Reauthorization of TANF Interim Final Rule

[Federal Register: June 29, 2006 (Volume 71, Number 125)]
[Rules and Regulations]               
[Page 37453-37483]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jn06-11]                         


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Part IV

Department of Health and Human Services

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Administration for Children and Families

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45 CFR Parts 261, et al.

Reauthorization of the Temporary Assistance for Needy Families Program;
Interim Final Rule

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Parts 261, 262, 263, 265

RIN 0970-AC27

Reauthorization of the Temporary Assistance for Needy Families
Program

AGENCY: Administration for Children and Families (ACF), Department of
Health and Human Services (HHS).

ACTION: Interim final rule with request for comments.

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SUMMARY: This interim final rule implements the statutory changes
enacted in the reauthorization of the Temporary Assistance for Needy
Families (TANF) program in the Deficit Reduction Act of 2005. This
legislation reauthorizes the TANF program through fiscal year (FY) 2010
with a renewed focus on work, program integrity and strengthening
families through healthy marriage promotion and responsible fatherhood.
The interim final rule addresses the work and program integrity changes
of the new law.

DATES: Effective Date: June 29, 2006.
    Comment Date: Comments due on or before August 28, 2006.

ADDRESSES: You may submit your comments in writing to the Office of
Family Assistance (OFA), Administration for Children and Families, 5th
Floor East, 370 L'Enfant Promenade, SW., Washington, DC 20447 or hand
deliver to OFA/ACF, 5th Floor East, 901 D St., SW., Washington, DC
20447. You may download an electronic version of the interim final rule
and may download a copy and transmit written comments electronically via
the Internet.

FOR FURTHER INFORMATION CONTACT: Robert Shelbourne, Director, Division
of State TANF Policy, Office of Family Assistance, ACF, at (202) 401-
5150.

SUPPLEMENTARY INFORMATION:

I. Comment Procedures

    Instructions: All comments received, including any personal
information provided, will be posted without change.
 Also, comments will be available for

public inspection Monday through Friday 8:30 a.m. to 5 p.m. at 901 D
St., SW., 5th Floor, Washington, DC.
    We will not consider comments received beyond the 60-day comment
period in modifying the interim final rule. To make sure your comments
are fully addressed, we suggest the following:
     Be specific;
     Address only issues raised by the rulemaking discretion
exercised in the interim final rule, not the changes to the law itself;
     Explain reasons for any objections or recommended changes;
     Propose appropriate alternatives; and
     Reference the specific section of the interim final rule
being addressed.

II. Background

    The Personal Responsibility and Work Opportunity Reconciliation Act
of 1996 (PRWORA) (Pub. L. 104-193) created the Temporary Assistance for
Needy Families (TANF) block grant that fundamentally transformed
welfare from a cash benefits program to a program focused on work and
temporary assistance. Under TANF, adults receiving assistance are
expected to engage in work activities and develop the capability to
support themselves before their time-limited assistance runs out.
States are required to assist recipients in making the transition to
employment. Also, they are expected to meet work participation rates
and other critical program requirements in order to maintain their full
Federal funding and avoid penalties.
    The PRWORA legislation also dramatically changed intergovernmental
relationships, giving States and Tribes broad flexibility to set
eligibility rules and decide what types of benefits and services to
provide clients. States and Tribes have used this flexibility to try
new, far-reaching initiatives that effectively addressed the needs of
families. PRWORA limited Federal regulatory authority, but added new
responsibility for tracking State performance and imposing penalties
when States fail to comply with program requirements.
    TANF has been a truly remarkable example of a successful Federal-
State partnership. Millions of parents have left welfare for work,
reducing the TANF rolls by nearly 60 percent, from about 4.4 million
families in August 1996 to just 1.9 million families in September 2005.
But the decline in the caseload is just part of the story. During this
period there were also great improvements in a range of outcomes for
low-income families and children:
     The percentage of never-married mothers who work outside
the home for wages increased nearly 30 percent, from 49.3 percent in
1996 to 63.1 percent in 2004.
     The child poverty rate fell from 20.5 percent in 1996 to
17.8 percent in 2004, reflecting 1.4 million fewer children living in
poverty.
     During this same period, the poverty rate among African
American children declined from 39.9 percent to 33.2 percent, and the
poverty rate among Hispanic children declined from 40.3 percent to 28.9
percent.
     Although the poverty rate has increased some since 2000 as
a result of the most recent recession, the surge in job creation over
the past two years portends favorably for renewed improvement in
poverty rates.
    But, if we are to succeed in achieving the full purposes of TANF,
there is still much to be done. Even with the dramatic results States
have achieved, there are still far too many clients that are denied the
opportunities of work and preparation for work. In FY 2005, only 30
percent of those required to work were participating in work activities
for sufficient hours to count toward the work participation rate.
States have been less effective in placing clients with multiple
barriers in work, including those with mental health issues, addiction,
developmental or learning disabilities, limited English proficiency,
and those subject to domestic violence. While the average wages of
clients entering the workforce are above the minimum wage, they are
still too low to ensure family well-being. More effective models of
post-employment supports that lead to career development and wage
progression are needed. Our clients also need programs that sustain and
keep families together and programs that enable low-income, non-
custodial fathers to help their families financially.

Justification for Interim Final Rule

    The Administrative Procedure Act requirements for notice of
proposed rulemaking do not apply to rules when the agency finds that
notice is impracticable, unnecessary, or contrary to the public
interest. We find proposed rulemaking impracticable and contrary to the
public interest because it would fragment the implementation of the
Deficit Reduction Act's (DRA) (Pub.L. 109-171) work requirements. The
DRA clearly states that implementation of certain work requirement
changes will be effective October 1, 2006. In particular, the statute
strengthens the existing work requirements by extending work
participation requirements to families with an adult receiving
assistance in a separate State program and recalibrating the caseload
reduction credit by updating the base year from FY 1995 to FY 2005. The
law

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also directs the Secretary of Health and Human Services to define work
activities and determine who is a work-eligible individual, and these
provisions are critical to the timely implementation of work
requirements. In particular, without Federal definitions for work
activities, States could define some activities so broadly that they
render the new work provisions meaningless, thereby delaying
implementation of meaningful reform. Moreover, such a practice would
perpetuate existing disparities in State definitions and undermine the
equitable treatment of States. In addition, States would be required to
establish work participation verification procedures regarding
activities that would not yet be defined in regulation. Therefore,
States might have to revise their procedures substantially once final
regulations were published. Thus, issuing regulations regarding all
aspects of work requirements simultaneously is necessary to implement
the intent of the law and promote the public interest. Under an interim
final rule, States would know how to plan their programs and take
necessary steps to implement the new requirements.
    Further, in the Deficit Reduction Act of 2005, Congress explicitly
allows HHS to issue these regulations on an interim final basis. Thus,
the policies reflected in this interim final rule are effective
immediately. We will consider all germane comments received during the
comment period. With one exception, States must comply with these
requirements by October 1, 2006, or be subject to potential penalties
during FY 2007. The exception relates to the new penalty created by the
Deficit Reduction Act of 2005 for States that fail to establish and
maintain procedures to verify reported work participation data. While
States are required by the statute and this rule at Sec.  261.63 to
submit a Work Verification Plan by September 30, 2006, we will hold
States accountable for failure to maintain adequate internal controls
and work verification procedures only for conduct that occurs after
October 1, 2007.

III. The Deficit Reduction Act of 2005

    On February 8, 2006, the President signed the Deficit Reduction Act
of 2005 (Pub. L. 109-171). It includes provisions to reauthorize TANF
and build on this program's success. The new law addresses the needs of
families by maintaining the program's overall funding and basic
structure, while focusing increased efforts on building stronger
families through work, job advancement, and research on healthy
marriage and responsible fatherhood programs. It retains funding at
$16.5 billion each year for block grants to States and Tribes; $319
million a year through FY 2008 for supplemental grants to certain
States with high population growth and historically low welfare
payments; and $2 billion over five years for the Contingency Fund for
needy States. It also creates a $150 million a year research,
demonstration, and technical assistance fund for competitive grants to
strengthen family formation, promote healthy marriages, and support
responsible fatherhood.
    The Deficit Reduction Act of 2005 maintains State flexibility and
many provisions of PRWORA, but includes important changes to improve
the effectiveness of the program. The law strengthens work
participation requirements by recalibrating the caseload reduction
credit so that States only receive credit for additional caseload
reductions after FY 2005. Families in separate State programs for whom
funds are claimed to meet the ``maintenance of effort'' (MOE)
requirements are now included in the work participation rate
calculation and other data collection requirements. The law also
requires the Secretary to provide additional direction and oversight on
how to count and verify allowable work activities, to clarify who is a
work-eligible individual and to ensure that State internal control
procedures will result in accurate and consistent work participation
information. The Deficit Reduction Act of 2005 also creates a new
penalty for States that fail to establish and maintain procedures to
verify reported work participation data. This interim final rule
implements these statutory changes and the next phase of welfare reform
by helping more low-income families enter the workforce and succeed at
work.
    Under PRWORA, we interpreted the limitation on Federal authority to
allow us to regulate in two situations: (1) Where Congress explicitly
directed the Secretary to regulate; and (2) where Congress charged HHS
with enforcing penalties. In the latter situation, we promulgated
regulations to set out the criteria we would use in carrying out our
authority to assess penalties. The Deficit Reduction Act of 2005 does
not alter the general restriction on Federal regulatory authority at
Section 417 of the Social Security Act, and so we are continuing this
overall policy. However, the law did explicitly direct HHS to regulate
on certain aspects of the work participation requirements.
    The TANF final rule (64 FR 17720, April 12, 1999) reflects PRWORA's
strong focus on moving recipients to work and self-sufficiency, and on
ensuring that welfare is a short-term, transitional experience, not a
way of life. The rule encourages and supports State flexibility,
innovation, and creativity while holding States accountable for moving
families toward self-sufficiency. In developing this interim final
rule, we have sought to implement the new requirements of the Deficit
Reduction Act of 2005 in a way that does not impinge on a State's
ability to design effective and responsive programs. Indeed, most
States have demonstrated a tremendous commitment to the TANF work goals
and objectives, using creativity and ingenuity to help families
succeed.
    Nevertheless, some observers, and the Government Accountability
Office (GAO) in particular, have noted that the flexibility provided to
States to define work activities for themselves has led to inconsistent
definitions across States as well as inconsistent measurement of work
participation. In their 2005 report ``Welfare Reform: HHS Should
Exercise Oversight to Help Ensure TANF Work Participation Is Measured
Consistently Across States'' (GAO-05-821), GAO noted that the wide
range of work activity definitions used across States makes it
difficult to compare work participation across States. Similarly, some
States have used this flexibility to authorize a wide variety of
activities to advantage themselves compared to other States. In
particular, some activities included by some States under some work
activities do not appear to effectively address barriers to work or
enhance the job readiness of clients.
    As a result of concerns about the inconsistency of work measures
among States, the Deficit Reduction Act of 2005 requires us to issue
this regulation to define each work activity category. As we discuss in
detail later, under our definitions States retain the flexibility to
engage clients in appropriate activities, tailored to their needs. But
we restrict certain practices that some States have used under our
prior rules, particularly those activities that do not improve job
skills or enhance an individual's employability.
    We also provide guidance to States on our expectations for
verifying and documenting actual hours of participation. We do this
through preamble language with examples, as well as through general
regulatory language that outlines internal control principles that
derive from government auditing standards. The basic premise of this
approach is that public officials are accountable for establishing and
maintaining effective internal control systems to ensure that laws and
regulations are followed; that program

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goals and objectives are met; that resources are safeguarded; and that
reliable data are obtained, maintained, and fairly disclosed. Under
this principle, when a State reports hours of participation for a
family, it is reasonable to expect that there is supporting
documentation that the reported activities are real and were actually
performed for the hours claimed. We also recognize the need to be
careful in establishing documentation requirements so that we do not
return to an eligibility-focused culture, where paperwork receives more
attention than moving individuals into self-sufficiency.
    Unsubsidized employment is the primary goal of TANF. A growing body
of evidence suggests that more TANF recipients may be working than many
believe, and that State-reported TANF data on reasons for case closure
may be persistently understating the role of employment. More
specifically, States report that less than 20 percent of case closures
are due to employment, while nearly half of all cases are closed due to
reasons such as ``failure to cooperate,'' ``voluntary closure,'' or
``other'' unspecified reasons. In contrast, an HHS-funded synthesis
report of welfare leaver studies conducted by the Urban Institute found
that somewhat over half of families leaving welfare do so as a result
of employment (Final Synthesis Report of Findings from ASPE ``Leavers''
Grants, November, 2001). Many closures that are, in fact, due to
employment are coded by the States as ``failure to cooperate'' or as
some other category because at the point of closure, the State agency
often is unaware that the client became employed. This undercount in
administrative data may occur because some recipients obtain
employment, but do not immediately notify the TANF agency. As a result,
individuals miss out on other employment-supporting benefits for which
they may be eligible and States miss families that they could count
toward the participation rates.
    Part of the success of State efforts is that many recipients want
to work and get jobs on their own. The new requirements set forth in
the Deficit Reduction Act of 2005 will ensure that TANF agencies know
whether their clients are employed so that they can properly address
the needs of families moving to self-sufficiency and count them in the
work participation rates. The new requirements will also help ensure
that TANF agencies know whether families that left welfare were
employed prior to case closure so that these families can be counted
toward the work participation rate.
    New hires information contained in the National Directory of New
Hires (NDNH) may help solve these problems. The NDNH information can
help identify those who are employed but whose employment is unknown to
the TANF agency. We will continue to work with State agencies to
provide the NDNH information and to identify effective verification and
documentation practices. If State TANF agencies use the NDNH regularly
and base their participation rate data on verified employment matches,
they will improve the accuracy and consistency of information on which
work participation rates are calculated.
    In keeping with the President's New Freedom Initiative, we
encourage States to make every effort to engage individuals with
disabilities in work activities. Disabled individuals on TANF caseloads
are capable of participating in productive work activities and deserve
an opportunity to become self-sufficient through work. Under the TANF
statute, such families are included in the work participation rate
calculation. It is important that every effort is made to serve the
full range of TANF recipients that can work and benefit from work
activities and supports. States are encouraged to explore the
capabilities of all TANF recipients to learn what they can do rather
than focusing on their limitations. States may explore new ways to
implement work activities like specialized work experience sites that
help families attain the necessary work skills to improve their ability
to obtain employment. In fact, in the definition of ``work-eligible
individual'' in Sec.  261.2, we encourage States to work with parents
who receive Supplemental Security Income (SSI) and whose children are
TANF recipients by giving them the option to include such families when
they meet participation requirements. We are hopeful this increased
State flexibility will give States the incentive to broaden their
efforts in working with disabled individuals to give them every
opportunity to enter the workforce.
    Of course, States must continue to comply with the civil rights
laws, including those enumerated at 408(d) of the Social Security Act,
when implementing the new work requirements. Section 408(d) expressly
states that any program or activity receiving Federal TANF funds is
subject to: (1) The Age Discrimination Act of 1975; (2) Section 504 of
the Rehabilitation Act of 1973 (Section 504); (3) the Americans with
Disabilities Act of 1990 (ADA); and (4) Title VI of the Civil Rights
Act of 1964. These laws are also referenced in the regulations at 45
CFR 260.35. For information about the application of civil rights laws
in the context of TANF, visit the Office for Civil Rights (OCR) Web
site. Among other things, the Web site
contains OCR guidance entitled Civil Rights Laws and Welfare Reform--An
Overview and Technical Assistance for Caseworkers on Civil Rights Law
and Welfare Reform and Prohibition Against Discrimination on the Basis
of Disability in the Administration of TANF and other information on
how to contact OCR headquarters and regional offices for further
information and technical assistance. Additional information, including
fact sheets and discrimination complaint forms, is also located on the
OCR Web site or may be obtained by calling OCR toll free at 800-368-
1019, TDD 800-537-7697.

IV. Regulatory Provisions

    The Deficit Reduction Act of 2005 requires relatively modest
changes to existing TANF regulations at 45 CFR Parts 261, 262, 263 and
265. Thus, this interim final rule reflects primarily the changes to
the original TANF rules required by the new statutory provisions. In
the preamble, we discuss only the regulatory sections that are being
revised or newly established. We do not make any changes to either 45
CFR part 260, General TANF Provisions or to 45 CFR part 264, Other
Accountability Provisions.
    Note that we use the term ``we'' throughout the regulatory text and
preamble. The term ``we'' means the Secretary of the Department of
Health and Human Services or any of the following individuals or
agencies acting on his behalf: the Assistant Secretary for Children and
Families, the Regional Administrators for Children and Families, the
Department of Health and Human Services, and the Administration for
Children and Families. Likewise, the term ``Act'' refers to the Social
Security Act, as amended. We use the term ``The Deficit Reduction Act
of 2005'' (Pub. L. 109-171) when we refer to the new law. States, the
Territories, and the District of Columbia are all subject to the TANF
requirements, but for the ease of the reader, hereinafter, a reference
to States means this entire group. Tribal TANF programs are not
affected by this rule; the Deficit Reduction Act of 2005 does not amend
section 412 of the Social Security Act that authorizes Tribal TANF
programs.
    For the convenience of readers, where we make major changes to a
regulatory section or to a subpart, we republish the

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section or subpart in its entirety, rather than just the changes. This
makes the provisions easier to understand and gives context to the
regulatory changes.

Part 261--Ensuring That Recipients Work

Section 261.2 What definitions apply to this part?

    Under the original TANF rule, we chose not to define work
activities to provide maximum flexibility to States so they could
design and carry out the welfare reform programs that best met the
individual needs to help families find work and become self-sufficient.
We simply listed the 12 work activities in 45 CFR 261.30 in the order
they appear in the Act. However, we indicated in the preamble of the
final TANF rule, that we were ``concerned that different TANF
definitions [of work activities] could affect the vulnerability of
States to penalties for failure to meet the participation rate.'' As we
noted, ``to the extent possible, we want to ensure an equitable and
level playing field for the States.'' We also explained that we would
``carefully assess the types of programs and activities States
develop'' and ``if necessary at some time in the future, we will
initiate further regulatory action.''
    We are now convinced that the flexibility we initially allowed
States to define work activities results in inconsistent work
participation measurement and that disparities in State definitions
undermine the principle of equitable treatment. For example, several
States count job search, job readiness activities, and vocational
educational training as part of a work experience or community service
program. In some instances, it appears that States integrated these
activities into work experience or community service to avoid various
limitations on some TANF work activities, such as the statutory six-
week limitation on counting job search and job readiness assistance.
Some States also count participation in otherwise unallowable
educational activities as part of an allowable TANF work activity.
Thus, defining work activities is necessary to maintain the integrity
of the TANF work participation requirements. Unless we define the work
activities, States with narrow definitions would be at a disadvantage
in meeting the participation requirements compared to States with
broader definitions.
    Furthermore, the Deficit Reduction Act of 2005 requires the
Secretary to promulgate regulations to ensure consistent measurement of
work participation rates. The law specifically requires us to determine
whether an activity of a recipient of assistance may be treated as a
work activity. We are defining each of the allowable work activities to
promote consistency in the measurement of work participation rates and
thus treat States fairly.
    Section 407(d) of the Social Security Act specifies 12 separate and
distinct activities. Thus, we have attempted to draft definitions that
are, as far as possible, mutually exclusive from one another. Because
the list of countable activities is provided by statute, we do not have
the regulatory authority to add additional activities. Our definitions
follow the order that the work activities are listed in Sec.  261.30 of
this part and section 407(d) of the Social Security Act for ease of
reference when referring to the nine core work activities that count
for the first 20 hours of required work and the three activities that
can only count as participation after the 20-hour requirement is met.
    We would like to emphasize that these definitions delineate what
constitutes each activity for the work participation rate but they in
no way change the requirement that individuals must participate for a
specified number of hours to count in the participation rate.
Generally, that requirement is for an individual to participate for an
average of 30 hours per week in the month with the exception that a
single custodial parent of a child under six must participate for an
average of only 20 hours per week in a month. To count in the two-
parent rate, the parents must participate for a combined total of at
least 35 or 55 hours, depending on whether they receive federally
funded child care. States continue to have the flexibility to assign an
individual to a combination of activities, for example blending school
and work or training and work or job search and community service, to
reach the hours needed to count a family in the work participation
rate. Please refer to the regulations in subpart C of part 261 and the
preamble explanation of that subpart for more a more detailed
discussion of the hours and activities requirements.
    Below, we discuss the rationale for the definitions that are
included in Sec.  261.2.
    Unsubsidized employment means full- or part-time employment in the
public or private sector that is not subsidized by TANF or any other
public program.
    The determination of whether or not employment is subsidized
depends on whether the employer, rather than the recipient, receives a
subsidy. If an employer receives a direct subsidy for hiring a
recipient from TANF or other public funds, that recipient would be
considered to be in subsidized public or private sector employment.
This definition does not apply to recipients whose employers claim a
tax credit for hiring economically disadvantaged workers. While such
tax credits are designed to foster the employment of low-income
workers, traditionally they have not been treated as ``subsidized
employment'' in the context of welfare.
    All TANF recipients in unsubsidized employment are, by definition,
receiving a subsidy--their TANF assistance grant. The receipt of this
grant, however, does not constitute subsidized employment, as long as
the employer receives no direct subsidy for employing the recipient.
Recipients in unsubsidized employment also may receive work-related
subsidies, such as child care, transportation, and other support
services.
    Self-employment may count as unsubsidized employment. Self-
employment may include, but is not limited to, domestic work and the
provision of child care. As we explain in the preamble to Sec.  261.60,
a State may not count more hours toward the participation rate for a
self-employed individual than the number derived by dividing the
individual's self-employment income (gross income less business
expenses) by the Federal minimum wage.
    We are defining both subsidized private sector employment and
subsidized public sector employment as employment for which the
employer receives a subsidy from TANF or other public funds to offset
some or all of the wages and costs of employing a recipient. Subsidized
employment differs from unsubsidized employment in that the employer
receives a subsidy. It differs from work experience in that the
participant is paid wages and receives the same benefits as a non-
subsidized employee who performs similar work.
    There are several ways to operate a subsidized employment program.
One approach is to use TANF funds that would otherwise be paid as
assistance to reimburse some or all of an employer's costs for the
wages, benefits, and/or the additional costs of employment-related
taxes and insurance. (Under the Aid to Families with Dependent Children
(AFDC) program, this approach was called ``work supplementation'' or
``grant diversion.'')
    A second model is one in which a third party acts as the employer
of record during the trial period, like a temporary staffing agency.
For example, a private, for-profit organization may

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contract with a welfare agency and serve as the employer of record
while the participant works for a private-sector company for a trial
period. The organization receives a fee from the TANF or other public
agency (and employers) to cover the participant's salary and support
services, including on-site follow-up for both employers and employees.
The total amount of the payment to the private, for-profit organization
depends on how successful it is in placing and keeping employees in
jobs.
    Supported work for individuals with disabilities, as defined under
the Rehabilitation Act of 1973 (29 U.S.C. 705(35)), also could be
counted as subsidized employment. Supported work for individuals with
disabilities means work in an integrated setting (i.e., where people
with and without disabilities work in the same place) for wages
consistent with those paid to non-disabled workers with similar job
functions. The workers with disabilities may receive individualized
services such as, but not limited to, transportation, family support,
or additional supervision. To the extent that supported work also
includes intensive on-site training activities, it may be counted as
on-the-job training, discussed below.
    Regardless of the approach, the employer is subject to the
requirements of the Fair Labor Standards Act (FLSA) and, as a result,
must pay the participant wages that equal or exceed the applicable
Federal or State minimum wage. We recommend that States generally limit
the duration of subsidized employment programs to six to twelve months;
however, longer durations may be appropriate for supported employment
of individuals with disabilities, as long as they are justified by an
individualized needs assessment.
    During this trial period in which the costs of employment are being
subsidized, the employer should provide necessary training, guidance,
and direction to an employee. At the end of the subsidy period, the
employer is expected to retain the participant as a regular employee
without receiving a subsidy. States should not allow employers to
recycle TANF recipients in subsidized employment slots, thereby
reducing their competitive labor costs.
    We considered whether to regulate the rate of reimbursement to
employers and the duration of a subsidized employment position. We
decided against specifying limits because States should have the
flexibility to design a program that meets their needs and the needs of
the individuals they serve. However, the goal of subsidized employment
should be to prepare participants for and move them into unsubsidized
employment.
    Receipt of employment subsidies provided through the tax code,
including Federal tax credits, such as the Work Opportunity Tax Credit
(WOTC) and the Welfare-to-Work Tax Credit (WWTC), does not make
subsidized employment of an otherwise unsubsidized job for purposes of
this definition. These tax credits subsidize employers who hire welfare
recipients or other hard-to-employ groups. TANF agencies, however, may
not know whether employers use such tax credits and employers may not
file for them until well after they have hired recipients. We consider
participants supported by Federal tax credits only to be in
``unsubsidized employment.''
    Subsidized private or public sector employment also does not
include ``on-the-job training'' programs, where employers are
subsidized to offset the costs of training. (See the discussion of on-
the-job training below.)
    Work experience (including work associated with the refurbishing of
publicly assisted housing) if sufficient private sector employment is
not available means a work activity, performed in return for welfare,
that provides an individual with an opportunity to acquire the general
skills, training, knowledge, and work habits necessary to obtain
employment. The purpose of work experience is to improve the
employability of those who cannot find unsubsidized employment. This
activity must be supervised by an employer, work site sponsor, or other
responsible party daily. Work experience programs are sometimes called
``workfare'' because participants continue to receive their TANF grant.
    Some existing State work experience programs include activities
that fall outside this definition. For example, several States count
job search, job readiness activities, and vocational educational
training as part of a work experience program. In some instances, it
appears that States integrated these activities into work experience to
avoid various limitations, such as the six-week limitation on counting
job search and job readiness assistance. We will not permit these
practices under this interim final rule.
    Work experience participants continue to receive their TANF grant
while they are taking part in work and training activities similar to
those of paid employees. They do not receive wages or compensation.
Nonetheless, they may be considered employees for the purpose of the
Fair Labor Standards Act (FLSA). According to the Department of Labor's
May 1997 guidance, ``How Workplace Laws Apply to Welfare Recipients,''
``[w]elfare recipients in `workfare' arrangements, which required
recipients to work in return for their welfare benefits, must be
compensated at the minimum wage if they are classified as `employees'
under the Fair Labor Standard Act's (FLSA) broad definition.'' The FLSA
applies if there is an employment relationship between an employer and
an employee. But the FLSA uses a broader definition than is often used
for tax or unemployment purposes. To ``employ'' under the FLSA, means
to ``suffer or permit to work.'' If recipients engaged in work
experience activities are ``employees'' under the FLSA definition, they
must be compensated at the applicable minimum wage. The FLSA's overtime
pay (for over 40 hours in a work week), child labor, and recordkeeping
requirements also apply.
    The TANF assistance and benefits that these work experience
participants receive are not considered wages for Social Security
purposes, nor are they considered taxable income for purposes of the
Federal income tax or the Earned Income Tax Credit. However, a State
might consider a participant in work experience to be an employee of
the State for purposes of workers' compensation coverage.
    We considered whether to regulate the duration of a traditional
work experience position. We decided against specifying limits. States
should have the flexibility to design programs that meet both their
needs and those of the individuals they serve. However, the goal of
work experience should be to prepare participants for and move them
into unsubsidized employment or other program activities that can help
in this transition.
    On-the-job training (OJT) means training in the public or private
sector that is given to a paid employee while he or she is engaged in
productive work and that provides knowledge and skills essential to the
full and adequate performance of the job. On-the-job training must be
supervised by an employer, work site sponsor, or other responsible
party daily.
    In this type of activity, States may subsidize the employer to
offset the cost of the training provided to the participant. Upon
satisfactory completion of the training, we expect the employer to
retain the participant as a regular employee without receiving a
subsidy.
    As noted under the discussion of subsidized employment, ``supported
employment'' as defined under the

[[Page 37459]]

Rehabilitation Act of 1973 (29 U.S.C. 705(35)), may be counted as OJT
if it includes significant on-site training in the knowledge and skills
essential to the full and adequate performance of the job. For example,
a State Vocational Rehabilitation agency may provide a client with an
onsite ``job coach'' who teaches job skills in the context of
productive work. If ``supported employment'' includes an employer
subsidy and other supportive services but does not include on-site
training, it should be counted as subsidized employment.
    We defined OJT as a component of employment, whether unsubsidized
or subsidized. However, some elements of training may involve
specialized preparation to prepare participants for a specific position
with an employer and do not constitute employment. Such training may be
more akin to vocational educational training. While we have tried to
define work activities so that they do not overlap, OJT combines some
elements of subsidized employment, vocational education and other forms
of training. We are interested in receiving comments about whether we
should broaden the definition beyond paid employment to include other
aspects of training.
    Job search and job readiness assistance means the act of seeking or
obtaining employment, preparation to seek or obtain employment,
including life skills training, and substance abuse treatment, mental
health treatment, or rehabilitation activities for those who are
otherwise employable. Job search and job readiness assistance
participants should be supervised on an ongoing basis no less
frequently than daily. Readers should refer to Sec.  261.34 (which is
not revised in this interim final rule) for a discussion of the time
limitations that apply to this activity.
    ``Job search and job readiness assistance'' is a single component
for Federal participation standards. The ``job search'' aspect of this
component is largely self-explanatory and we define it as ``the act of
seeking or obtaining employment,'' which should encompass all
reasonable job search initiatives. As such, ``job search'' includes
making contact with potential employers, whether by telephone, in
person or via the Internet, to learn of suitable job openings, applying
for vacancies, and interviewing for jobs.
    Our definition of ``job readiness assistance'' comprises two types
of activities. The first is preparation necessary for an individual to
seek or obtain employment. This includes activities such as preparing a
resume or job application, training in interviewing skills, instruction
in work place expectations (including instruction on appropriate attire
and behavior on the job), and training in effective job seeking, as
well as life skills training. The second is substance abuse treatment,
mental health treatment, or rehabilitation activities for those who are
otherwise employable. Such treatment or therapy must be determined to
be necessary and certified by a qualified medical or mental health
professional. Some individuals in the TANF caseload are capable of
getting and keeping a job but for a substance abuse, mental heath, or
other condition that treatment or rehabilitation activities would
resolve. We have included these services as part of our definition to
help such individuals make the transition from welfare to work.
    As with other work activities, a State may only count an
individual's actual hours of participation in substance abuse
treatment, mental health treatment, or rehabilitation activities and
must document those hours as required at Sec. Sec.  261.60 and 261.61.
If an individual does not have sufficient hours in substance abuse
treatment, mental health treatment, or rehabilitation activities alone
to count in the participation rate, he or she may still be counted in
the calculation of the State's work participation rate by combining
them with other allowable activities. Individuals in substance abuse
treatment, mental health treatment, or rehabilitation activities are
subject to the same hours requirements to count for participation that
individuals in any other activities must meet. Please refer to
Sec. Sec.  261.31 and 261.32 for more details about the number of hours
needed to count a family in the participation rates.
    Our goal in incorporating substance abuse treatment, mental health
treatment, and rehabilitative activities for those who are otherwise
employable into this interim final rule is to ensure that States can
meet the needs of all individuals in their caseloads struggling to
escape welfare dependency. We are interested in receiving comments
about our approach in this area.
    For substance abuse treatment, mental health treatment or
rehabilitation activities that are not part of job search and job
readiness assistance, States should be advised that a portion of those
activities may count toward the work participation rate. If a portion
of substance abuse treatment, mental health treatment or rehabilitation
service meets a common-sense definition of work, then the hours
associated with that work activity may count under the appropriate work
category, such as work experience. For example, a State may place an
individual who is otherwise able to work but for the need to reinforce
substance abuse treatment into a special program in which a single
provider coordinates work and treatment in a halfway house environment.
As part of that treatment program, the individual also fulfills
assigned supervised, documented work responsibilities for the benefit
of all the residents, such as preparing meals, housecleaning, or
scheduling group activities. In that case, the State may report the
hours the individual was in the work portion of the program, i.e.,
performing work that meets the requirements of these rules. The time
the individual spent in the treatment component does not count in the
work category.
    Some States currently incorporate as part of job search and job
readiness assistance programs that would fall outside our new
definition. For example, at least one State incorporates activities
``that are essential to the health, safety and welfare of families,''
including activities associated with a child's dental checkups,
immunization, and school attendance. Parenting skills training or
participating in Head Start is part of the definition in more than one
State. Another State includes personal care during recovery from a
medical problem, bed rest, hospitalization, and activities that promote
a healthier lifestyle, such as smoking cessation. These are valuable
and important things for a family to address or may be medically
appropriate, but they do not constitute work or direct preparation for
work. Thus, these activities may not count as job search and job
readiness assistance. Only programs that involve seeking and preparing
for work can meet this definition.
    Current State definitions of job search and job readiness also
include one or more of the other eleven countable work activities. For
example, one State lists remedial education and English as a Second
Language (ESL) as part of job search and job readiness. These
activities more closely fit our definition of job skills training
directly related to employment or education directly related to
employment and should be counted under those activities, as
appropriate.
    Some States have asked us what constitutes a week for the
limitations on counting no more than six weeks per fiscal year of job
search and job readiness assistance, no more than four of which may be
consecutive. We believe that the most commonly understood and simplest
way to answer this question is to use the ordinary

[[Page 37460]]

definition of a week: seven consecutive days. Whether the State starts
counting an individual's participation on a Monday, a Wednesday or any
other day, a week ends seven days later, regardless of how many hours
the individual participated in the course of those seven days. If an
individual participates for more than four consecutive weeks or a total
of six weeks in a fiscal year, the State may not count those hours
toward the participation rate.
    Community service programs mean structured programs in which TANF
recipients perform work for the direct benefit of the community under
the auspices of public or nonprofit organizations. We limit community
service programs to projects that serve a useful community purpose.
This includes programs in fields such as health, social service,
environmental protection, education, urban and rural redevelopment,
welfare, recreation, public facilities, public safety, and child care.
Community service programs must be designed to improve the
employability of recipients not otherwise able to obtain employment and
must be supervised on an ongoing basis no less frequently than daily. A
State agency shall take into account, to the extent possible, the prior
training, experience, and skills of a recipient in making appropriate
community service assignments.
    This definition limits the activity to what many commonly think of
as ``community service.'' It excludes, for example, activities such as
participation in a substance abuse treatment program, mental health and
family violence counseling, life skills classes, parenting classes, job
readiness instruction, and caring for a disabled household member,
which while important and beneficial, are not primarily directed to
benefiting the greater community. As we stated in the preamble to the
original final TANF rule (64 FR 17778, April 12, 1999), ``The fact that
something has value or is integral to a countable activity does not
necessarily mean it can count as participation.'' We reaffirm that
perspective under this interim final rule.
    Community service programs must include structured activities that
both provide a community service and also improve the employability of
participants. Some existing State community service programs allow and
count unstructured activities that are undertaken with little or no
supervision. One State, for example, considers shoveling a neighbor's
sidewalk or helping a friend with errands to be community service.
Another State counts serving as a foster parent as a community service.
Although these activities benefit the community, they do not
necessarily involve real supervision or help an individual move toward
self-sufficiency. Unlike other work activities, Congress added the term
``programs'' after community service, suggesting that allowable
activities should involve structure and supervision. Thus, shoveling
sidewalks would meet this criterion only if done as part of a
neighborhood maintenance program undertaken by a public or nonprofit
agency. In such an environment, this activity would not only address
unmet community needs, but also would help participants develop basic
works skills, improve work habits, and help move participants toward
employment.
    In addition, community service programs do not include activities
that meet the definition of another allowable TANF work activity.
Several States, for example, count job search and job readiness
activities, and vocational educational training as part of a community
service program. Doing so effectively avoids statutory limitations on
these allowable TANF work activities, such as the six-week limitation
on counting ``job search and job readiness'' activities, the 12-month
limitation on vocational educational training, and the 30-percent limit
on counting individuals in vocational educational training. Some States
also count participation in otherwise unallowable educational
activities as community service. Under our definition, States may not
define countable community service programs so broadly as to circumvent
statutorily-imposed restrictions on other TANF activities.
    We recognize that there may be instances in which other activities
are embedded within the community service activity. For example, an
individual providing clerical support might attend computer training
classes as part of the community service if the assigned activity
requires it. Short-term training or similar activities may be counted
as community service as long as such activities are of limited duration
and are a necessary or regular part of the community service.
Activities that are not an integral part of community service cannot
count. For example, substance abuse treatment may be a prerequisite for
participation in work activities, but it does not count under community
service because it is not an integral part of the community service
activity.
    Examples of programs and activities that fit under our definition
of community service include, but are not limited to, work performed
for a school (e.g., serving as a teacher's aide), Head Start program
(e.g., helping as a parent volunteer), church (e.g., preparing meals
for the needy), or government/nonprofit agency (e.g., providing
clerical support), as well as participation in volunteer organizations
such as Americorps, Volunteers in Service to America (VISTA), or
private volunteer organizations.
    Vocational educational training (not to exceed 12 months with
respect to any individual) means organized educational programs that
are directly related to the preparation of individuals for employment
in current or emerging occupations requiring training other than a
baccalaureate or advanced degree. Vocational educational training
participants should be supervised no less frequently than daily.
    Vocational educational training programs should be limited to
activities that give individuals the knowledge and skills to perform a
specific occupation. Under AFDC and the Job Opportunities and Basic
Skills (JOBS) Training programs, basic and remedial education,
education in English proficiency, and postsecondary education were
statutorily authorized activities. However, PRWORA did not include
these activities as separate work activities. Although they may help
prepare individuals for employment, they are generally not considered
vocational education or training and Congress purposely concentrated
the TANF work activities on those focused on employment.
    Some existing State vocational educational training programs allow
other educational activities such as basic skills, language training,
and postsecondary education leading to a baccalaureate or advanced
degree. We are explicitly restricting these practices to prevent the
use of the term ``vocational educational training'' from covering
virtually any educational activity. In particular, the TANF program was
not intended to be a college scholarship program for postsecondary
education. Programs authorized by the Higher Education Act of 1965 (and
subsequent amendments) support these longer-term educational
activities. In contrast, activities such as basic education and
language training qualify as education directly related to employment.
    Some States count education leading to a high school diploma as
vocational educational training. Although vocational education is often
provided in high school, minor parents attending high school, even if
in a vocational education track, should be counted as

[[Page 37461]]

participating in ``satisfactory attendance at secondary school or in a
course of study leading to a certificate of general equivalence.''
Doing so avoids triggering the lifetime 12-month limit on the use of
vocational educational training.
    We recognize that there may be instances in which basic skills
education is embedded within a vocational educational training
activity. Such basic skills education may be counted as vocational
educational training as long as it is of limited duration and is a
necessary or regular part of the vocational educational training. Basic
skills education of this nature may enhance preparation for the labor
market by giving participants an opportunity to apply their learning in
the context of their future jobs.
    Our definition of vocational educational training narrows the scope
of what counts for this activity to programs that prepare participants
for a specific trade, occupation, or ``vocation.'' This definition is
consistent with definitions used in other Federal programs that provide
vocational education, such as the Carl D. Perkins Vocational and
Applied Technology Education Act of 1990. Even so, this definition
could overlap with other TANF work activities that provide training,
including on-the-job training and job skills training. Since we want to
define work activities that are mutually exclusive, we are interested
in comments on how States currently implement this component and
whether the definition should be broadened.
    Vocational educational training must be provided by education or
training organizations, which may include, but are not limited to,
vocational-technical schools, community colleges, postsecondary
institutions, proprietary schools, non-profit organizations, and
secondary schools that offer vocational education.
    Under vocational educational training, States may not count
unsupervised homework time as part of the hours of participation. We
do, however, permit hours to count where a State structures a
vocational educational training program to include monitored study
sessions and it can document the hours of participation.
    Job skills training directly related to employment means training
and education for job skills required by an employer to provide an
individual with the ability to obtain employment or to advance or adapt
to the changing demands of the workplace. Job skills training can
include customized training to meet the needs of a specific employer or
it can be general training that prepares an individual for employment.
This can include literacy instruction or language instruction when such
instruction is explicitly focused on skills needed for employment or
combined in a unified whole with job training. Job skills training
directly related to employment should be supervised on an ongoing basis
no less frequently than daily.
    Some States include barrier removal activities as job skills
training, such as substance abuse counseling and treatment, mental
health services, and other rehabilitative activities. While we
encourage States to work with individuals in these areas, the
definition of job skills training focuses on educational or technical
training that is designed specifically to help individuals move into
employment.
    Education directly related to employment, in the case of a
recipient who has not received a high school diploma or a certificate
of high school equivalency means education related to a specific
occupation, job, or job offer. This includes courses designed to
provide the knowledge and skills for specific occupations or work
settings, but may also include adult basic education and ESL. Where
required as a prerequisite for employment by employers or occupations,
this activity may also include education leading to a General
Educational Development (GED) or high school equivalency diploma.
Participants in education directly related to employment should be
supervised on an ongoing basis no less frequently than daily.
    Participants should make ``good or satisfactory progress'' in order
for their hours to count. This includes a standard of progress
developed by the educational institution or program in which the
recipient is enrolled. Good or satisfactory progress should be judged
by both a qualitative measure of progress, such as grade point average,
as well as a quantitative measure, such as a time frame within which a
participant is expected to complete such education. We are interested
in receiving comments that describe other possible criteria or
definitions for what constitutes making ``good or satisfactory
progress.''
    As under other TANF educational activities, States may not count
unsupervised homework time as part of the hours of participation for
this activity. We do permit hours to count where a State structures a
program of education directly related to employment to include
monitored study sessions and it can document the hours of
participation.
    Satisfactory attendance at secondary school or in a course of study
leading to a certificate of general equivalence, in the case of a
recipient who has not completed secondary school or received such a
certificate means regular attendance, in accordance with the
requirements of the secondary school or course of study at a secondary
school, or in a course of study leading to a certificate of general
equivalence, in the case of a recipient who has not completed secondary
school or received such a certificate. The former is aimed primarily at
minor parents still in high school, whereas the latter could apply to
recipients of any age. Unlike ``education directly related to
employment,'' this activity need not be restricted to those for whom
obtaining a GED is a prerequisite for employment. However, this
activity may not include other related educational activities, such as
adult basic education or language instruction unless it is linked to
attending a secondary school or leading to a GED. Participants in this
activity should be supervised on an ongoing basis no less frequently
than daily.
    In addition to regular school attendance at a secondary school or
in a course of study leading to a certificate of general equivalence,
participants should be making ``good or satisfactory progress'' for the
activity to count. This includes a standard of progress developed
either by the State or by the educational institution or program in
which the recipient is enrolled. In addition, it must include both a
qualitative measure of progress, such as grade point average, as well
as a quantitative measure, such as a time frame within which a
participant is expected to complete such education. We are interested
in receiving comments that describe possible criteria or definitions
for what constitutes making ``good or satisfactory progress.''
    As under other TANF educational activities, States may not count
unsupervised homework time as part of the hours of participation for
this activity. We do permit hours to count where a secondary school or
structured GED program includes monitored study sessions and it can
document the hours of participation.
    Providing child care services to an individual who is participating
in a community service program means providing child care to enable
another TANF recipient to participate in a community service program.
Participants in this activity should be supervised on an ongoing basis
no less frequently than daily.
    It does not include providing child care to enable a TANF recipient
to participate in any of the other eleven allowable work activities.
Child care

[[Page 37462]]

provided to TANF recipients (and others) in other activities typically
involves payment for services rendered and would be classified as
unsubsidized employment. Indeed, providing child care for TANF
recipients in community service could also be considered under other
TANF work activities, such as unsubsidized employment, work experience,
or community service. We are interested in comments that describe how
this activity differs and might be distinguished from other work
activities.
    We caution States to implement this activity responsibly. Because
assistance is time-limited, States should ensure that the activity is
effective in helping move the provider toward self-sufficiency.
Training, certification or mentoring will help make the activity
meaningful and could be a first step toward the provider's employment
in the child care field.
    The Deficit Reduction Act of 2005 also requires us to include
families receiving assistance under a separate State program that is
funded with money counted towards the State's MOE requirement and to
specify the circumstances under which a parent who resides with a child
who is a recipient of assistance should be included in the work
participation rates. The simplest way for us to do this was to use a
new term, ``work-eligible individual'' to describe anyone whose
participation in work activities contributes to determining whether the
family counts in the calculation of the work participation rate. We
drew the term from the heading to the statutory section with this new
requirement.
    Thus we define a work-eligible individual as one of two types of
adults. The first is an adult (or minor child head-of-household)
receiving assistance under TANF or a separate State program, unless
excluded. The second is a non-recipient parent living with a child
receiving assistance, unless the parent is a member of one of three
excluded groups of parents described below.
    In drafting this provision of the regulations, we considered in
turn each type of family in which a parent resides with a child
recipient of assistance to determine whether it was appropriate to
include that group of families in the calculation of the work
participation rates. We chose to exclude the following non-recipient
parents living with a child receiving assistance from the definition of
work-eligible individual: a minor parent who is not a head-of-household
(or a spouse of head-of-household); an alien who is ineligible to
receive assistance due to his or her immigration status; and, at State
option on a case-by-case basis, a recipient of Supplemental Security
Income (SSI) benefits. We have excluded these groups because they
either cannot receive TANF-funded services or it would be inappropriate
to require them to work. For example, many immigrant families lack a
work authorization or permit and requiring these adults to work would
be a violation of their immigration status. In the case of non-
recipient minor parents, we want to encourage them to stay in school
and complete their education.
    Unless otherwise excluded above, we chose to include all other non-
recipient parents living with a child receiving assistance as work-
eligible individuals. This new language primarily adds child-only cases
to the work participation rates, but could include some two-parent
cases where both parents live in the household but one is not part of
the assistance unit. In particular, it adds families in which non-
recipient parents were removed from a case due to a sanction or a State
time limit. We have included these groups because expecting parents to
participate in work activities is consistent with the goal of reducing
dependency by promoting work. Further, such a policy improves the
consistency of the work participation rate calculation across States,
specifically called for in the Deficit Reduction Act of 2005.
    To illustrate the importance of including these families, consider
the situation of a parent whose needs have been removed from the case
due to a work-related penalty. The effect on a family's grant of
removing a parent's needs from the assistance unit is often no
different from the effect of a sanction that uses a fixed percentage or
dollar amount. Yet, under the original TANF rules, cases with a
parent's needs removed were excluded from the calculation of work
participation rates because they became child-only cases, whereas those
subject to fixed percentage or dollar amount sanction methods were, by
law, excluded for a maximum of only three months in a 12-month period.
Under the interim final rule, we bring consistency to how we treat all
sanction methods in the participation rates. Similarly, families in
which non-recipient parents whose needs have been removed from the case
for other types of sanctions will now be included in the calculation of
work participation rates.
    We give States the option of including on a case-by-case basis
families in which a non-recipient parent receives SSI. SSI recipients
are not eligible for TANF benefits and we recognize that many are
unable to work. Therefore it would not be appropriate to require
inclusion of their families in the rates. However, the Social Security
Administration is working to remove disincentives to work from the SSI
program, and we would like to encourage States to support these efforts
through their TANF programs. Therefore, we will allow States to receive
credit toward the TANF participation rates for any parents that are
able to participate in these efforts by including their families in
both the numerator and the denominator of the calculation of the
participation rate on a case-by-case basis.
    We also chose to exclude from the definition of a work-eligible
individual a parent providing care for a disabled family member living
in the home who does not attend school on a full-time basis. The State
must provide medical documentation to support the need for the parent
to remain in the home to care for the disabled family member. We
recognize that parents responsible for disabled family members often
encounter problems finding affordable and appropriate care and may not
be able to participate in TANF work activities to the same extent as
other adults. We therefore exclude them from the participation rate
calculation. We chose not to count their participation as one of TANF's
work activities, as several States did under prior rules, because this
activity cannot be easily supervised and is not focused on preparing
individuals for unsubsidized employment.
    In drafting this interim final rule, it has been our goal to ensure
that States can meet the needs of all individuals in their caseloads.
We are interested in receiving comments about our approach in this
area, particularly with respect to a State's ability to serve families
struggling to escape welfare dependency in which there is an individual
with a disability.
    Finally, readers should note that the definition of ``work-eligible
individual'' does not include individuals in families served under an
approved Tribal TANF program, even if those families receive State MOE
funding, unless the State includes those Tribal families in calculating
work participation rates, as permitted under Sec.  261.25.

Subpart A--What Are the Provisions Addressing Individual
Responsibility?

    We made no changes to this subpart.

[[Page 37463]]

Subpart B--What Are the Provisions Addressing State Accountability?

Section 261.20 How will we hold a State accountable for achieving the
work objectives of TANF?

    At the heart of PRWORA was the expectation that we hold States
accountable for moving families from welfare to self-sufficiency
through work. Each State had to meet two separate work participation
rates that reflected how well it succeeded in engaging adults in work
activities. The minimum participation rate for adults in all families
(the overall rate) started at 25 percent in FY 1997 and rose to 50
percent in FY 2002 and thereafter. The minimum participation rate for
adults in two-parent families (the two-parent rate) was 75 percent in
fiscal years 1997 and 1998, increasing to 90 percent afterward. A State
that failed to meet the required participation rates was subject to a
monetary penalty. The Deficit Reduction Act of 2005 retains the 50
percent participation requirement for all families and the 90 percent
requirement for two-parent families, but includes families in separate
State programs in the calculation of the respective work participation
rates.
    Our original TANF rule included similar but separate regulatory
provisions for the ``overall'' and ``two-parent'' participation rates.
These same distinctions and provisions are continued in this interim
final rule, but we extend the calculation of work participation rates
to include families with a work-eligible individual in order to conform
to our new wording on calculating the work participation rates. We also
added a reference to the years that the participation rates apply.

Section 261.21 What overall work rate must a State meet?

    Under PRWORA, the overall participation rate for adults in families
started at 25 percent in FY 1997 and increased by five percentage
points each year to 50 percent in FY 2002 and thereafter. Under our
prior TANF rules, this section of the regulation included a chart of
the minimum participation rates required by fiscal year. The Deficit
Reduction Act of 2005 continues the overall work participation rate at
50 percent in FY 2006 and thereafter. Under the interim final rule, we
have deleted the former phased-in participation rate chart and updated
the language to reflect these statutory requirements.

Section 261.22 How will we determine a State's overall work rate?

    To determine a State's participation rate, PRWORA called for
dividing the number of families receiving TANF assistance that include
an adult or a minor child head-of-household engaged in work activities
by the total number of such families, excluding families sanctioned
that month for refusal to participate in work activities, as long as
they had not been penalized for more than three months in the preceding
12-month period. A State could also exclude from the denominator
single-parent families with a child under the age of one for not more
than a total of 12 months or include or exclude families receiving
assistance under a tribal family assistance plan or under a tribal
Native Employment Works (NEW) program.
    The Deficit Reduction Act of 2005 modifies the work participation
rate calculation to include families with an adult or minor child head-
of-household under State programs funded with qualified State
expenditures and other work-eligible individuals, which we have defined
in Sec.  261.2. In Sec. Sec.  261.22(a)(2) and (b)(1), we simply modify
the prior language to reflect this new calculation.
    In general terms, the original participation rate calculation
excluded two categories of families. First, it excluded families
subject to a work sanction for not more than three months in the
preceding twelve months. Second, it excluded (for a maximum of 12
months) families in which a single custodial parent is caring for a
child less than one year old. In this interim final rule, we clarify
that States may apply both of these exclusions on a case-by-case basis
for families with a work-eligible individual Sec. Sec.  261.22(b)(3)
and (c)(2).
    As we note in the preamble to Sec.  261.24, we do not consider a
two-parent family with a disabled work-eligible individual to be a two-
parent family for work participation rate purposes. The statute directs
us to exclude these families from the two-parent work participation
rate calculation, but not from the overall work participation rate
calculation.
    Similar to the policy we allowed under the original TANF rule,
States may now count families for a partial month if a work-eligible
individual is engaged in work for the minimum average number of hours
in each full week that the family receives assistance.
    This policy is now added to the rule at Sec.  261.22(d)(1). States
that pay benefits retroactively also have the option to consider the
family to be receiving assistance during the period of retroactivity
under Sec.  261.22(d)(2).

Section 261.23 What two-parent work rate must a State meet?

    Under PRWORA, the overall participation rate for two-parent
families started at 75 percent in FY 1997 and increased to 90 percent
in FY 1999 and thereafter. Under prior TANF rules, this section of the
regulation included a chart of the minimum participation rates required
by fiscal year. The Deficit Reduction Act of 2005 continues the two-
parent work participation rate at 90 percent in FY 2006 and thereafter.
Under the interim final rule, we have deleted the former phased in
participation rate chart and updated the language to reflect these
ongoing statutory requirements and dates.

Section 261.24 How will we determine a State's two-parent work rate?

    The Deficit Reduction Act of 2005 modifies the statute to include
in the two-parent work participation rate calculation two-parent
families in ``State programs funded with qualified State
expenditures.'' It also gave us the authority to include other two-
parent families with work-eligible individuals, which we have defined
in Sec.  261.2. In Sec. Sec.  261.24(a)(2), (b)(1) and (b)(2) we modify
the language to reflect the new statutory participation rate
calculation.
    The original two-parent participation rate calculation also
excluded families subject to a work sanction for not more than 3 months
in the preceding 12 months. We modify this exclusion at Sec.  
261.24(b)(2) to apply to two-parent families with work-eligible
individuals.
    Additionally, under Sec.  261.24(d) we clarify two provisions of
current policy: (1) We count toward the participation rate those
families receiving assistance for a partial month if a work-eligible
individual is engaged in work for the minimum average number of hours
in each full week that the family receives assistance; and (2) States
that pay benefits retroactively also have the option to consider the
family to be receiving assistance during the period of retroactivity.
    Unchanged by the Deficit Reduction Act of 2005, we will continue to
sum the participation hours of both parents in the assistance unit when
calculating the two-parent rate. This differs from the way two-parent
families are treated in the overall work rate, which requires that all
of the participation requirements be met by one of the adults in the
assistance unit. Also, as under PRWORA and the original rule in
paragraph (e) of this section, we do not

[[Page 37464]]

consider a two-parent family with a disabled work-eligible individual
to be a two-parent family for work participation rate purposes.

Section 261.25 Do we count Tribal families in calculating the work
participation rate?

    This section of the prior rule permits a State to include families
that are receiving assistance under an approved Tribal family
assistance plan or under a Tribal work program in calculating the
State's participation rate. We have made a slight change to this
section in the interim final rule by adding the term ``with a work-
eligible individual'' after family to be consistent with our revised
calculation methods and the definition of a work-eligible individual in
Sec.  261.2.

Subpart C--What Are the Work Activities and How Do They Count?

    We revised only two sections of subpart C.

Section 261.31 How many hours must a work-eligible individual
participate for the family to count in the numerator of the overall
rate?

    As we explained in Sec.  261.2, we added a new definition of a
work-eligible individual for purposes of calculating the work
participation rates. The only changes we have made to Sec.  261.31 are
to incorporate this phrase into the heading and to substitute the
phrase ``work-eligible individual'' for the word ``individual'' where
it is appropriate.
    We would like to emphasize that under these rules States retain the
flexibility to assign an individual to a combination of activities, for
example blending school and work or training and work or job search and
community service, to reach the hours needed to count a family in the
rate. We encourage States to use this approach where it best serves the
needs of their clients.
    A work-eligible individual who participates in a work experience or
community service program that is subject to FLSA requirements cannot
be required to participate in that work activity for more hours than
the welfare grant divided by the minimum wage. For some families, the
TANF grant divided by the minimum wage does not result in enough hours
to satisfy TANF's minimum hourly requirements. In general, a TANF grant
of less than $446 would result in fewer than 20 hours of countable
participation per week through an activity that is subject to the FLSA
requirements. (This amount is based on the Federal minimum wage; it
would be smaller in States that have a higher State minimum wage.) For
a family of three, the maximum TANF grant in about 30 States is less
than $446 per month; however, the FLSA calculation is not limited to
the TANF grant.
    According to the Department of Labor's guidance entitled ``How
Workplace Laws Apply to Welfare Recipients'' (May 1997), a State may
count the cash value of food stamps toward participation requirements
if the State adopts a food stamp workfare program. In addition, a State
could adopt a Simplified Food Stamp Program, which would allow it to
match its food stamp exemptions to those of its TANF program. For
example, the Food Stamp Program exempts single parents with a child
under age 6 from participation. Adopting a Simplified Food Stamp
Program would allow a State to count food stamp benefits toward the
hours of required participation for this otherwise exempt group. By
adding the value of food stamps, recipients in most States could meet
current TANF's requirement for 20-hour per week of core activities.
Indeed, the combined TANF/Food Stamp benefit in all States for a family
of three or more exceeds the $446 threshold.
    Even after counting the value of food stamps, in some States TANF
families with just one or two people in the assistance unit may still
not have a large enough combined TANF/food stamp grant to generate the
20 hours per week of participation needed to satisfy TANF's core
activity requirement. The combined benefits also may not be enough for
families that have unearned income, such as Social Security and child
support, and do not receive the maximum TANF grant. Moreover, some TANF
families do not receive food stamps, so there is no food stamp benefit
to add to the calculation.
    Under this interim final rule, we allow States to count any family
that participates the maximum hours it is allowed under the minimum
wage requirement of the FLSA as having satisfied the 20-hour per week
core activity requirement if actual participation falls short of 20
hours per week. We are limiting this policy to States that have adopted
a food stamp workfare program and a Simplified Food Stamp Program to
ensure that recipients participate to the fullest extent possible and
that the calculation of the work participation rate is based on uniform
standards across all States. The Simplified Food Stamp Program must be
structured to match food stamp exemptions to those of the TANF program
so that work requirements could be applied to as many work-eligible
individuals as possible. Families that need additional hours beyond the
core activity requirement must satisfy them in some other TANF work
activity.
    This policy respects the protections that the FLSA affords to
individuals in positions subject to the minimum wage requirement. At
the same time, it gives added flexibility in the work participation
rate for States that maximize the hours they can require of individuals
in such positions.
    We considered remaining silent on FLSA; however, given the
challenge of meeting the work participation rates under the Deficit
Reduction Act of 2005, we thought it important to address this issue in
a consistent and fair manner. Nearly all States have some cases that
cannot meet the 20-hour minimum required in core work activities to
count toward the work participation rate. The FLSA clarification
provides States with increased flexibility to assign work activities
and meet work participation rates while treating participants subject
to the FLSA requirements fairly. We also considered establishing a
maximum number of hours that a State could use to meet the core hour
requirement, such as 5 hours per week. While this would be an
improvement over existing rules, a 5-hour cap would only address a
portion of the affected cases and would be administratively complex;
therefore we decided against this approach.

Section 261.32 How many hours must a work-eligible individual
participate for the family to count in the numerator of the two-parent
rate?

    In similar fashion to Sec.  261.31 above, we substituted the phrase
``work-eligible individual'' for the word ``individual'' in the heading
and in the section as needed to clarify how States can count hours and
the calculation of the two-parent work participation rate. Again, we
stress that States may combine the activities to which it assigns
individuals, blending, for example, school and work or training and
work or job search and community service, to reach the hours needed to
count a family in the work participation rate.
    As we do for single-parent families, when two-parent families have
work-eligible individuals in work activities subject to the minimum
wage requirement of the FLSA, we will count any family that
participates the maximum hours allowable as having satisfied the 30-
hour per week (or 50-hour per week, if the family receives federally-
funded child care) core activity requirement, even if actual
participation falls short of 30 (or 50) hours per week. For a more
detailed

[[Page 37465]]

discussion of this policy, please refer to the preamble to Sec.  
261.31.

Subpart D--How Will We Determine Caseload Reduction Credit for Minimum
Participation Rates?

    Under PRWORA, the caseload reduction credit reduces the required
work participation rate that a State must meet for a fiscal year by the
percentage that a State reduces its overall caseload in the prior
fiscal year compared to its caseload under the title IV-A State plan in
effect in FY 1995, excluding reductions due to Federal law or to State
changes in eligibility criteria. The Deficit Reduction Act of 2005
recalibrates the caseload reduction year by establishing a new FY 2005
base year, which is reflected in this interim final rule in Sec. Sec.  
261.40, 261.41 and 261.42.
    Because of the sharp caseload decline since FY 1995, the caseload
reduction credit had virtually eliminated participation requirements
for most States. By recalibrating the base year for the caseload
reduction credit, this provision encourages States to help families
become independent.

Section 261.40 Is there a way for a State to reduce the work
participation rates?

    In this section, we have eliminated the obsolete reference to FY
1995 and replaced it with the new base year of FY 2005, as required by
the Deficit Reduction Act of 2005. The caseload reduction credit for a
fiscal year equals the percentage point decline in the caseload, net of
eligibility changes, between FY 2005 and the prior-year caseload. To
simplify the language at Sec.  261.40(a)(3), we have also created a new
term--``comparison year''--to refer to the fiscal year that precedes
the fiscal year to which the credit applies.
    For the two-parent participation rate, our interim final rule
continues to allow a State to use the caseload decline, net of
eligibility changes, of either the two-parent caseload or the overall
caseload.
    As under current policy, Sec.  261.40(b)(1) of the interim final
rule clarifies that the calculation of the caseload reduction credit
must disregard caseload reductions due either to changes in Federal law
or to changes that a State has made in its eligibility criteria in
comparison to the criteria in effect in the new base year of FY 2005.
However at Sec.  261.40(b)(2) we clarify that a State may reduce or
offset the disregard for caseload reductions due to changes in
eligibility criteria that increase caseloads. In other words, the
revised regulatory language simply clarifies our continuing policy: We
will calculate a net impact of eligibility changes (i.e., caseload
decreases minus increases) if the State provides information on changes
that increase the caseload. A State is under no obligation to provide
the impacts of changes that increase the caseload. Such impacts merely
serve to offset the effects of eligibility changes that decrease the
caseload and as such are to a State's advantage because they may make
for a larger credit.
    We will continue to base the caseload decline on the combined TANF
and Separate State Program caseload figures for families receiving
assistance. As indicated at Sec.  261.40(c), we will use the ACF-199,
TANF Data Report, and the ACF-209, SSP-MOE Data Report, to establish
both the FY 2005 base-year and the comparison-year caseloads. We have
deleted references to earlier data reports needed for the FY 1995 base
year. This rule continues to allow States to correct erroneous data and
make adjustments to include unduplicated data.

Section 261.41 How will we determine the caseload reduction credit?

    Again in this section, we have substituted FY 2005 for any prior
reference to FY 1995, as required by the Deficit Reduction Act of 2005.
Our interim final rule maintains the same general caseload reduction
methodology, while simplifying some of the reporting requirements.
    In particular, we have eliminated the requirement formerly located
at Sec.  261.41(a)(1), (b)(5) and (b)(6) that States report caseload
closure and application denial information because we have found that
this information is not always relevant or helpful in estimating the
impact of an eligibility change. Instead, a State should submit
whatever data or analyses are most relevant for estimating the average
monthly impact of individual policy changes on the comparison-year
caseload and include that information as an attachment to its ACF 202--
TANF Caseload Reduction Report. Those materials should clearly show the
step-by-step processes the State uses to arrive at each impact and
should demonstrate how the State took into account the effect of the
change over time. In conjunction with this interim final rule, we are
revising the Caseload Reduction Report form to accommodate the
revisions to the credit calculations and to reduce the reporting burden
on States.
    The interim final rule continues to require under Sec.  
261.41(b)(6) that a State certify that it has provided the public an
opportunity to comment on the estimates and methodology and
incorporated all net reductions resulting from Federal and State
eligibility changes. We have, however, dropped the prior requirement
that States submit a summary of public comments received about the
proposed methodology, as we have not found this helpful to the process
of calculating the credits.
    The interim final rule also clarifies at Sec.  261.41(c)(2) the
language permitting a State requesting a caseload reduction credit for
its two-parent caseload to base its estimate on either the change in
its two-parent caseload or on the decline in its overall caseload. We
made no changes to paragraphs (d), (e) or (f) of the prior rule.

Section 261.42 Which reductions count in determining the caseload
reduction credit?

    We revised language in Sec.  261.42(a) to clarify that the caseload
reduction credit calculation must disregard caseload reductions due
either to Federal law or to changes in State eligibility criteria in
comparison to the criteria in effect in FY 2005; however, a State may
also reduce the disregard for caseload reductions due to changes in
eligibility criteria that increase caseloads. As we explained in the
preamble to Sec.  261.40, this change only clarifies our ongoing policy
of calculating the net impact of eligibility changes (i.e., caseload
decreases minus increases) where a State provides information on the
impacts of policies that expanded eligibility. In addition, we also
incorporated into the regulation at Sec.  261.42(a)(3) our existing
policy that a State may not receive a caseload reduction credit that
exceeds the actual caseload decline between FY 2005 and the comparison
year.
    At Sec.  261.42(b), we also clarified in the regulatory language
that a State include Separate State Program cases in both its base-year
and its comparison year caseloads. We have eliminated the reference to
``cases made ineligible for Federal benefits by Pub. L. 104-93.'' It is
no longer relevant due to the change in the base year to FY 2005,
required by the Deficit Reduction Act of 2005. Indeed, the new base
year also means many caseload reductions due to State changes in
eligibility criteria no longer apply because such policies were in
effect in the new, recalibrated base year of FY 2005.

Section 261.43 What is the definition of a ``case receiving
assistance'' in calculating the caseload reduction credit?

    Our interim final rule does not make any changes to the definition
of a ``case receiving assistance'' in calculating the

[[Page 37466]]

caseload reduction credit. The only change we have made in this section
is the elimination of the reference to a State's implementation date
formerly in Sec.  261.43(b) which is no longer applicable, with the
statutory change in the base year to FY 2005.

Section 261.44 When must a State report the required data on the
caseload reduction credit?

    Our interim final rule continues to require that a State report the
necessary documentation on caseload reductions for the preceding fiscal
year by December 31. We have removed the reference to our intent to
notify a State of its caseload reduction credit no later than March 31.
Discussions with States about their caseload reduction methodology,
negotiations about necessary changes, and requesting and receiving
additional data and documentation have often gone beyond the prior
notification date of March 31. This in no way represents a change in
our intention to issue caseload reduction credits as early in a fiscal
year as possible.

Subpart F--How Do We Ensure the Accuracy of Work Participation
Information?

    Under our prior rules, subpart F was entitled ``How Do Welfare
Reform Waivers Affect State Penalties?'' Because this subpart now only
applies to one State, we moved the subpart to subpart H, with
appropriate re-designation and renumbering changes. We also think the
new work verification provisions of the Deficit Reduction Act of 2005
more logically follow the discussion of participation requirements and
the caseload reduction credit, so we have added them under a new
subpart F.
    Under the Deficit Reduction Act of 2005, HHS is required to
promulgate regulations to ensure consistent measurement of work
participation rates. The statute directs the Secretary to include
information with respect to (1) determining whether the activities of a
recipient of assistance may be treated as a work activity; (2)
establishing uniform methods for reporting hours of work of a recipient
of assistance; (3) identifying the types of documentation needed by the
State to verify reported hours of work; and (4) specifying the
circumstances under which a parent who resides with a child who is a
recipient of assistance should be included in the work participation
rates.
    A reliable and consistent work participation measurement system
requires uniformity among States in identifying work-eligible
individuals and in the counting of work hours. To help achieve this
goal, we defined a work-eligible individual and each of the work
activities in Sec.  261.2 and created new sections describing methods
for reporting and the types of documentation needed to verify a work-
eligible individual's hours of participation. To verify work
participation information under these rules, each State must establish
and maintain the procedures and internal controls outlined below. The
following provides the specific new verification requirements we added
and the statutory authority for these requirements.

Section 261.60 What methods may a State use to report a work-eligible
individual's hours of participation?

    Under the prior TANF rule, some States asked whether they were
required to report actual hours of participation or whether they could
report required or scheduled hours. We replied that ``The State must
report the actual hours of participation for each work activity.
Reporting required (or scheduled) hours of participation is
inconsistent with the `complete and accurate' standard and is not
acceptable.'' (See the answer to question 42 under TANF
Reporting Questions under TANF Program Policy Questions and Answers,
which can be found on our Web site.

    Our interim final rule at Sec.  261.60(a) makes the existing policy
of counting only actual and not scheduled hours explicit in the
regulations. The new legislative language in the Deficit Reduction Act
of 2005 makes clear that Congress intended that only actual hours of
work activities should count toward the participation rates. Allowing
scheduled hours would both introduce inconsistencies among States and
reduce the incentive for States to ensure that recipients actually
participate for the hours they are assigned. Thus, each State must have
in place a system for determining whether the hours they report toward
the participation rates correspond to hours in which work-eligible
individuals actually participate in work activities. The State must
describe this system as part of its Work Verification Plan, which we
explain in detail at Sec.  261.62.
    Under Sec.  261.60(b) of these interim final rules, we continue to
permit States to follow ordinary practice for counting work time by
basing it on the hours for which the individual was paid, thus allowing
for occasional absences due to paid holidays and sick leave. We
recognize that all clients, regardless of the activity in which they
participate, may miss work or training because of a holiday or a
temporary illness.
    Thus, our interim final rule permits States to count limited
excused absences for individuals in unpaid allowable work activities. A
State may define and count reasonable short-term, excused absences for
hours missed due to holidays and a maximum of 10 additional days of
excused absences in any 12-month period, no more than two of which may
occur in a month. In order to count an excused absence as actual hours
of participation, the individual must have been scheduled to
participate in an allowable work activity for the period of the absence
that the State reports as participation.
    We believe the 10-day limitation for additional days beyond
holidays is an appropriate accommodation that takes into consideration
varying work-site and educational practices as well as unexpected
events that cause a work-site to close or an individual to miss
scheduled hours. Each State must describe its ``excused absence''
policies and practice as part of its Work Verification Plan described
below in Sec.  261.62. We considered not addressing excused absences
for unpaid participants but rejected this alternative in order to treat
recipients in all activities equitably. We also considered permitting
more days of excused absences but decided on 10 based on a typical
accrued leave scenario for working families. For example, many places
of employment allow employees to accrue one half day of leave per two-
week pay period, which accounts for about 13 days over a calendar year.
These individuals often work 40 hours per week. Our decision to allow
10 days is based on required hours of 20 or 30 hours per week in non-
paid work.
    We want to emphasize that this ``excused absence'' policy applies
to what may be counted in the Federal participation rate. The policy in
no way limits a State's flexibility to excuse absences or otherwise
make accommodations in the participation requirements it imposes on
individuals. That is why the participation requirement is only 50
percent. An individual's requirements are set by the State balancing
the goals of the program, the needs of the family, and obligations
under the Americans with Disabilities Act (ADA) and Section 504 of the
Rehabilitation Act of 1973. Thus, the State may require more or fewer
hours of the individual than needed to count the family toward the
Federal participation rate. States may also have a more expansive or a
more restrictive list of allowable activities than those

[[Page 37467]]

that count to meet the Federal participation rate.
    Under Sec.  261.60(c) of the interim final rule, we make clear
that, in the case of self-employment, as we noted in our discussion of
the definition of unsubsidized employment in Sec.  261.2, we will not
permit a State to count more hours toward the participation rate for a
self-employed individual than the number derived by dividing the
individual's self-employment income (gross income less business
expenses) by the Federal minimum wage. A State may propose an
alternative method of determining self-employment hours as part of its
Work Verification Plan.
    Finally as a reminder of current policy, because some weeks fall
across more than one month, we allow States to choose one of three
methods to calculate the average hours per week for such a month. A
State may decide that the week falls in the month that includes the
majority of the days of that week; it may include the week in the month
in which the Friday falls; or it may count each month of the fiscal
year as having 4.33 weeks. We considered establishing a single method
to promote consistent work participation measurement but ultimately
decided against regulating in this area. Any differences in State
approaches average out over the fiscal year and thus do not result in
inconsistent measurement. In our view, the appeal of a single method
does not justify the administrative burden on States that would need to
change their data reporting systems.

Section 261.61 How must a State document a work-eligible individual's
hours of participation?

    To clarify recordkeeping requirements with respect to
participation, the interim final rule at Sec.  261.61(a) adds an
explicit requirement that a State must verify through documentation in
the case file all hours of participation that it reports. The Work
Verification Plan required at Sec.  261.62 must describe the forms of
documentation that the State will use. Under this requirement, a State
may not report data to us on the basis of ``exception reporting'' where
States assume that clients participate in all scheduled hours unless it
receives a report to the contrary from a service provider.
    As explained at Sec.  261.61(b), we expect that many States will
continue to use pay stubs as the basis for documenting hours of
participation in unsubsidized employment, provided by either the
employee or employer at State-specified periods. This approach has
significant advantages: It uses an existing system of valid documents
for which the employer has great incentives to ensure accuracy, and it
minimizes reporting burden. Other possibilities include timecards,
sign-in/sign-out sheets, and rosters with recorded hours of work.
    We encourage States to develop systems that minimize requests for
documentation from an employer of an employee's hours of participation.
We want to ensure that our documentation and verification requirements
do not discourage work by placing an undue burden on the employer
because a primary goal of TANF is to help clients achieve self-
sufficiency through unsubsidized work.
    Under Sec.  261.61(c) of the interim final rule, we permit States
to report projected actual hours of unsubsidized or subsidized
employment or OJT for up to six months at a time on the basis of prior,
documented actual hours of work. This rule is similar to the
``prospective budgeting'' that was used to calculate earned income and
grant amounts under the former AFDC program. If a State chooses to
project actual hours of work, the State must provide its policies and
practices in its Work Verification Plan required under Sec.  261.62(b).
    An example will illustrate what we envision. Based on valid
documentation such as pay stubs, or employer reports, a State knows
that a client averages 32 hours of work per week. As long as the State
receives no conflicting information, the State may report 32 hours of
participation a week in employment for a maximum of the next six
months. At the end of this six-month period, the State must obtain new
valid documentation or re-verify the client's current, actual average
hours and these hours may be reported for another six-month period. If,
at any time, the State becomes aware of a change in the client's work
situation, the new actual hours must be documented and may be
prospectively reported for six months. For example, if a client
requests a grant adjustment due to either increased or decreased wages,
this report would require documentation and a restatement of the actual
hours of participation.
    In developing this option, we considered whether the timeframe
should be shorter, for example three months. However, we believe that a
six-month period appropriately balances the administrative burden with
the Deficit Reduction Act's new emphasis on verification and
documentation. We want to emphasize that this method of reporting
projected actual hours is only permitted for paid employment under the
activities of unsubsidized employment, subsidized employment or OJT.
    For non-employment activities, as outlined in Sec.  261.61(d), we
believe States should require service providers to document the hours
of their clients' participation. Documentation could include time
sheets, service provider attendance records and school attendance
records. If there are other documents that would substantiate the hours
an individual participates in these activities, the State should
specify them in its plan. Contractual arrangement with service
providers of work activities should require documentation of the hours
in which an assigned recipient participates.
    Section 261.61(e) relates to reporting self-employment hours. In
such cases, there is neither an employer to issue a pay stub nor a
supervisor or teacher to monitor participation. Therefore, the State
needs another approach to documenting the hours it reports for the
participation rate. Under these circumstances, we will allow States to
count the number of hours derived by dividing the individual's self-
employment income (gross income less business expenses) by the Federal
minimum wage. A State may propose an alternative method of determining
self-employment hours as part of its Work Verification Plan. We will
not approve plans that provide for an individual's self-reporting of
participation without additional verification.

Section 261.62 What must a State do to verify the accuracy of its work
participation information?

    The Deficit Reduction Act of 2005 requires the Secretary to issue
rules on determining whether activities may be counted as work
activities, verifying countable hours of work, and determining who is a
work-eligible individual. Under Sec.  261.62(a), a State must establish
and employ procedures for: (1) Determining whether its work activities
may count for participation rate purposes; (2) determining how to count
and verify reported hours of work; (3) identifying who is a work-
eligible individual; and (4) internal controls to ensure compliance
with the procedures; and (5) submit a complete Work Verification Plan
to the Secretary for approval. We outline our expectations and
guidelines for these requirements below.
    Procedures for determining whether work activities may count for
participation: Under Sec.  261.62(b)(1)(i) for each of its work
activities, a State must establish procedures to ensure that the
activity is consistent with one of the work definitions in Sec.  261.2.
Hours of participation must be reported for the proper countable work
activity. For

[[Page 37468]]

example, our definition of a community service program excludes
activities that do not directly benefit the community. Therefore,
family- and self-improvement activities can no longer be counted as a
community service work activity in the participation rate. For each
work activity, the State's procedures should specify the types of
situations and range of activities which will be included.
    Procedures for determining how to count and verify reported hours
of work: Under Sec.  261.62(b)(1)(ii), for each countable work activity
in which a work-eligible individual participates, States must report
the actual hours of participation in the report month and calculate and
report the average hours of participation per week for each month in
the quarter. Acceptable documentation for the reported hours must be
based on affirmative reports that the individual actually participated
for the reported hours, rather than an exception reporting system.
    Under Sec.  261.62(b)(1)(iii), for each of the work activities, a
State must describe in its Work Verification Plan the documentation it
uses to monitor participation and ensure that it reports actual hours
of participation. While all activities must be supervised no less than
daily to count in the work participation rate, we are establishing a
range of documentation guidelines that vary by type of activity. Job
search and job readiness assistance should be documented daily due to
the short-term nature of this activity. Other unpaid work activities,
including work experience, community service programs, vocational
educational training, and providing child care to participants in
community service programs, require documentation of hours of
participation no less than every two weeks. For paid employment, as we
explain in the preamble to Sec.  261.61(c), States may report projected
actual hours for up to six months at a time. Readers should refer to
Sec.  261.61 for additional detail about documentation requirements.
    Currently, States may report the family and individual-level data
that HHS uses to calculate work participation rates on either a sample
or population basis. To minimize the documentation verification burden
on States that report using a sample, we expect to focus audits and
reviews on the sample cases used to calculate participation rates.
These sample cases should contain all the documentation needed to count
and verify reported hours of work and identify who is a work-eligible
individual. It is important for States using population data to ensure
that all cases contain all the documentation needed to count and verify
reported hours of work and identify who is a work-eligible individual.
We would be interested in suggestions or approaches as to how to
minimize the documentation burden for the States that report the entire
universe of population data.
    Procedures for identifying who is a work-eligible individual:
[Sec. Sec.  261.62(b)(2) and (3)] The Deficit Reduction Act of 2005
requires the Secretary to identify the circumstances under which a
parent who resides with a child who is a recipient of assistance should
be included in the work participation rates. Thus, we have defined a
work-eligible individual in Sec.  261.2 and have added a data element
``Work-eligible Individual Indicator'' to the quarterly data reports.
This definition includes all adults and minor child heads-of-household
receiving assistance and some non-recipient parents.
    Identifying adult and minor child head-of-household recipients as
work-eligible individuals should not be difficult--they have been
included in the work participation rates since the inception of the
TANF program. However, we now require that some non-recipient parents
be included to ensure consistent work participation rates. For example,
a parent whose needs have been removed from the grant due to a work-
related sanction is included in the definition of a work-eligible
individual and in the work participation rate. (Please refer to the
discussion in the preamble to Sec.  261.2 for more detail about the
definition of a work-eligible individual.) State procedures must be
able to identify all individuals in TANF and separate State programs
claimed for MOE (SSP-MOE) families who meet the definition of a work-
eligible individual.
    Internal controls to ensure compliance with the procedures: Each
State, under Sec.  261.62(b)(5) must develop internal controls and
procedures that are sufficient to verify and validate the work
participation rates. Internal controls include the State's mechanism
for monitoring the quality of its work participation data and may
entail such approaches as a secondary-stage supervisory review, special
studies, regularly scheduled audits or ongoing sampling and quality
assurance processes that are used to monitor adherence to established
policies and work verification procedures by staff and contractors.
    Work Verification Plan: Paragraph (b) of Sec.  261.62 describes
what must be included in a State's Work Verification Plan. The plan
must include a description of the procedures and documentation
requirements outlined above. In addition, under Sec.  261.62(b)(3) a
State must include a description of how it: Accurately inputs into its
automated data processing system; properly tracks the hours; and
accurately reports the hours. Paragraph (b)(4) requires a description
of the procedures for ensuring that only hours of participation in an
activity that meets a Federal definition are transmitted as countable
work activities and paragraph (b)(5) requires a description of the
internal controls to ensure a consistent measurement of the work
participation rates, including any quality assurance processes and
sampling specifications. Under paragraph (c) we state that we will
review a State's plan for completeness and approve it if we believe it
will result in accurate reporting of work participation information.
    States may develop internal control and verification systems that
match their unique program resources and operational requirements. Some
States rely on client information systems and/or use integrated data
warehouses to collect and process work participation information. These
States are able to compile electronically all or most of the work
participation data items, control for the special rules and conditions
that apply to the Federal work activities, compute the average hours
across all activities for the month, perform item-by-item edit checks,
and control for internal consistency and completeness of the work
participation data. Some systems can validate the work data against the
National Directory of New Hires database or State Employment Security
files. Other States may rely on TANF case managers to accurately track
the participation data, including the participation hours and
application of the special rules and conditions.
    Some current systems may be inadequate to meet the new verification
and validation requirements of the statute and this rule. States may
need to develop and conduct quality assurance systems and tests. Using
these procedures, States could: (1) Perform case reviews to validate
the accuracy of the data reported; (2) examine documentation for the
reported hours of work; (3) test how the hours of participation were
calculated; (4) check how data is tracked through the system; (5)
review the verification procedures to ensure they are doing what was
intended; and (6) check what procedures State staff, local staffs, and
contractors are actually using to document, count and report hours of
participation.

[[Page 37469]]

    The State's Work Verification Plan also should describe the State's
procedures for controlling for data errors in inputting work
participation items to the TANF report file. These include
transcription and coding errors, data omissions, computational errors,
and compilation errors. The plan should document the checks used to
isolate electronic systems and programming errors and the steps to
ensure that all work participation report items are internally
consistent. If sampling is used to perform quality assurance tasks to
test the validity of the participation information, the State should
include the sampling specifications in its verification plan.

Section 261.63 When is the State's Work Verification Plan Due?

    In accordance with the Deficit Reduction Act of 2005, paragraph (a)
requires that each State submit its interim verification procedures for
validating work activities reported in the TANF Data Report and, if
applicable, the SSP-MOE Data Report to the Secretary no later than
September 30, 2006. In addition, under paragraph (b), a State must
submit revisions requested by the Department within 60 days of receipt
of our notice, and must submit and operate under an approved Work
Verification Plan no later than September 30, 2007.
    Paragraph (c) describes the time frame for submitting a revised
verification plan to the Secretary for approval. A State must submit
its revised Work Verification Plan by the end of the quarter in which
the State modifies its procedures or internal controls. Validating work
activities is an ongoing process that uses internal controls to check
that staff is properly applying the verification procedures, to ensure
that computer systems have been accurately programmed to implement the
verification procedures, and to ensure the verification procedures are
working properly. As problems are identified, a State may need to
modify its verification procedures and/or internal controls.

Section 261.64 How will we determine if the State is meeting the
requirement to establish and maintain work verification procedures that
ensure an accurate measurement of work participation?

    The Deficit Reduction Act of 2005 adds a new penalty provision to
the Social Security Act at section 409(a)(15) for a State's failure to
establish or comply with its work participation verification
procedures. We will determine whether to impose this penalty based on
two conditions. First, as provided in paragraphs (a) and (b), the State
will be liable for a penalty if it fails to establish its work
verification procedures by submitting its interim Work Verification
Plan by September 30, 2006, or it fails to have its complete plan
approved by September 30, 2007. A complete Work Verification Plan
includes all the information required by Sec.  261.62(b) and a
certification that it accurately reflects State operating procedures.
    Second, as set forth in paragraph (c), beginning in FY 2008, we
will use the single audit under OMB Circular A-133 in conjunction with
other reviews, audits, and data sources to assess the validity of a
State's internal control procedures and the accuracy of the data filed
by States to calculate the work participation rates. We will determine
whether a State is penalty-liable based on the findings drawn from a
sample of cases during the single audit or via another Federal review.
Therefore, States must maintain case documentation and pertinent
findings produced through its verification process for use by the
single State audit or ACF in its review of the State's work
participation verification system.

Section 261.65 Under what circumstances will we impose a work
verification penalty for failure to submit a work verification plan or
for failure to maintain adequate internal controls to ensure a
consistent measurement of the work participation rates?

    The new statutory penalty language at section 409(a)(15)(B) of the
Social Security Act requires us to base the penalty on the State's
degree of noncompliance with its work verification procedures, and that
it equal an amount of not less than one percent and not more than five
percent of the State's adjusted SFAG. Under paragraph (a) of this
section, we will take action to impose a penalty if the State has not
met the requirements of Sec.  261.64. Under paragraph (b), if a State
fails to submit its interim Work Verification Plan by the due date of
September 30, 2006, or fails to revise its procedures based on Federal
guidance and submit the complete plan by September 30, 2007, that we
approve, we will impose a penalty of five percent, because the State
will not have complied with the fundamental requirements of the law.
    Under paragraph (c), if, beginning in FY 2008, we determine,
through audits or special reviews, that the State has not maintained
adequate documentation, verification and internal control procedures to
ensure the accuracy of the data used in calculating the work
participation rates over the course of a fiscal year we will base the
penalty on the number of times the State fails to meet the
requirements. We will impose a penalty based on the number of years
that a State fails to comply, i.e., one percent of the adjusted SFAG
for the first year, two percent for the second year, three percent for
the third year until a maximum of five percent is reached. If a State
subsequently complies with its work verification procedures for two
consecutive years after any failure, we will consider a subsequent
failure to be the first occurrence again.
    If a penalty is assessed, we will impose it in the immediately
succeeding fiscal year. States that are subject to a penalty for
failure to comply with work verification procedures may claim
reasonable cause as specified at Sec.  262.5. They may also submit a
corrective compliance plan to remedy the deficiency as described at
Sec.  262.6. States that elect to enter into a corrective compliance
plan will have the same time frame for correcting this violation that
applies to the penalty for failing to satisfy the minimum work
participation rates and the penalty for failing to comply with the
five-year limit on the receipt of Federal assistance under Sec.  
262.6(e)(1). Thus, any State that is subject to a penalty for failing
to establish or comply with the work participation verification
procedures must fully correct the violation by the end of the first
fiscal year ending at least six months after our receipt of the State's
corrective compliance plan. We may also require an amendment to the
State Verification Plan as one of the steps the State must take to
correct or discontinue the violation. We have added this requirement to
Sec.  262.6(f).

Part 262--Accountability Provisions--General

Section 262.1 What penalties apply to States?

    The Deficit Reduction Act of 2005 adds an additional penalty at
section 409(a)(15) of the Social Security Act for States that fail to
establish or comply with work participation verification procedures. If
we determine that this penalty applies, then we must reduce the
adjusted SFAG payable for the immediately succeeding fiscal year by not
less than one percent and not more than five percent. (See the
discussion in the preamble discussion for subpart F of part 261 of this
chapter.) States may avail themselves of the penalty resolution process
provided in Sec. Sec.  262.4 through 262.7, which may enable the State
to avoid this penalty. We added

[[Page 37470]]

this new penalty at (a)(15) and (c)(2) of this section.

Section 262.2 When do the TANF penalty provisions apply?

    The penalty for States that fail to establish work participation
verification procedures takes effect on October 1, 2006. If a State
does not comply with these new work participation verification
procedures by October 1, 2007, it will be subject to the penalty. We
have added this provision as paragraph (d) of this section. Postponing
penalty action until the beginning of FY 2008 for compliance will
provide States with sufficient time to implement fully the changes
associated with the development of work verification procedures.

Section 262.3 How will we determine if a State is subject to a penalty?

    In the preamble to Sec. Sec.  261.64 and 261.65, we noted that we
will impose the penalty for failure to establish or comply with work
participation verification procedures based on two conditions. The
first condition will depend on whether or not the State has submitted
acceptable work participation verification procedures to us. The second
condition will depend on the findings drawn from a sample of cases
during the single audit or via another federal review. We will use the
single audit under OMB Circular A-133 as well as other avenues (e.g.,
other reviews, audits, and data sources) as appropriate to determine
whether the penalty applies. We have added these procedures to
paragraph (a)(1) of this section.

Section 262.6 What happens if a State does not demonstrate reasonable
cause?

    States that are subject to a penalty for failure to establish or
comply with work participation verification procedures will have the
opportunity to claim reasonable cause as specified at Sec.  262.5 and/
or submit a corrective compliance plan to remedy the deficiency as
described in this section.
    In order for a State to avoid a penalty, the State must fully
correct or discontinue the violation within the time frame specified in
the corrective compliance plan. In paragraph (e)(1) of this section, we
specified the fixed time frame in which a State must fully correct or
discontinue the violation for two penalties: Failure to meet the
minimum work participation rates and failure to comply with the five-
year limit on the receipt of Federal TANF assistance. We have
determined that the same fixed time frame should apply to this new
penalty as well. Therefore, States subject to this penalty that elect
to enter into a corrective compliance plan must fully correct the
violation by the end of the first fiscal year ending at least six
months after our receipt of the State's corrective compliance plan. We
have added this penalty to Sec.  262.6(e)(1). Also, we may require, on
a case-by-case basis, an amendment to the State's verification
procedures/plan as one of the steps the State must take to correct or
discontinue the violation. We included this requirement at Sec.  
262.6(f).
    States that are subject to a penalty for failure to meet one of the
required minimum work participation rates also have the opportunity to
claim reasonable cause, as specified at Sec.  262.5. As a reminder,
under the current process, States would not typically learn the results
of the work participation rates for a fiscal year until the third or
fourth quarter of the following year. For example, for FY 2007, after
we receive the final quarter of State work participation data at the
end of the first quarter of FY 2008, it will take several months to
analyze the data and determine which States failed to meet the FY 2007
work participation rates and therefore are liable for a penalty. Any
State that failed to meet one of the required rates then would receive
a notice with several options, including, as noted above, requesting a
reasonable cause exception from the penalty and entering into a
corrective compliance plan to correct the violation fully. Please refer
to the regulations at 45 CFR 262.4 et seq. for a complete explanation
of that process.
    We recognize that this interim final rule imposes new requirements
on States, which, in some States, will require legislative action. We
invite States that believe that it will be impossible to meet the work
participation rates without State legislative action to submit comments
explaining why it will be impossible to meet the required rates and how
we should use the reasonable cause exception to provide relief from the
work participation penalty.

Part 263--Expenditures of State and Federal TANF Funds

Subpart A--What Rules Apply to a State's Maintenance of Effort?

Section 263.2 What kinds of State expenditures count toward meeting a
State's basic MOE expenditure requirement?
    We made changes to the maintenance of effort regulations in Sec.  
263.2(a)(4) to reflect the impact of the provision in the Deficit
Reduction Act of 2005 on counting spending for certain pro-family
activities. Similarly, we clarified existing matching policy under a
new Sec.  263.2(e) and renumbered the former section (e) as section
(f). We also added a new paragraph (g) to clarify that State funds used
to meet any matching requirement under the Healthy Marriage Promotion
and Responsible Fatherhood Grant may count to meet the MOE requirement
in Sec.  263.1.
    As provided under PRWORA, States are subject to a cost-sharing
amount known as the maintenance-of-effort (MOE) requirement. If a State
fails to meet the required minimum all-family or two-parent work
participation rate for a fiscal year, then the State must spend at
least 80 percent of its FY 1994 historic State expenditures in that
fiscal year. If the State meets both minimum work program participation
rate requirements, then the required spending level decreases to 75
percent of its FY 1994 historic State expenditures.
    Before the Deficit Reduction Act of 2005, States could only count
toward their MOE requirement, expenditures to provide assistance,
benefits, and/or services to or on behalf of eligible families,
regardless of the TANF purpose that the expenditure is reasonably
calculated to accomplish. Under our original rule, an ``eligible
family'' must meet two fundamental criteria. First, the family must, at
a minimum, consist of a child living with a custodial parent or other
caretaker relative, or consist of a pregnant woman. Second, to receive
benefits, the family must be financially needy according to the
quantified income and resource (if applicable) criteria established by
the State and contained in the State's TANF plan.
    The Deficit Reduction Act of 2005 maintains the same MOE spending
levels. However, the new law adds a provision ``Counting of Spending on
Certain Pro-Family Activities'' at 409(a)(7)(B)(i)(V) of the Social
Security Act. This provision allows States to count expenditures on
pro-family activities, if the expenditure is reasonably calculated to
prevent and reduce the incidence of out-of-wedlock births (TANF purpose
three), or encourage the formation and maintenance of healthy two-
parent married families (TANF purpose four).
    This new provision allows States to claim for MOE all qualified
pro-family expenditures for non-assistance benefits and services
provided to or on behalf of an individual or family, regardless of
financial need or family composition, if the activity is reasonably
calculated to accomplish either TANF purpose three or TANF purpose
four. We reflect this

[[Page 37471]]

new provision in the MOE regulation at Sec.  263.2(a)(4). However,
States must continue to limit the provision of Federal TANF and MOE-
funded ``assistance,'' as defined in Sec.  260.31(a) to eligible
families, regardless of the TANF purpose.
    Congress also created a new TANF discretionary funding stream
(Grants for Healthy Marriage Promotion and Responsible Fatherhood) in
the Deficit Reduction Act of 2005. Because Congress placed these funds
in title IV-A of the Social Security Act, all State expenditures for
allowable activities under the Healthy Marriage Promotion and Promoting
Responsible Fatherhood programs specified in sections 403(a)(2)(A)(iii)
and 403(a)(2)(C)(ii) of the Act may count toward the State's MOE
requirement, unless a limitation, restriction or prohibition under this
subpart applies.
    Section 409(a)(7)(B)(iv)(IV) of the Act allows States to count
expenditures made as a condition of receiving Federal funds under title
IV, part A of the Social Security Act toward their MOE requirement. The
Healthy Marriage Promotion Grants are under title IV, part A of the
Social Security Act. Therefore, if grantees are required to contribute
a matching share of the total approved costs of Healthy Marriage
Promotion and Responsible Fatherhood projects under subsections
403(a)(2)(A)(iii) and 403(a)(2)(C)(ii) of the Act, then State
expenditures made to meet any required non-Federal share may count
toward the State's MOE requirement, provided the expenditure also meets
all applicable MOE requirements, restrictions, and limitations. This
provision is outlined in Sec.  263.2(g).
    The regulations at 45 CFR Part 92, which apply to the TANF program,
cover matching or cost-sharing requirements. These rules permit States
to count toward their MOE requirement non-Federal cash or in-kind
qualified expenditures on allowable activities by a third party,
provided there is an agreement to do so in writing by the two parties.
We previously clarified this point in TANF Policy Announcement TANF-
ACF-PA-2004-01, dated December 1, 2004. This may include Healthy
Marriage and Responsible Fatherhood providers in a State to meet any
required non-Federal share. In the interest of clarity, we have added a
paragraph discussing the counting of third-party expenditures towards
the MOE requirement at Sec.  263.2(e). This amendment does not reflect
a change in policy.
Section 263.6 What kinds of expenditures do not count?
    The Deficit Reduction Act of 2005 does not change the prohibition
at section 409(a)(7)(B)(iv)(IV) of the Act. Under this prohibition,
States may not count expenditures made ``as a condition of receiving
Federal funds other than under this part'' toward its TANF MOE
requirement. However, paragraph (c) of our original rule does not
accurately reflect this provision, as it stipulates that ``Expenditures
that a state makes as a condition of receiving Federal funds under
another program * * *'' may not count toward the State's MOE
requirement. Therefore, we have corrected paragraph (c) to say that the
prohibition applies to expenditures that a State makes as a condition
of receiving Federal funds under another program that is not in Part
IV-A of the Act. This should avoid any misunderstanding and ensure that
States know that they may count the non-Federal share of expenditures
on allowable activities under the healthy marriage promotion or
promoting responsible fatherhood programs in sections 403(a)(2)(A)(iii)
or 403(a)(2)(C)(ii) of the Act.

Part 265--Data Collection and Reporting Requirements

    Under the TANF program, States must meet a number of specific data
reporting requirements. Some of these reporting requirements are
explicit, primarily in section 411(a) of the Social Security Act, while
others are implicit. For example, States are the source of information
for reports that the Secretary must submit to Congress and also for the
accountability provisions and determination of penalties.
    These data requirements support two complementary purposes: (1)
They provide information about the effectiveness and success of States
in meeting the TANF purposes; and (2) they assure State accountability
for key programmatic requirements. In particular, they ensure
measurement of State performance in achieving the work participation
rates in section 407 and other objectives of the Social Security Act.
    These purposes can only be achieved if data are comparable across
States and over time. Section 411(a)(7) of the Social Security Act
permits the Secretary to prescribe such regulations as may be necessary
to define the data elements required in the reports mandated by section
411(a). This is one of the few places in which the TANF law requires
regulation by the Secretary and therefore reflects the importance of
collecting comparable data.
    The data requirements of section 411(a) reflect particular features
of the program which are important for measuring the success of TANF.
States have collected and reported similar data on the characteristics,
financial circumstances, and assistance received by families for many
years. These data enable Congress and the public to observe how changes
in welfare policies affect the demographic characteristics and the
financial circumstances of families receiving assistance, as well as
the self-sufficiency services provided by States. Similar data
facilitate comparisons across States and over time and promotes better
understanding of what is happening nationwide--how States are assisting
needy families; how they are promoting job preparation, work, and
marriage; what is happening to out-of-wedlock birth trends among
assisted families; and what kinds of support two-parent families are
receiving.
    Section 411(a)(1)(A)(xii) of the Act specifically requires States
to report on ``information necessary to calculate participation rates
under section 407.'' Given the significance of the work rates for
achieving the objectives of TANF and for determining whether States
face penalties, this is an area where accurate and timely measurement
is particularly important.
    Our primary goal in implementing the data collection and reporting
requirements of the Act is to collect the data necessary to monitor
program performance or required by statute. A secondary goal of this
interim final rule is to give States clear guidance about what these
requirements entail and the consequences of failing to meet the
requirements. At the same time, however, we are sensitive to the issue
of paperwork burden and are committed to minimizing the reporting
burden on States, consistent with the TANF statutory framework.
    As an aid to States, we will continue to support personal computer-
based software packages to facilitate data entry and to create
transmission files for each quarterly data report. These system
supports also provide some edits to ensure data consistency. The
transmission files use a standard file format for electronic submission
to ACF. For the aggregated sections of the quarterly reports, we have
created web-based reporting systems that permit easy access to States
for adding and modifying their aggregated quarterly data reports on-
line.
    As discussed under the Paperwork Reduction Act of 1995 (PRA)
provisions

[[Page 37472]]

of this preamble, we have submitted copies of this interim final rule
and data reporting requirements to the Executive Office of Management
and Budget (OMB) for its review of the information collection
requirements. We encourage States, organizations, individuals, and
others to submit comments regarding the information collection
requirements to ACF (at the address above) and to the Office of
Information and Regulatory Affairs, OMB, Room 3208, New Executive
Office Building, Washington, DC 20503, ATTN: ACF/HHS Desk Officer. We
will make necessary revisions in these instruments following the
comment period and will issue them to States through the ACF policy
issuance system.
    The following discussion provides information on the changes we
have made in part 265. We discuss the specific new data elements and
the statutory authority for the new data elements.

Section 265.1 What does this part cover?

    Paragraph (c) specifies the quarterly report that must be filed by
States that claim MOE expenditures for separate State program(s). Under
the prior TANF regulation, the quarterly report for separate State
programs was required only if a State wanted to qualify for a caseload
reduction credit or receive a high performance bonus. Now, this report
is mandatory as required by section 411(a)(1)(A) of the Act as modified
by the Deficit Reduction Act of 2005. We discuss this report and the
specific data elements in the report more fully in Sec.  265.3 below.

Section 265.2 What definitions apply to this part?

    In addition to the definition contained in this provision, the data
collection and reporting regulations rely on the general TANF
definitions in Sec. Sec.  260.30 through 33 and the definitions of a
work-eligible individual and the work activities in Sec.  261.2.

Section 265.3 What reports must the State file on a quarterly basis?

    Each State must file two reports on a quarterly basis--the TANF
Data Report and the TANF Financial Report. Also, each State that claims
MOE expenditures for a separate State program(s) must file an
additional report on a quarterly basis--the SSP-MOE Data Report.
    Under prior TANF regulations, we discussed the statutory
authorities for the TANF Data Report data elements that States will
continue to collect. Below, we discuss the statutory authorities for
all newly required data elements of the TANF Data Report. However, for
ease of understanding, we have included Sec.  265.3 in the interim rule
in its entirety.
Section 265.3(b)(1) TANF Data Report: Disaggregated Data--Section One
    Paragraph (b)(1) of this section requires that each State file the
disaggregated case record information, as specified in section 411(a)
of the Act, on families receiving TANF assistance.
    The information we require to be collected is, for the most part,
the same information that was collected under the prior TANF
regulations. However, we have made several changes to the prior data
collection instrument. We added a data element to identify work-
eligible individuals for calculating the work participation rates. The
statutory authority for the new data element comes from Sections 407(i)
and 411(a)(1)(A)(xii) of the Social Security Act. We modified the
definition of a two-parent family for work participation rate purposes
and the instructions to the data element, Type of Family for Work
Participation, to reflect the work-eligible individual concept. As
clarification, we have also included the definitions of each work
activity as defined at Sec.  261.2.
Section 265.3(b)(4) TANF Data Report: Aggregated Data--Section Four
    Paragraph (b)(4) of this section requires that each State that opts
to report data for sections one and/or two based on a stratified sample
must file quarterly aggregated caseload data by stratum for each month
of the quarter. We did not explicitly regulate on submitting section
four of the TANF Data Report under prior TANF regulation. However, it
was implicit in prior TANF regulations as we did require States to
follow the procedures in the TANF Sampling Manual in reporting data
based on samples. The TANF Sampling Manual required States that used
stratified sampling to report the information in section four of the
TANF Data Report. Section four of the TANF Data Report was issued on
January 19, 2000 in TANF-ACF-PI-2000-1 along with the TANF Sampling
Manual. The only change we are making to section four is one additional
code to designate whether the caseload data for a stratum is for
section one or for section two of the TANF Data Report.
Section 265.3(d) SSP-MOE Data Report
    Paragraph (d) requires a State that claims MOE expenditures for a
separate State program(s) to report case record data on separate MOE
programs. This implements the Deficit Reduction Act of 2005 changes to
section 411(a)(1)(A) of the Act.
    The data elements we are requiring States to collect on separate
State programs are identical in content to, but fewer in number than
the demographic and work activity data we are requiring in paragraph
(b) of this section and are unchanged except as explained under the
revised individual SSP-MOE Data Report sections below.
Section 265.3(d)(1) SSP-MOE Data Report: Disaggregated Data--Section
One
    Paragraph (d)(1) requires that each State that claims MOE
expenditures for a separate State program(s) file the disaggregated
case record information, as specified in section 411(a) of the Act, on
families receiving SSP-MOE assistance.
    Generally, the information we require to be reported is the same
information that was collected under the prior TANF regulations. There
are several changes to the prior data collection instrument. We have
added a data element to identify work-eligible individuals for
calculating the work participation rates. The statutory authority for
the new data element comes from sections 407(i) and 411(a)(1)(A)(xii)
of the Social Security Act. We modified the definition of a two-parent
family for work participation rate purposes and the instructions to the
data element, Type of Family for Work Participation, to reflect the
work-eligible individual concept. As clarification, we have also
included the definitions of each work activity as defined at Sec.  
261.2.
Section 265.3(d)(2) SSP-MOE Data Report: Disaggregated Data--Section
Two
    Paragraph (d)(2) of this section requires that each State that
claims MOE expenditures for a separate State program(s) file the
disaggregated case record information, as specified in section 411(a)
of the Act, on families no longer receiving SSP-MOE assistance.
    The second section of the SSP-MOE Data Report contains 28 data
elements applicable to families no longer receiving assistance. The
data elements in section two are identical to those in section one and
are unchanged from the data elements collected in this section under
prior TANF regulations.
Section 265.3(d)(3) SSP-MOE Data Report: Aggregated Data--Section Three
    Paragraph (d)(3) of this section requires that each State that
claims MOE expenditures for a separate State program(s) file quarterly
aggregated information.

[[Page 37473]]

    This third section of the SSP-MOE Data Report contains twelve data
elements. These data elements are unchanged from what we collected
under prior TANF regulations.
Section 265.3(d)(4) SSP-MOE Data Report: Aggregated Data--Section Four
    Paragraph (d)(4) of this section requires that each State that
claims MOE expenditures for a separate State program(s) and that opts
to report data for sections one and/or two of the SSP-MOE Data Report
based on a stratified sample file quarterly aggregated caseload data by
stratum for each month in the quarter. We did not explicitly regulate
on submitting section four of the SSP-MOE Data Report under prior TANF
regulation. However, it was implicit in prior regulations as we did
require States to follow the procedures in the TANF Sampling Manual in
reporting data based on samples. The TANF Sampling Manual required
States that used stratified sampling to report the information in
section four of the SSP-MOE Data Report. Section four of the SSP-MOE
Data Report was issued on January 19, 2000 in TANF-ACF-PI-2000-1 along
with the TANF Sampling Manual. The only change to section four is one
additional code to designate whether the caseload data for a stratum is
for section one or for section two of the SSP-MOE Data Report.
Section 265.4 When are quarterly reports due?
    For States that claim MOE expenditures for separate State
program(s), revised paragraph (b) of this section implements section
409(a)(2) of the Act which requires that States file quarterly reports
within 45 days following the end of the fiscal quarter or be subject to
a penalty. Under the prior regulations, the quarterly SSP-MOE Data
Report was required only if a State wanted to qualify for a caseload
reduction credit or receive a high performance bonus. Under the Deficit
Reduction Act of 2005, section 411(a)(1)(A) of the Social Security Act
now requires that States report quarterly on their separate State
program(s) for which they claim MOE expenditures.
Section 265.8 Under what circumstances will a State be subject to a
reporting penalty for failure to submit quarterly reports?
    Under the interim final rule, the SSP-MOE Data Report is now
included as a required quarterly report. Failure to submit this report
by the due dates may subject the State to a reporting penalty as
required by section 409(a)(2) of the Act and revised section
411(a)(1)(A) of the Act. This change is reflected in Sec.  265.8(a)(1)
and Sec.  265.8(b). We also changed this section to remove the penalty
trigger previously located at Sec.  265.8(c) if a State fails to
include the definitions of work activities in its annual report. This
information is now required as part of the Work Verification Plan. For
ease of understanding, we have included the revised section in its
entirety.

IV. Paperwork Reduction Act

    This rule contains information collection requirements that have
been submitted to the Office of Management and Budget (OMB) under the
Paperwork Reduction Act of 1995 (PRA). Under this Act, no persons are
required to respond to a collection of information unless it displays a
valid OMB control number. If you have any comments on these information
collection requirements, please submit them to OMB within 30 days. The
address is: Office of Management and Budget, Paperwork Reduction
Project, 725 17th Street, NW., Washington, DC 20503, Attn: ACF/HHS Desk
Officer.
    This interim final rule imposes some new requirements and modifies
others. They are:
     A new requirement that States establish documentation,
verification and internal control procedures to ensure valid work
participation rates, based on regulatory specifications. States will be
required to submit the procedures to HHS no later than September 30,
2006. We will review the procedures and approve them if they meet the
requirements. If the procedures fail to address or meet the
requirements, States will be given 60 days to revise and correct them.
If a State fails to establish, submit, or correct the procedures within
specified timeframes, the State will be liable for a full five percent
penalty for the year.
     A modification and reduction in burden of the caseload
reduction credit information collection based on the recalibration of
the caseload reduction credit.
     A modification of the reasonable cause/corrective
compliance information collection burden based on the requirements of
the participation rate verification procedures.
     A modification of the TANF Data Report and the SSP-MOE
Data Report based on how we define work-eligible individuals,
especially with regard to child-only cases.
    The estimated burdens for these data collections (existing burden
plus additional burden) are:



Instrument or requirement

Number of respondents

Yearly submittals

Average burden hours per response

Total burden hours

Original total burden hours

Preparation and Submission of Data Verification Procedures--Sec. Sec. 261.60-261.63.

54

1

640

34,560

Not Applicable.

Caseload Reduction Documentation Process, ACF-202--Sec. Sec. 261.41 & 261.44.

54

1

120

6,480

8,640

Reasonable Cause/Corrective Compliance Documentation Process--Sec. Sec. 262.4, 262.6, & 262.7; Sec. 261.51.

54

2

240

25,920

17,280

TANF Data Report--Part 265

54

4

2,193

473,688

465,169

SSP-MOE Data Report--Part 265

29

4

714

82,824

78,213


    We are submitting this information collection to OMB for approval.
These requirements will not become effective until approved by OMB.
Copies of the proposed collection may be obtained by writing to the
Administration for Children and Families, Office of Administration,
Office of Information Services, 370 L'Enfant Promenade, SW.,
Washington, DC 20447, Attn: ACF Reports Clearance Officer. All requests
should be identified by the title of the information collection. E-mail
address: rsargis@acf.hhs.gov Written comments to OMB for the
information collection should be sent directly to: Office of Management
and Budget, Paperwork Reduction Project, 725 17th Street, NW.,
Washington, DC 20503, Attn: Desk Officer for the Administration for
Children and Families.

V. Regulatory Flexibility Analysis

    The Secretary certifies, under 5 U.S.C. 605(b), as enacted by the
Regulatory Flexibility Act (Pub. L. 96-354), that this interim final
rule will not result in

[[Page 37474]]

a significant impact on a substantial number of small entities. The
primary impact of these rules is on State governments and on the
operation of the Federal Government. Neither is considered a small
entity under the Regulatory Flexibility Act.
    In developing this interim final rule, we sought to implement the
new requirements of the Deficit Reduction Act of 2005 in a way that
does not impinge on a State's ability to design effective and
responsive programs. At the same time, we sought to address concerns
about inconsistency of work measures among States and to focus renewed
attention on strengthening efforts to help more low-income families
enter the workforce and succeed at work. We considered alternatives
along the spectrum of these goals and believe the policies adopted in
this interim final rule achieve a balance between the aims of the DRA
to improve effectiveness of the program and preserving States' ability
to continue using creativity and ingenuity to help families succeed
under the TANF work goals and objectives. The balance we strove to
attain encompassed such issues as: how to count and verify allowable
work activities; who is a work-eligible individual; and how to ensure
that State internal control procedures will result in accurate and
consistent work participation information.
    In determining how to count and verify allowable work activities,
we considered establishing a single documentation standard in which
States would verify an individual's participation in work activities
each day. We rejected this alternative as excessive and cumbersome for
States to implement; moreover we feared it might discourage employers
from hiring TANF recipients, thus undermining the program. Instead, as
we describe above, we chose a set of guidelines that allows variation
in documentation by the type of work activity in question. Not only
does this let a State tailor its documentation procedures to the nature
of the activity, but also it approximates the standards in the working
world.
    With regard to the definition of a work-eligible individual, we
considered a range of alternatives looking at each type of family in
which a parent resides with a child recipient of assistance to
determine whether it was appropriate to include that group of families
in the calculation of the work participation rates. As we examined each
of these types of families, we considered the ability of each to work
and sought to balance this ability to work with the need for consistent
work participation rates as envisioned under the Deficit Reduction Act
and State flexibility.
    As an alternative to our regulatory approach to monitoring State
internal control procedures for verifying work participation
information, we considered developing a system in which we would
regularly draw one or more samples of cases and validate critical data
needed to calculate the work participation rates, using an error
percentage as a means of determining whether a State might be liable
for a work verification penalty. Ultimately, we decided this
alternative would be too burdensome, reminiscent of quality control
systems of the past. We determined that the best approach was to
describe in detail what we expect States to include in the Work
Verification Plan and then to use the existing audit process as the
principal means of assessing the accuracy of work participation data.
We discuss this approach to regulating in greater detail throughout the
preamble to these rules.

VI. Regulatory Impact Analysis

    Executive Order 12866 requires that regulations be reviewed to
ensure that they are consistent with the priorities and principles set
forth in the Executive Order. The Department has determined that this
interim final rule is consistent with these priorities and principles.
These regulations primarily implement statutory changes to TANF
included in the Deficit Reduction Act of 2005.

VII. Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that a covered agency prepare a budgetary impact statement before
promulgating a rule that includes any Federal mandate that may result
in the expenditure by State, local, and Tribal governments, in the
aggregate, or by the private sector, of $100 million or more in any one
year.
    If an agency must prepare a budgetary impact statement, section 205
requires that it select the most cost-effective and least burdensome
alternative that achieves the objectives of the rule consistent with
the statutory requirements. Section 203 requires a plan for informing
and advising any small government that may be significantly or uniquely
impacted.
    The Department has determined that this interim final rule, in
implementing the new statutory requirements, would not impose a mandate
that will result in the expenditure by State, local, and tribal
governments, in the aggregate, or by the private sector, of more than
$100 million in any one year. In enacting the provisions of the Deficit
Reduction Act, the Congress maintained the basic funding structure and
flexibility of the TANF program. Over each of the next five years, the
TANF block grant will provide States with $16.5 billion in Federal
funds and a total of over $27 billion annually when including State
Maintenance of Effort (MOE) funding. With the continued commitment of
full funding for TANF, along with $2.1 billion in reported unobligated
TANF balances at the end of FY 2005, States will have the resources to
successfully meet the requirements of the Deficit Reduction Act. The
funding level for States remains fixed and is based on historic levels
of welfare spending when states used to serve a cash-dependent welfare
caseload of more than twice its current size. States retain significant
flexibility in the use of their TANF dollars to design their programs
and have wide flexibility to determine eligibility criteria, benefit
levels and the type of services and benefits available to TANF
recipients.
    In addition, over five years (FYs 2007-2011), the Department
estimates that the States will pay penalties of $51 million due to
failure to meet work requirements. In general, our estimate assumes
that most States will meet the work participation rates, because States
retain considerable programmatic flexibility, along with increased
motivation to develop a stronger focus on moving people to work and
more accurate reporting systems. For those States that fail to meet
work participation requirements, we do not anticipate assessing
penalties until FY 2009. Once penalty liability is identified States
will have an opportunity to correct the problem prior to the assessment
of a penalty. We estimate issuing penalties amounting to $7 million in
FY 2009, $16 million in FY 2010 and $28 million in FY 2011. Our
estimated penalty assessment level increases during this period, in
part, because the penalty percentage rate is progressive. Accordingly,
we have not prepared a budgetary impact statement or prepared a plan
for informing impacted small governments.

VIII. Congressional Review

    This regulation is not a major rule as defined in 5 U.S.C. Chapter
8.

IX. Assessment of Federal Regulation and Policies on Families

    Section 654 of the Treasury and General Government Appropriations
Act of 1999 requires Federal agencies to determine whether a proposed
policy or regulation may negatively affect family well being. If the
agency's determination

[[Page 37475]]

is affirmative, then the agency must prepare an impact assessment
addressing seven criteria specified in the law. The Department has
conducted a Family Policymaking Assessment in accordance with this
requirement and determined that these regulations will not have a
negative impact on family well being as defined in the legislation.

X. Executive Order 13132

    Executive Order 13132, Federalism, requires that Federal agencies
consult with State and local government officials in the development of
regulatory policies with federalism implications. Consistent with
Executive Order 13132, we specifically solicit comment from State and
local government officials on this interim final rule. We will
seriously consider these comments in developing the final rule.

List of Subjects

45 CFR Parts 261 and 262

    Administrative practice and procedure, Day care, Employment, Grant
programs-social programs, Penalties, Public assistance programs,
Reporting and recordkeeping requirements, Vocational education.

45 CFR Part 263

    Administrative practice and procedure, Day care, Employment, Grant
programs-social programs, Loan programs-social programs, Penalties,
Public assistance programs.

45 CFR Part 265

    Administrative practice and procedure, Day care, Employment, Grant
programs-social programs, Penalties, Public assistance programs,
Reporting and recordkeeping requirements.

    Dated: March 23, 2006.
Wade F. Horn,
Assistant Secretary for Children and Families.
    Approved: May 25, 2006.
Michael O. Leavitt,
Secretary of Health and Human Services.
    For the reasons stated in the preamble, we are amending 45 CFR
chapter II by revising part 261, part 262, part 263, and part 265 as
set forth below:

0
1. The authority citation for part 261 is revised to read as follows:

    Authority: 42 U.S.C. 601, 602, 607, and 609; Pub. L. 109-171.

0
2. Revise Sec.  261.1 to read as follows:


Sec.  261.1  What does this part cover?

    This part includes the regulatory provisions relating to the
mandatory work requirements of TANF and State work participation data
verification requirements.

0
3. Revise Sec.  261.2 to read as follows:


Sec.  261.2  What definitions apply to this part?

    (a) The general TANF definitions at Sec. Sec.  260.30 through
260.33 of this chapter apply to this part.
    (b) Unsubsidized employment means full-or part-time employment in
the public or private sector that is not subsidized by TANF or any
other public program.
    (c) Subsidized private sector employment means employment in the
private sector for which the employer receives a subsidy from TANF or
other public funds to offset some or all of the wages and costs of
employing a recipient.
    (d) Subsidized public sector employment means employment in the
public sector for which the employer receives a subsidy from TANF or
other public funds to offset some or all of the wages and costs of
employing a recipient.
    (e) Work experience (including work associated with the
refurbishing of publicly assisted housing) if sufficient private sector
employment is not available means a work activity, performed in return
for welfare, that provides an individual with an opportunity to acquire
the general skills, training, knowledge, and work habits necessary to
obtain employment. The purpose of work experience is to improve the
employability of those who cannot find unsubsidized employment. This
activity must be supervised by an employer, work site sponsor, or other
responsible party on an ongoing basis no less frequently than daily.
    (f) On-the-job training means training in the public or private
sector that is given to a paid employee while he or she is engaged in
productive work and that provides knowledge and skills essential to the
full and adequate performance of the job. On-the-job training must be
supervised by an employer, work site sponsor, or other responsible
party on an ongoing basis no less frequently than daily.
    (g) Job search and job readiness assistance means the act of
seeking or obtaining employment, preparation to seek or obtain
employment, including life skills training, and substance abuse
treatment, mental health treatment, or rehabilitation activities for
those who are otherwise employable. Such treatment or therapy must be
determined to be necessary and certified by a qualified medical or
mental health professional. Job search and job readiness assistance
activities must be supervised by the TANF agency or other responsible
party on an ongoing basis no less frequently than daily.
    (h) Community service programs mean structured programs and
embedded activities in which TANF recipients perform work for the
direct benefit of the community under the auspices of public or
nonprofit organizations. Community service programs must be limited to
projects that serve a useful community purpose in fields such as
health, social service, environmental protection, education, urban and
rural redevelopment, welfare, recreation, public facilities, public
safety, and child care. Community service programs are designed to
improve the employability of recipients not otherwise able to obtain
employment, and must be supervised on an ongoing basis no less
frequently than daily. A State agency shall take into account, to the
extent possible, the prior training, experience, and skills of a
recipient in making appropriate community service assignments.
    (i) Vocational educational training (not to exceed 12 months with
respect to any individual) means organized educational programs that
are directly related to the preparation of individuals for employment
in current or emerging occupations requiring training other than a
baccalaureate or advanced degree. Vocational educational training must
be supervised on an ongoing basis no less frequently than daily.
    (j) Job skills training directly related to employment means
training or education for job skills required by an employer to provide
an individual with the ability to obtain employment or to advance or
adapt to the changing demands of the workplace. Job skills training
directly related to employment must be supervised on an ongoing basis
no less frequently than daily.
    (k) Education directly related to employment, in the case of a
recipient who has not received a high school diploma or a certificate
of high school equivalency means education related to a specific
occupation, job, or job offer. Education directly related to employment
must be supervised on an ongoing basis no less frequently than daily.
    (l) Satisfactory school attendance at secondary school or in a
course of study leading to a certificate of general equivalence, in the
case of a recipient who has not completed secondary school or received
such a certificate means regular attendance, in accordance with the
requirements of the secondary school or course of study, at a secondary
school or in a course of study leading to a certificate of general
equivalence, in

[[Page 37476]]

the case of a recipient who has not completed secondary school or
received such a certificate. This activity must be supervised on an
ongoing basis no less frequently than daily.
    (m) Providing child care services to an individual who is
participating in a community service program means providing child care
to enable another TANF recipient to participate in a community service
program. This activity must be supervised on an ongoing basis no less
frequently than daily.
    (n)(1) Work-eligible individual means an adult (or minor child
head-of-household) receiving assistance under TANF or a separate State
program or a non-recipient parent living with a child receiving such
assistance unless the parent is:
    (i) A minor parent and not the head-of-household or spouse of the
head-of-household;
    (ii) An alien who is ineligible to receive assistance due to his or
her immigration status; or
    (iii) At State option on a case-by-case basis, a recipient of
Supplemental Security Income (SSI) benefits.
    (2) The term also excludes:
    (i) A parent providing care for a disabled family member living in
the home who does not attend school on a full-time basis, provided that
the need for such care is supported by medical documentation; and
    (ii) An individual in a family receiving MOE-funded assistance
under an approved Tribal TANF program, unless the State includes the
Tribal family in calculating work participation rates, as permitted
under section 261.25.

0
4. Revise Subpart B to read as follows:

Subpart B--What Are the Provisions Addressing State Accountability?

Sec.
261.20 How will we hold a State accountable for achieving the work
objectives of TANF?
261.21 What overall work rate must a State meet?
261.22 How will we determine a State's overall work rate?
261.23 What two-parent work rate must a State meet?
261.24 How will we determine a State's two-parent work rate?
261.25 Does a State include Tribal families in calculating these
rates?


Sec.  261.20  How will we hold a State accountable for achieving the
work objectives of TANF?

    (a) Each State must meet two separate work participation rates in
FY 2006 and thereafter, one--the two-parent rate based on how well it
succeeds in helping work-eligible individuals in two-parent families
find work activities described at Sec.  261.30, the other--the overall
rate based on how well it succeeds in finding those activities for
work-eligible individuals in all the families that it serves.
    (b) Each State must submit data, as specified at Sec.  265.3 of
this chapter, that allows us to measure its success in requiring work-
eligible individuals to participate in work activities.
    (c) If the data show that a State met both participation rates in a
fiscal year, then the percentage of historic State expenditures that it
must expend under TANF, pursuant to Sec.  263.1 of this chapter,
decreases from 80 percent to 75 percent for that fiscal year. This is
also known as the State's TANF ``maintenance-of-effort'' (MOE)
requirement.
    (d) If the data show that a State did not meet a minimum work
participation rate for a fiscal year, a State could be subject to a
financial penalty.
    (e) Before we impose a penalty, a State will have the opportunity
to claim reasonable cause or enter into a corrective compliance plan,
pursuant to Sec. Sec.  262.5 and 262.6 of this chapter.


Sec.  261.21  What overall work rate must a State meet?

    Each State must achieve a 50 percent minimum overall participation
rate in FY 2006 and thereafter, minus any caseload reduction credit to
which it is entitled as provided in subpart D of this part.


Sec.  261.22  How will we determine a State's overall work rate?

    (a)(1) The overall participation rate for a fiscal year is the
average of the State's overall participation rates for each month in
the fiscal year.
    (2) The rate applies to families with a work-eligible individual.
    (b) We determine a State's overall participation rate for a month
as follows:
    (1) The number of TANF and SSP-MOE families that include a work-
eligible individual who meet the requirements set forth in Sec.  261.31
for the month (i.e., the numerator), divided by,
    (2) The number of TANF and SSP-MOE families that include a work-
eligible individual, minus the number of such families that are subject
to a penalty for refusing to work in that month (i.e., the
denominator). However, if a family with a work-eligible individual has
been penalized for refusal to participate in work activities for more
than three of the last 12 months, we will not exclude it from the
participation rate calculation.
    (3) At State option, we will include in the participation rate
calculation families with a work-eligible individual that have been
penalized for refusing to work no more than three of the last 12
months.
    (c)(1) A State has the option of not requiring a single custodial
parent caring for a child under age one to engage in work.
    (2) At State option, we will disregard a family with such a parent
from the participation rate calculation for a maximum of 12 months.
    (d)(1) If a family receives assistance for only part of a month, we
will count it as a month of participation if a work-eligible individual
is engaged in work for the minimum average number of hours in each full
week that the family receives assistance in that month.
    (2) If a State pays benefits retroactively (i.e., for the period
between application and approval of benefits), it has the option to
consider the family to be receiving assistance during the period of
retroactivity.


Sec.  261.23  What two-parent work rate must a State meet?

    Each State must achieve a 90 percent minimum two-parent
participation rate in FY 2006 and thereafter, minus any caseload
reduction credit to which it is entitled as provided in subpart D of
this part.


Sec.  261.24  How will we determine a State's two-parent work rate?

    (a)(1) The two-parent participation rate for a fiscal year is the
average of the State's two-parent participation rates for each month in
the fiscal year.
    (2) The rate applies to two-parent families with two work-eligible
individuals. However, if one of the parents is a disabled work-eligible
individual, we will not consider the family to be a two-parent family;
i.e., we will not include such a family in either the numerator or
denominator of the two-parent rate.
    (b) We determine a State's two-parent participation rate for the
month as follows:
    (1) The number of two-parent TANF and SSP-MOE families in which
both parents are work-eligible individuals and together they meet the
requirements set forth in Sec.  261.32 for the month (i.e., the
numerator), divided by,
    (2) The number of two-parent TANF and SSP-MOE families in which
both parents are work-eligible individuals during the month, minus the
number of such two-parent families that are subject to a penalty for
refusing to work in that month (the denominator). However, if a family
with a work-eligible individual has been penalized for more than three
months of the last 12 months, we will

[[Page 37477]]

not exclude it from the participation rate calculation.
    (3) At State option, we will include in the participation rate
calculation families with a work-eligible individual that have been
penalized for refusing to work no more than three of the last 12
months.
    (c) For purposes of the calculation in paragraph (b) of this
section, a two-parent family includes, at a minimum, all families with
two natural or adoptive parents (of the same minor child) who are work-
eligible individuals and living in the home, unless both are minors and
neither is a head-of-household.
    (d)(1) If the family receives assistance for only part of a month,
we will count it as a month of participation if a work-eligible
individual in the family (or both work-eligible individuals, if they
are both required to work) is engaged in work for the minimum average
number of hours in each full week that the family receives assistance
in that month.
    (2) If a State pays benefits retroactively (i.e., for the period
between application and approval of benefits), it has the option to
consider the family to be receiving assistance during the period of
retroactivity.


Sec.  261.25  Does a State include Tribal families in calculating the
work participation rate?

    At State option, we will include families with a work-eligible
individual that are receiving assistance under an approved Tribal
family assistance plan or under a Tribal work program in calculating
the State's participation rates under Sec. Sec.  261.22 and 261.24.

0
5. Revise Sec.  261.31 to read as follows:


Sec.  261.31  How many hours must a work-eligible individual
participate for the family to count in the numerator of the overall
rate?

    (a) A work-eligible individual counts as engaged in work for a
month for the overall rate if:
    (1) He or she participates in work activities during the month for
at least a minimum average of 30 hours per week; and
    (2) At least 20 of the above hours per week come from participation
in the activities listed in paragraph (b) of this section.
    (b) The following nine activities count toward the first 20 hours
of participation: Unsubsidized employment; subsidized private-sector
employment; subsidized public-sector employment; work experience; on-
the-job training; job search and job readiness assistance; community
service programs; vocational educational training; and providing child
care services to an individual who is participating in a community
service program.
    (c) Above 20 hours per week, the following three activities may
also count as participation: Job skills training directly related to
employment; education directly related to employment; and satisfactory
attendance at secondary school or in a course of study leading to a
certificate of general equivalence.
    (d) We will consider a work-eligible individual who participates in
a work experience or community service program for the maximum number
of hours per week that a State may require by dividing the combined
monthly TANF grant and food stamp allotment by the appropriate minimum
wage under the minimum wage requirement of the Fair Labor Standards Act
(FLSA) to have participated 20 hours per week if actual participation
falls short of 20 hours per week. This policy is limited to States that
have adopted a food stamp workfare program and a Simplified Food Stamp
Program. For families that need additional hours beyond the core
activity requirement, these hours must be satisfied in some other TANF
work activity.

0
6. Revise Sec.  261.32 to read as follows:


Sec.  261.32  How many hours must work-eligible individuals participate
for the family to count in the numerator of the two-parent rate?

    (a) Subject to paragraph (d) of this section, a family with two
work-eligible parents counts as engaged in work for the month for the
two-parent rate if:
    (1) Work-eligible parents in the family are participating in work
activities for a combined average of at least 35 hours per week during
the month, and
    (2) At least 30 of the 35 hours per week come from participation in
the activities listed in paragraph (b) of this section.
    (b) The following nine activities count for the first 30 hours of
participation: Unsubsidized employment; subsidized private-sector
employment; subsidized public-sector employment; work experience; on-
the-job training; job search and job readiness assistance; community
service programs; vocational educational training; and providing child
care services to an individual who is participating in a community
service program.
    (c) Above 30 hours per week, the following three activities may
also count for participation: Job skills training directly related to
employment; education directly related to employment; and satisfactory
attendance at secondary school or in a course of study leading to a
certificate of general equivalence.
    (d) We will consider a family with two work-eligible parents in
which one or both parents participate in a work experience or community
service program for the maximum number of hours per week that a State
may require by dividing their combined monthly TANF grant and food
stamp allotment by the appropriate minimum wage under the minimum wage
requirement of the Fair Labor Standards Act (FLSA) to have participated
30 hours per week if actual participation falls short of 30 hours per
week. This policy is limited to States that have adopted a food stamp
workfare program and a Simplified Food Stamp Program. For families that
need additional hours beyond the core activity requirement, these hours
must be satisfied in some other TANF work activity.
    (e)(1) If the family receives federally funded child care
assistance and an adult in the family is not disabled or caring for a
severely disabled child, then the work-eligible individuals must be
participating in work activities for an average of at least 55 hours
per week to count as a two-parent family engaged in work for the month.
    (2) At least 50 of the 55 hours per week must come from
participation in the activities listed in paragraph (b) of this
section.
    (3) Above 50 hours per week, the three activities listed in
paragraph (c) of this section may also count as participation.
    (4) We will consider family with two work-eligible parents
receiving federally funded child care in which one or both parents
participate in a work experience or community service program for the
maximum number of hours per week that a State may require by dividing
their combined monthly TANF grant and food stamp allotment by the
appropriate minimum wage under the minimum wage requirement of the Fair
Labor Standards Act (FLSA) to have participated 50 hours per week if
actual participation falls short of 50 hours per week. This policy is
limited to States that have adopted a food stamp workfare program and a
Simplified Food Stamp Program. For families that need additional hours
beyond the core activity requirement, these hours must be satisfied in
some other TANF work activity.

0
7. Revise Subpart D to read as follows:

Subpart D--How Will We Determine Caseload Reduction Credit for
Minimum Participation Rates?

Sec.

[[Page 37478]]

261.40 Is there a way for a State to reduce the work participation
rates?
261.41 How will we determine the caseload reduction credit?
261.42 Which reductions count in determining the caseload reduction
credit?
261.43 What is the definition of a ``case receiving assistance'' in
calculating the caseload reduction credit?
261.44 When must a State report the required data on the caseload
reduction credit?


Sec.  261.40  Is there a way for a State to reduce the work
participation rates?

    (a)(1) If the average monthly number of cases receiving assistance,
including assistance under a separate State program (as provided at
Sec.  261.42(b)), in a State in the preceding fiscal year was lower
than the average monthly number of cases that received assistance,
including assistance under a separate State program in that State in FY
2005, the minimum overall participation rate the State must meet for
the fiscal year (as provided at Sec.  261.21) decreases by the number
of percentage points the prior-year caseload fell in comparison to the
FY 2005 caseload.
    (2) The minimum two-parent participation rate the State must meet
for the fiscal year (as provided at Sec.  261.23) decreases, at State
option, by either:
    (i) The number of percentage points the prior-year two-parent
caseload, including two-parent cases receiving assistance under a
separate State program (as provided at Sec.  261.42(b)), fell in
comparison to the FY 2005 two-parent caseload, including two-parent
cases receiving assistance under a separate State program; or
    (ii) The number of percentage points the prior-year overall
caseload, including assistance under a separate State program (as
provided at Sec.  261.42(b)), fell in comparison to the FY 2005 overall
caseload, including cases receiving assistance under a separate State
program.
    (3) For the credit calculation, we will refer to the fiscal year
that precedes the fiscal year to which the credit applies as the
``comparison year.''
    (b)(1) The calculations in paragraph (a) of this section must
disregard caseload reductions due to requirements of Federal law and to
changes that a State has made in its eligibility criteria in comparison
to its criteria in effect in FY 2005.
    (2) At State option, the calculation may offset the disregard of
caseload reductions in paragraph (b)(1) of this section by changes in
eligibility criteria that increase caseloads.
    (c)(1) To establish the caseload base for FY 2005 and to determine
the comparison-year caseload, we will use the combined TANF and
Separate State Program caseload figures reported on the Form ACF-199,
TANF Data Report, and Form ACF-209, SSP-MOE Data Report, respectively.
    (2) To qualify for a caseload reduction, a State must have reported
monthly caseload information, including cases in separate State
programs, for FY 2005 and the comparison year for cases receiving
assistance as defined at Sec.  261.43.
    (d)(1) A State may correct erroneous data or submit accurate data
to adjust program data or to include unduplicated cases within the
fiscal year.
    (2) We will adjust both the FY 2005 baseline and the comparison-
year caseload information, as appropriate, based on these State
submissions.
    (e) We refer to the number of percentage points by which a caseload
falls, disregarding the cases described in paragraph (b), as a caseload
reduction credit.


Sec.  261.41  How will we determine the caseload reduction credit?

    (a)(1) We will determine the overall and two-parent caseload
reduction credits that apply to each State based on the information and
estimates reported to us by the State on eligibility policy changes
using application denials, case closures, or other administrative data
sources and analyses.
    (2) We will accept the information and estimates provided by a
State, unless they are implausible based on the criteria listed in
paragraph (d) of this section.
    (3) We may conduct on-site reviews and inspect administrative
records on applications, case closures, or other administrative data
sources to validate the accuracy of the State estimates.
    (b) In order to receive a caseload reduction credit, a State must
submit a Caseload Reduction Report to us containing the following
information:
    (1) A listing of, and implementation dates for, all State and
Federal eligibility changes, as defined at Sec.  261.42, made by the
State since the beginning of FY 2006;
    (2) A numerical estimate of the positive or negative average
monthly impact on the comparison-year caseload of each eligibility
change (based, as appropriate, on application denials, case closures or
other analyses);
    (3) An overall estimate of the total net positive or negative
impact on the applicable caseload as a result of all such eligibility
changes;
    (4) An estimate of the State's caseload reduction credit;
    (5) A description of the methodology and the supporting data that a
State used to calculate its caseload reduction estimates; and
    (6) A certification that it has provided the public an appropriate
opportunity to comment on the estimates and methodology, considered
their comments, and incorporated all net reductions resulting from
Federal and State eligibility changes.
    (c)(1) A State requesting a caseload reduction credit for the
overall participation rate must base its estimates of the impact of
eligibility changes on decreases in its comparison-year overall
caseload compared to the FY 2005 overall caseload baseline established
in accordance with Sec.  261.40(d).
    (2) A State requesting a caseload reduction credit for its two-
parent rate must base its estimates of the impact of eligibility
changes on decreases in either:
    (i) Its two-parent caseload compared to the FY 2005 comparison-year
two-parent caseload baseline established in accordance with Sec.  
261.40(d); or
    (ii) Its overall caseload compared to the FY 2005 comparison-year
overall caseload baseline established in accordance with Sec.  
261.40(d).
    (d)(1) For each State, we will assess the adequacy of information
and estimates using the following criteria: its methodology; its
estimates of impact compared to other States; the quality of its data;
and the completeness and adequacy of its documentation.
    (2) If we request additional information to develop or validate
estimates, the State may negotiate an appropriate deadline or provide
the information within 30 days of the date of our request.
    (3) The State must provide sufficient data to document the
information submitted under paragraph (b) of this section.
    (e) We will not calculate a caseload reduction credit unless the
State reports case-record data on individuals and families served by
any separate State program, as required under Sec.  265.3(d) of this
chapter.
    (f) A State may only apply to the participation rate a caseload
reduction credit that we have calculated. If a State disagrees with the
caseload reduction credit, it may appeal the decision as an adverse
action in accordance with Sec.  262.7 of this chapter.


Sec.  261.42  Which reductions count in determining the caseload
reduction credit?

    (a)(1) A State's caseload reduction credit must not include
caseload decreases due to Federal requirements or State changes in
eligibility rules since

[[Page 37479]]

FY 2005 that directly affect a family's eligibility for assistance.
    (2) At State option, a State's caseload reduction credit may
include caseload increases due to Federal requirements or State change
in eligibility rules since FY 2005 if used to offset caseload decreases
in paragraph (a)(1) of this section.
    (3) A State may not receive a caseload reduction credit that
exceeds the actual caseload decline between FY 2005 and the comparison
year.
    (4) A State may count the reductions attributable to enforcement
mechanisms or procedural requirements that are used to enforce existing
eligibility criteria (e.g., fingerprinting or other verification
techniques) to the extent that such mechanisms or requirements identify
or deter families otherwise ineligible under existing rules.
    (b) A State must include cases receiving assistance in separate
State programs as part of its FY 2005 caseload and comparison-year
caseload. However, if a State provides documentation that separate
State program cases overlap with or duplicate cases in the TANF
caseload, we will exclude them from the caseload count.


Sec.  261.43  What is the definition of a ``case receiving assistance''
in calculating the caseload reduction credit?

    (a) The caseload reduction credit is based on decreases in
caseloads receiving assistance (other than those excluded pursuant to
Sec.  261.42) both in a State's TANF program and in separate State
programs that address basic needs and are used to meet the MOE
requirement.
    (b) A State that is investing State MOE funds in eligible families
in excess of the required 80 percent or 75 percent basic MOE amount
need only include the pro rata share of caseloads receiving assistance
that is required to meet basic MOE requirements.


Sec.  261.44  When must a State report the required data on the
caseload reduction credit?

    A State must report the necessary documentation on caseload
reductions for the preceding fiscal year by December 31.

Subpart F--[Redesignated as Subpart H]

0
8. Redesignate Subpart F as subpart H.


Sec.  261.60  [Redesignated as Sec.  261.80.]

0
9. Redesignate Sec.  261.60 as Sec.  261.80.

0
10. Add a new subpart F to read as follows:

Subpart F--How Do We Ensure the Accuracy of Work Participation
Information?

Sec.
261.60 What methods may a State use to report a work-eligible
individual's hours of participation?
261.61 How must a State document a work-eligible individual's hours
of participation?
261.62 What must a State do to verify the accuracy of its work
participation information?
261.63 When is the State's Work Verification Plan due?
261.64 How will we determine if the State is meeting the requirement
to establish and maintain work verification procedures that ensure
an accurate measurement of work participation?
261.65 Under what circumstances will we impose a work verification
penalty for failure to submit a work verification plan or for
failure to maintain adequate internal controls to ensure consistent
measurement of the work participation rate?


Sec.  261.60  What methods may a State use to report a work-eligible
individual's hours of participation?

    (a) A State must report the actual hours that an individual
participates in an activity, subject to the qualifications in
paragraphs (b) and (c) and Sec.  261.61(c). It is not sufficient to
report the hours an individual is scheduled to participate in an
activity.
    (b) For the purposes of calculating the work participation rates,
actual hours may include the hours for which an individual was paid,
including paid holidays and sick leave. For participation in unpaid
work activities, it may also include excused absences for hours missed
due to holidays and a maximum of an additional 10 days of excused
absences in any 12-month period, no more than two of which may occur in
a month. In order to count an excused absence as actual hours of
participation, the individual must have been scheduled to participate
in an allowable work activity for the period of the absence that the
State reports as participation. A State must describe its excused
absence policies and definitions as part of its Work Verification Plan,
specified at Sec.  261.62.
    (c) A State may not count more hours toward the participation rate
for a self-employed individual than the number derived by dividing the
individual's self-employment income (gross income less business
expenses) by the Federal minimum wage. A State may propose an
alternative method of determining self-employment hours as part of its
Work Verification Plan.


Sec.  261.61  How must a State document a work-eligible individual's
hours of participation?

    (a) A State must support each individual's hours of participation
through documentation in the case file. In accordance with Sec.  
261.62, a State must describe in its Work Verification Plan the
documentation it uses to verify hours of participation in each
activity.
    (b) For an employed individual, the documentation may consist of,
but is not limited to pay stubs, employer reports, or time and
attendance records substantiating hours of participation. A State may
presume that an employed individual participated in unsubsidized
employment for the total number of hours for which that individual was
paid.
    (c) For unsubsidized employment, subsidized employment, and OJT, a
State may report projected actual hours of employment participation for
up to six months based on current, documented actual hours of work. Any
time a State receives information that the client's actual hours of
work have changed, or no later than the end of any six-month period,
the State must re-verify the client's current actual average hours of
work, and may report these projected actual hours of participation for
another six-month period.
    (d) For an individual who is not employed, the documentation for
substantiating hours of participation may consist of, but is not
limited to, time sheets, service provider attendance records, or school
attendance records.
    (e) For an individual who is self-employed, the documentation must
comport with standards set forth in the State's approved Work
Verification Plan. Self-reporting by a participant without additional
verification is not sufficient documentation.


Sec.  261.62  What must a State do to verify the accuracy of its work
participation information?

    (a) To ensure accuracy in the reporting of work activities by work-
eligible individuals on the TANF Data Report and, if applicable, the
SSP-MOE Data Report, each State must:
    (1) Establish and employ procedures for determining whether its
work activities may count for participation rate purposes;
    (2) Establish and employ procedures for determining how to count
and verify reported hours of work;
    (3) Establish and employ procedures for identifying who is a work-
eligible individual;
    (4) Establish and employ internal controls to ensure compliance
with the procedures; and

[[Page 37480]]

    (5) Submit to the Secretary for approval the State's Work
Verification Plan in accordance with paragraph (b) of this section.
    (b) A State's Work Verification Plan must include the following:
    (1) For each countable work activity:
    (i) A description demonstrating how the activity meets the relevant
definition at Sec.  261.2;
    (ii) A description of how the State determines the number of
countable hours of participation for self-employed individuals; and
    (iii) A description of the documentation it uses to monitor
participation and ensure that the actual hours of participation are
reported;
    (2) A description of the State's procedures for identifying all
work-eligible individuals, as defined at Sec.  261.2;
    (3) A description of how the State ensures that, for each work-
eligible individual, it:
    (i) Accurately inputs data into the State's automated data
processing system;
    (ii) Properly tracks the hours though the automated data processing
system; and
    (iii) Accurately reports the hours to the Department;
    (4) A description of the procedures for ensuring it does not
transmit to the Department a work-eligible individual's hours of
participation in an activity that does not meet a Federal definition of
a countable work activity; and
    (5) A description of the internal controls that the State has
implemented to ensure a consistent measurement of the work
participation rates, including the quality assurance processes and
sampling specifications it uses to monitor adherence to the established
work verification procedures by State staff, local staff, and
contractors.
    (c) We will review a State's Work Verification Plan for
completeness and approve it if we believe that it will result in
accurate reporting of work participation information.


Sec.  261.63  When is a State's Work Verification Plan Due?

    (a) Each State must submit its interim Work Verification Plan for
validating work activities reported in the TANF Data Report and, if
applicable, the SSP-MOE Data Report no later than September 30, 2006.
    (b) If HHS requires changes, a State must submit them within 60
days of receipt of our notice and include all necessary changes as part
of a final approved Work Verification Plan no later than September 30,
2007.
    (c) If a State modifies its verification procedures for TANF or
SSP-MOE work activities or its internal controls for ensuring a
consistent measurement of the work participation rate, the State must
submit for approval an amended verification plan by the end of the
quarter in which the State modifies the procedures or internal
controls.


Sec.  261.64  How will we determine if the State is meeting the
requirement to establish and maintain work verification procedures that
ensure an accurate measurement of work participation?

    (a) We will determine that a State has met the requirement to
establish work verification procedures if it submits an interim Work
Verification Plan by September 30, 2006 and a complete Work
Verification Plan that we approve by September 30, 2007.
    (b) A ``complete'' Work Verification Plan means that:
    (1) The plan includes all the information required by Sec.  
261.62(b); and
    (2) The State certifies that the plan includes all the information
required by Sec.  261.62(b) and that it accurately reflect the
procedures under which the State is operating.
    (c) For conduct occurring after October 1, 2007, we will use the
single audit under OMB Circular A-133 in conjunction with other
reviews, audits, and data sources, as appropriate, to assess the
accuracy of the data filed by States for use in calculating the work
participation rates.


Sec.  261.65  Under what circumstances will we impose a work
verification penalty for failure to submit a work verification plan or
for failure to maintain adequate procedures to ensure a consistent
measurement of the work participation rate?

    (a) We will take action to impose a penalty under Sec.  
262.1(a)(15) of this chapter if:
    (1) The requirements under Sec. Sec.  261.64(a) and (b) have not
been met; or
    (2) We determine that the State has not maintained adequate
documentation, verification, or internal control procedures to ensure
the accuracy of the data used in calculating the work participation
rates.
    (b) If a State fails to submit an interim or complete Work
Verification Plan by the due dates in Sec.  261.64(a), we will reduce
the SFAG payable for the immediately succeeding fiscal year by five
percent of the adjusted SFAG.
    (c) If a State fails to maintain adequate internal controls to
ensure a consistent measurement of work participation, we will reduce
the adjusted SFAG by the following percentages for a fiscal year:
    (1) One percent for the first year;
    (2) Two percent for the second year;
    (3) Three percent for the third year;
    (4) Four percent for the fourth year; and
    (5) Five percent for the fifth and subsequent years.
    (d) If a State complies with the requirements in this subpart for
two consecutive years, then any penalty imposed for subsequent failures
will begin anew, as described in paragraph (c) of this section.
    (e) If we take action to impose a penalty under Sec. Sec.  
261.64(b) or (c), we will reduce the SFAG payable for the immediately
succeeding fiscal year.

PART 262--ACCOUNTABILITY PROVISIONS--GENERAL

0
1. The authority citation for part 262 is revised to read as follows:

    Authority: 31 U.S.C. 7501 et seq.; 42 U.S.C. 606, 609, and 610;
Pub. L. 109-171.


0
2. In Sec.  262.1, revise paragraphs (a)(13) and paragraph (a)(14), add
paragraph (a)(15), and revise paragraph (c) to read as follows:


Sec.  262.1  What penalties apply to States?

    (a) * * *
    (13) A penalty equal to the amount of the State's Welfare-to-Work
formula grant for failure to meet its basic MOE requirement during a
year in which it receives the formula grant;
    (14) A penalty of not less than one percent and not more than five
percent of the adjusted SFAG for failure to impose penalties properly
against individuals who refuse to engage in required work in accordance
with section 407 of the Act; and
    (15) A penalty of not less than one percent and not more than five
percent of the adjusted SFAG for failure to establish or comply with
work participation verification procedures.
* * * * *
    (c)(1) We will take the penalties specified in paragraphs (a)(1),
(a)(2), and (a)(7) of this section by reducing the SFAG payable for the
quarter that immediately follows our final decision.
    (2) We will take the penalties specified in paragraphs (a)(3),
(a)(4), (a)(5), (a)(6), (a)(8), (a)(9), (a)(10), (a)(11), (a)(12),
(a)(13), (a)(14), and (a)(15) of this section by reducing the SFAG
payable for the fiscal year that immediately follows our final
decision.
* * * * *

0
3. Amend Sec.  262.2 by adding a new paragraph (d) as follows:


Sec.  262.2  When do the TANF penalty provisions apply?

* * * * *
    (d) The penalty specified in Sec.  262.1(a)(15) takes effect on
October 1,

[[Page 37481]]

2006, for failure to establish work participation verification
procedures and on October 1, 2007, for failure to comply with those
procedures.

0
4. Amend Sec.  262.3 by revising paragraph (a)(1) to read as follows:


Sec.  262.3  How will we determine if a State is subject to a penalty?

    (a)(1) We will use the single audit under OMB Circular A-133, in
conjunction with other reviews, audits, and data sources, as
appropriate, to determine if a State is subject to a penalty for
misusing Federal TANF funds (Sec.  263.10 of this chapter),
intentionally misusing Federal TANF funds (Sec.  263.12 of this
chapter), failing to participate in IEVS (Sec.  264.10 of this
chapter), failing to comply with paternity establishment and child
support requirements (Sec.  264.31 of this chapter), failing to
maintain assistance to an adult single custodial parent who cannot
obtain child care for a child under 6 (Sec.  261.57 of this chapter),
failing to reduce assistance to a recipient who refuses without good
cause to work (Sec.  261.54 of this chapter), and after October 1, 2007
failing to comply with work participation verification procedures
(Sec.  261.64 of this chapter).
* * * * *

0
5. Amend Sec.  262.6 by revising paragraphs (e) and (f) to read as
follows:


Sec.  262.6  What happens if a State does not demonstrate reasonable
cause?

* * * * *
    (e) The corrective compliance plan must correct or discontinue the
violation within the following time frames:
    (1) For a penalty under Sec. Sec.  262.1(a)(4), (a)(9), or (a)(15),
by the end of the first fiscal year ending at least six months after
our receipt of the corrective compliance plan; and
    (2) For the remaining penalties, by a date the State proposes that
reflects the minimum period necessary to achieve compliance.
    (f) During the 60-day period following our receipt of the State's
corrective compliance plan, we may request additional information and
consult with the State on modifications to the plan including in the
case of a penalty under Sec.  262.1(a)(15), modifications to the
State's work verification procedures and Work Verification Plan.
* * * * *

PART 263--EXPENDITURES OF STATE AND FEDERAL TANF FUNDS

0
1. The authority section for Part 263 is revised to read as follows:

    Authority: 42 U.S.C. 604, 607, 609, and 862a; Pub. L. 109-171.


0
2. Revise Sec.  263.2 to read as follows:


Sec.  263.2  What kinds of State expenditures count toward meeting a
State's basic MOE expenditure requirement?

    (a) Expenditures of State funds in TANF or separate State programs
may count if they are made for the following types of benefits or
services:
    (1) Cash assistance, including the State's share of the assigned
child support collection that is distributed to the family, and
disregarded in determining eligibility for, and amount of the TANF
assistance payment;
    (2) Child care assistance (see Sec.  263.3);
    (3) Education activities designed to increase self-sufficiency, job
training, and work (see Sec.  263.4);
    (4) Any other use of funds allowable under section 404(a)(1) of the
Act including:
    (i) Nonmedical treatment services for alcohol and drug abuse and
some medical treatment services (provided that the State has not
commingled its MOE funds with Federal TANF funds to pay for the
services), if consistent with the goals at Sec.  260.20 of this
chapter; and
    (ii) Pro-family activities that are consistent with the goals at
Sec. Sec.  260.20(c) or (d) of this chapter, but do not constitute
``assistance'' as defined in Sec.  260.31(a) of this chapter; and
    (5)(i) Administrative costs for activities listed in paragraphs
(a)(1) through (a)(4) of this section, not to exceed 15 percent of the
total amount of countable expenditures for the fiscal year.
    (ii) Costs for information technology and computerization needed
for tracking or monitoring required by or under part IV-A of the Act do
not count towards the limit in paragraph (5)(i) of this section, even
if they fall within the definition of ``administrative costs.''
    (A) This exclusion covers the costs for salaries and benefits of
staff who develop, maintain, support, or operate the portions of
information technology or computer systems used for tracking and
monitoring.
    (B) It also covers the costs of contracts for the development,
maintenance, support, or operation of those portions of information
technology or computer systems used for tracking or monitoring.
    (b) With the exception of paragraph (a)(4)(ii) of this section, the
benefits or services listed under paragraph (a) of this section count
only if they have been provided to or on behalf of eligible families.
An ``eligible family'' as defined by the State, must:
    (1) Be comprised of citizens or aliens who:
    (i) Are eligible for TANF assistance;
    (ii) Would be eligible for TANF assistance, but for the time limit
on the receipt of federally funded assistance; or
    (iii) Are lawfully present in the United States and would be
eligible for assistance, but for the application of title IV of PRWORA;
    (2) Include a child living with a custodial parent or other adult
caretaker relative (or consist of a pregnant individual); and
    (3) Be financially eligible according to the appropriate income and
resource (when applicable) standards established by the State and
contained in its TANF plan.
    (c) Benefits or services listed under paragraph (a) of this section
provided to a family that meets the criteria under paragraphs (b)(1)
through (b)(3) of this section, but who became ineligible solely due to
the time limitation given under Sec.  264.1 of this chapter, may also
count.
    (d) Expenditures for the benefits or services listed under
paragraph (a) of this section count whether or not the benefit or
service meets the definition of assistance under Sec.  260.31 of this
chapter. Further, families that meet the criteria in paragraphs (b)(2)
and (b)(3) of this section are considered to be eligible for TANF
assistance for the purposes of paragraph (b)(1)(i) of this section.
    (e) Expenditures for benefits or services listed under paragraph
(a) of this section may include allowable costs borne by others in the
State (e.g. local government), including cash donations from non-
Federal third parties (e.g., a non-profit organization) and the value
of third party in-kind contributions if:
    (1) The expenditure is verifiable and meets all applicable
requirements in 45 CFR 92.3 and 92.24;
    (2) There is an agreement between the State and the other party
allowing the State to count the expenditure toward its MOE requirement;
and
    (3) The State counts a cash donation only when it is actually
spent.
    (f)(1) The expenditures for benefits or services in State-funded
programs listed under paragraph (a) of this section count only if they
also meet the requirements of Sec.  263.5.
    (2) Expenditures that fall within the prohibitions in Sec.  263.6
do not count.
    (g) State funds used to meet the Healthy Marriage Promotion and
Responsible Fatherhood Grant match requirement may count to meet the
MOE requirement in Sec.  263.1, provided the expenditure also meets all
the other MOE requirements in this subpart.

0
3. Revise Sec.  263.6 to read as follows:

[[Page 37482]]

Sec.  263.6  What kinds of expenditures do not count?

    The following kinds of expenditures do not count:
    (a) Expenditures of funds that originated with the Federal
government;
    (b) State expenditures under the Medicaid program under title XIX
of the Act;
    (c) Expenditures that a State makes as a condition of receiving
Federal funds under another program that is not in Part IV-A of the
Act, except as provided in Sec.  263.3;
    (d) Expenditures that a State made in a prior fiscal year;
    (e) Expenditures that a State uses to match Federal Welfare-to-Work
funds provided under section 403(a)(5) of the Act; and
    (f) Expenditures that a State makes in the TANF program to replace
the reductions in the SFAG as a result of penalties, pursuant to Sec.  
264.50 of this chapter.

PART 265--DATA COLLECTION AND REPORTING REQUIREMENTS

0
1. The authority citation for part 265 is revised to read as follows:

    Authority: 42 U.S.C. 603, 605, 607, 609, 611, and 613; Pub. L.
109-171.


0
2. Amend Sec.  265.1 by revising paragraph (c) to read as follows:


Sec.  265.1  What does this part cover?

* * * * *
    (c) If a State claims MOE expenditures under a separate State
program(s), this part describes the case record information
(disaggregated and aggregated) on individuals and families in the
quarterly SSP-MOE Data Report that each State must file.
* * * * *

0
3. Revise Sec.  265.2 to read as follows:


Sec.  265.2  What definitions apply to this part?

    (a) Except as provided in paragraph (b) of this section, the
general TANF definitions at Sec. Sec.  260.30 through 260.33 and the
definitions of a work-eligible individual and the work activities in
Sec.  261.2 of this chapter apply to this part.
    (b) For data collection and reporting purposes only, family means:
    (1) All individuals receiving assistance as part of a family under
the State's TANF or separate State program (including noncustodial
parents, where required under Sec.  265.5(g)); and
    (2) The following additional persons living in the household, if
not included under paragraph (b)(1) of this section:
    (i) Parent(s) or caretaker relative(s) of any minor child receiving
assistance;
    (ii) Minor siblings of any child receiving assistance; and
    (iii) Any person whose income or resources would be counted in
determining the family's eligibility for or amount of assistance.

0
4. Revise Sec.  265.3 to read as follows:


Sec.  265.3  What reports must the State file on a quarterly basis?

    (a) Quarterly reports. (1) Each State must collect on a monthly
basis, and file on a quarterly basis, the data specified in the TANF
Data Report and the TANF Financial Report (or, as applicable, the
Territorial Financial Report).
    (2) Each State that claims MOE expenditures for a separate State
program(s) must collect on a monthly basis, and file on a quarterly
basis, the data specified in the SSP-MOE Data Report.
    (b) TANF Data Report. The TANF Data Report consists of four
sections. Two sections contain disaggregated data elements and two
sections contain aggregated data elements.
    (1) Disaggregated Data on Families Receiving TANF Assistance--
Section one. Each State must file disaggregated information on families
receiving TANF assistance. This section specifies identifying and
demographic data such as the individual's Social Security Number and
information such as the amount of assistance received, educational
level, employment status, work participation activities, citizenship
status, and earned and unearned income. The data must be provided for
both adults and children.
    (2) Disaggregated Data on Families No Longer Receiving TANF
Assistance--Section two. Each State must file disaggregated information
on families no longer receiving TANF assistance. This section specifies
the reasons for case closure and data similar to the data required in
section one.
    (3) Aggregated Data--Section three. Each State must file aggregated
information on families receiving, applying for, and no longer
receiving TANF assistance. This section of the TANF Data Report
requires aggregate figures in such areas as: The number of applications
received and their disposition; the number of recipient families, adult
recipients, and child recipients; the number of births and out-of-
wedlock births for families receiving TANF assistance; the number of
noncustodial parents participating in work activities; and the number
of closed cases.
    (4) Aggregated Caseload Data by Stratum--Section four. Each State
that opts to use a stratified sample to report the quarterly TANF
disaggregated data must file the monthly caseload data by stratum for
each month in the quarter.
    (c) The TANF Financial Report (or Territorial Financial Report).
(1) Each State must file quarterly expenditure data on the State's use
of Federal TANF funds, State TANF expenditures, and State expenditures
of MOE funds in separate State programs.
    (2) If a State is expending Federal TANF funds received in prior
fiscal years, it must file a separate quarterly TANF Financial Report
(or, as applicable, Territorial Financial Report) for each fiscal year
that provides information on the expenditures of that year's TANF
funds.
    (3) Territories must report their expenditure and other fiscal data
on the Territorial Financial Report, as provided at Sec.  264.85 of
this chapter, in lieu of the TANF Financial Report.
    (d) SSP-MOE Data Report. The SSP-MOE Data Report consists of four
sections. Two sections contain disaggregated data elements and two
sections contain aggregated data elements.
    (1) Disaggregated Data on Families Receiving SSP-MOE Assistance--
Section one. Each State that claims MOE expenditures for a separate
State program(s) must file disaggregated information on families
receiving SSP-MOE assistance. This section specifies identifying and
demographic data such as the individual's Social Security Number, the
amount of assistance received, educational level, employment status,
work participation activities, citizenship status, and earned and
unearned income. The data must be provided for both adults and
children.
    (2) Disaggregated Data on Families No Longer Receiving SSP-MOE
Assistance--Section two. Each State that claims MOE expenditures for a
separate State program(s) must file disaggregated information on
families no longer receiving SSP-MOE assistance. This section specifies
the reasons for case closure and data similar to the data required in
section one.
    (3) Aggregated Data--Section three. Each State that claims MOE
expenditures for a separate State program(s) must file aggregated
information on families receiving and no longer receiving SSP-MOE
assistance. This section of the SSP-MOE Data Report requires aggregate
figures in such areas as: The number of recipient families, adult
recipients, and child recipients; the total amount of assistance for
families receiving SSP-MOE assistance; the number of non-custodial
parents participating in work activities; and the number of closed
cases.
    (4) Aggregated Caseload Data by Stratum--Section four. Each State
that

[[Page 37483]]

claims MOE expenditures for a separate State program(s) and that opts
to use a stratified sample to report the SSP-MOE quarterly
disaggregated data must file the monthly caseload by stratum for each
month in the quarter.
    (e) Optional data elements. A State has the option not to report on
some data elements for some individuals in the TANF Data Report and the
SSP-MOE Data Report, as specified in the instructions to these reports.
    (f) Non-custodial parents. A State must report information on a
non-custodial parent (as defined in Sec.  260.30 of this chapter) if
the non-custodial parent:
    (1) Is receiving assistance as defined in Sec.  260.31 of this
chapter;
    (2) Is participating in work activities as defined in section
407(d) of the Act; or
    (3) Has been designated by the State as a member of a family
receiving assistance.

0
5. Revise Sec.  265.4 to read as follows:


Sec.  265.4  When are quarterly reports due?

    (a) Each State must file the TANF Data Report and the TANF
Financial Report (or, as applicable, the Territorial Financial Report)
within 45 days following the end of the quarter or be subject to a
penalty.
    (b) Each State that claims MOE expenditures for a separate State
program(s) must file the SSP-MOE Data Report within 45 days following
the end of the quarter or be subject to a penalty.
    (c) A State that fails to submit the reports within 45 days will be
subject to a penalty unless the State files complete and accurate
reports before the end of the fiscal quarter that immediately succeeds
the quarter for which the reports were required to be submitted.

0
6. Revise Sec.  265.8 to read as follows:


Sec.  265.8  Under what circumstances will we take action to impose a
reporting penalty for failure to submit quarterly and annual reports?

    (a) We will take action to impose a reporting penalty under Sec.  
262.1(a)(3) of this chapter if:
    (1) A State fails to file the quarterly TANF Data Report, the
quarterly TANF Financial Report (or, as applicable, the Territorial
Financial Report), or the quarterly SSP-MOE Data Report (if applicable)
within 45 days of the end of the quarter;
    (2) The disaggregated data in the TANF Data Report or the SSP-MOE
Data Report are not accurate or a report does not include all the data
required by section 411(a) of the Act (other than section
411(a)(1)(A)(xii) of the Act) or the nine additional elements necessary
to carry out the data collection system requirements, including the
social security number;
    (3) The aggregated data elements in the TANF Data Report or the
SSP-MOE Data Report required by section 411(a) of the Act are not
accurate and the report does not include the data elements necessary to
carry out the data collection system requirements and to verify and
validate the disaggregated data;
    (4) The TANF Financial Report (or, as applicable, the Territorial
Financial Report) does not contain complete and accurate information on
total expenditures and expenditures on administrative costs and
transitional services; or
    (5) The annual report under Sec.  265.9 does not contain the
description of transitional services provided by a State to families no
longer receiving assistance due to employment.
    (b) If we determine that a State meets one or more of the
conditions set forth in paragraph (a) of this section, we will notify
the State that we intend to reduce the SFAG payable for the immediately
succeeding fiscal year.
    (c) We will not impose the penalty at Sec.  262.1(a)(3) of this
chapter if the State files the complete and accurate quarterly report
or the annual report before the end of the fiscal quarter that
immediately succeeds the fiscal quarter for which the reports were
required.
    (d) If the State does not file all reports as provided under
paragraph (a) of this section by the end of the immediately succeeding
fiscal quarter, the penalty provisions of Sec. Sec.  262.4 through
262.6 of this chapter will apply.
    (e) Subject to paragraphs (a) through (c) of this section and
Sec. Sec.  262.4 through 262.6 of this chapter, for each quarter for
which a State fails to meet the reporting requirements, we will reduce
the SFAG payable by an amount equal to four percent of the adjusted
SFAG (or a lesser amount if the State achieves substantial compliance
under a corrective compliance plan).

[FR Doc. 06-5743 Filed 6-28-06; 8:45 am]

BILLING CODE 4184-01-P
          




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