when they do not funnel all non-AFDC payments through the IV-D agency. In determining the use of the performance indicators to evaluate State IV-D programs, we focused on identifying a system that would ensure that the AFDC and non-AFDC portions of the IV-D program be given equal weight. This is consistent with the House and Senate reports on H.R. 4325 which encourage States to develop and improve both the AFDC and non-AFDC portions of the IV-D program. Under the system we adopted, the ratios of the three performance indicators we will use during fiscal years 1986 and 1987 will be evaluated on the basis of a 100-point scoring system. A maximum of 50 points can be scored on the two AFDC-related performance indicators (25 points for each indicator). Similarly, a maximum of 50 points can be achieved on the single non-AFDC performance indicator. To meet the audit criteria, a State's total score must equal or exceed 70.

36. Comment: One commenter objected to the reimbursement rate of assistance payments performance indicator because it does not account for the differences in State IV-A assistance payment levels. A second commenter objected to this indicator because it requires high grant States to maintain higher AFDC collections than low grant States to avoid a penalty.

Response: OCSE conducted a statistical analysis to determine whether the reimbursement rate of assistance payments performance indicator favors low grant States over high grant States. We determined that there is no correlation between the grant amount and the ability to perform well on the reimbursement rate of assistance payments performance indicator.

In discussing the mission of the Child Support Enforcement program, the House and Senate reports on H.R. 4325 indicate that one basic objective of the Child Support Enforcement program is the collection of support to reimburse assistance payments made to the family. This is consistent with Federal distribution requirements which provide for using support collections made with respect to AFDC recipients to reimburse both the State and Federal share of the current assistance payment. We believe that the use of the reimbursement rate of assistance payments performance indicator will help to focus attention on the recovery of assistance payments.

37. Comment: One commenter indicated that States with a level of performance higher than seven on the reimbursement rate of assistance payments performance indicator should receive a higher score than States with a level of performance of seven on the performance indicator.

Response: We believe that giving States with a level of performance higher than seven on the reimbursement rate of assistance payments performance indicator a score higher than States with a level of performance of seven on the performance indicator will encourage the States to place less emphasis on certain other aspects of the IV-D program so that they can improve program activity related to one specific performance indicator. We want to encourage the States to place equal emphasis on the AFDC and non-AFDC aspects of the IV-D program. We believe that the scoring system OCSE has developed to evaluate the ratios of the three performance indicators we will use during fiscal year 1986 and 1987 are consistent with this approach.

38. Comment: One commenter asked us to better define the phrase "less payments to unemployed parents" as used in the performance indicator regarding reimbursement rate of assistance payments.

Response: The States are required to submit assistance payments data to OFA on the "Quarterly Statement of Expenditures". This report includes a monthly breakout of assistance payments made to the family due to an unemployed parent when a State has elected the optional unemployed parents program. The report contains a brief description of these payments, which will be used in excluding assistance payments under the reimbursement rate of assistance payments performance indicator.

39. Comment: Several commenters indicated that the IV-A assistance payments variable in the reimbursement rate of assistance payments indicator should be revised to exclude assistance payments made to families due to the death or disability of one or more parents.

Response: OFA does not require the States to prepare and report the amount of IV-A assistance payments paid to families because of the death or disability of one or more parents. Since the States do not report data on death or disability-related assistance payments we are unable to revise the performance indicator to exclude such payments.

40. Comment: One commenter asked whether we can justify the cost and effort required to produce, maintain and report the data necessary to use the accounts receivable performance indicators. A second commenter suggested that we accelerate the use and place greater emphasis on the accounts receivable performance indicators because they constitute a valid measure of IV-D program effectiveness.

Response: Since the collection of support on behalf of welfare and non-welfare families is a fundamental aspect of the IV-D program, we believe that State collection activity should be considered in determining whether a State has an effective IV-D program. Therefore, the regulations contain four accounts receivable performance indicators OCSE will use to evaluate the collection of support as of fiscal year 1988. We believe that the cost and effort required to produce, maintain and report the data necessary to use the accounts receivable performance indicators will be justified because the use of these indicators will help to focus attention on State collection activity.

The regulations also indicate that, beginning in fiscal year 1987, OCSE will describe and update in regulation once every two years the scoring system to be used during the following two years to evaluate State performance according to the accounts receivable and other performance indicators in effect. We plan to place significant emphasis on the accounts receivable performance indicators in the scoring system because they constitute a valid measure of IV-D program effectiveness. However, we believe that the accounts receivable performance indicators should not be over-emphasized because they measure only one aspect of the IV-D program.

Beginning with fiscal year 1986, section 13 of Pub. L. 98-378 requires the Secretary to report to Congress for each fiscal year the data necessary to compute the accounts receivable performance indicators. OCSE is developing a financial and statistical report the States will use to report accounts receivable and other data to OCSE as of fiscal year 1986. Since the States do not currently report to OCSE all the data necessary to compute the accounts receivable performance indicators, we believe that it would be unreasonable to accelerate the use of these indicators. Therefore, the indicators will not be effective until October 1, 1987 (fiscal year 1988), so that States will have sufficient time to prepare and report the necessary data in an accurate manner.

41. Comment: One commenter requested clarification regarding the fiscal years to be audited using the accounts receivable performance indicators.

Response: Beginning with the fiscal year 1988 audit period, OCSE will use the four accounts receivable performance indicators in determining whether each State has an effective IV-D program. The indicators OCSE will use to measure collection activity during the audit period are ratios designating either AFDC or non-AFDC collections on support due (for a fiscal year) as the numerator and either total AFDC or non-AFDC support due (for the same fiscal year) as the denominator. The indicators OCSE will use to measure collection activity prior to the audit period are ratios designating either AFDC or non-AFDC collections on support due (for prior periods) as the numerator and either total AFDC or non-AFDC support due (for the same periods) as the denominator. These indicators will include all AFDC and non-AFDC support due prior to the audit period and all AFDC and non-AFDC collections on support due prior to the audit period.

42. Comment: One commenter asked about the meaning of the phrase "support due" as used in the accounts receivable performance indicators that become effective as of the fiscal year 1988 audit period.

Response: The phrase "support due" as used in the accounts receivable performance indicators means the amount of money which is to be paid on a regular basis by an absent parent or other legally responsible individual for the support of a child, or spouse or former spouse living with a child receiving IV-D services. This amount must be established by a court order, voluntary agreement (when such agreement is legally enforceable), or other legal process.

Audit Criteria Relating to Performance Indicators

43. Comment: One commenter indicated that the performance indicators should be geared to results attainable by all States. A second commenter indicated that a review of the table in the proposed regulations shows that over half of the States could fail to meet the national standard of 70. Another commenter recommended that we lower the score a State must equal or exceed to be found to meet the performance-related criteria because the table in the preamble of the proposed regulations shows that five of the top seven States in population do not meet the minimum score of 70 and a sixth State has a score of 72.

Response: Beginning with the fiscal year 1986 audit period, we will use three performance indicators to evaluate State IV-D programs. We will combine each State's scores on the performance indicators into a single composite score for the State and use a single national standard to assess program performance. We believe that the single national standard in the regulations is attainable by all States because it is not a floating standard dependent on other States' performance, but a fixed standard. In addition, the State scores included in the table in the proposed regulations are based on fiscal year 1983 data. Since OCSE will not use the three performance indicators addressed in the table and related standard score of 70 to evaluate State IV-D programs until the fiscal year 1986 audit period, we expect significant improvement in State scores by that fiscal year. We believe that achievement of a score of 70 on the three performance indicators represents the minimum level of acceptable performance at this time. We also believe that all States have the ability to achieve a score of 70 on the performance indicators regardless of their size.

44. Comment: One commenter indicated that State IV-D agencies need notice of the change in the scoring system at least two full years prior to the effective date of the change to make necessary adjustments to their programs.

Response: The regulations specify that, as of the fiscal year 1984 audit period, OCSE will evaluate State performance according to seven performance indicators on the basis of a scoring system that will be described and updated in regulation at lease once every two years beginning in fiscal year 1987. We believe that any scoring system prescribed in regulation will include a standard that is attainable by all States. We plan to involve the State IV-D Directors in the development of changes to the scoring system. Other interested parties will also be given an opportunity to comment on the proposed changes prior to any final publication of changes in the Federal Register. Lastly we will publish any changes to the scoring system as a proposed rule with a 60-day comment period to give the public an opportunity to submit to us, in writing, any comments they have on this subject. Therefore, the States should have sufficient time to make any adjustments necessary to meet any standard prescribed in a scoring system.

Because the scoring system will be revised once every two years beginning in fiscal year 1987, one commenter asked whether a State found not to meet the performance-related audit criteria will be evaluated after the corrective action period according to the standard in effect during the period covered by the initial audit or the standard in effect during the period covered by the follow-up audit.

A State found not to meet performance-related audit criteria during an audit period will be evaluated after the corrective action period according to the performance-related standard in effect during the period covered by the initial audit and the performance-related standard in effect during the follow-up audit period. If a State is found to meet the performance-related standard in effect during the initial audit period, the State would be in substantial compliance with that standard. If the State fails to meet the performance-related standard in effect during the initial audit period, but meets the performance-related standard in effect during the follow-up audit period, the State would be considered in substantial compliance with the performance-related standard in effect during the initial audit period. If the State fails to meet either standard, the State's total Federal AFDC funds will be reduced in accordance with the regulations.

45. Comment: One commenter suggested that we specify in the regulations the criteria for measuring performance based on the accounts receivable performance indicators.

Response: The regulations indicate that, beginning with the fiscal year 1988 audit period, OCSE will use the accounts receivable performance indicators in determining whether each State has an effect IV-D program. The regulations also indicate that, once every two years beginning in fiscal year 1987, OCSE will describe and update in regulation the scoring system for evaluating State performance according to the cost-effectiveness, reimbursement rate of assistance payments and accounts receivable performance indicators, and any other performance indicators in effect.

Notice and Corrective Action Period

46. Comment: One commenter asked us to define the term "marginal" as used in the regulations.

Response: In describing the content of the notice to a State found not to substantially comply with the requirements of title IV-D of the Act, the regulations indicate that the functional State plan-related audit criteria the State met only marginally refers to audit criteria the State met in 75 to 80 percent of the cases reviewed.

47. Comment: Several commenters indicated that, because some States will not be able to take corrective action within the maximum one-year corrective action period due to the need for staff, or to revise State law, the regulations should be revised to specify that the State and OCSE will jointly determine the corrective action period. Several other commenters suggested that the regulations be revised to provide for a longer corrective action period when the necessary corrective action (e.g. development of an automated system) is likely to take more than one year. A commenter also pointed out that the regulations provide for a corrective action period of significantly less than one-year when the State fails to meet audit criteria related to the performance indicators.

Response: Federal law permits the Secretary to specify the length of the corrective action period. We believe that a one-year corrective action period is reasonable because the interim and final audit reports inform each State of its deficiencies before the State receives a notice from OCSE regarding the Secretary's finding that the State did not substantially comply with the requirements of title IV-D of the Act. In addition, under prior Federal law and implementing audit regulations, OCSE conducted audits and issued audit reports for five prior periods. The reports identified many of the deficiencies in State IV-D programs. Also, OCSE has been conducting financial and statistical system reviews in the States to determine whether State systems for recording, summarizing and reporting financial and statistical data are reliable in terms of accuracy, completeness, and timeliness. As of April 19, 1985, OCSE has conducted systems reviews in 53 States and jurisdictions and issued 44 final audit reports. The States are using these results to take corrective action. To enable OCSE to provide any State with up to one-year corrective action period. we have revised the regulations to specify that the corrective action period granted to the State will not exceed one year from the date of the notice. Thus, a State can receive a corrective action period of up to one year when the State fails to meet State plan-related audit criteria and/or performance-related audit criteria.

48. Comment: Several commenters indicated that, because audits are often conducted six months or more after the end of the audit period, the suspension period for a State that failed to meet audit criteria related to performance indicators will be over or significantly less than a year by the time the State gets a notice.

Response: Consistent with the change discussed above, we have revised the regulations to specify what when a State fails to meet audit criteria the penalty may be suspended for a period not to exceed one year from the date of the notice. This provision applies when the State fails to meet State plan-related audit criteria and/or performance related audit criteria.

49. Comment: Two commenters asked whether the corrective action plan might include making adjustments or corrections to a financial report, such as including collections or expenditures that occurred during the fiscal year, but were not reported, because local jurisdictions did not submit them in time.

Response: The corrective action plan cannot include making any adjustments or corrections to a financial report for a prior period. The regulations specify that the corrective action plan must contain the steps necessary to achieve substantial compliance with the requirements of title IV-D of the Act. The State will use the plan as a guide in working toward the achievement of substantial compliance with the unmet audit criteria as of the end of the corrective action period. If a notice of noncompliance to a State indicates that the State failed to meet the audit criteria on reports and maintenance of records because the State does not submit complete financial reports to OCSE, the State should include in its corrective action plan the steps necessary to insure that financial reports submitted to OCSE as of the end of the corrective action period are complete, and that future financial reports will be complete.

50. Comment: Several commenters recommended that the regulations be revised to permit States to amend and resubmit disapproved corrective action plans. Several commenters also recommended that OCSE assist the States in developing the corrective action plan.

Response: We believe that 60 days after being notified of noncompliance is sufficient time to develop an approvable corrective action plan. During this period, there will be time for consultation, if desired, with OCSE. We expect that States will submit approvable corrective action plans by showing a constructive approach to corrective action.

51. Comment: One commenter indicated that the regulations do not specify what happens if OCSE disapproves a corrective action plan.

Response: The regulations specify that if a State is found by the Secretary, on the basis of the results of an audit conducted under the regulations, not to comply substantially with the requirements of title IV-D of the Act, OCSE will notify the State in writing of such finding. The regulations require the notice to cite the State for noncompliance, list the unmet audit criteria, apply the penalty and give the reasons for the Secretary's finding. The notice also must specify the conditions under which the penalty will be suspended for a specified period of time. These conditions include the approval of a corrective-action plan. Therefore, if the Secretary disapproves a corrective action plan, the penalty will be imposed as of the date of the notice of noncompliance to the State.

Review Following Corrective Action period

52. Comment: Two commenters asked about the scope of the review following the corrective action period. One commenter also asked when a finding of noncompliance and imposition of the penalty would occur as a result of the review.

Response: The regulations indicate that the review following the corrective action period will cover only the audit criteria specified in the notice of noncompliance to the State. The notice of noncompliance will specify any audit criteria the State failed to meet and any functional criteria that the State met only marginally. Federal AFDC payments will be reduced by not less than one nor more than two percent. The reduction will not exceed the one-year period following the end of the suspension period. The penalty will be increased to not less than two nor more than three percent of a State's Federal AFDC funds if the second consecutive finding as the result of an audit indicates that the State did not achieve substantial compliance with the same criterion or criteria. If the third consecutive audit indicates that the State still did not achieve substantial compliance with the same criterion or criteria, the penalty will be increased to not less than three nor more than five percent of a State's Federal AFDC funds.

Imposition of the Penalty

53. Comment: One commenter indicated that since the IV-A and IV-D programs are required to be single and separate, it seems inappropriate to penalize IV-A program for an ineffective IV-D program. A second commenter indicated that the penalty should be applied to the State's AFDC administrative funds, or more appropriately to the quarterly grant award for the IV-D program.

Response: Previous Federal law and regulations provided that, if on the basis of the audit a determination is made that a State does not have an effective IV-D program meeting the requirements of title IV-D of the Act, the State was subject to a five percent reduction of its Federal AFDC funds. Under current Federal law and regulations, if on the basis of the results of an audit the Secretary finds that the State's IV-D program does not comply substantially with the requirements of title IV-D of the Act, and the State fails to correct cited deficiencies or falls out of compliance in a marginal area listed in the notice, total payments to the State under title IV-A of the Act will be reduced by not less than one nor more than five percent of a State's Federal AFDC funds in accordance with the regulations. Federal law and regulations do not authorize any reduction in payments under title IV-D of the Act when a State found by the Secretary not to substantially comply with the requirements of title IV-D of the Act fails to correct cited deficiencies or falls out of compliance in a marginal area.

54. Comment: One commenter asked us to specify how we will determine the percentage of the penalty imposed against a State. A second commenter asked us to develop standardized criteria for setting the penalty. A third commenter inquired as to how the States can determine the percentage of the penalty. The commenter also asked that we specify how we assure that the penalty is applied consistently among the States.

Response: OCSE will determine the penalty imposed on any State found not to substantially comply with the requirements of the title IV-D of the Act based on the gravity of the substantial compliance problems identified in the audit report and limited by the ranges prescribed in Federal law. The notice OCSE will send to any State found not to substantially comply with the requirements of title IV-D of the Act will specify the percentage of the penalty and the basis for setting the specific percentage. Penalties will be imposed on a consistent basis.

55. Comment: One commenter suggested that, because it is difficult to determine whether the 75-percent standard is reasonable for the first year covered by the new substantial compliance audit, the fiscal year 1984 audit should be a trial audit without the imposition of penalties. Because the audit criteria and 75-percent standard were not published until after the fiscal year 1984 audit period, a second commenter suggested that the regulations be revised to specify that the penalty is effective for quarters beginning after September 30, 1984. Another commenter suggested that the penalty be waived until at least the fiscal year 1986 audit period so that the State has adequate time to eliminate its case backlog.

Response: Prior to the October 1,1983 effective date of the audit and penalty provisions of the new law, Federal law and the audit regulations required the States to be in full compliance with the requirements of title IV-D of the Act to avoid imposition of a penalty. In addition, OCSE conducted audits and issued audit reports for each of five prior periods. The audits covered the same State plan-related audit criteria during each of these periods and identified many of the deficiencies in State IV-D programs. The new law requires the use of a substantial compliance standard to determine whether each State has an effective Child Support Enforcement program and a graduated penalty of not less than one nor more than five percent of a State's Federal AFDC funds if a State is not in substantial compliance with title IV-D of the Act. We believe that the new standard is attainable by all States. The new law is effective for audit periods beginning on and after October 1,1983. There is no waiver provision under the law.

56. Comment: One commenter asked us to clarify in the regulations whether the penalty increases when there is a consecutive finding of an audit exception, including marginally met criteria, that fall below the 75-percent standard, or when any new audit exception is found after a State is in penalty status.

Response: The penalty increases only if the second or third consecutive finding as the result of an audit indicates that a State did not achieve substantial compliance with the same criterion or criteria, including marginal criteria, that fall below the 75-percent standard. We have revised the regulations to clarify this matter.

Technical Changes From Proposed Regulations

In addition to the changes discussed above, we have made several editorial changes to the proposed regulations to correct typographical errors, simplify complex sentences and simplify adding new sections to Part 305 in the future. Some State plan-related audit criteria have been changed to reflect changes in State plan requirements as a result of the publication of final regulations implementing sections of Pub. L. 98-378.

Paperwork Reduction Act

The regulations contain information collection requirements which are subject to OMB approval under the Paperwork Reduction Act of 1980 (Pub. L. 96-511). The public is not required to comply with the information collection requirements until OMB approves then under section 3507 of the Paperwork Reduction Act. Comments regarding the information collection requirements should be directed to the Office of Information and Regulatory Affairs, OMB, New Executive Office Building (Room 3208), Washington, DC., 20503, Attention: Desk Officer for HHS. A notice will be published in the Federal Register when OMB approval is obtained. The collection, expenditure and assistance payment reports referred to in this document have been reviewed and approved by OMB under the following approval numbers:

1. OCSE-34 (Quarterly Report of Collections) 0960-0235.

2. OCSE-41 (Quarterly Report of Expenditures) 0960-0235.

3. SSA-41 (Quarterly Report of Expenditures) 0960-0294.

OCSE is developing a financial and statistical report that will include data necessary to compute the performance indicators regarding collection activity and will be submitted for OMB approval in sufficient time to allow implementation consistent with the requirements of the rule.

Regulatory Impact Analysis

The Secretary has determined, in accordance with Executive Order 12291, that this rule does not constitute a "major" rule. A major is one that is likely to result in:

-An annual impact on the economy of $100 million or more;

-A major increase in cost or prices for consumers individual industries, Federal, State or local government agencies, or geographical regions; or

-Significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of the United States-based enterprises to compete with foreign-based enterprises in domestic or import markets.

These regulations amend the OCSE audit regulations to: (1) Require OCSE to conduct an audit of the effectiveness of State Child Support Enforcement programs at least once every three years; (2) require OCSE to use a "substantial compliance" standard to determine whether each State has an effective IV-D program; (3) provide that any state found not to have an effective IV-D program in substantial compliance with the requirements of Title IV-D of the Act be given an opportunity to take the corrective action necessary to be in substantial compliance with those requirements; (4) provide for the use of a graduated penalty of not more than five percent of a State's Federal AFDC funds; and (5) specify the period of time during which a penalty is effective. These changes are a direct result of the statute.

In order to be found to have an effective program in substantial compliance with the requirements of title IV-D of the Act, a State must, beginning with the fiscal year 1984 audit period, meet audit criteria listed in § 305.20. If a State is found by the Secretary, on the basis of the results of an audit, not to comply substantially with the requirements of title IV-D of the Act, OCSE will notify the State that the penalty may be suspended for a period of time not to exceed one year from the date of the notice, to allow the State to take corrective action. If a State fails to take the corrective action necessary to achieve substantial compliance during the period prescribed in the notice, Federal AFDC funds to the State will be reduced in an amount not to exceed five percent until the first quarter throughout which the State IV-D program is found to substantially comply with the requirements of title IV-D of the Act.

The regulations may save some States funds they otherwise might have lost because a "substantial compliance standard and corrective action period are used rather than the "full compliance" standard in determining whether a State meets the IV-D State plan requirements already addressed in the audit regulations. However, the penalty under prior law was never assessed. Nonetheless, the new regulations may cost the States money because they are more workable and enforceable than prior regulations. Audit results will depend on State performance. If State performance improves in response to this audit system, States (as well as the Federal government) would save money due to increased collections and decreased administrative costs. We therefore have no basis for projecting either net costs or savings to States.

These regulations also include performance indicators for evaluating State IV-D programs and new audit criteria related to the performance indicators that together will be used to assess State program effectiveness. The seven performance indicators in the regulations are designed to show: (1) The cost effectiveness of a State IV-D program; (2) the amount of IV-A assistance payments reimbursed by IV-D collections; and (3) the amount of support collected on the amount of support due for a fiscal year and the period prior to a fiscal year. The three indicators that will enable us to determine the cost effectiveness of State IV-D programs and the reimbursement rate for payments made to AFDC recipients will be effective as of the fiscal year 1986 audit period. The four performance indicators that will enable us to evaluate State collection activity will be effective as of the fiscal year 1986 audit period. To determine whether a State meets the performance-related criteria, its performance will be compared to the standard as described earlier.

Finally, these regulations include audit criteria based on IV-D State plan requirements, including criteria based on the Child Support Enforcement Amendments of 1984, that will be used to assess State program effectiveness. These criteria are similar to the criteria already in the regulations for other State plan requirements. The criteria prescribed in §§ 305.37 through 305.43 will be effective as of the fiscal year 1985 audit period. The criteria prescribed in § 305.44 through 305.56 will be effective as of the fiscal year 1986 audit period.

Under these regulations, a State must have an effective program in substantial compliance with the IV-D State plan requirements as measured by the audit criteria listed and referred to in § 305.20 in effect for the audit period to avoid reduction of its Federal AFDC funds. We cannot estimate the number of States that may avoid losing AFDC funds because a "substantial compliance" standard and corrective action period were used rather than the "full compliance" standard in determining whether a State meets the current IV-D State plan requirements. In addition, we cannot estimate the number of States that may lose AFDC funds because they failed to meet the new State plan-related audit criteria.

Beginning with the fiscal year 1988 audit period, we will compare 1988 State performance to a new national standard in determining whether a State meets the performance-related criteria. Again, we do not have data sufficient to allow us to estimate the number of States that could lose AFDC funds because they failed to meet the new national standard.

These regulations could result in minor increases in Federal and State administrative costs. The States will not be required to perform any new program functions. Thus, additional Federal/State costs of conducting audits will be limited to the area of documenting State performance using criteria based on new IV-D State plan requirements and performance indicators for evaluating program effectiveness.

The Secretary certifies, under 5 U.S.C. 605(b), as enacted by the Regulatory Flexibility Act (P.L. 96-354), that these regulations will not result in a significant impact on a substantial number of small entities because they primarily affect Federal and State governments.

List of subjects

45 CFR Part 205

Administrative practice and procedure, Aid to families with dependent children, Family assistance office, Grant programs/social programs, Public assistance programs, Reporting and recordkeeping requirements.

45 CFR Part 305

Child welfare, Grant programs/social programs, Accounting.

For the reasons discussed above, 45 CFR 205.146 is amended as follows.

PART 205[AMENDED]

1. The authority citation for Part 205 continues to read as follows:

Authority: Sec. 1102, 49 Stat. 647; 42 U.S.C. 1302, unless otherwise noted.

2. Section 205.146 is amended by revising paragraphs (d) (1) and (2), and by adding a new paragraph (d)(3) to read as follows:

§205.146 [Amended]

* * * * *

(d) Penalty for failure to have an effective child support enforcement program.

(1) General. Pursuant to section 403(h) of the Act, notwithstanding any other provision of this chapter, total payments to a State under title IV-A of the Act for any quarters in any fiscal year, shall be reduced if a State is found by the Secretary to have failed to have an effective child support enforcement program in substantial compliance with the requirements of section 402(a)(27), as implemented by Parts 302 and 305 of this title. The reduction for any quarter (calculated without regard to any other reduction under this section) shall be:

(i) Not less than one nor more than two percent of such payments for a period beginning in accordance with § 305.100 (c) or (d) of this title not to exceed the one-year period following the end of the suspension period specified in the notice required by § 305.99 of this title;

(ii) Not less than two nor more than three percent of such payments if the finding is the second consecutive finding made as a result of an audit for a period beginning as of the second one-year period following the suspension period specified in the notice required by § 305.99 of this title not to exceed one year; or

(iii) Not less than three nor more than five percent of such payments if the finding is the third or subsequent consecutive finding as a result of an audit for a period beginning as of the third one-year period following the suspension period specified in the notice required by § 305.99 of this title.

(2) Application of penalty. (i) The penalty will be imposed for any quarter beginning after September 30, 1983.

(ii) The penalty will be imposed on the basis of the results of the audit conducted pursuant to Part 305 of this title.

(3) Notice, suspension, corrective action period. Notice, suspension and corrective action provisions are set forth at 45 CFR 305.99.

PART 305-[AMENDED]

45 CFR Part 305 is amended as follows:

1. The authority citation for Part 305 is revised to read as follows:

Authority: Secs. 403(h), 404(d), 452(a) (1) and (4); and 1102 of the Social Security Act; 42 U.S.C. 603(h), 604(d), 652(a) (1) and (4), and 1302.

2. The table of contents is revised to read as follows:

PART 305--AUDIT AND PENALTY

Sec.

305.0 Scope.

305.1 Definitions.

305.10 Timing and scope of audit.

305.11 Audit period.

305.12 State comments.

305.13 State cooperation in the audit.

305.20 Effective support enforcement program.

305.21 Statewide operation.

305.22 State financial participation.

305.23 Single and separate organizational unit.

305.24 Establishing paternity.

305.25 Support obligations.

305.26 Enforcement of support obligation.

305.27 Support payments to the IV-D agency.

305.28 Distribution of support payment.

305.29 Payments to the family.

305.31 Individuals not otherwise eligible.

305.32 Cooperation with other States.

305.33 State parent locator service.

305.34 Cooperative arrangements.

305.35 Reports and maintenance of records.

305.38 Fiscal policies and accountability.

305.37 Bonding of employees.

305.38 Separation of cash handling and accounting functions.

305.39 Withholding of unemployment compensation.

305.40 Federal tax refund offset.

305.41 Recovery of direct payments.

305.42 Spousal support.

305.43 90 percent Federal financial participation for computerized support enforcement systems.

305.44 Publicizing the availability of support enforcement services.

305.45 Notice of collection of assigned support.

305.48 Incentive payments to States and political subdivisions.

305.47 Guidelines for setting child support awards.

305.48 Payment of support through the IV-D agency or other entity.

305.49 Wage or income withholding.

305.50 Expedited processes.

305.51 Collection of overdue support by State income tax refund offset. 305.52 Imposition of liens against real and personal property.

305.53 Posting security, bond or guarantee to secure payment of overdue support.

305.54 Making information available to consumer reporting agencies.

305.55 Imposition of late payment fees on 55 Imposition of late payment fees on absent parents who owe overdue support.

305.56 Medical support.

305.98 Performance indicators and audit criteria.

305.99 Notice and corrective action period.

305.100 Penalty for failure to have an effective support enforcement program.

Authority: Secs. 403(h), 404(d), 452(a)(1) and (4), and 1102 of the Social Security Act; 42 U.S.C. 603(h), 604(d), 652(a) (1) and (4), and 1302.

3. Section 305.0 is revised to read as follows:

§ 305.0 Scope.

This part implements the requirements in sections 452(a)(4) and 403(h) of the Act for an audit, at least once every three years, of the effectiveness of State Child Support Enforcement programs under title IV-D and for a possible reduction in Federal reimbursement for a State's title IV-A program pursuant to sections 403(h) and 404(d) of the Act. Sections 305.10 through 305.13 describe the audit. Section 305.20 defines an effective program for the purposes of this part. Sections 305.21 through 305.56 and §305.98 establish audit criteria the Office will use to determine program effectiveness. Section 305.98 also establishes performance indicators the Office will use to determine State IV-D program effectiveness. Section 305.99 provides for the issuance of a notice and corrective action period if a State is found by the Secretary not to have an effective IV-D program. Section 305.100 provides for the imposition of a penalty if a State is found by the Secretary not to have had an effective program and fails to take corrective action and achieve substantial compliance within the period prescribed by the Secretary.

4. Section 305.10 and 305.11 are revised to read as follows:

§ 305.10 Timing and scope of audit.

(a) The Office will conduct an audit in accordance with sections 452(a)(4) and 403(h) of the Act, at least once every three years, to evaluate the effectiveness of each State's program in carrying out the purposes of title IV-D of the Act and to determine that the program meets the title IV-D requirements. The audit of each State's program meets the title IV-D requirements. The audit of each State's program will be a comprehensive review using the criteria prescribed in §§305.21 through 305.58 and § 305.98 of this part.

(b) The Office will conduct an annual comprehensive audit in the case of a State that is being penalized. For a State operating under a corrective action plan, the review at the end of the corrective action period will cover only the criteria specified in the notice of non-compliance as prescribed in §305.99 of this part.

(c) During the course of the audit, the Office will:

(1) Make a critical investigation of the State's IV-D program through inspection, inquiries. observation, and confirmation; and

(2) Use the audit standards promulgated by the Comptroller General of the United States in the "Standards for Audit of Governmental Organizations, Programs, Activities, and Functions."

§305.11 Audit period.

The audit will cover the period October 1 through September 30 of each fiscal year audited and, when the State is operating under a corrective action plan, will cover the first full quarter after the corrective action period, and, beginning with the fiscal year 1986 audit period, when the State fails to meet audit criteria related to the performance indicators, will cover the fiscal year following the fiscal year in which a determination was made that performance was not in substantial compliance. The audit may cover a shorter period at State request when the State is being penalized under §305.100 of this part.

5. Section 305.20 is revised to read, as follows:

§ 305.20 Effective support enforcement program.

For the purposes of this part and section 403(h) of the Act, in order to be found to have an effective program in substantial compliance with the requirements of title IV-D of the Act, a State must meet the IV-D State plan requirements contained in Part 302 of this chapter measured as follows:

(a) For the fiscal year 1984 audit period:

(1) The following audit criteria must be met: Statewide operation. (45 CFR 305.21(d)) State financial participation. (45 CFR 305.22 (a) and (b)) Single and separate organizational unit. (45 CFR 305.23 (a) and (b)) Establishing paternity. (45 CFR 305.24(b)) Enforcement of support obligation. (45 CFR 28 (c) and (d)) Distribution of child support payment; (45 CFR 305.28(a)) State parent locator service. (45 CFR 305.33(e)) Cooperative arrangements. (45 CFR 305.34) Reports and maintenance of records. (45 CFR 305.35 (a) and (b)) Fiscal policies and accountability. (45 CFR 305.36(a))

(2) The procedures required by the following audit criteria must be used in 75 percent of the cases reviewed for each criterion:

Establishing paternity. (45 CFR 305.24(c))

Support obligations. (45 CFR 305.25 (a) and (b))

Enforcement of support obligation. (45 CFR 305.26 (a), (b), and (e))

Support payments to the IV-D agency. (45 CFR 305.27 (a), (b), and (d))

Distribution of support payment. (45 CFR 305.28(b))

Payments to the family. (45 CFR 305.29)

Individuals not otherwise eligible. (45 CFR 305.31 (a). (b), and (c)) Cooperation with other States. (45 CFR 305.32 (a), (b), (c), (d), (e), (f), and (g))

State parent locator service. (45 CFR 305.33 (a) and (g))

(b) Beginning with fiscal year 1985 audit period:

(1) The criteria prescribed in paragraph (a)(1) of this section and the following audit criteria must be met:

Bonding of employees. (45 CFR 305.37(a))

Separation of cash handling and accounting functions. (45 CFR 305.38(a))

Withholding of unemployment compensation. (45 CFR 305.39 (a) through (h))

Federal tax refund offset. (45 CFR 305.40(a))

Recovery of direct payments. (45 CFR 305.41(a))

Spousal support. (45 CFR 305.42(a))

90 percent Federal financial participation for computerized support enforcement systems. (45 CFR 305.43)

(2) The procedures required by the criteria prescribed in paragraph (a)(2) of this section and the following audit criteria must be used in 75 percent of the cases reviewed for each criterion:

Bonding of employees. (45 CFR 305.37(c))

Separation of cash handling and accounting functions. (45 CFR 305.38(c))

Withholding of unemployment compensation. (45 CFR 305.39(i))

Federal tax refund offset. (45 CFR 305.40(b))

Recovery of direct payments. (45 CFR 305.41(b))

Spousal support. (45 CFR 305.42(b))

(c) For the fiscal year 1986 and 1987 audit periods:

(1) The criteria prescribed in paragraphs (a)(1) and (b)(1) of this section and the following criteria must be met:

Publicizing the availability of support enforcement services. (45 CFR 305.44)

Notice of collection of assigned support. (45 CFR 305.45(a))

Incentive payments to States and political subdivisions. (45 CFR 305.46(a))

Payment of support through the IV-D agency or other entity. (45 CFR 305.46) (a) and (b))

Wage or income withholding. (45 CFR 305.49(a))

Expedited processes. (45 CFR 305.50(a))

Collection of overdue support by State income tax refund offset. (45 CFR 305.51(a))

Imposition of liens against real and personal property. (45 CFR 305.52(a)) Posting security, bond or guarantee to secure payments of overdue support. (45 CFR 305.53(a))

Making information available to consumer reporting agencies. (45 CFR 305.54(a))

Imposition of late payment fees on absent parents who owe overdue support. (45 CFR 305.55(a))

Medical support. (To be determined)

(2) The procedures required by the criteria prescribed in paragraphs (a) (2) and (b)(2) of this section and the following audit criteria must be used in 75 percent of the cases reviewed foreach criterion:

Notice of collection of assigned support. (45 CFR 305.45(b))

Incentive payments to States and political subdivisions. (45

CFR 305.46(b))

Payment of support through the IV-D agency or other entity.

(45 CFR 305.48(c))

Wage or income withholding. (45 CFR 305.49(b))

Expedited processes. (45 CFR 305.50(b))

Collection of overdue support by State income tax refund offset. (45 CFR 305.51(b))

Imposition of liens against real and personal property. (45 CFR 305.52(b)) Posting security, bond or guarantee to secure payment of overdue support. (45 CFR 305.53(b))

Making information available to consumer reporting agencies. (45 CFR 305.54(b))

Imposition of late payment fees on absent parents who owe overdue support. (45 CFR 305.55(b))

Medical support. (To be determined)

(3) The criteria prescribed in § 305.98(c) of this part relating to the performance indicators prescribed in paragraph (a) of that section must be met.

(d) For fiscal year 1988 and future audit periods:

(1) The criteria prescribed in paragraphs (a)(1), (b)(1) and (c)(1) of this section must be met.

(2) The procedures required by the criteria prescribed in paragraphs (a)(2) (b)(2) and (c)(2) of this section must be used in 75 percent of the cases reviewed for each criterion.

(3) The criteria prescribed in 45 CFR 305.47, Guidelines for setting child support awards, must be met.

(4) The criteria referred to in § 305.98(d) of this part relating to the performance indicators prescribed in paragraphs (a) and (b) of that section must be met.

6. Section 305.24 is amended by revising paragraphs (b) and (c) to read as follows:

§ 305.24 Establishing paternity.

* * * * *

(b) Have established and use written procedures for establishing the paternity of any child at least until the child's 18th birthday:

(1) By court order or other legal process established by State law; and

(2) By acknowledgment, if under State law such acknowledgment has the same legal effect as court ordered paternity, including the rights to benefits other than child support.

(c) By utilizing such written procedures to establish the paternity of any child born out of wedlock whose paternity has not previously been established and with respect to whom there is an assignment pursuant to § 232.11 of this title or section 471(a) (17) of the Act in effect or with respect to whom there is an application for child support services pursuant to § 302.33 of this chapter;

* * * * *

7. Section 305.25 is amended by revising paragraph (a)(1) to read as follows:

§ 305.25 Support obligations.

(a)* * *

(1) With respect to whom there is an assignment pursuant to § 232.11 of this title or section 471(a)(17) of the Act in effect or with respect to whom there is an application for child support services pursuant to

§ 302.33 of this chapter.

* * * * *

§305.28 [Amended]

8. Section 305.28 is amended by inserting a comma and the reference "302.52" after the reference "302.51" wherever it appears in that section.

§ 305.33 [Amended]

9. 45 CFR 305.33 is amended by removing the citation "§ 302.35(e)" where it appears in paragraph (f) and inserting in its place the citation "§ 303.70(e)(2)."

10. Section 305.34 is revised to read as follows:

§ 305.34 Cooperative arrangements.

For the purpose of this part, in order to be found in compliance with the State plan requirements for cooperative arrangement (45 CFR 302.34), a State must enter into written cooperative agreements with appropriate courts and law enforcement officials when necessary to establish and enforce support obligations, collect support and cooperate with other States in these functions.

11. Sections 305.37 through 305.56 are added to read as follows:

§ 305.37 Bonding of employees.

For the purposes of this part, to be found in compliance with the State plan requirement for bonding of employees (45 CFR 302.19), a State must:

(a) Have written procedures to ensure that every person, including the individuals prescribed in § 302.19(b) of this chapter, who, as a regular part of his or her employment, receives, disburses, handles or has access to or control over funds collected under the Child Support Enforcement program is covered by a bond against loss resulting from employee dishonesty;

(b) Have written procedures for obtaining a bond in an amount which the State IV-D agency deems adequate to indemnify the State IV-D program for loss resulting from employee dishonesty; and

(c) Use the written procedures specified above.

§ 305.38 Separation of cash handling and accounting functions.

(a) For the purposes of this part, to be found in compliance with the State plan requirement for the separation of cash handling and accounting functions (45 CFR 302.20), a State must have written administrative procedures:

(1) Designed to assure that persons, including the individuals specified in § 302.20(b) of this chapter, responsible for handling cash receipts of support do not participate in accounting or operating functions which would permit them to conceal in the accounting records the misuse of support receipts; and

(2) Designed to assure use of generally accepted accounting principles.

(b) The requirements prescribed in paragraph (a) of this section do not apply to sparsely populated geographic areas within the State granted a waiver under § 302.20(c) of this chapter by the Regional Office.

(c) The State must use the written procedures specified above.

§ 305.39 Withholding of unemployment compensation.

For the purposes of this part, to be found in compliance with the State plan requirement for the withholding of unemployment compensation (45 CFR 302.65), a State must:

(a) Have negotiated a cost effective cooperative agreement with the State Employment Security Agency (SESA) that provides for:

(1) Exchange of information;

(2) The withholding of unemployment compensation benefits to satisfy unmet support obligations;

(3) Payment of withheld unemployment compensation by the SESA to the IV-D agency; and

(4) Reimbursement of administrative costs of the SESA by the IV-D agency.

(b) Have written procedures to determine, based on information provided by the SESA, whether individuals who apply for or receive unemployment compensation owe support obligations that are being enforced by the IV-D agency;

(c) Have written procedures for arranging for the withholding of unemployment compensation:

(1) Pursuant to a voluntary agreement with the individual who owes support; or

(2) Pursuant to legal process under State or local law;

(d) Have written criteria for selecting cases to pursue by the withholding of unemployment compensation process for the collection of past-due support;

(e) Have written procedures for providing a receipt at least annually to an individual who requests a receipt for the support paid by the withholding of unemployment compensation, if receipts are not provided through other means;

(f) Have written procedures for maintaining direct contact with the SESA in its State as prescribed in § 302.65(c)(5) of this chapter;

(g) Have written procedures for the reimbursement of the administrative costs incurred by the SESA that are actual, incremental costs attributable to the process of withholding of unemployment compensation for support purposes insofar as these costs have been agreed upon by the SESA and the IV-D agency;

(h) Have written procedures to review and document, at least annually, the State withholding of unemployment compensation program, including the case selection criteria and costs of the withholding process versus the amounts collected and, as necessary, modify the procedures and renegotiate the services provided by the SESA to improve program and cost effectiveness;

(i) Use of written procedures specified above; and

(j) Have personnel performing the activities described above.

§ 305.40 Federal tax refund offset

For the purpose of this part, to be found in compliance with the State plan requirement for Federal tax refund offset (45 CFR 302.60), a State must:

(a) Have written procedures to obtain payment of past-due support from Federal tax refunds in accordance with section 484 of the Act,

§ 303.72 of this chapter and regulations of the Internal Revenue Service at 28 CFR 301.6402-5;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.41 Recovery of direct payment

For the purposes of this part, to be found in compliance with the State plan requirement for recovery of direct payments (45 CFR 302.31(a)). a State must:

(a) Have written procedures to:

(1) Notify the IV-A agency whenever a determination is made that directly received payments have been retained, if the State elects the IV-A recovery method; or

(2) Recover retained direct support payments in accordance with the standards in § 303.80 of this chapter if the State elects the IV-D recovery method.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.42 Spousal support

For the purposes of this part, to be found in compliance with the State plan provision for the collection of spousal support (45 CFR 302.31(a)), a State must:

(a) Have written procedures for the collection of spousal support from a legally liable person when:

(1) A support order has been established for the spouse;

(2) The spouse or former spouse is living with the child(ren) for whom the individual is liable for child support; and

(3) The support order established for the child(ren) is being enforced under the IV-D plan.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.43 90 percent Federal financial participation for computerized support enforcement systems.

For the purpose of this part, to be found in compliance with the State plan requirement for the establishment of a computerized support enforcement system eligible for 90 percent Federal financial participation (45 CFR 302.85), a State's system must meet the requirements in § 307.10 of this chapter.

§ 305.44 Publicizing the availability of support enforcement services

For the purposes of this part, to be found in compliance with the State plan requirement for publicizing the availability of support enforcement services (45 CFR 302.30), a State must publicize regularly and frequently the availability of support enforcement services under the State plan through public service announcements that include.

(a) Information on any application fees imposed for such services; and

(b) A telephone number or postal address where further information may be obtained.

§ 305.45 Notice of collection of assigned support

For the purposes of this part, to be found in compliance with the State plan requirement for providing notice of collection of assigned support (45 CFR 302.54), a State must:

(a) Have written procedures for:

(1) Sending, at least annually, a notice of the amount of support payments collected during the past year to individuals who have assigned rights to support under § 232.11 of this title; and

(2) Listing separately in the notice support payments collected from each absent parent when more than one absent parent owes support to the family; and

(3) Indicating in the notice the amount of support collected which was paid to the family.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.46 incentive payments to States and political subdivisions.

For the purposes of this part, to be found in compliance with the State plan requirement for incentive payments to States, and political subdivisions (45 CFR 302.55), the State must;

(a) Have written procedures:

(1) To require that, if one or more political subdivisions of the State participate in the costs of carrying out the activities under the State plan during any period, each such subdivision shall be paid an appropriate share of any incentive payments made to the State for such period, as determined by the State in accordance with § 303.52(d) of this chapter, and

(2) To consider the efficiency and effectiveness of the political subdivision in carrying out the activities under the State plan in determining the amount of the incentive payments made to the political subdivision.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.47 Guidelines for setting child support awards.

For the purposes of this part, to be found in compliance with the State plan requirement for guidelines for setting child support awards (45 CFR 302.56) a State must;

(a) Establish guidelines by law or by judicial or administrative action for setting child support award amounts within the State;

(b) Have procedures for making the guidelines available to all persons in the State whose duty it is to set child support award amounts, but the guidelines need not be binding on those persons;

(c) Base the guidelines on specific descriptive and numeric criteria that result in a computation of the support obligation; and

(d) Include a copy of the guidelines in its State plan.

§ 305.48 Payment of support through the IV-D agency or other entity.

For purposes of this part, to be found in compliance with the optional State plan provision for payment of support through the IV-D agency or other entity (45 CFR 302.57), a State must:

(a) Have written procedures for the payment of support through the State IV-D agency or entity designated to administer the State's withholding system upon request of either the absent parent or custodial parent, regardless of whether or not arrearages exist or withholding procedures have been instituted;

(b) Have written procedures to;

(1) Monitor all amounts paid and dates of payments and record them on an individual payment record;

(2) Ensure prompt payment to the custodial parent; and

(3) Require the requesting parent to pay a fee for the cost of providing the service not to exceed $25 annually and not to exceed State costs;

(c) Use the written procedures specified above; and

(d) Have personnel performing the functions specified above.

§ 305.49 Wage or income withholding.

For the purposes of this part, to be found in compliance with the State plan requirement for wage or income withholding (45 CFR 302.70(a)(1)), a State must;

(a) Have written procedures for carrying out a program of withholding in accordance with § 303.100 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.50 Expedited processes.

For the purposes of this part, to be found in compliance with the State plan requirement for expedited process (45 CFR 302.70(a)(2)), a State must;

(a) Have written expedited procedures to establish and enforce child support obligations having the same force and effect as those established through full judicial process in accordance with § 303.101 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.51 Collection of overdue support by State income tax refund offset.

For the purposes of this part, to be found in compliance with the State plan requirement for collection of overdue support by State income tax refund offset (45 CFR 302.70(a)(3)), a State must:

(a) Have written procedures for obtaining overdue support from State income tax refunds on behalf of recipients of aid under the State's title IV-A or IV-E plan with respect to whom an assignment under § 232.11 of this title or section 471(a)(17) of the Act is effective, and on behalf of individuals who apply for services under §302.33 of this part, in accordance with § 303.102 of this chapter;

(b) Use the written procedure specified above; and

(c) Have personnel performing the functions specified above.

§ 305.52 Imposition of liens against real and personal property

For the purposes of this part, to be found in compliance with the State plan requirement for the imposition of liens against real and personal property (45 CFR 302.70(a)(4)), a State must;

(a) Have written procedures for the imposition of liens against the real and personal property of absent parents who owe overdue support in accordance with § 303.103 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.53 Posting security, bond or guarantee to secure payment of overdue support

For the purposes of this part, to be found in compliance with the State plan requirement for posting security, bond or guarantee to secure payment of overdue support (45 CFR 302.70(a)(6)), a State must;

(a) Have written procedures which require that an absent parent give security, post a bond, or give some other guarantee to secure payment of support in accordance with § 303.104 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.54 Making Information available to consumer reporting agencies.

For the purposes of this part, to be found in compliance with the State plan requirement for making information available to consumer reporting agencies (45 CFR 302.70(a)(7)), a State must:

(a) Have written procedures for making information regarding the amount of overdue support owned by an absent parent available to consumer reporting agencies in accordance with § 303.105 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.55 Imposition of late payment fees on absent parents who owe overdue support

For the purposes of this part, to be found in compliance with the optional State plan provision for imposing late payment fees on absent parents who owe overdue support (45 CFR 302.75), a State must:

(a) Have written procedures for uniformly applying the late payment in accordance with § 302.75 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.56 Medical support.

For the purposes of this part, to be found in compliance with the State plan requirement for medical support, a State must meet requirements that will be published as final regulations on medical support effective upon publication of the requirements.

12. Section 305.98 is added to read as follows:

§ 305.98 Performance indicators and audit criteria.

(a) Beginning with the fiscal year 1986 audit period, the Office will use the following performance indicators in determining whether each State has an effective IV-D program.

(1) AFDC IV-D collections divided by total IV-D expenditures (less laboratory cost incurred in determining paternity at State option);

(2) Non-AFDC IV-D collections divided by total IV-D expenditures (less laboratory costs incurred in determining paternity at State option); and

(3) AFDC IV-D collections divided by IV-A assistance payments (Less payments to unemployed parents).

(b) Beginning with the fiscal year 1988 audit period, the Office will use the performance indicators prescribed in paragraph (a) of this section and the following performance indicators in determining whether each State has an effective IV-D program.

(1) AFDC IV-D collections on support due (for a fiscal year) divided by total AFDC support due (for the same fiscal) year);

(2) Non-AFDC IV-D collections on support due (for a fiscal year) divided by total non-AFDC support due (for the same fiscal year);

(3) AFDC IV-D collections on support due (for prior periods) divided by total AFDC support due (for the same periods); and

(4) Non-AFDC IV-D collection on support due (for prior periods) divided by total non-AFDC support due (for the same periods).

(c) The Office shall use the following procedures and audit criteria to measure State performance in fiscal years 1986 and 1987.

(1) The ratio for each of the performance indicators in paragraph (a) of this section will be evaluated on the basis of the scores in the tables in paragraphs (c)(1)(i) through (iii) of this section. The tables show the scores the States will receive for different levels of performance.

(i) Dollar of AFDC IV-D collections per dollar of total IV-D expenditures less laboratory costs incurred in determining paternity at State option).

Level of performance Score

_________________________________________________________________ _______

$20-$29 . . . 6

$30-$39 . . . 8

$40-$49 . . . 10 $50-$59 . . . 12

$60-$69 14

$70-$79 16

$80-$89 18

$90-$99 20

$1.00-$1.19 22

$1.20-$1.39 24

$1.40 or more 25

(ii) Dollar of non-AFDC IV-D collections per dollar of total IV-D expenditures (less laboratory cost incurred in determining paternity at State option).

Level of performance Score

_________________________________________________________________

$.00 0

$.01-$.09 4

$.10-$.19 8

$.20-$.29 12

$.30-$.39 16

$.40-$.49 20

$.50-$.59 24

$.60-$.69 28

$.70-$.79 32

$.80-$.89 36

$.90-$.99 40

$1.00-$1.19 44

$1.20-$1.39 48

$1.40 or more 50

(iii) AFDC IV-D collections divided by IV-A assistance payments (less payments to unemployed parents).

Level of performance (in percent) Score

________________________________________________________________

0 to 1.9 percent 0

2 to 3.9 percent 5

4 to 4.9 percent 10

5 to 5.9 percent 15

6 to 6.9 percent 20

7 or more 25

(2) To be found to meet the audit criteria, a State's total score must equal or exceed 70.

Examples. A State achieves levels of performance of $1.22. $1.35 and 6.5 percent on the performance indicators in paragraph (a) of this section. The State would receive individual scores of 24, 48 and 20 on these performance indicators. The State would be found to meet the audit criteria because the total score is 92.

A State achieves levels of performance of $.65, $.65 and 2.5 percent on the performance indicators in paragraph (a) of this section. The State would receive individual scores of 14, 28 and 5 on these performance indicators. The State would be found not to meet the audit criteria because the total score is 47.

A State achieves levels of performance of $.92. $.96 and 4.2 percent on the performance indicators in paragraph (a) of this section. The State would receive individual scores of 20, 40 and 10 on these performance indicators. The State would be found to meet the audit criteria because the total score is 70.

(d) Beginning in fiscal year 1988, the Office shall evaluate State performance according to the indicators in paragraphs (a) and (b) of this section on the basis of a scoring system that will be described and updated in regulation once every two years beginning in fiscal year 1987.

13. Section 305.99 is added to read as follows:

§ 305.99 Notice and corrective action period.

(a) If a State is found by the Secretary on the basis of the results of the audit described in this part not to comply substantially with the requirements of title IV-D of the Act, as implemented by Chapter III of this title, the Office will notify the State in writing of such finding.

(b) The notice will:

(1) Cite the State for noncompliance, list the unmet audit criteria, apply a penalty and give the reasons for the Secretary's finding:

(2) Identify any audit criteria listed in § 305.20(a)(2), (b)(2) or (c)(2) of this part that the State met only marginally (that is, in 75 to 80 percent of the cases reviewed);

(3) Specify that the penalty may be suspended if the State meets the conditions specified in paragraph (c) of this section; and

(4) Specify the conditions that result in terminating the suspension of the penalty as specified in paragraph (d) of this section.

(c) The penalty will be suspended for a period not to exceed one year from the date of the notice and, beginning with the fiscal year 1986 audit period, when a State fails to meet audit criteria relating to the performance indicators prescribed in § 305.58 of this part the penalty will be suspended until the end of the fiscal year following the fiscal year in which a State failed to meet those criteria if the following conditions are met:

(1) Within 60 days of the date of the notice, the State submits a corrective action plan to the appropriate Regional Office which contains a corrective action period not to exceed one year from the date of the notice and which contains steps necessary to achieve substantial compliance with the requirements of title IV-D of the Act;

(2) The corrective action plan and any amendment are:

(i) Approved by the Secretary within 30 days of receipt of the corrective action plan; or

(ii) Approved automatically because the Secretary took no action within the period specified in paragraph (c)(2)(i) of this section; and

(3) The Secretary finds that the corrective action plan (or any amendment to it approved by the Secretary) is being fully implemented by the State and that the State is progressing to achieve substantial compliance with the unmet criteria cited in the notice.

(d) The suspension of the penalty will continue until such time as the Secretary determines that;

(1) The State has achieved substantial compliance with the unmet criteria cited in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice;

(2) The State is not implementing its corrective action plan; or

(3) The State has implemented its corrective action plan but has failed to achieve substantial compliance with the unmet criteria cited in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice. For State plan-related criteria, this determination will be made as of the first full quarter after the corrective action period. For performance-related criteria, this determination will be made as of the fiscal year following the fiscal year in which a determination was made that performance was not in substantial compliance,

(e) A corrective action plan disapproved under paragraph (c) of this section is not subject to appeal.

(fl Only one corrective action period is provided to a State in relation to a given criterion even consecutive findings of noncompliance are made on that criterion.

14. Section 305.50 is redesignated as § 305.100 and revised to read as follows:

§ 305.100 Penalty for failure to have an effective support enforcement program.

(a) If the Secretary finds, on the basis of the results of the audit described in this part, that a State's program does not substantially meet the requirements in title IV-D of the Act, as implemented by Chapter III of this title, and the State does not achieve substantial compliance with those requirements identified in the notice within the corrective action period approved by the Secretary under § 305.99(c) of this part and maintain compliance in areas cited in the notice as marginally acceptable under

§ 305.99(b)(2) of this part, total payments to the State under title IV-A of the Act will be reduced for the period prescribed in paragraph (c) or (d) of this section by:

(1) Not less than one nor more than two percent of such payments for a period beginning in accordance with paragraph (c) or (d) of this section not to exceed the one-year period following the end of the suspension period;

(2) Not less than two nor more than three percent of such payments if the finding is the second consecutive finding made as a result of an audit for a period beginning as of the second one-year period following the suspension period not to exceed one year; or

(3) Not less than three nor more than five percent of such payments if the finding is the third or subsequent consecutive finding as a result of an audit for a period beginning as of the third one-year period following the suspension period.

(b) In the case of a State that has achieved substantial compliance with the unmet criteria identified in the notice and maintained substantial compliance with any marginally-met criteria identified in the notice within the corrective action period approved by the Secretary under § 305.99 of this part, the penalty will not be applied.

(c) In the case of a State whose penalty suspension ends because the State is not implementing its corrective action plan, the penalty will be applied as if the suspension had not occurred.

(d) In the case of a State whose penalty suspension ends because the State is implementing its corrective action plan but has failed to achieve substantial compliance with the unmet criteria identified in the notice and maintain substantial compliance with any marginally-met criteria identified in the notice within the corrective action period approved by the Secretary under § 305.99 of this part, the penalty will be effective for any quarter that ends after the expiration of the suspension period until the first quarter throughout which the State IV-D program is in substantial compliance with the requirements of title IV-D of the Act.

(e) A consecutive finding under paragraph (a)(2) or (3) of this section occurs only when the State does not achieve substantial compliance with the same criterion or criteria.

(f) Any reduction required to be made under his section shall be made pursuant to § 205.146(d) of this title.

(g) The reconsideration of penalty imposition provided for by § 205.146(e) of this title shall be applicable to any reduction made pursuant to this section.

(Catalog of Federal Domestic Assistance Program No. 13.679, ChildSupport Enforcement Program.)

Dated: May 31, 1985.

R. Stephen Ritchie,

Director, Office of Child Support Enforcement

Dated: June 7, 1985.

Martha A. McSteen,

Acting Commissioner Social Security

Administration

Approved: August 21, 1985.

Margaret M. Heckler,

Secretary.

[FR Doc. 85-23268 Filed 9-30-85; 8:45am] BILLING CODE 4190-11-M

 

 

Revision of the Child Support Enforcement Program Audit Regulations

FINAL REGULATION

ACTION TRANSMITTAL

OCSE-AT-85-15

October 1, 1985

SUBJECT: Revision of the Child Support Enforcement Program Audit Regulations

ATTACHMENT: Attached are final regulations that amend Office

of Family Assistance (OFA) regulations at 45 CFR 205.146(d) and OCSE regulations at 45 CFR Part 305 to implement Section 9 of P. L. 98-378, the Child Support Enforcement Amendments of 1984. Section 9 amends titles IV-A and IV-D of the Social Security Act to modify the Child Support Enforcement program audit and related penalty. This regulation will strengthen the Child Support Enforcement program by providing the States with audit and penalty provisions that will encourage program improvement.

EFFECTIVE DATE: October 1, 1985.

REGULATIONS REFERENCE: 45 CFR 205.146(d) and Part 305.

SUPERSEDED MATERIAL: OCSE-AT-84-11, dated October 4, 1984.

RELATED REFERENCE: OCSE-AT-85-6, dated May 9, 1985.

INQUIRIES TO: OCSE Regional Representatives.

Director Office of Child Support Enforcement

DEPARTMENT OF HEALTH AND HUMAN SERVICES

Office of Child Support Enforcement

Social Security Administration

45 CFR Parts 205 and 305

Child Support Enforcement Program; Aid to Families With Dependent Children; Revision of Child Support Enforcement Program Audit Regulations

Agency: Office of Child Support Enforcement (OCSE) and Social Security Administration (SSA), HHS.

Action: Final rule.

SUMMARY: These final rules amend Office of Family Assistance (OFA) and OCSE regulations at 45 CFR 205.146(d) and Part 305 to implement section 9 of Pub. L. 98-378, the Child Support Enforcement Amendments of 1984. The rules will strengthen the Child Support Enforcement Program by providing the States with audit and penalty provisions that will encourage program improvement. For a detailed discussion of the changes see Supplementary Information. Also, see the discussion under the heading "Paperwork Reduction Act" regarding information collection requirements.

Effective Dates: Section 9 of Pub. L. 98-378 is effective on and after October 1, 1983. These regulations are effective October 1, 1985.

FOR FURTHER INFORMATION CONTACT:

Michael Fitzgerald, Policy Branch, OCSE, (301)443-5350.

SUPPLEMENTARY INFORMATION:

Statutory Requirements:

Section 9 of Pub. L. 98-378 amends sections 403(h) and 452(a)(4) of the Act regarding the Child Support Enforcement program audit requirements. Section 452(a)(4) of the Act was amended by replacing the requirement for an annual review of State IV-D programs with a requirement for a review at least once every three years (or not less than annually in the case of any State which is being penalized, or is operating under a corrective action plan in accordance with section 403(h). Section 403(h)(1) of the Act was amended by substituting a "substantial compliance" standard for the existing "full compliance" test used to determine whether a State has an effective IV-D program meeting the requirements of title IV-D of the Act. Section 403(h)(3) now specifies that a State which is not in full compliance with the title IV-D requirements shall be determined to be in substantial compliance with the requirements only if the Secretary determines that any noncompliance with the requirements is of a technical nature which does not adversely affect the performance of the program.

Section 403(h) was further amended to provide for a corrective action period and to substitute a graduated penalty for the flat five percent reduction of a State's AFDC funds for any quarter beginning after September 30, 1983. Section 403(h)(1) provides for a reduction of not less than one nor more than two percent in an initial finding, not less than two nor more than three percent if the finding is the second consecutive such finding made as a result of a review, or not less than three nor more than five percent if the finding is the third or subsequent finding made as a result of a review. Under section 403(h)(2)(A), a reduction will be suspended for a quarter if: (1) The State submits a corrective action plan within a period specified by the Secretary which contains steps necessary to achieve substantial compliance within a time period the Secretary finds appropriate; (2) the Secretary approved the plan and amendments thereto; and (3) the Secretary finds that the corrective action plan (or any amendment that is approved) is being fully implemented and the State is progressing towards substantial compliance in accordance with the timetable in the plan. Under paragraph (h)(2)(B), the penalty shall be suspended until the Secretary determines that: (1) The State has achieved substantial compliance; (2) the State is no longer implementing its corrective action plan; or (3) the State is implementing or has implemented its corrective action plan but has failed to achieve substantial compliance within the appropriate time period. Under paragraph (h)(2)(C), a penalty shall not be applied to any quarter during a suspension period if the State achieves substantial compliance. If a State is implementing its corrective action plan but fails to achieve substantial compliance within the time period allowed, the penalty will be applied to all quarters ending after the expiration of the suspension period until the first quarter throughout which the State IV-D program is in substantial compliance. If a State is not implementing its corrective action plan, the penalty will be applied as if the suspension had not occurred.

Although these statutory changes are effective beginning October 1, 1983, these proposed regulations have varying effective dates for different provisions as discussed below.

Under the existing section 452(a)(1) of the Act, the Director, OCSE, may establish standards for locating absent parents, establishing paternity and obtaining child support and support for the spouse (or former spouse) with whom the absent parent's child is living as he determines to be necessary to assure that State programs will be effective. The performance indicators in these regulations are established under the authority of section 452(a)(1).

Regulatory Provisions

Frequency Of Audit

Previous regulations at 45 CFR 305.10 required OCSE to conduct an annual audit of State Child Support Enforcement programs to determine whether each State has an effective IV-D program. To implement the provision of the amended section 452(a)(4) of the Act regarding the frequency of audit, the regulations at 305.10, Audit, require OCSE to conduct an audit of State IV-D programs, at least once every three years, or at least annually in the case of any State which is being penalized to evaluate the effectiveness of the programs and determine that they meet the requirements of title IV-D of the Act.

Under this provision, OCSE has flexibility regarding the frequency of audit during the three-year period. OCSE may conduct an audit of each State's IV-D program once every two years, continue to conduct annual audit or vary the audit frequency among States (e.g., audit some States twice a year and others every 2 years). OCSE plans to conduct an audit, at least once a year, in any State that is not meeting the performance-related criteria in effect for fiscal year 1986 and any subsequent fiscal year. Nonetheless, we will conduct an audit of each State's IV-D program at least once every three years. We will conduct an audit more frequently than on an annual basis at the request of any State that is being penalized for not meeting State plan-related criteria. States should be aware that any audit conducted in this situation may result in an increased penalty for the State if the State is not found in substantial compliance. The audit will cover a one-year or shorter period (see 45 CFR 305.11).

Current Measurement of Program Effectiveness

Previous audit and penalty regulation at 45 CFR Part 305 prescribed audit criteria for an effective IV-D program and provided for an annual audit and imposition of the penalty

if a State was found not to have an effective program. Those regulations defined an effective program as one that is in compliance with each of several specified IV-D State plan requirements. In order to be in compliance with a particular State plan requirement, the State had to meet specific regulatory criteria which, for the most part, required States to have and use written procedures to carry out the requirement. Thus, if a determination was made that a State had and used written procedures and/or met other criteria with regard to each State plan requirement, the State was not subject to the penalty.

OCSE has completed annual audits during the past few years. After reviewing the findings, we believe that the audits have encouraged States to establish Child Support Enforcement programs that carry out the activities described in the IV-D State plan. Nevertheless, a State may have and be using procedures for each State plan requirement and not be operating its program in an effective manner. The House of Representatives, Committee on Ways and Means, in House Report No. 98-527, page 44, indicates that the audit should focus on program effectiveness rather than on simple compliance with processes. The Senate, Committee on Finance, in Senate Report No. 98-387, page 32, indicates that the Department should be developing performance measures which will enable OCSE auditors to determine whether States are effectively attaining each of the important objectives of the program. The Report further indicates that, based on the experience in the program to date, it should be possible to set standards which represent minimum acceptable levels of success in carrying out the various objectives of the Child Support Enforcement program. We agree that, because State IV-D programs have been in operation for ten years, sufficient time has passed to allow States to reach a degree of maturity where it is no longer necessary to focus solely on compliance with the IV-D State plan.

Having reviewed the results of the audits for the first four periods, we have concluded that the current audit regulations do not enable us to adequately measure program effectiveness. We therefore have revised 45 CFR Part 305, Audit and Penalty, as described below.

Substantial Compliance Standard

In these regulations, a State must meet both State plan-related audit criteria and performance-related audit criteria to be found to have an effective program.

To implement the provisions of the amended section 403(h)(1) of the Act regarding the use of a substantial compliance standard and section 304(h)(3) of the Act regarding the determination OCSE will make as to whether noncompliance with requirements is of a technical nature that does not adversely affect program performance, we amended the regulations at § 305.20, Audit criteria.

Previously, OCSE regulations at § 305.20(a) listed IV-D State plan requirements that a State must satisfy to have an effective IV-D program. To implement substantial compliance, the new § 305.20(a)(1) lists ten selected criteria that must be fully met in order for a State to be found to meet the corresponding IV-D State plan requirements. The new § 305.20(a)(2) contains nine selected criteria and specifies that the procedures required by each criterion must be used in 75 percent of the cases reviewed in order for the State to be found to meet the corresponding IV-D State plan requirements. These provisions are effective beginning with fiscal year 1984. We consider the 75 percent standard to be rigorous because prior audit findings indicate that many States were not meeting that audit criteria in 75 percent of the cases reviewed. However, we believe that the 75 percent standard is attainable by all States and will strengthen the program by providing the States with a measure of program activity that will encourage improvement. In addition, we believe that the use of a 75 percent standard is reasonable because the audit criteria listed in § 305.20(a)(2) relate to program activities that have been IV-D State plan requirements applicable to all IV-D cases since the inception of the IV-D program in July, 1975.

The revised § 305.20(b) contains additional audit criteria OCSE will use, beginning with the October 1, 1984 through September 30, 1985 audit period, to determine whether the State meets the IV-D State plan requirements contained in 45 CFR Part 302. The new § 305.20(b)(1) incorporates the criteria listed in § 305.20(a)(1) and lists seven additional criteria, all of which must be fully met in order for the State to be found to meet the corresponding IV-D State plan requirements. The criteria added beginning in fiscal year 1985 apply only to State plan requirements that were effective before fiscal year 1985. Thus, States were aware of these requirements prior to fiscal year 1985 and we have merely added audit criteria to measure requirements which were effective for that fiscal year.

The new § 305.20(b)(2) incorporates the criteria listed in § 305.20(a)(2), lists six additional criteria, and specifies that the procedures required by each criterion must be used in 75 percent of the cases reviewed. As already noted, we believe that the use of a 75 percent standard is both rigorous and reasonable because the audit criteria referred to and listed in §305.20(b)(2) relate to case activities that have been IV-D State plan requirements since the inception of the IV-D program, or for several years.

The new § 305.20(c) contains additional State plan-related audit criteria and new performance-related audit criteria OCSE will use for the period October 1, 1985 through September 30, 1987 to determine whether the State is in substantial compliance with the requirements of title IV-D of the Act. The new § 305.20(c)(1) incorporates the criteria listed in § 305.20(a)(1) and (b)(1) and lists twelve additional criteria, all of which must be fully met in order for the State to be found to meet the corresponding IV-D State plan requirements. The new § 305.20(c)(2) incorporates the criteria listed in § 305.20 (a)(2) and (b)(2), lists ten additional criteria, and specifies that the procedures required by each criterion must be used in 75 percent of the cases reviewed.

The new § 305.20(c)(3) requires the State to meet the performance-related audit criteria prescribed in the new 45 CFR 305.98(c).

The new § 305.20(d) contains State plan-related audit criteria and new performance-related audit criteria OCSE will use, for the period October 1, 1987 through September 30, 1988 and all subsequent audit periods, to determine whether the State has an effective IV-D program in substantial compliance with the requirements of title IV-D of the Act. The new § 305.20(d)(1) incorporates the criteria listed in § 305.20(a)(1), (b)(1) and (c)(1), all of which must be met in order for the State to be found to meet the corresponding IV-D State plan requirements. In addition, the new § 305.20(d)(2) incorporates the criteria listed in § 305.20(a)(2), (b)(2) and (c)(2), each of which must be met for 75 percent of the cases reviewed. The new §305.20(d)(3) lists one additional criterion which must be met in order for the State to be found to meet the corresponding IV-D State plan requirement.

The new § 305.20(d)(4) requires the State to meet the audit criteria referred to in § 305.98(d) relating to the performance indicators in § 305.98(a) and(b).

The new § 305.20(a), (b) and (c) do not include all of the State plan-related audit criteria in 45 CFR Part 305. However, they do cover each of the IV-D State plan requirements prescribed in section 454 of the Act. The criteria addressed in 305.20 involve IV-D functions and activities that we consider to be essential to an effective IV-D program. The criteria that were left out include having staff to perform IV-D functions covered in § 305.20, performing functions and activities that are otherwise covered by criteria in § 305.20, and performing functions and activities we do not consider to be essential to effective program performance. Nonetheless, we may at some later date, as discussed below, revise the criteria addressed in § 305.20 as a result of future audit findings.

OCSE will use only the State plan-related audit criteria listed or referred to in § 305.20(a), (b), (c) and (d) in determining whether a State has an effective program in substantial compliance with the requirements of title IV-D of the Act. Nonetheless, audits of State IV-D programs will cover all of the State plan-related criteria in Part 305 (i.e., §§ 305.21 through 305.36 for the period October 1, 1983 through September 30, 1984, and §§ 305.21 through 305.43 for the period October 1, 1984 through September 30, 1985, and §§ 305.21 through 305.56 for all subsequent periods.) The audit reports will include audit findings on each criterion. After reviewing future audit findings, OCSE may revise § 305.20(c) to include additional audit criteria.

Beginning with the fiscal year 1986 audit period, a State must substantially comply with both State plan-related audit criteria and performance-related audit criteria to be found to have an effective IV-D program. A failure to comply under either set of criteria may result in imposition of the penalty. (See the discussion below under the headings: "Technical Changes to 45 CFR Part 305," for details regarding the deletion of the current § 305.20(b); "Performance Indicators," for details regarding the new performance indicators; and "Audit Criteria Relating to Performance Indicators," for details regarding scoring based on the performance indicators.)

The effect of these revisions in the audit and penalty regulations is that a substantial compliance standard as defined in section 403(h)(3) of the Act and § 305.20 will be the basis for determining whether States have effective IV-D programs. Under this standard, the State must, beginning with the fiscal year 1984 audit period, meet selected State plan-related criteria and, beginning with the fiscal year 1986 audit period, meet both selected State plan-related and performance-related criteria to be found to have an effective IV-D program. No failure to meet these criteria may be construed as noncompliance of a technical nature. A State will be subject to the penalty if it fails to meet either the selected plan-related or performance-related audit criteria prescribed in § 305.20.

Audit Criteria Relating to IV-D State Plan Requirements

Previously, OCSE regulations at § 305.21 through 305.36 prescribed audit criteria for determining program effectiveness. The criteria were based on the statutory IV-D State plan requirements prescribed in section 454 of the Act at the inception of the IV-D program in July, 1975. Since then, several mandatory and optional IV-D State plan provisions, including provisions added by the Child Support Enforcement Amendments of 1984, have been added to section 454 of the Act. To measure program effectiveness under section 403(h) of the Act, OSCE must determine whether the State is in substantial compliance with the requirements of title IV-D of the Act. Therefore, we have added new § 305.37 through 305.43 to the audit regulations to specify additional audit criteria OCSE will use to determine whether the State is in substantial compliance with the requirements of title IV-D of the Act as of the fiscal year 1985 audit period. We have also added new § 305.44 through 305.55 to the audit regulations to specify audit criteria OCSE will use to determine whether the State is in substantial compliance with the requirements of title IV-D of the Act as of the fiscal year 1986 audit period. The criteria prescribed in § 305.21 through 305.42, § 305.44 through 305.47 and § 305.49 through 305.54 apply to all States. However, the criteria prescribed in § 305.43, 305.48 and 305.55 only apply to States that have elected to implement the corresponding State plan provision. In addition, the criteria prescribed in § 305.42 only apply to States for fiscal year 1985 that elect to implement the corresponding State plan provision and will apply to all States effective October 1, 1985. Thus, OCSE will use audit criteria to determine whether a State is in compliance only with IV-D State plan requirements that apply to the State.

Finally, we issued proposed regulations in the Federal Register (48 FR 35468) on August 4, 1983 that amend the non-statutory State plan requirement at § 302.80 to specify that the IV-D agency shall perform certain medical support activities. States will be required, in order to be in compliance, to have and use written procedures which meet the requirements for medical support as published in the final regulations. Audit criteria will be effective upon publication of the final regulations. At the time that final medical support regulations are published, specific audit criteria will be published as interim final regulations.

Performance Indicator

In November, 1981, the Deputy Director, OCSE, established a task group to develop specific performance indicators to be used to evaluate State IV-D programs. During the development of these indicators, the task group reviewed the performance indicators used in several States. This review helped to identify indicators that are appropriate for evaluating all State IV-D programs. Also, contacts were made with other Federal agencies to identify systems and methodologies which could be used in conjunction with a performance indicator system; however, the agencies contacted did not run programs similar to the IV-D program. In addition, the task group solicited and received extensive input from State Child Support Enforcement agencies during the development of the performance indicators. In February, 1982, the proposed performance indicators were presented to the Executive Board of the National Council of State Child Support Enforcement Administrators at a meeting held in Alexandria, Virginia. In May, 1982, a revision of the proposed performance indicators were distributed to State IV-D Directors at the National Council of State Child Support Enforcement Administrators meeting held in Chevy Chase, Maryland. After that meeting, the Council conducted a survey of State IV-D Directors to determine their views on the proposed performance indicators. In July, 1982, the Executive Board of the IV-D Directors Council and OCSE representatives discussed the results of the survey at a meeting held in Kansas City, Missouri. In May, 1983, the IV-D Directors were again briefed on the proposed performance indicators at the National Council of State Child Support Enforcement Administrators meeting held in Crystal City, Virginia. Lastly, in August, 1983, the IV-D Directors were briefed at a National Reciprocal and Family Support Enforcement Association meeting in St. Louis. Several changes were made to the proposed performance indicators as a result of this meeting. The indicators prescribed in this regulation are similar to those agreed to by the IV-D Directors.

In developing the seven performance indicators prescribed in the new § 305.98(a) and (b) we took the following factors into consideration. First, the data necessary to use each performance indicator reflect State IV-D operations and are not overly burdensome to collect. Second, performance indicators are as objective as possible at this point in time.

The House of Representatives, Committee on Appropriations, in House Report No. 97-894, page 83, indicates that the concept of child support enforcement is good social and fiscal policy. However, it (the committee) cannot indefinitely support a program with such a negative cost-benefit ratio. The Committee also indicates in House Report No. 98-357, page 93, that it remains concerned over the cost effectiveness of the Child Support Enforcement program. In addition, the House of Representatives, Committee on Ways and Means, in House Report No. 98-527, page 44, indicates that the Federal Government pays 70 percent of the States' child support enforcement administrative costs and ought to be getting its money's worth in terms of firm and effective establishment and enforcement of AFDC and non-AFDC support obligations. OCSE also believes that the cost effectiveness of the IV-D program is an important aspect of program operations. Therefore, we have added a new § 305.98(a)(1) and (2) to prescribe two performance indicators OCSE will use to evaluate the cost effectiveness of State IV-D programs as of fiscal year 1986. These indicators are: (1) AFDC IV-D collections over total IV-D expenditures (less laboratory costs incurred in determining paternity at State option); and (2) non-AFDC IV-D collections over total IV-D expenditures (less laboratory costs incurred in determining paternity at State option). We believe that the use of these indicators will help to improve the cost effectiveness of State IV-D programs. The collection and expenditure data necessary to compute these indicators are currently submitted to the Federal Government on the OCSE-34 and OCSE-41 reports. The States have been submitting these data to us since 1975. Thus, these performance indicators will not impose an additional burden on the States. In addition the new performance indicators are as objective as possible at this point in time.

OCSE believes that the collection of support to reimburse assistance payments made to the family is an important aspect of the IV-D program. This is consistent with section 457 of the Act which provides for using support collections made with respect to AFDC recipients to reimburse both the State and Federal share of the current assistance payment. Therefore, we have added a new performance indicator at § 305.98(a)(3) to evaluate the reimbursement rate of assistance payments made to those receiving AFDC for reasons other than unemployment. This indicator will be used beginning in fiscal year 1986. We believe that the use of this performance indicator will help to increase the percentage of assistance payments made to those receiving AFDC for reasons other than unemployment that are reimbursed via AFDC support collections. It should be noted that section 2640 of Pub. L. 98-369 requires the first $50 of support collected periodically which represents monthly support payments to be paid to the AFDC family. These payments will be treated and reported as AFDC IV-D collections. The collection and assistance payments data necessary to compute this indicator are submitted to the Federal government on the OCSE-34 and the SSA-41 reports. The States have been submitting both AFDC IV-D collection and AFDC assistance payment data to the Federal government since 1975. Thus, the new performance indicator will not place an additional burden on the States. We believe this indicator is also as objective as possible.

One basic purpose of the Child Support Enforcement program is to reduce or avert welfare costs by increasing the collection of support from absent parents. Since the collection of support is an important aspect of the IV-D program, we believe that State collection activity should be considered in determining whether a State has an effective IV-D program. Therefore, we have added a new § 305.98(b) to prescribe four performance indicators OCSE will use to evaluate the collection of support as of fiscal year 1988. The indicators are: (1) Ratios designating either AFDC or non-AFDC collections on support due (for a fiscal year) as the numerator and either total AFDC or non-AFDC support due (for the same fiscal year) as the denominator; and (2) ratios designating either AFDC or non-AFDC collections on support due (for prior periods) as the numerator and either total AFDC or non-AFDC support due (for the same periods) as the denominator. Beginning with fiscal year 1986, section 13 of Pub. L. 98-378 requires the Secretary to report to Congress for each fiscal year the data necessary to compute these indicators. Since these indicators will not be effective until the audit period beginning October 1, 1987 (fiscal year 1988), States will have sufficient time to prepare and report the necessary data (i.e., the amount of current support due during the fiscal year). We will amend the OCSE-34 report to accomplish this.

The performance indicators discussed above measure certain aspects of the IV-D program. We recognize that these indicators do not address IV-D functions such as cost avoidance and establishing paternity. We have not developed performance indicators that address all IV-D functions at this time because many of the States cannot easily collect and maintain the data necessary to use performance indicators other than the indicators we have developed. As State data collection systems and techniques improve and we evaluate results from research projects currently underway, we intend to propose additional performance indicators, including those measuring paternity establishment and cost avoidance. Nonetheless, we believe that the new performance indicators will better enable us to determine whether each State has an effective IV-D program. The indicators are consistent with section 452(a)(1) of the Act which requires the Director, OCSE to establish standards to assure that State programs will be effective.

Audit Criteria Relating to Performance Indicators

In developing these regulations, we considered two options regarding the use of performance indicators to evaluate State IV-D programs. In considering these options, we focused on identifying a system that would ensure that the AFDC and non-AFDC portions of the IV-D program be given equal weight. Under the first option considered. a national standard would be developed for the AFDC portion of the IV-D program and a second standard would be developed for the non-AFDC portion of the program. Under this dual standard system, States could not compensate for unacceptable performance in one portion of the IV-D program with excellent performance in the other portion of the program. Nonetheless, we have decided to use a single standard system in which AFDC and non-AFDC indicators are given equal weight rather than the dual standard system for the following reasons. First, States, in general, do not have functioning cost accounting systems to allocate costs between the AFDC and non-AFDC portions of the IV-D program. Therefore, we cannot compare AFDC collections with actual AFDC expenditures or non-AFDC collections with actual non-AFDC expenditures. Our only meaningful expenditure data are for total expenditure. Second, we believe that there would be little difference in the States at risk under a dual standard system and under a single standard.

We will combine the scores on the performance indicators into a single composite score for each State and use a single national standard by which to assess program performance. We have added a new § 305.98(c)(1) to evaluate the ratios of the performance indicators in paragraph (a) of this section on the basis of a 100 point scoring system. The tables in § 305.98(c)(1) (i) through (iii) show the scores States will receive for different levels of performance on each performance indicator. Under this scoring system, equal weight is given to the AFDC and non-AFDC components of the IV-D program. A maximum of 50 points can be scored on the two AFDC related performance indicators in 305.98(a)(1) and (3) (25 points for each indicator). Similarly, a maximum of 50 points can be achieved on the single non-AFDC performance indicator in § 305.98(a)(2).

The regulations at § 305.98(c)(2) specify that to be found to meet the audit criteria, a State's total score must equal or exceed 70, as illustrated by the examples in the regulation. In developing this standard, our goal was to define a minimum level of acceptable performance. We believe that achievement of a score of 70 on these three performance indicators represents the minimum level of acceptable performance at this time. However, because of the changing and evolving nature of the program, we intend to revise this scoring system for fiscal year 1988 to reflect anticipated improvements in State program performance.

The new § 305.98(d) indicates that we will evaluate State performance according to the indicators in § 305.98(a) and (b) on the basis of a scoring system we will describe and update by regulation once every two years. In fiscal year 1987, we will publish the scoring system to be used during the following two fiscal years.

Table 1 shows the results of applying this scoring system to the States for fiscal year 1983. The table indicates the level of performance achieved by the States in each of the performance indicators in § 305.98(a), the scores which would be awarded for each of the performance indicators and the total score which would be used to determine whether a State meets the audit criteria.

The table also shows the level of performance of the nation as a whole. In fiscal year 1983, the national averages were $1.27, $1.65 and 6.6 percent on each of the three performance indicators in 305.98(a). This would result in individual scores of 24, 50 and 20, for a total score of 94. The table indicates that 18 States would have achieved scores of less than 70 in fiscal year 1983. These States are marked by an asterisk. Finally, we note that a score of 70 can be achieved by levels of performance as low as $.90, $.90 and 4.0 percent on the three performance indicators in 305.98(a). Thus, we feel that a score of 70 is clearly achievable.

Table 1

State Indicator 1ScoreIndicat or 2 Score Indicator 3ScoreTotal Score

Alabama*0.85180.09 410.62547

Alaska0.44101.97505.91575

Arizona*0.25 61.55502.3561

Arkansas1.01220.622813.32575

California1.08220.92404.61072

Colorado1.17220.98409.42587

Connecticut1.73251.565012.725100

Delaware0.69141.76508.42589

DC*0.49100.22.123.0527

Florida*0.66140.55244.31048

Georgia*1.38240.25126.02056

Guam*0.821180.42206.12058

Hawaii1.21241.51505.31589

Idaho1.76250.412017.82570

Illinois*1.16220.80362.3563

Indiana2.61250.462012.12570

Iowa3.29251.645013.525100

Kansas1.5250.41208.62570

Kentucky0.82181.74505.01583

Louisiana0.75161.25487.22589

Maine2.86250.622813.32578

Maryland1.70253.025012.425100

Massachusetts2.04251.615013.625100

Michigan2.36254.26508.625100

Minnesota1.48251.114410.02594

Mississippi*1.55250.1288.02558

Missouri1.27240.73326.12076

Montana1.63250.52247.72574

Nebraska1.12224.62507.32597

Nevada0.53121.094416.82581

New Hampshire1.21244.085011.22599

New Jersey1.14222.83508.12597

New Mexico*0.90200.53256.72064

New York*0.79161.22483.9569

North Carolina1.53250.984016.32590

North Dakota1.55250.552413.52574

Ohio*1.68250.0745.11544

Oklahoma*0.60140.26124.71036

Oregon1.15222.105012.62597

Pennsylvania1.10225.56506.42092

Puerto Rico*0.2769.21502.9561

Rhode Island1.97251.39486.32093

South Carolina2.08250.50247.92574

South Dakota1.81250.562412.42574

Tennessee0.79161.92506.92086

Texas*0.72160.47207.02561

Utah*1.75250.291221.62562

Vermont*2.74250.21127.22562

Virgin Islands0.44101.70504.71070

Virginia*1.53250.24127.02562

Washington1.56250.893610.12586

West Virginia*1.30240.0545.81543

Wisconsin1.92250.80368.82586

Wyoming2.12250.61287.12573

National Average1.27241.65506.62094

Data as reported by States as of June 1, 1984.

*States that would have achieved a score less than 70 in fiscal year 1983.

Notice and Corrective Action Period

Previous regulations at 45 CFR 305.50 provided that a State is subject to an immediate five percent reduction of its AFDC funds if, on the basis of an audit, a determination is made that the State failed to have an effective program meeting the requirements of section 402(a)(27) of the Act. Under this requirement, the Secretary could not suspend penalties during corrective action periods or take into account subsequent improvements before imposing the penalty.

To implement the provision of the amended section 403(h)(2) of the Act regarding the corrective action period provided to the State, we have added a new regulation at § 305.99. Notice and corrective action period, to specify that, if a State is found by the Secretary on the basis of the results of the audit described in Part 305 not to comply substantially with the requirements of title IV-D of the Act, OCSE will notify the State in writing of such finding. The regulation further requires the notice to cite the State for noncompliance, list the unmet audit criteria, apply the penalty and give the reasons for the Secretary's findings. The notice must also identify any audit criteria listed in

§ 305.20(a)(2), (b)(2) or (c)(2) that the State met only marginally (that is, in 75 to 80 percent of the cases reviewed), specify that the penalty may be suspended if the State meets the conditions specified in § 305.99(c) and specify the conditions prescribed in § 305.99(d) that result in terminating the suspension of the penalty. The regulations at § 305.99(c) specify that the penalty will be suspended for a period of time not to exceed one year from the date of notice, if the following conditions are met: (1) The State submits a corrective action plan to the appropriate Regional Office within 80 days of the date of the notice, which contains a corrective action period not to exceed one year from the date of the notice and which contains steps necessary to achieve substantial compliance with the requirements of title IV-D of the Act; (2) the corrective action plan and any amendments are approved by the Secretary within 30 days of receipt of the plan, or approved automatically because the Secretary took no action within the 30-day period; and (3) the Secretary finds that the plan (or any amendment approved by the Secretary) is being fully implemented by the State and that the State is progressing to achieve substantial compliance with the unmet criteria cited in the notice. The regulations at § 305.98(d) specify that the penalty will remain suspended until the Secretary determines that the State has achieved substantial compliance with the unmet criteria cited in the notice and maintained substantial compliance with any marginally-met criteria cited in the notice, the State is no longer implementing its corrective action plan, or the State has implemented its corrective action plan but has failed to achieve substantial compliance with the unmet criteria cited in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice. In the event that a State fails to meet audit criteria relating to the performance indicators prescribed in § 305.98, the State must meet those criteria as of the first full fiscal year after the corrective action period. This is necessary because these criteria must be measured on a fiscal year basis. If the State achieves substantial compliance within the corrective action period, the State will not be subject to a reduction of its Federal AFDC funds. However, if the State is no longer implementing its corrective action plan or has implemented its corrective action plan but failed to achieve substantial compliance with the unmet criteria cited in the notice, and maintain substantial compliance with any marginally-met criteria cited in the notice, the State will be subject to a reduction of its Federal AFDC funds in accordance with § 305.100. For State plan-related criteria, this determination will be made as of the first full quarter after the end of the corrective action period. For performance-related criteria, this determination will be made as of the first full fiscal year after the corrective action period.

The regulations at § 305.99(e) specify that a corrective action plan disapproved under § 305.99(b) is not subject to appeal. Because the Congress has given the Secretary discretion to determine whether or not to approve a corrective action plan disapproval of a corrective action plan is not subject to appeal.

The regulations at § 305.99(f) specify that only one corrective action period is provided to a State in relation to a given criterion when consecutive findings of noncompliance are made on that criterion.

We believe that any State found to be operating a IV-D program which does not substantially comply with one or more of the requirements in the Act could, with diligent effort, develop and carry out a plan for bringing the program into substantial compliance within the specified period.

Imposition of the Penalty

Previous regulations at 45 CFR 305.50 provided that if, on the basis of the audit, a determination is made that a State does not have an effective program meeting the requirements of section 402(a)(27) of the Act, the State is subject to a five percent reduction of its Federal AFDC funds. Under that provision, a State found not to have an effective IV-D program was subject to the flat percent penalty regardless of whether it was the first or a subsequent occasion that such determination was made.

Under the new statute a State found not to have an effective IV-D program is subject to a penalty only if the State fails to achieve substantial compliance with unmet criteria cited in the notice, or fails to maintain substantial compliance with any marginally-met criteria cited in the notice.

To implement the provision of the amended section 403(h) of the Act regarding the graduated penalty, we have amended § 305.50, Penalty for failure to have an effective Child Support Enforcement program by redesignating the regulation as 305.100, revising paragraph (a), redesignating paragraphs (b) and (c) as (e) and (f) and adding new paragraphs (b), (c) and (d). Section 305.100(a) specifies that if the Secretary determines, on the basis of the results of the audit conducted under Part 305 that a State does not substantially meet the requirements in title IV-D of the Act and failed to achieve substantial compliance with such requirements within the corrective action period approved by the Secretary under § 305.99, payments to the State under title IV-A of the Act must be reduced for the period prescribed in the new § 305.100(c) and (d) by: (1) not less than one nor more than two percent for a period beginning in accordance with paragraph (c) or (d) of this section and not to exceed the one-year period following the end of the suspension period; (2) not less than two nor more than three percent if it is the second consecutive finding made as a result of an audit for a period beginning as of the second one-year period following the suspension period and not to exceed one year; or (3) not less than three nor more than five percent if it is the third or a subsequent consecutive finding as a result of an audit for a period beginning as of the third one-year period following the suspension period.

Under paragraph (b), the penalty will not be applied if the State achieves substantial compliance with the unmet criteria identified in the notice and maintains substantial compliance with any marginally-met criteria cited in the notice within the corrective action period approved by the Secretary under § 305.99. Under paragraph (c), if the penalty suspension ends because the State is no longer implementing the corrective action plan, the penalty will be applied as if the suspension had not occurred. Under paragraph (d), if the penalty suspension ends because the State is implementing its corrective action plan but has failed to achieve substantial compliance with the unmet criteria identified in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice within the corrective action period approved by the Secretary under § 305.99, the penalty will be effective for any quarter that ends after the expiration of the suspension period until the first quarter throughout which the state IV-D program is in substantial compliance with the requirements of title IV-D of the Act.

This is illustrated by the following examples. OCSE conducts an audit of a State Child Support Enforcement program for fiscal year 1984 in the spring of 1985. After reviewing the audit findings, a determination is made that the State did not substantially comply with the requirements of title IV-D of the Act because it did not meet two of the audit criteria prescribed in § 305.20(a)(1). A notice dated July 1, 1985 is sent to the State in accordance with § 305.99. The notice indicates the criteria that resulted in the finding of noncompliance and the criteria that the State only marginally met, indicates that the penalty is in effect, specifies the conditions under which the penalty may be suspended and specifies the conditions that result in termination of suspension of the penalty. The State submits an approved corrective action plan which specifies a 10-month corrective action period (July 1, 1985 through April 30, 1986). After the corrective action period, OCSE conducts a follow-up on the initial audit, to determine whether the State is now in substantial compliance with respect to the criteria identified in the notice. Based on the findings, a determination is made that the State implemented its corrective action plan but failed to achieve substantial compliance with the unmet criteria identified in the notice during the suspension period. The State's Federal AFDC payments will be reduced by not less than one nor more than two percent of such payments from the beginning of the quarter in which the corrective action period expires (in this case, from April 1, 1986) and up to a year from the end of the corrective action period (April 30, 1987).

An audit will be conducted at least once a year in the case of a State that is being penalized. Suppose OCSE conducts a second consecutive audit in May, 1987 and a determination is made that the State has continued to fail to achieve substantial compliance during the audit period with those unmet criteria specified in the initial notice. The State's Federal AFDC payments will be reduced between two and three percent as of May 1, 1987 for a period not to exceed one year.

Suppose OCSE conducts a third consecutive audit in May, 1988. After reviewing the audit findings, a determination is made that the State was in substantial compliance as of August 1, 1987 with the criteria on which it is being penalized. The reduction in Federal AFDC funds will cease as of October 1, 1987. The State's Federal AFDC payments were reduced between two and three percent from May 1, 1987 until October 1, 1987.

Since the penalty would be taken against the AFDC program administered by States under title IV-A of the Act, the Social Security Administration's Office of Family Assistance would assume responsibility for making the appropriate penalty reductions. Revisions to the penalty provisions at 45 CFR 205.146(d) are included in this document to implement amendments to section 403(h) of the Act.

In the second example, OCSE conducts an audit of a State Child Support Enforcement program for fiscal year 1984 in the spring of 1985. After reviewing the audit findings, a determination is made that the State did not substantially comply with the requirements of title IV-D of the Act because it did not meet two of the audit criteria listed in § 305.20(a)(1). The finding also identifies two of the audit criteria listed in § 305.20(a)(2) that the State met only marginally (that is, in 75 to 80 percent of the cases reviewed). A notice dated July 1, 1985 is sent to the State in accordance with § 305.99. The notice lists the criteria that resulted in the finding of noncompliance and the criteria that the State marginally met, indicates that the penalty is in effect, specifies the conditions under which the penalty may be suspended, and specifies the conditions that result in termination of suspension of the penalty The State submits an approved corrective action plan which specifies a 10-month corrective action period (July 1, 1985 through April 30, 1986). After the corrective action period, OCSE conducts a follow-up on the initial audit to determine whether the State is now in substantial compliance with respect to the criteria identified in the notice. Based on the findings, a determination is made that the State implemented its corrective action plan but is not in substantial compliance because, although it met the criteria in the notice that resulted in a finding of noncompliance, it failed to meet the criteria in the notice that it had previously met on a marginal basis. The State's Federal AFDC payments will be reduced by not less than one nor more than two percent of such payments from the beginning of the quarter in which the corrective action period expires (in this case, from April 1, 1986 and up to a year from the end of the corrective action period (April 30, 1987).

OCSE immediately conducts a complete audit of the State Child Support Enforcement program for fiscal year 1985. Based on the findings, a determination is made than the State did not achieve substantial compliance with one of the audit criteria listed in § 305.20(b)(1). A noticed dated July 1, 1985 is sent to the State in accordance with § 305.99. The notice indicates the criterion that resulted in the findings of noncompliance, indicates that the penalty is in effect, specifies the conditions under which the penalty maybe suspended and specifies the conditions that result in termination of suspension of the penalty. After the corrective action period, OCSE conducts an audit to determine whether the State is now in substantial compliance with the one audit criterion listed in § 305.20(b)(1) in the second notice. At the same time, OCSE conducts an audit in accordance with § 305.10(b) to determine whether the State is in substantial compliance with the requirements of title of IV-D of the Act, including the two criteria listed in § 305.20(a)(2) on which it is being penalized. After reviewing the audit findings, a determination is made that the State was in substantial compliance as of November 1, 1986 with the two criteria specified in the initial notice on which it is being penalized. The reduction in Federal AFDC funds will cease as of January 1, 1987. The State's Federal AFDC payments were reduced between one and two percent from April 1, 1986 through December 31, 1986. A determination is subsequently made that the State achieved substantial compliance with respect to the one audit criterion listed in § 305.20(b)(1) in the second notice. The increased penalty due to a subsequent audit findings is not applied.

Application of the Regulations

For program audits for any fiscal year beginning after October 1, 1983, OCSE will: (1) Conduct an audit of the effectiveness of State Child Support Enforcement programs at least once every three years (see § 305.10): (2) use the substantial compliance standard specified in § 305.20 to determine whether each State has an effective IV-D program; (3) provide any State found not to have an effective program in substantial compliance with the requirements of title IV-D of the Act with a corrective action period in accordance with § 305.99; (4) provide for the use of the graduated penalty prescribed in §

305.100; and (5) specify in accordance with § 305.100 the period during which the penalty is to be imposed.

OCSE will use the new audit criteria specified in §§ 305.37 through 305.43 for program audits beginning with the October 1, 1984 through September 30, 1985 audit period. The new audit criteria specified in §§ 305.44 through 305.46, 305.48 through 305.56 and § 305.98(c) will be effective for fiscal years beginning after September 30, 1985. The audit criteria referred to in § 305.47 and § 305.98(d) will be effective for fiscal years beginning after September 30, 1987. OCSE has been conducting financial and statistical systems reviews in the States to determine whether State systems for recording, summarizing and reporting financial and statistical data are reliable in terms of accuracy, completeness and timeliness. Although these audit regulations do not address the review of State financial and statistical systems, OCSE, as part of the audit process, will review these systems during any audit conducted for a period beginning on or after October 1, 1983 to ensure that the data used to determine whether a State meets the performance-related audit criteria are reliable. The States are using these results to take corrective action. OCSE will continue to apply the previous audit regulations to all program audits for fiscal years beginning prior to October 1, 1983.

Technical Changes to 45 CFR Part 305

We have made the following technical changes to the audit and penalty regulations to conform with the revisions discussed above. We have revised § 305.0, Scope, by substituting descriptions of the new § 305.10, § 305.20, § 305.21 through § 305.56, § 305.98 and 305.100 for the descriptions of the current § 305.10, §§ 305.20 through 305.36 and § 305.50. In addition, we added a description of the new § 305.99. We have amended § 305.10, Timing and scope of audit, by making reference to criteria specified in §§ 305.21 through 305.56 and § 305.98 instead of §§ 305.20 through 305.36.

We have also revised § 305.11, audit period, by deleting the description of the first audit period (January 1, 1977 through September 30, 1977) and the reference to an annual audit. Since the first compliance audit has been conducted, it is no longer necessary to describe the first audit period in the regulation. In addition, we have revised § 305.11 to specify that any audit conducted when the State is being penalized under § 305.100 may cover a period of less than one year.

We have revised the title of § 305.20 because the current title "Audit criteria" does not reflect the content of the regulation. We believe that the title "Effective support enforcement program" better reflects the content of the regulation. Previously, OCSE regulations at § 305.20(b) required the IV-D agency to be receiving notice from the IV-A agency pursuant to 45 CFR 235.70 and the State to be obtaining assignment of support rights in accordance with 45 CFR 232.11 in order for the State to be found to have an effective IV-D program. However, the corresponding audit criteria were deleted from 45 CFR Part 305 via final regulations published in the Federal Register (47 FR 24716) on June 8, 1982. Therefore, we have deleted the previous § 305.20(b).

We have amended the audit regulations at 45 CFR 305.24(b) to reflect the requirement in Pub. L. 98-378 that States have in effect procedures for the establishment of paternity for any child at any time prior to the child's 18th birthday. We have also amended the audit regulations at 45 CFR 305.24(c) and

305.25(a)(1) to reflect the requirement in Pub. L. 98-378 that States provide support enforcement services to recipients of foster care maintenance assistance under title IV-E of the Act.

OCSE regulations at 45 CFR 305.33(f) require the States to have and use written procedures for collecting any fees required by 45 CFR 302.35(e). In final regulations published in the Federal Register (48 FR 54554) on November 3, 1981, OCSE moved the fee provision at 45 CFR 302.35(e) to 45 CFR 303.70(e)(2). Therefore, we have amended 45 CFR 305.33(f) to reflect this change.

Previously, OCSE regulations at § 305.34 indicated that OCSE would not audit to determine whether the State has entered into written cooperative agreements with appropriate courts and law enforcement officials when necessary to provide IV-D services. To enable OCSE to audit all requirements under the Act, we have revised §305.34 to permit OCSE to use State plan-related audit criteria to determine whether the State has entered into written cooperative agreements with appropriate courts and law enforcement officials when necessary to provide IV-D services.

45 CFR 305.12 and 305.13 are not amended by these proposed rules.

Public Comment

A notice of proposed rulemaking was published on October 5, 1984 (see 49 FR 39488). The comment period ended on December 4, 1984. In addition, four public hearings were held on the following dates and at the locations listed to obtain the broadest public participation possible: October 10-Chicago; October 12-Dallas; October 15-Seattle; October 17-Washington,

D.C.

We also received 21 written comments from State and local agencies and one from an organization.

Meetings to discuss the proposed regulations were held with the following groups: the National Child Support Enforcement Legislative Committee of the National Child Support Enforcement Association; the National Conference of State Legislatures: the National Governors Association; the National Council of State Child Support Enforcement Administrators; the American Public Welfare Association; the National District Attorneys Association; the National Council of Juvenile and Family Court Judges; and staff of the Senate Committee on Finance and the House of Representatives Committee on Ways and Means.

We have grouped the comments by subject and discuss them below along with our responses.

General Comments

1. Comment: One commenter indicated that the establishment of audit criteria by one branch of HHS will promote the use of multiple audit guides and complicate single concept auditing as prescribed in the "Single Audit Act of 1984." The commenter also indicated that Attachment P of Office of Management and Budget (OMB) Circular A-102 prohibits Federal agencies from imposing additional requirements for audit unless required by Federal law or approved by OMB.

Response: We agree that Attachment P of OMB Circular A-102 prohibited Federal agencies from adding requirements for audit except when added by law or approved by OMB. Title IV-D of the Act requires the Secretary to establish within the Department of Health and Human Services a separate organizational unit under the direction of a designee of the Secretary who shall perform all the functions related to the administration of the Federal Child Support Enforcement program. The statute specifically requires the Secretary's designee to conduct a complete audit of each State IV-D program and determine for the purposes of the penalty provision in title IV-D of the Act whether the actual operation of the program conforms to the requirements of title IV-D of the Act. The audit must be conducted not less often than once every three years or not less often than annually in the case of any State whose Federal Aid to Families with Dependent Children (AFDC) funds are being reduced as the result of an audit finding or which is operating under a corrective action plan. These audits are performed by the Audit Division, OCSE.

Section 9 of Pub. L. 98-378 made several changes to the provisions in titles IV-A and IV-D of the Act which govern the audit of State Child Support Enforcement programs. To implement these changes, we published proposed regulations in the Federal Register on October 5, 1984. The proposed regulations and the final regulations in this document were both approved by OMB.

On October 5, 1984, the President signed into law Pub. L. 98-502, the Single Audit Act of 1984. Under the new law, a State or local government shall have a financial or financial and compliance audit made in accordance with the requirements of the new law and implementing regulations that covers any fiscal year which begins after December 31, 1984 in which it receives $100,000 or more in Federal financial assistance. In addition, a State or local government shall have a financial or financial and compliance audit made in accordance with the requirements of the new law and implementing regulations, or in accordance with the laws and regulations governing the programs it participates in, that covers any fiscal year beginning after December 31,1984 in which it receives an amount equal to or more than $25,000 but less than $100,000 in Federal financial assistance. The new law indicates that an audit conducted in accordance with the requirements of the law shall replace any financial or financial and compliance audit of an individual financial assistance program which a State or local government is required to conduct under any other Federal law or regulations. However, economy and efficiency audits, program results audits and program evaluations are not required to be conducted in accordance with the provisions of the new law. In addition, the new law provides that a Federal agency may conduct any additional audits necessary to carry out its responsibilities under Federal law or regulation. Audits conducted by OCSE to evaluate State IV-D programs in accordance with the regulations in this document are necessary to meet the requirements in titles IV-A and IV-D of the Act. The OCSE audit described in this document is not a financial or financial and compliance audit as described in the new law. The General Accounting Office (GAO) document entitled "Standards for Audit of Governmental Organizations, Programs, Activities and Functions" defines financial and compliance audits, economy and efficiency audits and program results audits. We believe that audits conducted by OCSE in accordance with these final regulations fall within the scope of "program results audits" as defined in the GAO standards. In accordance with the Single Audit Act of 1984, OCSE will, to the extent feasible, rely upon and not duplicate the financial or financial and compliance audit and any other audit conducted in accordance with the new law.

OMB has published a new Circular A-128, "Audits of State and Local Governments", in the Federal Register (50 FR 19114) to implement the Single Audit Act of 1984. The Circular supersedes Attachment P of OMB Circular A-102. HHS is in the process of formally implementing the circular.

2. Comment: One commenter indicated that the audit and penalty provisions of section 9 of Pub. L. 98-378 may be unconstitutional because they have a retroactive effective date.

Response: We believe that the retroactive effective date of section 9 will not make it more difficult for the States to meet the audit standards and that there is no constitutional impediment. Under prior Federal law, OCSE was required to conduct an audit using audit criteria based on IV-D State plan requirements to determine whether a State had an effective IV-D program. For the fiscal year 1984 audit period, OCSE will use the same audit criteria that were used under prior Federal law in determining whether a State has an effective IV-D program. For the fiscal year 1985 audit period, we plan to use seven additional audit criteria to evaluate State IV-D programs because Federal law requires the audit to cover all State plan requirements under title IV-D of the Act. We believe that the new audit criteria are no more stringent than the audit criteria used under prior Federal law because the new criteria are based on corresponding State plan requirements that were in effect as of fiscal year 1983, except the recovery of direct payments provisions that became effective as of the fifth day (October 5, 1982) of fiscal year 1983.

3. Comment: One commenter recommended that, in a county-administered State, the case sample be drawn from at least 75 percent of all local jurisdictions during the audit period because the results are projected as statewide. A second commenter indicated that a probe sample is invalid. Two other commenters indicated that, because we have increased the number of criteria to be reviewed, a large sample of cases will have to he pulled to come up with a statistically significant number of cases for each criterion. Another commenter asked whether cases to be audited will be chosen from those which were active at some point during the audit period. The commenter also asked about the treatment of cases opened near the end of the audit period.

Response: The sampling methodology used by OCSE will provide statistically reliable results for each criterion measured. OCSE agrees that sometimes the case sample will have to be drawn from a number of jurisdictions. However, the precise number of jurisdictions to be selected will vary depending on the circumstances in each State. Representative samples of cases can be selected for review without the necessity of always visiting at least 75 percent of the jurisdictions within States. OCSE believes that the use of an initial probe sample is both valid and appropriate. By probe sample we mean OCSE's current sampling approach in which a small initial sample (the probe sample) of cases is reviewed. If the results of the probe sample indicate that a State meets each audit criterion, no further cases are reviewed. If the results of the probe sample indicate that a State may not meet each audit criterion, then a larger sample of cases is chosen and reviewed. Thus, in many instances, the results of the probe sample will be sufficiently reliable to determine if a State meets each audit criterion. In all instances, the probe sample will enable OCSE to determine when an expanded sample will be necessary and the size of that expanded sample. This will result in a much more efficient use of audit resources without sacrificing validity and reliability. OCSE agrees that as the number of criteria increase the sample may have to be increased in order to ensure there will be a statistically significant number of cases for each criterion.

Beginning with the fiscal year 1984 audit period, the auditors will exclude from the sample cases closed prior to the audit period. Cases improperly referred by the IV-A agency and cases opened near the end of the audit period such that time was insufficient to take an action related to the necessary services during that period will also be excluded. The State will be evaluated on whether it took some action related to the required service on all cases not excluded from the sample.

4. Comment: One commenter asked about the possible conflict between requiring appropriate action on all cases and the regulations that permit case prioritization. Two other commenters suggested that the regulations address and recognize the prioritization procedures in caseload management. Another commenter suggested that cases identified as low priority not result in an audit exception when selected by the auditors for review because they are not representative of the State's normal casework procedures.

Response: OCSE regulations on case management and prioritization offer States a means of enhancing the effectiveness and efficiency of their operations by improving the management of cases. Under those regulations, the State must ensure that no program services (e.g. locating absent parents) required to be performed under the IV-D State plan are systematically excluded by the priorization system. In addition, a State cannot neglect or ignore certain cases or classes of cases. As indicated above, any case selected for audit and not excluded from the sample will be evaluated to determine whether the State took some action during the audit period related to the services needed on the case during that period. A State cannot use case prioritization to justify its failure to take appropriate action on a case beyond the period normally required to take such action.

5. Comment: One commenter asked whether audits are more stringent in States where more data are available.

Response: Each case selected for audit and not excluded from the sample will be reviewed to determine whether the State took action during the audit period to provide the services needed during that period. The auditors will find it easier to determine when an action related to a necessary service was taken in States that maintain detailed case records. Therefore, we believe that these States will be better able to withstand the audit because they have better records.

6. Comment: Several commenters asked about the maintenance of consistency from one audit office to another so that States are evaluated in an equitable manner.

Response: As indicated in the regulations, the auditors will conduct the audits in accordance with the audit standards promulgated by the Comptroller General of the United States in the "Standards for Audits of Governmental Organizations, Programs, Activities, and Functions." In addition, the auditors will conduct the audits using the Program Compliance Audit Guide developed by the OCSE Audit Division. The Audit Guide and audit regulations describe the requirements a State must meet for each audit criterion. The auditors will also prepare their findings in accordance with a uniform compliance audit report format. OCSE staff will visit various audit sites to monitor and evaluate audit activity to ensure consistency and accuracy. Interim audit reports will all be reviewed by the OCSE "Penalty Evaluation Committee." Lastly, OCSE staff will perform a selective quality control review of audit reports to consistency and accuracy.

7. Comment: Several commenters suggested that the audit report indicate the percentage of cases reviewed for each criterion that must be met in 75 percent of the cases reviewed. A commenter also suggested that the audit report should include the percentage of cases reviewed for each criterion that was met marginally, and a plus or minus standard deviation so that States know where they stand.

Response: For each audit criterion covered by the 75 percent standard, the audit report will specify the total number of cases reviewed for the criterion and the number of cases in which the criterion was met. The audit report will take into account the sampling error of the cases reviewed, and will clearly indicate which criteria were not met (that is, needed services were provided in less than 75 percent of the cases reviewed); which criteria were met only marginally (that is, needed services were provided in 75 to 80 percent of the cases reviewed); and which criteria were met in over 80 percent of the cases reviewed.

Frequency of Audit

8. Comment: One commenter suggested that the regulations be revised to specify that if a State, as the result of an audit, is found to be in substantial compliance with the requirements of title IV-D of the Act, the State will not be audited again until all the other States are audited.

Response: Federal law and the implementing audit regulations in this document require OCSE to conduct an audit of State IV-D programs, at least once every three years, to evaluate the effectiveness of the programs and determine whether they meet the requirements of title IV-D of the Act. Under these provisions, OCSE has discretion regarding the frequency of audit during the three-year period and is not prepared to say that under no condition will a State found to be in substantial compliance by an audit be audited again until all other States have been audited. OCSE may perform more frequent audits due to the size of the State, indications that the State may not be operating an effective IV-D program or some other reason.

Substantial Compliance Standard

9. Comment: The preamble to the proposed regulations indicated that current audit regulations do not enable OCSE to fully measure program effectiveness at this time. Several commenters indicated that, because the regulations continue to require the States to meet State plan-related audit criteria, including many additional State plan-related criteria, they still do not adequately measure program effectiveness. The commenters also indicated that the focus in the proposed regulations on "simple compliance with process" is contrary to Federal law and the intent of Congress as expressed in the House and Senate Reports quoted in the proposed regulations. Lastly, the commenters asked how will the new regulations enable HHS to measure program effectiveness better than under prior regulations.

Response: Since 1976, the audit and penalty regulations have included process-oriented audit criteria for determining program effectiveness based on State plan requirements. Federal law requires the audit to cover all of the State plan requirements under title IV-D of the Act. Since the inception of the IV-D program, several mandatory and optional State plan provisions, including provisions added by Pub. L. 98-378, have been added to title IV-D of the Act. We have added new audit criteria based on these State plan provisions. We recognize that the State plan-related audit criteria only measure one aspect of program effectiveness. However, we believe that these audit criteria represent good measures of compliance with State plan provisions. The Senate Report on H.R. 4325 indicates that audits conducted by OCSE should continue to measure compliance with process-related Federal requirements.

The Senate report on H.R. 4325 indicates that the audits must now focus on substantial compliance with both process-related Federal requirements and performance-related indicators. The Senate report in a lengthy discussion encourages the development and use of the performance indicators. Beginning with the fiscal year 1986 audit period, the regulations provide for the use of two performance indicators to measure the cost effectiveness of State IV-D programs and a third indicator to measure the reimbursement rate of assistance payments. Beginning with the fiscal year 1988 audit period, OCSE will use four additional performance indicators based on collection of accounts receivable to evaluate State program effectiveness. We believe that these performance indicators adequately measure program effectiveness. As State programs continue to mature, we will develop and adjust performance indicators to reflect this maturation.

10. Comment: One commenter asked about the Federal course of action when a State is found to be in substantial compliance under the regulations but fails to meet the national standard of 70 on the performance-related criteria.

Response: Beginning with the fiscal year 1986 audit period, the regulations specify that, on the basis of the results of an audit, a State must be found to substantially comply with both State plan-related audit criteria and performance-related audit criteria to be found to have an effective IV-D program. A State's failure to score 70 or above on the performance-related audit criteria will result in an audit finding that the State did not substantially comply with the requirement of title IV-D of the Act which will lead to imposition of the penalty. If the score does not reach 70 by the end of the fiscal year following the fiscal year in which the audit report was issued financial sanctions will be imposed.

11. Comment: One commenter suggested that we permit the waiver of a finding that the State did not substantially comply with the requirements of the title IV-D of the Act when the State can demonstrate that socio-economic factors beyond its control directly influenced its expenditures or collections.

Response: Revised Federal law and regulations do not provide for the waiver of any finding that the State did not substantially comply with the requirements of title IV-D of the Act, regardless of the reason for the finding. We believe that the performance-related criteria the State must meet during the fiscal year 1986 and 1987 audit periods represent the minimum level of acceptable performance at this time. Nonetheless, a State found not to have an effective IV-D program is given the opportunity to take the corrective action necessary to be in substantial compliance with the requirements of title IV-D of the Act prior to the loss of Federal AFDC funds.

12. Comment: Several commenters asked us to explain and provide examples of: "noncompliance of a technical nature." A commenter also asked that we explain the statement: "No failure to meet these criteria may be construed as noncompliance of a technical nature," on page 39491 of the proposed regulations.

Response: Section 403(h) of the Act specifies that a State which is not in full compliance with the requirements of title IV-D of the Act shall be determined to be in substantial compliance only if the Secretary determines that any noncompliance with the requirements is of a technical nature which does not adversely affect the performance of the program.

The regulations require the State to meet both State plan-related audit criteria and performance-related audit criteria to be found to have an effective program in substantial compliance with the requirements of title IV-D of the Act. The substantial compliance provisions do not include all of the State plan-related criteria in 45 CFR Part 305. However, they do cover each of the IV-D State plan requirements prescribed in title IV-D of the Act because Federal law requires the audit to cover all such requirements. The criteria addressed in the substantial compliance provisions also cover IV-D functions and activities that we consider to be essential to an effective IV-D program. The State must meet each criterion. Failure to meet any of these criteria or the performance-related criteria cannot be considered "noncompliance of a technical nature".

The substantial compliance provisions exclude criteria that involves staffing requirements, functions and activities that are covered by other audit criteria, and functions and activities we do not consider to be essential to an effective IV-D program. We consider these criteria to be technical in nature because they do not focus on program results. Although these criteria will be addressed in the audit report, a determination that a State failed to meet one or more of these criteria will not affect whether a State is found to have an effective IV-D program.

13. Comment: Several commenters also listed several State plan-related audit criteria, such as publicizing the availability of support enforcement services and incentive payments to States and political subdivisions, covered by the "substantial compliance" provisions that they suggested be treated as "noncompliance of a technical nature."

Response: Sections 5 and 14 of Pub. L. 98-378 add several new State plan requirements to title IV-D of the Act. Section 5 and the implementing program regulations prescribe the payment of incentive payments to political subdivisions. Section 14 and the implementing program regulation require the States to publicize the availability of support enforcement services. The audit criteria on publicizing the availability of support enforcement services, and payments of incentives to States and political subdivisions are based on the corresponding State plan requirements. We believe that the requirement to publicize the availability of support enforcement services is essential to an effective IV-D program because many families in need of child support are unaware that support enforcement services are available which they can afford. We also believe that the new incentive payment requirements are essential to the development of IV-D programs that emphasize the provision of support enforcement services to both AFDC and non-AFDC families and encourage the participation of political subdivisions in the IV-D program.

14. Comment: One commenter suggested that we delay the use of the seven additional State plan-related criteria we propose to add as of the fiscal year 1985 audit period to give the States time to bring their programs into compliance.

Response: The final regulations retain the seven additional audit criteria because Federal law requires the audit to cover all State plan requirements under title IV-D of the Act. The criteria added beginning in fiscal year 1985 apply only to State plan requirements that were in effect as of fiscal year 1983, except the recovery of direct payments provisions which became effective as of the fifth day (October 5, 1982) of fiscal year 1983. We believe that a delay in using these additional audit criteria is unwarranted because the States should already be meeting the corresponding State plan requirements.

15. Comment: One commenter objected to the provisions in the proposed regulations that require OCSE, beginning with the fiscal year 1986 audit period, to use audit criteria based on procedures that become effective as of that period because it is unrealistic to expect the States to have laws passed and procedures implemented immediately in 75 percent of the cases reviewed. The commenter suggested we postpone auditing these procedures for one year.

Response: Effective October 1, 1985, Pub. L. 98-378 requires the States to have State laws passed and implemented regarding certain mandatory procedures and requirements. However, section 3 of the new law and the implementing regulations at 45 CFR 302.70 permit the Secretary of Health and Human Services (HHS) to exempt a State from having to implement one or more of the mandatory procedures if the State can demonstrate that such procedure or procedures will not improve the effectiveness and efficiency of the State IV-D program. In addition, section 3 of the new law permits the Secretary of HHS to grant a State a delay in implementation of one or more of the mandatory procedures until the beginning of the fourth month beginning after the end of the first session of the State legislature which ends on or after October 1, 1985, if the Secretary determines that a State needs legislation to implement these procedures.

Pub. L. 98-378 gives the States over a year to implement the new State plan requirements with an effective date of October 1, 1985. Therefore, since Pub. L. 98-378 added new State plan requirements with an effective date of October 1, 1985, the audit regulations contain corresponding State plan-related audit criteria that become effective as of the fiscal year 1986 audit period. Nonetheless, OCSE will exclude from the audit of a State's IV-D program any procedure covered by an exemption or delay in implementation granted by the Secretary during the period that such exemption or delayed implementation is in effect.

16. Comment: Several Commenters suggested that, because prior audits indicated that many States were not meeting the audit criteria in 75 percent of the cases reviewed, the regulations should begin with a lower standard with a gradual increase to 75 percent. Several other commenters indicated that the 75 percent standard is too rigorous for the fiscal year 1984 audit period. Several commenters also suggested that, because it is impossible to bring a past period into compliance with rules issued after that period, we postpone use of the 75 percent standard.

Response: Prior to October 1, 1983, effective date of the audit and penalty provisions of section 9 of Pub. L. 98-378, Federal law and the audit regulations required the States to be in full compliance with the requirements of title IV-D of the Act to avoid imposition of a penalty. In addition, OCSE conducted audits and issued audit reports for each of five prior periods. The audits covered the same State plan-related audit criteria during each of these periods. Effective October 1,1983, section 9 of the new law requires the States to be in substantial compliance with the requirements of title IV-D of the Act to avoid imposition of the penalty. Under the implementing audit regulations in this document, a less stringent 75 percent standard is used with respect to certain functional criteria in determining whether the State is in substantial compliance with the requirements of title IV-D of the Act.

17. Comment: One commenter indicated that, because of the large number of cases with arrearages, it is impossible for States to comply with the 75 percent standard for wage withholding during fiscal year 1986. The commenter suggested that we begin with a 25 percent standard for wage withholding in fiscal year 1986 and raise the standard in 25 percent increments until the 75 percent level is reached.

Response: The new law gives the States over a year to implement the wage withholding process. Thus, effective October 1, 1985, the States must initiate the wage withholding process in all cases in which there is a one-month arrearage. Beginning with the fiscal year 1986 audit period, all IV-D cases that require wage withholding will be subject to review under the wage and income withholding audit criteria. Although we agree the implementation will require a major effort on the part of most States, we believe it would be inappropriate to allow the low standards proposed by the commenter since that would effectively result in delaying the legislated implementation date.

18. Comment: Two commenters indicated that the regulations specify the use of both a 75 and an 80 percent standard in evaluating functional criteria.

Response: The regulations indicate that in order to be found in substantial compliance with the requirements of title IV-D of the Act, a State must have and use written procedures in 75 percent of the cases reviewed for each functional criterion. The regulations also indicate that the notice OCSE sends to a State found not to substantially comply with the requirements of title IV-D of the Act will list any audit criteria, including criteria covered by the 75 percent standard, that the State did not meet. The notice also will specify any functional audit criteria that the State met, but only marginally (that is, in 75 to 80 percent of the cases reviewed). Although the audit criteria the State marginally met cannot result in a finding of noncompliance or application of the penalty at the time of notice, the State must, during the corrective action period, maintain substantial compliance in the areas cited in the notice as marginally acceptable to avoid losing funds under the penalty. The regulations require the notice to indicate the functional audit criteria that the State only marginally met because we want to discourage the States from placing less emphasis on the marginal areas in order to improve their performance in areas that resulted in the finding of noncompliance. We encourage the States to improve their performance in all areas addressed in the notice.

19. Comment: One commenter indicated that it would not be appropriate to use audit criteria such as imposition of liens or posting security in 75 percent of all cases. A second commenter indicated that the regulations are unclear as to whether, for example, liens on personal property must be used in 75 percent of all cases with arrearages, be available for use in 75 percent of the cases with arrearages, or be used in 75 percent of the cases where liens are required, by State procedure. A third commenter suggested that, if a determination that an action should not or cannot be taken in a case is properly documented, the case meets the substantial compliance requirements. A fourth commenter asked whether there can be cases in which no action was taken during the audit period, yet this nonaction will be considered as the "appropriate action." Another commenter indicated that it will be difficult to take an appropriate action on 75 percent of its cases without a great increase in personnel. The commenter also asked, if an appropriate action was taken in a prior fiscal year and no action was taken on a case during the audit period, would the case count against the State. Lastly, the commenter asked how often cases should be reviewed to assure appropriate action is taken. Another commenter asked whether a systems review of sources for address and other information on a case constitutes an appropriate action, in a case requiring location of the absent parent.

Response: The regulations specify that the procedures required by certain audit criteria must be used in 75 percent of the cases reviewed for each criterion in order for the State to be found to meet the corresponding IV-D State plan requirements. After the auditors have selected a sample of cases, the cases not excluded will be evaluated by criterion. This is illustrated by the following examples. If a review of the case record for the audit period indicated that action should be taken to establish paternity, the case would be reviewed under the establishing paternity criterion. In a second example, if a review of a case record for the audit period indicated that action should be taken to enforce the support obligation, the case would be reviewed under the enforcement of support obligation criterion. If the audit is for the fiscal year 1986 or a later audit period and the State in accordance with statewide guidelines generally available to the public is required to impose a lien against the real or personal property of the absent parent the case also would be reviewed under the imposition of liens criterion. A case will be reviewed under criteria related to any services (e.g. enforcement of support obligation) that, based on the case record and any statewide guidelines, were necessary during the audit period. Beginning with the fiscal year 1984 audit period, unless the case was closed during a prior audit period, closed during the current audit period and an action related to services was not necessary, improperly referred by the IV-A agency, or opened near the end of the audit period such that time was insufficient to take an action related to necessary services during the period, the State must take some action during the audit related to services necessary during that period. Under this requirement, a State must take action with respect to each criterion under which a case is reviewed. For example, if a case is reviewed under the establishing paternity criterion and the support obligations criterion, the State must take an action related to the services covered by each criterion. However, if time was insufficient to take an action to establish a support obligation before the end of the audit period, the case would be excluded from review under the support obligations criterion.

OCSE leaves to State discretion the determination of action to be taken in a given case in accordance with State guidelines so long as the action is an activity directly related to performing the necessary child support enforcement services during the audit period. We believe that the States should, at least once a year, take some action related to providing the necessary services on each case which is not otherwise excluded. The States should document in the case record any action taken. We encourage the States to obtain whatever resources are necessary to provide IV-D services to all cases in an efficient and effective manner. This includes the development of automated systems and the use of other techniques to improve program operations.

Except as indicated above, the States must take some action on the cases in their caseloads during each audit period (Federal fiscal year). If the State, through use of an automated system, checked one or more sources of locate information for a case that needs location services during the audit period, we believe that would constitute a locate action. In addition, we will count an action taken by a State during the audit period related to necessary services on a case even when the action does not result in successful performance of the service. However, if an action was taken on a case during a prior audit period, but no required action was taken during the audit period, the case would count against the State.

20. Comment: Two commenters suggested that we eliminate from the substantial compliance provisions the need to have written procedures.

Response: OCSE regulations require each State to operate a IV-D program on a statewide basis in accordance with standards for administration that are mandatory throughout the State. Under this requirement, the State must develop written procedures for the performance of each IV-D function and ensure that these procedures are used throughout the State. We believe that the development and use of written procedures helps to ensure that IV-D functions are carried out properly, efficiently, effectively and in a consistent manner in the State.

21. Comment: Two commenters recommended that the cooperative arrangement audit criteria be deleted from the list of criteria States must meet beginning with the fiscal year 1984 audit period because the audit regulation on cooperative arrangements indicates that OCSE will not separately audit cooperative agreements.

Response: Since the audit determines whether each State is in substantial compliance with the requirements of title IV-D of the Act, OCSE will use audit criteria to evaluate State performance separately on each State plan requirement. We believe that the audit criteria based on the State plan requirement on cooperative arrangements should not be deleted, but strengthened to better enable us to evaluate State performance. Therefore, we have revised the audit regulation on cooperative arrangements to permit OCSE to use State plan-related audit criteria to separately determine whether the State has entered into written cooperative agreements with appropriate courts and law enforcement officials when necessary to provide IV-D services.

Audit Criteria Relating to IV-D State Plan Requirements

22. Comment: One commenter asked that we address in the regulations the meaning of the term "written procedures."

Response: The regulations at 45 CFR 305.1(b) define the term "procedures" for purposes of the audit regulations as a written set of instructions which describe in detail the step-by-step actions to be taken by child support enforcement personnel in the performance of specific functions under the State's IV-D plan. The IV-D agency may issue general instructions on one or more functions, and delegate responsibility for the detailed procedures to the office, agency or political subdivision actually performing the function.

23. Comment: One commenter objected to the proposed change to the audit criteria on establishing paternity which requires an acknowledgement of paternity to have the same force and effect as a court finding of paternity because the State has been effectively using voluntary acknowledgements of paternity as the basis for establishing support obligations and State laws does not permit administrative establishment of paternity.

Response: Since the inception of the IV-D program in July 1975, OCSE regulations have required the IV-D agency to: (1) Attempt to establish paternity by court order or other legal process established under State law; or (2) establish paternity by acknowledgement if under State law such acknowledgement has the same legal effect as court-ordered paternity, including the right to benefits other than child support. In December, 1976, OCSE published corresponding audit criteria on this subject that became effective as of the fiscal year 1977 audit period. We are now revising the audit criteria on establishing paternity only to reflect the requirements in Pub. L. 98-378 that States have in effect laws providing for establishing paternity up to the child's 18th birthday. This change is effective as of the fiscal year 1986 audit period.

24. Comment: One commenter recommended that we define the phrase "sparsely populated geographical area" as used in the audit regulation on separation of cash handling and accounting functions so that States know when to apply for a waiver.

Response: The audit regulation on separation of cash handling and accounting functions indicates that the audit criteria do not apply sparsely populated geographical areas within the State if the State is granted a waiver by the Regional Office. The State plan provision on separation of cash handling and accounting functions permits the Regional Office to grant a waiver to sparsely populated geographical areas, where the separation of cash handling and accounting functions requirements would necessitate the hiring of an unreasonable number of additional staff. The IV-D agency must document the administrative infeasibility and provide an alternative system of controls that reasonably ensures that support collections will not be misused. Under this provision, the Regional Office will determine, on a case-by-case basis, whether to grant a waiver based on the current circumstances within the State. We have not defined the phrase "sparsely populated geographical area" because it is not possible to do so in a consistent and fair manner on a national basis. However, since the circumstances in a State often change and may be unique to a particular State, the Regional Office will, on a case-by-case basis, develop criteria for determining what jurisdictions, if any, constitute a "sparsely populated geographical area."

25. Comment: Two commenters suggested that, because the collection of spousal support is an optional State plan provision through fiscal year 1985, the regulations be revised to indicate that spousal support will not be audited until fiscal year 1986.

Response: OCSE will use audit criteria based on optional State plan provisions only in States that have elected to implement the corresponding State plan provision. The audit criteria on spousal support only apply to States for fiscal year 1985 that elect to implement the corresponding State plan provision and will apply to all States effective October 1,1985.

26. Comment: Two commenters recommended that we define the terms "regularly" and "frequently" as used in the audit regulation on publicizing the availability of support enforcement services so that States know what standard they must meet.

Response: The audit criteria on publicizing the availability of support enforcement services is based on a corresponding State plan provision that does not define the terms "regularly" and "frequently" as used in the provision. Since Federal law and the implementing program regulation do not define these terms, the auditors will use the meanings given to these terms in State guidelines and procedures in evaluating State performances based on the audit criteria.

27. Comment: One commenter objected to the regulation on medical support because it indicates that the audit criteria on medical support will become effective immediately upon publication without giving the States any lead time or opportunity to comment on the audit criteria.

Response: OCSE will publish final regulations on medical support and corresponding audit criteria in the same document. The audit criteria will be published as interim final regulations and be used by OCSE to evaluate State IV-D programs as of the first full fiscal year following the date the audit criteria are published. Since the criteria will be published as interim final rules, the public will be given a 60-day period to submit to us, in writing, any comments they have on the criteria. We will review any comments received and determine whether the audit criteria on medical support should be revised.

Performance Indicators

28. Comment Several commenters stated that the indicators established by OCSE to determine the performance of a State are only indicators and should not be used to impose a penalty upon the States. The commenters said that the performance indicators are not actual measures of a State's performance during the audit period because: (1) The performance indicators do not reflect actual collections and expenditures for the year audited; (2)collections made during an audit period do not reflect expenditures incurred during that period and such expenditures result in collections during a subsequent period; (3) the two cost effectiveness performance indicators do not accurately reflect a State's performance in collecting AFDC or non-AFDC payments since non-AFDC expenditures are used in the AFDC indicator and AFDC expenditures are used in the non-AFDC indicator; and (4) the assistance payment factor in the reimbursement rate of assistance payments indicator is out of the control of the IV-D agency. Another commenter indicated that, because the two cost-effectiveness performance indicators each use total IV-D expenditures, they do not account for the difference in State economic demographic and social welfare structures. Lastly, a commenter indicated that the reimbursement rate of assistance payments performance indicator is not consistent with the provision in Federal law which requires the Director, OCSE, to establish standards to assure that State programs are effective because factors controlling IV-A assistance payments are not standardized.

Response: Federal law gives OCSE flexibility regarding the criteria that are used to determine whether the State has an effective IV-D program in substantial compliance with the requirements of title IV-D of the Act and the Congress has urged OCSE to measure performance. The two cost-effectiveness indicators and the reimbursement rate of assistance payments indicator we plan to use beginning with the fiscal year 1986 audit period are based on data the States currently collect and report to OCSE. The four accounts receivable performance indicators we plan to use beginning with the fiscal year 1988 audit period are based on data the States will collect and report to OCSE as of fiscal year 1986. We recognize that these performance indicators do not address all aspects of the IV-D program. We are not proposing performance indicators that address all IV-D functions at this time because many of the States cannot easily collect and maintain the data necessary to use performance indicators other than the indicators we are proposing. As State data collection systems and techniques improve and we evaluate results from research projects currently underway, we intend to propose additional performance indicators.

We believe that adjustments to collection and expenditure data are cyclical in nature and even out over a period of time. States can keep adjustments to a minimum by submitting full and complete reports to OCSE in a timely manner. Under OCSE policy, any adjustment to collection or expenditure data for any prior period is combined with current quarter collection or expenditure data reported to OCSE. Departmental regulations limit adjustments to expenditures for a quarter to a two year period which ends 2 years following the quarter in which the expenditure was made. We recognize that some portion of collections made during an audit period may result from expenditures made during a prior audit period and that expenditures made during an audit period are likely to result in recurring or some non-recurring collections during subsequent periods. Nonetheless, we believe that the States would find it difficult and expensive to collect and maintain the data necessary to compare a given collection to the amounts actually expended to make the collection.

We believe that the two cost-effectiveness performance indicators measure as well as possible the cost-effectiveness of State IV-D programs. Presently, because of State accounting systems and State reporting requirements, we cannot obtain a precise allocation of expenditures between the AFDC and non-AFDC portions of the IV-D program. Our only meaningful expenditure data are for total expenditures. We encourage the States to develop cost accounting systems for allocating expenditures between the AFDC and non-AFDC portions of the IV-D program. We will revise the performance indicators to replace total expenditures with AFDC and non-AFDC expenditures once States are reporting their data to us in an accurate manner. The collection of support to reimburse assistance payments made to the family is one of the primary objectives of the IV-D program. Although the size of the AFDC grant made to the family is not under the control of the IV-D agency, we have in-house statistical evidence that performance on the reimbursement rate of assistance payments performance indicator is not related to the size of the AFDC grant. Therefore, we believe that the reimbursement rate of assistance payments performance indicator is consistent with the provision in Federal law that requires the Director, OCSE, to establish standards to assure that State programs are effective, and that high AFDC grant States will not be systematically prejudiced.

We recognize that there are differences in AFDC caseload size from State to State, however, the reimbursement rate of assistance payments performance indicator measures a rate of recoupment and we expect that State IV-D agencies will commit resources commensurate to work requirements.

29. Comment: One commenter asked us to specify how the cost-effectiveness indicators and reimbursement rate of assistance payments indicator will be used in fiscal years 1986 and 1987.

Response: The regulations specify the procedures and criteria OCSE will use to evaluate State performance according to the two cost-effectiveness indicators and the reimbursement rate of assistance payments indicator in fiscal years 1986 and 1987. The procedures and criteria include using a 100-point scoring system that gives equal weight to the AFDC and non-AFDC components of the IV-D program, combining the scores on each performance indicator into a single composite score for each State and using a single national standard by which to assess program performance.

30. Comment: One commenter suggested that the regulations be revised to specify that the first $50 of support collected in public assistance cases will be reported as AFDC collections.

Response: Section 2640 of Pub. L. 98-369, the Deficit Reduction Act of 1984, amended titles IV-A and IV-D of the Act to require that the first $50 of support collected periodically for AFDC recipients which represents monthly support payments be paid to the family. Since these payments come out of AFDC IV-D collections, they are treated and reported as AFDC IV-D collections. We will amend the "Quarterly

Report of Collections" to clearly indicate this. The two AFDC-related performance indicators each include AFDC IV-D collections as a variable. The indicators will include all amounts reported on the "Quarterly Report of Collections" as AFDC IV-D collections.

31. Comment: One commenter asked us to specify how the cost-effectiveness indicators treat expenditures incurred and collections made in interstate cases.

Response: The "Quarterly Report of Collections" and reporting instructions describe what constitutes AFDC IV-D collections and non-AFDC IV-D collections.. The "Financial Status Report" used by the States to submit expenditures to OCSE and reporting instructions describe what constitutes IV-D expenditures. In evaluating State performance based on the cost-effectiveness indicators, OCSE will use these instructions.

32. Comment: One commenter suggested that the cost effectiveness performance indicators be revised to exclude from IV-D expenditures systems development cost, interstate grant project costs and laboratory costs for determining paternity.

Response: The cost-effectiveness performance indicators are the same ratios OCSE will use in computing incentive payments to States beginning in fiscal year 1986. Under the new incentive payment regulations, the States may exclude laboratory costs from total IV-D expenditures. However the States cannot exclude systems development, interstate project, or any other costs from total IV-D expenditures for purposes of computing State incentive payments in accordance with section 5 of Pub. L. 96-378 and the implementing incentive payment regulations. Since the cost-effectiveness performance indicators are identical to the cost-effectiveness ratios used in the new incentive payment system, we believe that the cost-effectiveness performance indicators can only be revised to exclude laboratory costs for determining paternity. Therefore, we have revised the denominator of these performance indicators to exclude laboratory costs from total IV-D expenditures if the State computes and reports such costs to OCSE.

33. Comment: One commenter suggested that, because the high costs associated with establishing paternity may skew the results of dollars collected to dollars spent on a paternity case, the cost-effectiveness performance indicators should be "weighted" to allow for increased effort and costs in paternity cases.

Response: The Center for Health and Social Service Research, Inc., is studying the costs and benefits of establishing paternity under a grant awarded by OCSE. The project involves the development of a model for assessing the costs and benefits of paternity establishment systems and applying the model to systems in several jurisdictions. After we have received and evaluated the final report on this project, we intend to propose additional performance indicators for measuring the establishment of paternity. We also will determine whether the cost

effectiveness performance indicators should be "weighted" as suggested by the commenter. In the interim, the optional deletion of laboratory costs for establishing paternity from the denominator of the cost effectiveness performance indicators should help to minimize any skewing of the scores on these indicators.

34. Comment: One commenter indicated that the cost effectiveness performance indicators are unfair to high cost-of-living States because these States have high administrative costs and find it difficult to obtain high support orders.

Response: We are not aware of any data that supports or refutes the commenter's position that the cost-effective performance indicators are unfair to high cost-of-living States. Nonetheless, we believe that the cost-effectiveness performance indicators measure as well as possible the cost effectiveness of State IV-D programs.

35. Comment: One commenter indicated that the cost effectiveness performance indicator that measures the non-AFDC aspect of the IV-D program favors States where all non-AFDC child support payments are funneled through the IV-D agency.

Response: We do not believe that the non-AFDC cost effectiveness performance indicator favors States that funnel all non-AFDC support payments through the IV-D agency because there is a maximum performance score on the non-AFDC performance indicator that can be obtained by States even when they do not funnel all non-AFDC payments through the IV-D agency. In determining the use of the performance indicators to evaluate State IV-D programs, we focused on identifying a system that would ensure that the AFDC and non-AFDC portions of the IV-D program be given equal weight. This is consistent with the House and Senate reports on H.R. 4325 which encourage States to develop and improve both the AFDC and non-AFDC portions of the IV-D program. Under the system we adopted, the ratios of the three performance indicators we will use during fiscal years 1986 and 1987 will be evaluated on the basis of a 100-point scoring system. A maximum of 50 points can be scored on the two AFDC-related performance indicators (25 points for each indicator). Similarly, a maximum of 50 points can be achieved on the single non-AFDC performance indicator. To meet the audit criteria, a State's total score must equal or exceed 70.

36. Comment: One commenter objected to the reimbursement rate of assistance payments performance indicator because it does not account for the differences in State IV-A assistance payment levels. A second commenter objected to this indicator because it requires high grant States to maintain higher AFDC collections than low grant States to avoid a penalty.

Response: OCSE conducted a statistical analysis to determine whether the reimbursement rate of assistance payments performance indicator favors low grant States over high grant States. We determined that there is no correlation between the grant amount and the ability to perform well on the reimbursement rate of assistance payments performance indicator.

In discussing the mission of the Child Support Enforcement program, the House and Senate reports on H.R. 4325 indicate that one basic objective of the Child Support Enforcement program is the collection of support to reimburse assistance payments made to the family. This is consistent with Federal distribution requirements which provide for using support collections made with respect to AFDC recipients to reimburse both the State and Federal share of the current assistance payment. We believe that the use of the reimbursement rate of assistance payments performance indicator will help to focus attention on the recovery of assistance payments.

37. Comment: One commenter indicated that States with a level of performance higher than seven on the reimbursement rate of assistance payments performance indicator should receive a higher score than States with a level of performance of seven on the performance indicator.

Response: We believe that giving States with a level of performance higher than seven on the reimbursement rate of assistance payments performance indicator a score higher than States with a level of performance of seven on the performance indicator will encourage the States to place less emphasis on certain other aspects of the IV-D program so that they can improve program activity related to one specific performance indicator. We want to encourage the States to place equal emphasis on the AFDC and non-AFDC aspects of the IV-D program. We believe that the scoring system OCSE has developed to evaluate the ratios of the three performance indicators we will use during fiscal year 1986 and 1987 are consistent with this approach.

38. Comment: One commenter asked us to better define the phrase "less payments to unemployed parents" as used in the performance indicator regarding reimbursement rate of assistance payments.

Response: The States are required to submit assistance payments data to OFA on the "Quarterly Statement of Expenditures". This report includes a monthly breakout of assistance payments made to the family due to an unemployed parent when a State has elected the optional unemployed parents program. The report contains a brief description of these payments, which will be used in excluding assistance payments under the reimbursement rate of assistance payments performance indicator.

39. Comment: Several commenters indicated that the IV-A assistance payments variable in the reimbursement rate of assistance payments indicator should be revised to exclude assistance payments made to families due to the death or disability of one or more parents.

Response: OFA does not require the States to prepare and report the amount of IV-A assistance payments paid to families because of the death or disability of one or more parents. Since the States do not report data on death or disability-related assistance payments we are unable to revise the performance indicator to exclude such payments.

40. Comment: One commenter asked whether we can justify the cost and effort required to produce, maintain and report the data necessary to use the accounts receivable performance indicators. A second commenter suggested that we accelerate the use and place greater emphasis on the accounts receivable performance indicators because they constitute a valid measure of IV-D program effectiveness.

Response: Since the collection of support on behalf of welfare and non-welfare families is a fundamental aspect of the IV-D program, we believe that State collection activity should be considered in determining whether a State has an effective IV-D program. Therefore, the regulations contain four accounts receivable performance indicators OCSE will use to evaluate the collection of support as of fiscal year 1988. We believe that the cost and effort required to produce, maintain and report the data necessary to use the accounts receivable performance indicators will be justified because the use of these indicators will help to focus attention on State collection activity.

The regulations also indicate that, beginning in fiscal year 1987, OCSE will describe and update in regulation once every two years the scoring system to be used during the following two years to evaluate State performance according to the accounts receivable and other performance indicators in effect. We plan to place significant emphasis on the accounts receivable performance indicators in the scoring system because they constitute a valid measure of IV-D program effectiveness. However, we believe that the accounts receivable performance indicators should not be over-emphasized because they measure only one aspect of the IV-D program.

Beginning with fiscal year 1986, section 13 of Pub. L. 98-378 requires the Secretary to report to Congress for each fiscal year the data necessary to compute the accounts receivable performance indicators. OCSE is developing a financial and statistical report the States will use to report accounts receivable and other data to OCSE as of fiscal year 1986. Since the States do not currently report to OCSE all the data necessary to compute the accounts receivable performance indicators, we believe that it would be unreasonable to accelerate the use of these indicators. Therefore, the indicators will not be effective until October 1, 1987 (fiscal year 1988), so that States will have sufficient time to prepare and report the necessary data in an accurate manner.

41. Comment: One commenter requested clarification regarding the fiscal years to be audited using the accounts receivable performance indicators.

Response: Beginning with the fiscal year 1988 audit period, OCSE will use the four accounts receivable performance indicators in determining whether each State has an effective IV-D program. The indicators OCSE will use to measure collection activity during the audit period are ratios designating either AFDC or non-AFDC collections on support due (for a fiscal year) as the numerator and either total AFDC or non-AFDC support due (for the same fiscal year) as the denominator. The indicators OCSE will use to measure collection activity prior to the audit period are ratios designating either AFDC or non-AFDC collections on support due (for prior periods) as the numerator and either total AFDC or non-AFDC support due (for the same periods) as the denominator. These indicators will include all AFDC and non-AFDC support due prior to the audit period and all AFDC and non-AFDC collections on support due prior to the audit period.

42. Comment: One commenter asked about the meaning of the phrase "support due" as used in the accounts receivable performance indicators that become effective as of the fiscal year 1988 audit period.

Response: The phrase "support due" as used in the accounts receivable performance indicators means the amount of money which is to be paid on a regular basis by an absent parent or other legally responsible individual for the support of a child, or spouse or former spouse living with a child receiving IV-D services. This amount must be established by a court order, voluntary agreement (when such agreement is legally enforceable), or other legal process.

Audit Criteria Relating to Performance Indicators

43. Comment: One commenter indicated that the performance indicators should be geared to results attainable by all States. A second commenter indicated that a review of the table in the proposed regulations shows that over half of the States could fail to meet the national standard of 70. Another commenter recommended that we lower the score a State must equal or exceed to be found to meet the performance-related criteria because the table in the preamble of the proposed regulations shows that five of the top seven States in population do not meet the minimum score of 70 and a sixth State has a score of 72.

Response: Beginning with the fiscal year 1986 audit period, we will use three performance indicators to evaluate State IV-D programs. We will combine each State's scores on the performance indicators into a single composite score for the State and use a single national standard to assess program performance. We believe that the single national standard in the regulations is attainable by all States because it is not a floating standard dependent on other States' performance, but a fixed standard. In addition, the State scores included in the table in the proposed regulations are based on fiscal year 1983 data. Since OCSE will not use the three performance indicators addressed in the table and related standard score of 70 to evaluate State IV-D programs until the fiscal year 1986 audit period, we expect significant improvement in State scores by that fiscal year. We believe that achievement of a score of 70 on the three performance indicators represents the minimum level of acceptable performance at this time. We also believe that all States have the ability to achieve a score of 70 on the performance indicators regardless of their size.

44. Comment: One commenter indicated that State IV-D agencies need notice of the change in the scoring system at least two full years prior to the effective date of the change to make necessary adjustments to their programs.

Response: The regulations specify that, as of the fiscal year 1984 audit period, OCSE will evaluate State performance according to seven performance indicators on the basis of a scoring system that will be described and updated in regulation at lease once every two years beginning in fiscal year 1987. We believe that any scoring system prescribed in regulation will include a standard that is attainable by all States. We plan to involve the State IV-D Directors in the development of changes to the scoring system. Other interested parties will also be given an opportunity to comment on the proposed changes prior to any final publication of changes in the Federal Register. Lastly we will publish any changes to the scoring system as a proposed rule with a 60-day comment period to give the public an opportunity to submit to us, in writing, any comments they have on this subject. Therefore, the States should have sufficient time to make any adjustments necessary to meet any standard prescribed in a scoring system.

Because the scoring system will be revised once every two years beginning in fiscal year 1987, one commenter asked whether a State found not to meet the performance-related audit criteria will be evaluated after the corrective action period according to the standard in effect during the period covered by the initial audit or the standard in effect during the period covered by the follow-up audit.

A State found not to meet performance-related audit criteria during an audit period will be evaluated after the corrective action period according to the performance-related standard in effect during the period covered by the initial audit and the performance-related standard in effect during the follow-up audit period. If a State is found to meet the performance-related standard in effect during the initial audit period, the State would be in substantial compliance with that standard. If the State fails to meet the performance-related standard in effect during the initial audit period, but meets the performance-related standard in effect during the follow-up audit period, the State would be considered in substantial compliance with the performance-related standard in effect during the initial audit period. If the State fails to meet either standard, the State's total Federal AFDC funds will be reduced in accordance with the regulations.

45. Comment: One commenter suggested that we specify in the regulations the criteria for measuring performance based on the accounts receivable performance indicators.

Response: The regulations indicate that, beginning with the fiscal year 1988 audit period, OCSE will use the accounts receivable performance indicators in determining whether each State has an effect IV-D program. The regulations also indicate that, once every two years beginning in fiscal year 1987, OCSE will describe and update in regulation the scoring system for evaluating State performance according to the cost-effectiveness, reimbursement rate of assistance payments and accounts receivable performance indicators, and any other performance indicators in effect.

Notice and Corrective Action Period

46. Comment: One commenter asked us to define the term "marginal" as used in the regulations.

Response: In describing the content of the notice to a State found not to substantially comply with the requirements of title IV-D of the Act, the regulations indicate that the functional State plan-related audit criteria the State met only marginally refers to audit criteria the State met in 75 to 80 percent of the cases reviewed.

47. Comment: Several commenters indicated that, because some States will not be able to take corrective action within the maximum one-year corrective action period due to the need for staff, or to revise State law, the regulations should be revised to specify that the State and OCSE will jointly determine the corrective action period. Several other commenters suggested that the regulations be revised to provide for a longer corrective action period when the necessary corrective action (e.g. development of an automated system) is likely to take more than one year. A commenter also pointed out that the regulations provide for a corrective action period of significantly less than one-year when the State fails to meet audit criteria related to the performance indicators.

Response: Federal law permits the Secretary to specify the length of the corrective action period. We believe that a one-year corrective action period is reasonable because the interim and final audit reports inform each State of its deficiencies before the State receives a notice from OCSE regarding the Secretary's finding that the State did not substantially comply with the requirements of title IV-D of the Act. In addition, under prior Federal law and implementing audit regulations, OCSE conducted audits and issued audit reports for five prior periods. The reports identified many of the deficiencies in State IV-D programs. Also, OCSE has been conducting financial and statistical system reviews in the States to determine whether State systems for recording, summarizing and reporting financial and statistical data are reliable in terms of accuracy, completeness, and timeliness. As of April 19, 1985, OCSE has conducted systems reviews in 53 States and jurisdictions and issued 44 final audit reports. The States are using these results to take corrective action. To enable OCSE to provide any State with up to one-year corrective action period. we have revised the regulations to specify that the corrective action period granted to the State will not exceed one year from the date of the notice. Thus, a State can receive a corrective action period of up to one year when the State fails to meet State plan-related audit criteria and/or performance-related audit criteria.

48. Comment: Several commenters indicated that, because audits are often conducted six months or more after the end of the audit period, the suspension period for a State that failed to meet audit criteria related to performance indicators will be over or significantly less than a year by the time the State gets a notice.

Response: Consistent with the change discussed above, we have revised the regulations to specify what when a State fails to meet audit criteria the penalty may be suspended for a period not to exceed one year from the date of the notice. This provision applies when the State fails to meet State plan-related audit criteria and/or performance related audit criteria.

49. Comment: Two commenters asked whether the corrective action plan might include making adjustments or corrections to a financial report, such as including collections or expenditures that occurred during the fiscal year, but were not reported, because local jurisdictions did not submit them in time.

Response: The corrective action plan cannot include making any adjustments or corrections to a financial report for a prior period. The regulations specify that the corrective action plan must contain the steps necessary to achieve substantial compliance with the requirements of title IV-D of the Act. The State will use the plan as a guide in working toward the achievement of substantial compliance with the unmet audit criteria as of the end of the corrective action period. If a notice of noncompliance to a State indicates that the State failed to meet the audit criteria on reports and maintenance of records because the State does not submit complete financial reports to OCSE, the State should include in its corrective action plan the steps necessary to insure that financial reports submitted to OCSE as of the end of the corrective action period are complete, and that future financial reports will be complete.

50. Comment: Several commenters recommended that the regulations be revised to permit States to amend and resubmit disapproved corrective action plans. Several commenters also recommended that OCSE assist the States in developing the corrective action plan.

Response: We believe that 60 days after being notified of noncompliance is sufficient time to develop an approvable corrective action plan. During this period, there will be time for consultation, if desired, with OCSE. We expect that States will submit approvable corrective action plans by showing a constructive approach to corrective action.

51. Comment: One commenter indicated that the regulations do not specify what happens if OCSE disapproves a corrective action plan.

Response: The regulations specify that if a State is found by the Secretary, on the basis of the results of an audit conducted under the regulations, not to comply substantially with the requirements of title IV-D of the Act, OCSE will notify the State in writing of such finding. The regulations require the notice to cite the State for noncompliance, list the unmet audit criteria, apply the penalty and give the reasons for the Secretary's finding. The notice also must specify the conditions under which the penalty will be suspended for a specified period of time. These conditions include the approval of a corrective-action plan. Therefore, if the Secretary disapproves a corrective action plan, the penalty will be imposed as of the date of the notice of noncompliance to the State.

Review Following Corrective Action period

52. Comment: Two commenters asked about the scope of the review following the corrective action period. One commenter also asked when a finding of noncompliance and imposition of the penalty would occur as a result of the review.

Response: The regulations indicate that the review following the corrective action period will cover only the audit criteria specified in the notice of noncompliance to the State. The notice of noncompliance will specify any audit criteria the State failed to meet and any functional criteria that the State met only marginally. Federal AFDC payments will be reduced by not less than one nor more than two percent. The reduction will not exceed the one-year period following the end of the suspension period. The penalty will be increased to not less than two nor more than three percent of a State's Federal AFDC funds if the second consecutive finding as the result of an audit indicates that the State did not achieve substantial compliance with the same criterion or criteria. If the third consecutive audit indicates that the State still did not achieve substantial compliance with the same criterion or criteria, the penalty will be increased to not less than three nor more than five percent of a State's Federal AFDC funds.

Imposition of the Penalty

53. Comment: One commenter indicated that since the IV-A and IV-D programs are required to be single and separate, it seems inappropriate to penalize IV-A program for an ineffective IV-D program. A second commenter indicated that the penalty should be applied to the State's AFDC administrative funds, or more appropriately to the quarterly grant award for the IV-D program.

Response: Previous Federal law and regulations provided that, if on the basis of the audit a determination is made that a State does not have an effective IV-D program meeting the requirements of title IV-D of the Act, the State was subject to a five percent reduction of its Federal AFDC funds. Under current Federal law and regulations, if on the basis of the results of an audit the Secretary finds that the State's IV-D program does not comply substantially with the requirements of title IV-D of the Act, and the State fails to correct cited deficiencies or falls out of compliance in a marginal area listed in the notice, total payments to the State under title IV-A of the Act will be reduced by not less than one nor more than five percent of a State's Federal AFDC funds in accordance with the regulations. Federal law and regulations do not authorize any reduction in payments under title IV-D of the Act when a State found by the Secretary not to substantially comply with the requirements of title IV-D of the Act fails to correct cited deficiencies or falls out of compliance in a marginal area.

54. Comment: One commenter asked us to specify how we will determine the percentage of the penalty imposed against a State. A second commenter asked us to develop standardized criteria for setting the penalty. A third commenter inquired as to how the States can determine the percentage of the penalty. The commenter also asked that we specify how we assure that the penalty is applied consistently among the States.

Response: OCSE will determine the penalty imposed on any State found not to substantially comply with the requirements of the title IV-D of the Act based on the gravity of the substantial compliance problems identified in the audit report and limited by the ranges prescribed in Federal law. The notice OCSE will send to any State found not to substantially comply with the requirements of title IV-D of the Act will specify the percentage of the penalty and the basis for setting the specific percentage. Penalties will be imposed on a consistent basis.

55. Comment: One commenter suggested that, because it is difficult to determine whether the 75-percent standard is reasonable for the first year covered by the new substantial compliance audit, the fiscal year 1984 audit should be a trial audit without the imposition of penalties. Because the audit criteria and 75-percent standard were not published until after the fiscal year 1984 audit period, a second commenter suggested that the regulations be revised to specify that the penalty is effective for quarters beginning after September 30, 1984. Another commenter suggested that the penalty be waived until at least the fiscal year 1986 audit period so that the State has adequate time to eliminate its case backlog.

Response: Prior to the October 1,1983 effective date of the audit and penalty provisions of the new law, Federal law and the audit regulations required the States to be in full compliance with the requirements of title IV-D of the Act to avoid imposition of a penalty. In addition, OCSE conducted audits and issued audit reports for each of five prior periods. The audits covered the same State plan-related audit criteria during each of these periods and identified many of the deficiencies in State IV-D programs. The new law requires the use of a substantial compliance standard to determine whether each State has an effective Child Support Enforcement program and a graduated penalty of not less than one nor more than five percent of a State's Federal AFDC funds if a State is not in substantial compliance with title IV-D of the Act. We believe that the new standard is attainable by all States. The new law is effective for audit periods beginning on and after October 1,1983. There is no waiver provision under the law.

56. Comment: One commenter asked us to clarify in the regulations whether the penalty increases when there is a consecutive finding of an audit exception, including marginally met criteria, that fall below the 75-percent standard, or when any new audit exception is found after a State is in penalty status.

Response: The penalty increases only if the second or third consecutive finding as the result of an audit indicates that a State did not achieve substantial compliance with the same criterion or criteria, including marginal criteria, that fall below the 75-percent standard. We have revised the regulations to clarify this matter.

Technical Changes From Proposed Regulations

In addition to the changes discussed above, we have made several editorial changes to the proposed regulations to correct typographical errors, simplify complex sentences and simplify adding new sections to Part 305 in the future. Some State plan-related audit criteria have been changed to reflect changes in State plan requirements as a result of the publication of final regulations implementing sections of Pub. L. 98-378.

Paperwork Reduction Act

The regulations contain information collection requirements which are subject to OMB approval under the Paperwork Reduction Act of 1980 (Pub. L. 96-511). The public is not required to comply with the information collection requirements until OMB approves then under section 3507 of the Paperwork Reduction Act. Comments regarding the information collection requirements should be directed to the Office of Information and Regulatory Affairs, OMB, New Executive Office Building (Room 3208), Washington, DC., 20503, Attention: Desk Officer for HHS. A notice will be published in the Federal Register when OMB approval is obtained. The collection, expenditure and assistance payment reports referred to in this document have been reviewed and approved by OMB under the following approval numbers:

1. OCSE-34 (Quarterly Report of Collections) 0960-0235.

2. OCSE-41 (Quarterly Report of Expenditures) 0960-0235.

3. SSA-41 (Quarterly Report of Expenditures) 0960-0294.

OCSE is developing a financial and statistical report that will include data necessary to compute the performance indicators regarding collection activity and will be submitted for OMB approval in sufficient time to allow implementation consistent with the requirements of the rule.

Regulatory Impact Analysis

The Secretary has determined, in accordance with Executive Order 12291, that this rule does not constitute a "major" rule. A major is one that is likely to result in:

-An annual impact on the economy of $100 million or more;

-A major increase in cost or prices for consumers individual industries, Federal, State or local government agencies, or geographical regions; or

-Significant adverse effects on competition, employment, investment, productivity, innovation, or on the ability of the United States-based enterprises to compete with foreign-based enterprises in domestic or import markets.

These regulations amend the OCSE audit regulations to: (1) Require OCSE to conduct an audit of the effectiveness of State Child Support Enforcement programs at least once every three years; (2) require OCSE to use a "substantial compliance" standard to determine whether each State has an effective IV-D program; (3) provide that any state found not to have an effective IV-D program in substantial compliance with the requirements of Title IV-D of the Act be given an opportunity to take the corrective action necessary to be in substantial compliance with those requirements; (4) provide for the use of a graduated penalty of not more than five percent of a State's Federal AFDC funds; and (5) specify the period of time during which a penalty is effective. These changes are a direct result of the statute.

In order to be found to have an effective program in substantial compliance with the requirements of title IV-D of the Act, a State must, beginning with the fiscal year 1984 audit period, meet audit criteria listed in § 305.20. If a State is found by the Secretary, on the basis of the results of an audit, not to comply substantially with the requirements of title IV-D of the Act, OCSE will notify the State that the penalty may be suspended for a period of time not to exceed one year from the date of the notice, to allow the State to take corrective action. If a State fails to take the corrective action necessary to achieve substantial compliance during the period prescribed in the notice, Federal AFDC funds to the State will be reduced in an amount not to exceed five percent until the first quarter throughout which the State IV-D program is found to substantially comply with the requirements of title IV-D of the Act.

The regulations may save some States funds they otherwise might have lost because a "substantial compliance standard and corrective action period are used rather than the "full compliance" standard in determining whether a State meets the IV-D State plan requirements already addressed in the audit regulations. However, the penalty under prior law was never assessed. Nonetheless, the new regulations may cost the States money because they are more workable and enforceable than prior regulations. Audit results will depend on State performance. If State performance improves in response to this audit system, States (as well as the Federal government) would save money due to increased collections and decreased administrative costs. We therefore have no basis for projecting either net costs or savings to States.

These regulations also include performance indicators for evaluating State IV-D programs and new audit criteria related to the performance indicators that together will be used to assess State program effectiveness. The seven performance indicators in the regulations are designed to show: (1) The cost effectiveness of a State IV-D program; (2) the amount of IV-A assistance payments reimbursed by IV-D collections; and (3) the amount of support collected on the amount of support due for a fiscal year and the period prior to a fiscal year. The three indicators that will enable us to determine the cost effectiveness of State IV-D programs and the reimbursement rate for payments made to AFDC recipients will be effective as of the fiscal year 1986 audit period. The four performance indicators that will enable us to evaluate State collection activity will be effective as of the fiscal year 1986 audit period. To determine whether a State meets the performance-related criteria, its performance will be compared to the standard as described earlier.

Finally, these regulations include audit criteria based on IV-D State plan requirements, including criteria based on the Child Support Enforcement Amendments of 1984, that will be used to assess State program effectiveness. These criteria are similar to the criteria already in the regulations for other State plan requirements. The criteria prescribed in §§ 305.37 through 305.43 will be effective as of the fiscal year 1985 audit period. The criteria prescribed in § 305.44 through 305.56 will be effective as of the fiscal year 1986 audit period.

Under these regulations, a State must have an effective program in substantial compliance with the IV-D State plan requirements as measured by the audit criteria listed and referred to in § 305.20 in effect for the audit period to avoid reduction of its Federal AFDC funds. We cannot estimate the number of States that may avoid losing AFDC funds because a "substantial compliance" standard and corrective action period were used rather than the "full compliance" standard in determining whether a State meets the current IV-D State plan requirements. In addition, we cannot estimate the number of States that may lose AFDC funds because they failed to meet the new State plan-related audit criteria.

Beginning with the fiscal year 1988 audit period, we will compare 1988 State performance to a new national standard in determining whether a State meets the performance-related criteria. Again, we do not have data sufficient to allow us to estimate the number of States that could lose AFDC funds because they failed to meet the new national standard.

These regulations could result in minor increases in Federal and State administrative costs. The States will not be required to perform any new program functions. Thus, additional Federal/State costs of conducting audits will be limited to the area of documenting State performance using criteria based on new IV-D State plan requirements and performance indicators for evaluating program effectiveness.

The Secretary certifies, under 5 U.S.C. 605(b), as enacted by the Regulatory Flexibility Act (P.L. 96-354), that these regulations will not result in a significant impact on a substantial number of small entities because they primarily affect Federal and State governments.

List of subjects

45 CFR Part 205

Administrative practice and procedure, Aid to families with dependent children, Family assistance office, Grant programs/social programs, Public assistance programs, Reporting and recordkeeping requirements.

45 CFR Part 305

Child welfare, Grant programs/social programs, Accounting.

For the reasons discussed above, 45 CFR 205.146 is amended as follows.

PART 205[AMENDED]

1. The authority citation for Part 205 continues to read as follows:

Authority: Sec. 1102, 49 Stat. 647; 42 U.S.C. 1302, unless otherwise noted.

2. Section 205.146 is amended by revising paragraphs (d) (1) and (2), and by adding a new paragraph (d)(3) to read as follows:

§205.146 [Amended]

* * * * *

(d) Penalty for failure to have an effective child support enforcement program.

(1) General. Pursuant to section 403(h) of the Act, notwithstanding any other provision of this chapter, total payments to a State under title IV-A of the Act for any quarters in any fiscal year, shall be reduced if a State is found by the Secretary to have failed to have an effective child support enforcement program in substantial compliance with the requirements of section 402(a)(27), as implemented by Parts 302 and 305 of this title. The reduction for any quarter (calculated without regard to any other reduction under this section) shall be:

(i) Not less than one nor more than two percent of such payments for a period beginning in accordance with § 305.100 (c) or (d) of this title not to exceed the one-year period following the end of the suspension period specified in the notice required by § 305.99 of this title;

(ii) Not less than two nor more than three percent of such payments if the finding is the second consecutive finding made as a result of an audit for a period beginning as of the second one-year period following the suspension period specified in the notice required by § 305.99 of this title not to exceed one year; or

(iii) Not less than three nor more than five percent of such payments if the finding is the third or subsequent consecutive finding as a result of an audit for a period beginning as of the third one-year period following the suspension period specified in the notice required by § 305.99 of this title.

(2) Application of penalty. (i) The penalty will be imposed for any quarter beginning after September 30, 1983.

(ii) The penalty will be imposed on the basis of the results of the audit conducted pursuant to Part 305 of this title.

(3) Notice, suspension, corrective action period. Notice, suspension and corrective action provisions are set forth at 45 CFR 305.99.

PART 305-[AMENDED]

45 CFR Part 305 is amended as follows:

1. The authority citation for Part 305 is revised to read as follows:

Authority: Secs. 403(h), 404(d), 452(a) (1) and (4); and 1102 of the Social Security Act; 42 U.S.C. 603(h), 604(d), 652(a) (1) and (4), and 1302.

2. The table of contents is revised to read as follows:

PART 305--AUDIT AND PENALTY

Sec.

305.0 Scope.

305.1 Definitions.

305.10 Timing and scope of audit.

305.11 Audit period.

305.12 State comments.

305.13 State cooperation in the audit.

305.20 Effective support enforcement program.

305.21 Statewide operation.

305.22 State financial participation.

305.23 Single and separate organizational unit.

305.24 Establishing paternity.

305.25 Support obligations.

305.26 Enforcement of support obligation.

305.27 Support payments to the IV-D agency.

305.28 Distribution of support payment.

305.29 Payments to the family.

305.31 Individuals not otherwise eligible.

305.32 Cooperation with other States.

305.33 State parent locator service.

305.34 Cooperative arrangements.

305.35 Reports and maintenance of records.

305.38 Fiscal policies and accountability.

305.37 Bonding of employees.

305.38 Separation of cash handling and accounting functions.

305.39 Withholding of unemployment compensation.

305.40 Federal tax refund offset.

305.41 Recovery of direct payments.

305.42 Spousal support.

305.43 90 percent Federal financial participation for computerized support enforcement systems.

305.44 Publicizing the availability of support enforcement services.

305.45 Notice of collection of assigned support.

305.48 Incentive payments to States and political subdivisions.

305.47 Guidelines for setting child support awards.

305.48 Payment of support through the IV-D agency or other entity.

305.49 Wage or income withholding.

305.50 Expedited processes.

305.51 Collection of overdue support by State income tax refund offset. 305.52 Imposition of liens against real and personal property.

305.53 Posting security, bond or guarantee to secure payment of overdue support.

305.54 Making information available to consumer reporting agencies.

305.55 Imposition of late payment fees on 55 Imposition of late payment fees on absent parents who owe overdue support.

305.56 Medical support.

305.98 Performance indicators and audit criteria.

305.99 Notice and corrective action period.

305.100 Penalty for failure to have an effective support enforcement program.

Authority: Secs. 403(h), 404(d), 452(a)(1) and (4), and 1102 of the Social Security Act; 42 U.S.C. 603(h), 604(d), 652(a) (1) and (4), and 1302.

3. Section 305.0 is revised to read as follows:

§ 305.0 Scope.

This part implements the requirements in sections 452(a)(4) and 403(h) of the Act for an audit, at least once every three years, of the effectiveness of State Child Support Enforcement programs under title IV-D and for a possible reduction in Federal reimbursement for a State's title IV-A program pursuant to sections 403(h) and 404(d) of the Act. Sections 305.10 through 305.13 describe the audit. Section 305.20 defines an effective program for the purposes of this part. Sections 305.21 through 305.56 and §305.98 establish audit criteria the Office will use to determine program effectiveness. Section 305.98 also establishes performance indicators the Office will use to determine State IV-D program effectiveness. Section 305.99 provides for the issuance of a notice and corrective action period if a State is found by the Secretary not to have an effective IV-D program. Section 305.100 provides for the imposition of a penalty if a State is found by the Secretary not to have had an effective program and fails to take corrective action and achieve substantial compliance within the period prescribed by the Secretary.

4. Section 305.10 and 305.11 are revised to read as follows:

§ 305.10 Timing and scope of audit.

(a) The Office will conduct an audit in accordance with sections 452(a)(4) and 403(h) of the Act, at least once every three years, to evaluate the effectiveness of each State's program in carrying out the purposes of title IV-D of the Act and to determine that the program meets the title IV-D requirements. The audit of each State's program meets the title IV-D requirements. The audit of each State's program will be a comprehensive review using the criteria prescribed in §§305.21 through 305.58 and § 305.98 of this part.

(b) The Office will conduct an annual comprehensive audit in the case of a State that is being penalized. For a State operating under a corrective action plan, the review at the end of the corrective action period will cover only the criteria specified in the notice of non-compliance as prescribed in §305.99 of this part.

(c) During the course of the audit, the Office will:

(1) Make a critical investigation of the State's IV-D program through inspection, inquiries. observation, and confirmation; and

(2) Use the audit standards promulgated by the Comptroller General of the United States in the "Standards for Audit of Governmental Organizations, Programs, Activities, and Functions."

§305.11 Audit period.

The audit will cover the period October 1 through September 30 of each fiscal year audited and, when the State is operating under a corrective action plan, will cover the first full quarter after the corrective action period, and, beginning with the fiscal year 1986 audit period, when the State fails to meet audit criteria related to the performance indicators, will cover the fiscal year following the fiscal year in which a determination was made that performance was not in substantial compliance. The audit may cover a shorter period at State request when the State is being penalized under §305.100 of this part.

5. Section 305.20 is revised to read, as follows:

§ 305.20 Effective support enforcement program.

For the purposes of this part and section 403(h) of the Act, in order to be found to have an effective program in substantial compliance with the requirements of title IV-D of the Act, a State must meet the IV-D State plan requirements contained in Part 302 of this chapter measured as follows:

(a) For the fiscal year 1984 audit period:

(1) The following audit criteria must be met: Statewide operation. (45 CFR 305.21(d)) State financial participation. (45 CFR 305.22 (a) and (b)) Single and separate organizational unit. (45 CFR 305.23 (a) and (b)) Establishing paternity. (45 CFR 305.24(b)) Enforcement of support obligation. (45 CFR 28 (c) and (d)) Distribution of child support payment; (45 CFR 305.28(a)) State parent locator service. (45 CFR 305.33(e)) Cooperative arrangements. (45 CFR 305.34) Reports and maintenance of records. (45 CFR 305.35 (a) and (b)) Fiscal policies and accountability. (45 CFR 305.36(a))

(2) The procedures required by the following audit criteria must be used in 75 percent of the cases reviewed for each criterion:

Establishing paternity. (45 CFR 305.24(c))

Support obligations. (45 CFR 305.25 (a) and (b))

Enforcement of support obligation. (45 CFR 305.26 (a), (b), and (e))

Support payments to the IV-D agency. (45 CFR 305.27 (a), (b), and (d))

Distribution of support payment. (45 CFR 305.28(b))

Payments to the family. (45 CFR 305.29)

Individuals not otherwise eligible. (45 CFR 305.31 (a). (b), and (c)) Cooperation with other States. (45 CFR 305.32 (a), (b), (c), (d), (e), (f), and (g))

State parent locator service. (45 CFR 305.33 (a) and (g))

(b) Beginning with fiscal year 1985 audit period:

(1) The criteria prescribed in paragraph (a)(1) of this section and the following audit criteria must be met:

Bonding of employees. (45 CFR 305.37(a))

Separation of cash handling and accounting functions. (45 CFR 305.38(a))

Withholding of unemployment compensation. (45 CFR 305.39 (a) through (h))

Federal tax refund offset. (45 CFR 305.40(a))

Recovery of direct payments. (45 CFR 305.41(a))

Spousal support. (45 CFR 305.42(a))

90 percent Federal financial participation for computerized support enforcement systems. (45 CFR 305.43)

(2) The procedures required by the criteria prescribed in paragraph (a)(2) of this section and the following audit criteria must be used in 75 percent of the cases reviewed for each criterion:

Bonding of employees. (45 CFR 305.37(c))

Separation of cash handling and accounting functions. (45 CFR 305.38(c))

Withholding of unemployment compensation. (45 CFR 305.39(i))

Federal tax refund offset. (45 CFR 305.40(b))

Recovery of direct payments. (45 CFR 305.41(b))

Spousal support. (45 CFR 305.42(b))

(c) For the fiscal year 1986 and 1987 audit periods:

(1) The criteria prescribed in paragraphs (a)(1) and (b)(1) of this section and the following criteria must be met:

Publicizing the availability of support enforcement services. (45 CFR 305.44)

Notice of collection of assigned support. (45 CFR 305.45(a))

Incentive payments to States and political subdivisions. (45 CFR 305.46(a))

Payment of support through the IV-D agency or other entity. (45 CFR 305.46) (a) and (b))

Wage or income withholding. (45 CFR 305.49(a))

Expedited processes. (45 CFR 305.50(a))

Collection of overdue support by State income tax refund offset. (45 CFR 305.51(a))

Imposition of liens against real and personal property. (45 CFR 305.52(a)) Posting security, bond or guarantee to secure payments of overdue support. (45 CFR 305.53(a))

Making information available to consumer reporting agencies. (45 CFR 305.54(a))

Imposition of late payment fees on absent parents who owe overdue support. (45 CFR 305.55(a))

Medical support. (To be determined)

(2) The procedures required by the criteria prescribed in paragraphs (a) (2) and (b)(2) of this section and the following audit criteria must be used in 75 percent of the cases reviewed foreach criterion:

Notice of collection of assigned support. (45 CFR 305.45(b))

Incentive payments to States and political subdivisions. (45

CFR 305.46(b))

Payment of support through the IV-D agency or other entity.

(45 CFR 305.48(c))

Wage or income withholding. (45 CFR 305.49(b))

Expedited processes. (45 CFR 305.50(b))

Collection of overdue support by State income tax refund offset. (45 CFR 305.51(b))

Imposition of liens against real and personal property. (45 CFR 305.52(b)) Posting security, bond or guarantee to secure payment of overdue support. (45 CFR 305.53(b))

Making information available to consumer reporting agencies. (45 CFR 305.54(b))

Imposition of late payment fees on absent parents who owe overdue support. (45 CFR 305.55(b))

Medical support. (To be determined)

(3) The criteria prescribed in § 305.98(c) of this part relating to the performance indicators prescribed in paragraph (a) of that section must be met.

(d) For fiscal year 1988 and future audit periods:

(1) The criteria prescribed in paragraphs (a)(1), (b)(1) and (c)(1) of this section must be met.

(2) The procedures required by the criteria prescribed in paragraphs (a)(2) (b)(2) and (c)(2) of this section must be used in 75 percent of the cases reviewed for each criterion.

(3) The criteria prescribed in 45 CFR 305.47, Guidelines for setting child support awards, must be met.

(4) The criteria referred to in § 305.98(d) of this part relating to the performance indicators prescribed in paragraphs (a) and (b) of that section must be met.

6. Section 305.24 is amended by revising paragraphs (b) and (c) to read as follows:

§ 305.24 Establishing paternity.

* * * * *

(b) Have established and use written procedures for establishing the paternity of any child at least until the child's 18th birthday:

(1) By court order or other legal process established by State law; and

(2) By acknowledgment, if under State law such acknowledgment has the same legal effect as court ordered paternity, including the rights to benefits other than child support.

(c) By utilizing such written procedures to establish the paternity of any child born out of wedlock whose paternity has not previously been established and with respect to whom there is an assignment pursuant to § 232.11 of this title or section 471(a) (17) of the Act in effect or with respect to whom there is an application for child support services pursuant to § 302.33 of this chapter;

* * * * *

7. Section 305.25 is amended by revising paragraph (a)(1) to read as follows:

§ 305.25 Support obligations.

(a)* * *

(1) With respect to whom there is an assignment pursuant to § 232.11 of this title or section 471(a)(17) of the Act in effect or with respect to whom there is an application for child support services pursuant to

§ 302.33 of this chapter.

* * * * *

§305.28 [Amended]

8. Section 305.28 is amended by inserting a comma and the reference "302.52" after the reference "302.51" wherever it appears in that section.

§ 305.33 [Amended]

9. 45 CFR 305.33 is amended by removing the citation "§ 302.35(e)" where it appears in paragraph (f) and inserting in its place the citation "§ 303.70(e)(2)."

10. Section 305.34 is revised to read as follows:

§ 305.34 Cooperative arrangements.

For the purpose of this part, in order to be found in compliance with the State plan requirements for cooperative arrangement (45 CFR 302.34), a State must enter into written cooperative agreements with appropriate courts and law enforcement officials when necessary to establish and enforce support obligations, collect support and cooperate with other States in these functions.

11. Sections 305.37 through 305.56 are added to read as follows:

§ 305.37 Bonding of employees.

For the purposes of this part, to be found in compliance with the State plan requirement for bonding of employees (45 CFR 302.19), a State must:

(a) Have written procedures to ensure that every person, including the individuals prescribed in § 302.19(b) of this chapter, who, as a regular part of his or her employment, receives, disburses, handles or has access to or control over funds collected under the Child Support Enforcement program is covered by a bond against loss resulting from employee dishonesty;

(b) Have written procedures for obtaining a bond in an amount which the State IV-D agency deems adequate to indemnify the State IV-D program for loss resulting from employee dishonesty; and

(c) Use the written procedures specified above.

§ 305.38 Separation of cash handling and accounting functions.

(a) For the purposes of this part, to be found in compliance with the State plan requirement for the separation of cash handling and accounting functions (45 CFR 302.20), a State must have written administrative procedures:

(1) Designed to assure that persons, including the individuals specified in § 302.20(b) of this chapter, responsible for handling cash receipts of support do not participate in accounting or operating functions which would permit them to conceal in the accounting records the misuse of support receipts; and

(2) Designed to assure use of generally accepted accounting principles.

(b) The requirements prescribed in paragraph (a) of this section do not apply to sparsely populated geographic areas within the State granted a waiver under § 302.20(c) of this chapter by the Regional Office.

(c) The State must use the written procedures specified above.

§ 305.39 Withholding of unemployment compensation.

For the purposes of this part, to be found in compliance with the State plan requirement for the withholding of unemployment compensation (45 CFR 302.65), a State must:

(a) Have negotiated a cost effective cooperative agreement with the State Employment Security Agency (SESA) that provides for:

(1) Exchange of information;

(2) The withholding of unemployment compensation benefits to satisfy unmet support obligations;

(3) Payment of withheld unemployment compensation by the SESA to the IV-D agency; and

(4) Reimbursement of administrative costs of the SESA by the IV-D agency.

(b) Have written procedures to determine, based on information provided by the SESA, whether individuals who apply for or receive unemployment compensation owe support obligations that are being enforced by the IV-D agency;

(c) Have written procedures for arranging for the withholding of unemployment compensation:

(1) Pursuant to a voluntary agreement with the individual who owes support; or

(2) Pursuant to legal process under State or local law;

(d) Have written criteria for selecting cases to pursue by the withholding of unemployment compensation process for the collection of past-due support;

(e) Have written procedures for providing a receipt at least annually to an individual who requests a receipt for the support paid by the withholding of unemployment compensation, if receipts are not provided through other means;

(f) Have written procedures for maintaining direct contact with the SESA in its State as prescribed in § 302.65(c)(5) of this chapter;

(g) Have written procedures for the reimbursement of the administrative costs incurred by the SESA that are actual, incremental costs attributable to the process of withholding of unemployment compensation for support purposes insofar as these costs have been agreed upon by the SESA and the IV-D agency;

(h) Have written procedures to review and document, at least annually, the State withholding of unemployment compensation program, including the case selection criteria and costs of the withholding process versus the amounts collected and, as necessary, modify the procedures and renegotiate the services provided by the SESA to improve program and cost effectiveness;

(i) Use of written procedures specified above; and

(j) Have personnel performing the activities described above.

§ 305.40 Federal tax refund offset

For the purpose of this part, to be found in compliance with the State plan requirement for Federal tax refund offset (45 CFR 302.60), a State must:

(a) Have written procedures to obtain payment of past-due support from Federal tax refunds in accordance with section 484 of the Act,

§ 303.72 of this chapter and regulations of the Internal Revenue Service at 28 CFR 301.6402-5;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.41 Recovery of direct payment

For the purposes of this part, to be found in compliance with the State plan requirement for recovery of direct payments (45 CFR 302.31(a)). a State must:

(a) Have written procedures to:

(1) Notify the IV-A agency whenever a determination is made that directly received payments have been retained, if the State elects the IV-A recovery method; or

(2) Recover retained direct support payments in accordance with the standards in § 303.80 of this chapter if the State elects the IV-D recovery method.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.42 Spousal support

For the purposes of this part, to be found in compliance with the State plan provision for the collection of spousal support (45 CFR 302.31(a)), a State must:

(a) Have written procedures for the collection of spousal support from a legally liable person when:

(1) A support order has been established for the spouse;

(2) The spouse or former spouse is living with the child(ren) for whom the individual is liable for child support; and

(3) The support order established for the child(ren) is being enforced under the IV-D plan.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.43 90 percent Federal financial participation for computerized support enforcement systems.

For the purpose of this part, to be found in compliance with the State plan requirement for the establishment of a computerized support enforcement system eligible for 90 percent Federal financial participation (45 CFR 302.85), a State's system must meet the requirements in § 307.10 of this chapter.

§ 305.44 Publicizing the availability of support enforcement services

For the purposes of this part, to be found in compliance with the State plan requirement for publicizing the availability of support enforcement services (45 CFR 302.30), a State must publicize regularly and frequently the availability of support enforcement services under the State plan through public service announcements that include.

(a) Information on any application fees imposed for such services; and

(b) A telephone number or postal address where further information may be obtained.

§ 305.45 Notice of collection of assigned support

For the purposes of this part, to be found in compliance with the State plan requirement for providing notice of collection of assigned support (45 CFR 302.54), a State must:

(a) Have written procedures for:

(1) Sending, at least annually, a notice of the amount of support payments collected during the past year to individuals who have assigned rights to support under § 232.11 of this title; and

(2) Listing separately in the notice support payments collected from each absent parent when more than one absent parent owes support to the family; and

(3) Indicating in the notice the amount of support collected which was paid to the family.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.46 incentive payments to States and political subdivisions.

For the purposes of this part, to be found in compliance with the State plan requirement for incentive payments to States, and political subdivisions (45 CFR 302.55), the State must;

(a) Have written procedures:

(1) To require that, if one or more political subdivisions of the State participate in the costs of carrying out the activities under the State plan during any period, each such subdivision shall be paid an appropriate share of any incentive payments made to the State for such period, as determined by the State in accordance with § 303.52(d) of this chapter, and

(2) To consider the efficiency and effectiveness of the political subdivision in carrying out the activities under the State plan in determining the amount of the incentive payments made to the political subdivision.

(b) Use the written procedures specified above.

(c) Have personnel performing the functions specified above.

§ 305.47 Guidelines for setting child support awards.

For the purposes of this part, to be found in compliance with the State plan requirement for guidelines for setting child support awards (45 CFR 302.56) a State must;

(a) Establish guidelines by law or by judicial or administrative action for setting child support award amounts within the State;

(b) Have procedures for making the guidelines available to all persons in the State whose duty it is to set child support award amounts, but the guidelines need not be binding on those persons;

(c) Base the guidelines on specific descriptive and numeric criteria that result in a computation of the support obligation; and

(d) Include a copy of the guidelines in its State plan.

§ 305.48 Payment of support through the IV-D agency or other entity.

For purposes of this part, to be found in compliance with the optional State plan provision for payment of support through the IV-D agency or other entity (45 CFR 302.57), a State must:

(a) Have written procedures for the payment of support through the State IV-D agency or entity designated to administer the State's withholding system upon request of either the absent parent or custodial parent, regardless of whether or not arrearages exist or withholding procedures have been instituted;

(b) Have written procedures to;

(1) Monitor all amounts paid and dates of payments and record them on an individual payment record;

(2) Ensure prompt payment to the custodial parent; and

(3) Require the requesting parent to pay a fee for the cost of providing the service not to exceed $25 annually and not to exceed State costs;

(c) Use the written procedures specified above; and

(d) Have personnel performing the functions specified above.

§ 305.49 Wage or income withholding.

For the purposes of this part, to be found in compliance with the State plan requirement for wage or income withholding (45 CFR 302.70(a)(1)), a State must;

(a) Have written procedures for carrying out a program of withholding in accordance with § 303.100 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.50 Expedited processes.

For the purposes of this part, to be found in compliance with the State plan requirement for expedited process (45 CFR 302.70(a)(2)), a State must;

(a) Have written expedited procedures to establish and enforce child support obligations having the same force and effect as those established through full judicial process in accordance with § 303.101 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.51 Collection of overdue support by State income tax refund offset.

For the purposes of this part, to be found in compliance with the State plan requirement for collection of overdue support by State income tax refund offset (45 CFR 302.70(a)(3)), a State must:

(a) Have written procedures for obtaining overdue support from State income tax refunds on behalf of recipients of aid under the State's title IV-A or IV-E plan with respect to whom an assignment under § 232.11 of this title or section 471(a)(17) of the Act is effective, and on behalf of individuals who apply for services under §302.33 of this part, in accordance with § 303.102 of this chapter;

(b) Use the written procedure specified above; and

(c) Have personnel performing the functions specified above.

§ 305.52 Imposition of liens against real and personal property

For the purposes of this part, to be found in compliance with the State plan requirement for the imposition of liens against real and personal property (45 CFR 302.70(a)(4)), a State must;

(a) Have written procedures for the imposition of liens against the real and personal property of absent parents who owe overdue support in accordance with § 303.103 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.53 Posting security, bond or guarantee to secure payment of overdue support

For the purposes of this part, to be found in compliance with the State plan requirement for posting security, bond or guarantee to secure payment of overdue support (45 CFR 302.70(a)(6)), a State must;

(a) Have written procedures which require that an absent parent give security, post a bond, or give some other guarantee to secure payment of support in accordance with § 303.104 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.54 Making Information available to consumer reporting agencies.

For the purposes of this part, to be found in compliance with the State plan requirement for making information available to consumer reporting agencies (45 CFR 302.70(a)(7)), a State must:

(a) Have written procedures for making information regarding the amount of overdue support owned by an absent parent available to consumer reporting agencies in accordance with § 303.105 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.55 Imposition of late payment fees on absent parents who owe overdue support

For the purposes of this part, to be found in compliance with the optional State plan provision for imposing late payment fees on absent parents who owe overdue support (45 CFR 302.75), a State must:

(a) Have written procedures for uniformly applying the late payment in accordance with § 302.75 of this chapter;

(b) Use the written procedures specified above; and

(c) Have personnel performing the functions specified above.

§ 305.56 Medical support.

For the purposes of this part, to be found in compliance with the State plan requirement for medical support, a State must meet requirements that will be published as final regulations on medical support effective upon publication of the requirements.

12. Section 305.98 is added to read as follows:

§ 305.98 Performance indicators and audit criteria.

(a) Beginning with the fiscal year 1986 audit period, the Office will use the following performance indicators in determining whether each State has an effective IV-D program.

(1) AFDC IV-D collections divided by total IV-D expenditures (less laboratory cost incurred in determining paternity at State option);

(2) Non-AFDC IV-D collections divided by total IV-D expenditures (less laboratory costs incurred in determining paternity at State option); and

(3) AFDC IV-D collections divided by IV-A assistance payments (Less payments to unemployed parents).

(b) Beginning with the fiscal year 1988 audit period, the Office will use the performance indicators prescribed in paragraph (a) of this section and the following performance indicators in determining whether each State has an effective IV-D program.

(1) AFDC IV-D collections on support due (for a fiscal year) divided by total AFDC support due (for the same fiscal) year);

(2) Non-AFDC IV-D collections on support due (for a fiscal year) divided by total non-AFDC support due (for the same fiscal year);

(3) AFDC IV-D collections on support due (for prior periods) divided by total AFDC support due (for the same periods); and

(4) Non-AFDC IV-D collection on support due (for prior periods) divided by total non-AFDC support due (for the same periods).

(c) The Office shall use the following procedures and audit criteria to measure State performance in fiscal years 1986 and 1987.

(1) The ratio for each of the performance indicators in paragraph (a) of this section will be evaluated on the basis of the scores in the tables in paragraphs (c)(1)(i) through (iii) of this section. The tables show the scores the States will receive for different levels of performance.

(i) Dollar of AFDC IV-D collections per dollar of total IV-D expenditures less laboratory costs incurred in determining paternity at State option).

Level of performance Score

_________________________________________________________________ _______

$20-$29 . . . 6

$30-$39 . . . 8

$40-$49 . . . 10 $50-$59 . . . 12

$60-$69 14

$70-$79 16

$80-$89 18

$90-$99 20

$1.00-$1.19 22

$1.20-$1.39 24

$1.40 or more 25

(ii) Dollar of non-AFDC IV-D collections per dollar of total IV-D expenditures (less laboratory cost incurred in determining paternity at State option).

Level of performance Score

_________________________________________________________________

$.00 0

$.01-$.09 4

$.10-$.19 8

$.20-$.29 12

$.30-$.39 16

$.40-$.49 20

$.50-$.59 24

$.60-$.69 28

$.70-$.79 32

$.80-$.89 36

$.90-$.99 40

$1.00-$1.19 44

$1.20-$1.39 48

$1.40 or more 50

(iii) AFDC IV-D collections divided by IV-A assistance payments (less payments to unemployed parents).

Level of performance (in percent) Score

________________________________________________________________

0 to 1.9 percent 0

2 to 3.9 percent 5

4 to 4.9 percent 10

5 to 5.9 percent 15

6 to 6.9 percent 20

7 or more 25

(2) To be found to meet the audit criteria, a State's total score must equal or exceed 70.

Examples. A State achieves levels of performance of $1.22. $1.35 and 6.5 percent on the performance indicators in paragraph (a) of this section. The State would receive individual scores of 24, 48 and 20 on these performance indicators. The State would be found to meet the audit criteria because the total score is 92.

A State achieves levels of performance of $.65, $.65 and 2.5 percent on the performance indicators in paragraph (a) of this section. The State would receive individual scores of 14, 28 and 5 on these performance indicators. The State would be found not to meet the audit criteria because the total score is 47.

A State achieves levels of performance of $.92. $.96 and 4.2 percent on the performance indicators in paragraph (a) of this section. The State would receive individual scores of 20, 40 and 10 on these performance indicators. The State would be found to meet the audit criteria because the total score is 70.

(d) Beginning in fiscal year 1988, the Office shall evaluate State performance according to the indicators in paragraphs (a) and (b) of this section on the basis of a scoring system that will be described and updated in regulation once every two years beginning in fiscal year 1987.

13. Section 305.99 is added to read as follows:

§ 305.99 Notice and corrective action period.

(a) If a State is found by the Secretary on the basis of the results of the audit described in this part not to comply substantially with the requirements of title IV-D of the Act, as implemented by Chapter III of this title, the Office will notify the State in writing of such finding.

(b) The notice will:

(1) Cite the State for noncompliance, list the unmet audit criteria, apply a penalty and give the reasons for the Secretary's finding:

(2) Identify any audit criteria listed in § 305.20(a)(2), (b)(2) or (c)(2) of this part that the State met only marginally (that is, in 75 to 80 percent of the cases reviewed);

(3) Specify that the penalty may be suspended if the State meets the conditions specified in paragraph (c) of this section; and

(4) Specify the conditions that result in terminating the suspension of the penalty as specified in paragraph (d) of this section.

(c) The penalty will be suspended for a period not to exceed one year from the date of the notice and, beginning with the fiscal year 1986 audit period, when a State fails to meet audit criteria relating to the performance indicators prescribed in § 305.58 of this part the penalty will be suspended until the end of the fiscal year following the fiscal year in which a State failed to meet those criteria if the following conditions are met:

(1) Within 60 days of the date of the notice, the State submits a corrective action plan to the appropriate Regional Office which contains a corrective action period not to exceed one year from the date of the notice and which contains steps necessary to achieve substantial compliance with the requirements of title IV-D of the Act;

(2) The corrective action plan and any amendment are:

(i) Approved by the Secretary within 30 days of receipt of the corrective action plan; or

(ii) Approved automatically because the Secretary took no action within the period specified in paragraph (c)(2)(i) of this section; and

(3) The Secretary finds that the corrective action plan (or any amendment to it approved by the Secretary) is being fully implemented by the State and that the State is progressing to achieve substantial compliance with the unmet criteria cited in the notice.

(d) The suspension of the penalty will continue until such time as the Secretary determines that;

(1) The State has achieved substantial compliance with the unmet criteria cited in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice;

(2) The State is not implementing its corrective action plan; or

(3) The State has implemented its corrective action plan but has failed to achieve substantial compliance with the unmet criteria cited in the notice and maintain substantial compliance with any marginally-met criteria cited in the notice. For State plan-related criteria, this determination will be made as of the first full quarter after the corrective action period. For performance-related criteria, this determination will be made as of the fiscal year following the fiscal year in which a determination was made that performance was not in substantial compliance,

(e) A corrective action plan disapproved under paragraph (c) of this section is not subject to appeal.

(fl Only one corrective action period is provided to a State in relation to a given criterion even consecutive findings of noncompliance are made on that criterion.

14. Section 305.50 is redesignated as § 305.100 and revised to read as follows:

§ 305.100 Penalty for failure to have an effective support enforcement program.

(a) If the Secretary finds, on the basis of the results of the audit described in this part, that a State's program does not substantially meet the requirements in title IV-D of the Act, as implemented by Chapter III of this title, and the State does not achieve substantial compliance with those requirements identified in the notice within the corrective action period approved by the Secretary under § 305.99(c) of this part and maintain compliance in areas cited in the notice as marginally acceptable under

§ 305.99(b)(2) of this part, total payments to the State under title IV-A of the Act will be reduced for the period prescribed in paragraph (c) or (d) of this section by:

(1) Not less than one nor more than two percent of such payments for a period beginning in accordance with paragraph (c) or (d) of this section not to exceed the one-year period following the end of the suspension period;

(2) Not less than two nor more than three percent of such payments if the finding is the second consecutive finding made as a result of an audit for a period beginning as of the second one-year period following the suspension period not to exceed one year; or

(3) Not less than three nor more than five percent of such payments if the finding is the third or subsequent consecutive finding as a result of an audit for a period beginning as of the third one-year period following the suspension period.

(b) In the case of a State that has achieved substantial compliance with the unmet criteria identified in the notice and maintained substantial compliance with any marginally-met criteria identified in the notice within the corrective action period approved by the Secretary under § 305.99 of this part, the penalty will not be applied.

(c) In the case of a State whose penalty suspension ends because the State is not implementing its corrective action plan, the penalty will be applied as if the suspension had not occurred.

(d) In the case of a State whose penalty suspension ends because the State is implementing its corrective action plan but has failed to achieve substantial compliance with the unmet criteria identified in the notice and maintain substantial compliance with any marginally-met criteria identified in the notice within the corrective action period approved by the Secretary under § 305.99 of this part, the penalty will be effective for any quarter that ends after the expiration of the suspension period until the first quarter throughout which the State IV-D program is in substantial compliance with the requirements of title IV-D of the Act.

(e) A consecutive finding under paragraph (a)(2) or (3) of this section occurs only when the State does not achieve substantial compliance with the same criterion or criteria.

(f) Any reduction required to be made under his section shall be made pursuant to § 205.146(d) of this title.

(g) The reconsideration of penalty imposition provided for by § 205.146(e) of this title shall be applicable to any reduction made pursuant to this section.

(Catalog of Federal Domestic Assistance Program No. 13.679, ChildSupport Enforcement Program.)

Dated: May 31, 1985.

R. Stephen Ritchie,

Director, Office of Child Support Enforcement

Dated: June 7, 1985.

Martha A. McSteen,

Acting Commissioner Social Security

Administration

Approved: August 21, 1985.

Margaret M. Heckler,

Secretary.

[FR Doc. 85-23268 Filed 9-30-85; 8:45am] BILLING CODE 4190-11-M