The new child support incentive system, in section 458A of the Act, as amended by the child support Performance and Incentive Act of 1998, measures State IV-D program performance in five major areas: (1) Paternity establishment; (2) cases with child support orders; (3) collections on current support; (4) cases with collections on arrears; and (5) cost-effectiveness.

The penalty system proposed in this regulation would measure State IV-D program performance in three areas: (1) Paternity establishment, (2) cases with child support orders, and (3) collections on current support. The first is required by the statute pursuant to 409(a)(8)(i) and the other two are measures being proposed by the Secretary.

1. Paternity Establishment

The measure for paternity establishment is that included by Congress for purposes of paternity establishment penalties under section 452(g) of the Act, as amended by PRWORA. It is also one of the performance measures for incentives purposes under section 458A(b)(6)(A)(i) of the Act. States may use either one of the following two measures set forth in 452(g)(2) of the Act:

(1) IV-D Paternity Establishment Percentage (PEP) is the ratio that the total number of children in the IV-D caseload in the fiscal year (or, at the option of the State, as of the end of the fiscal year) who have been born out-of-wedlock and for whom paternity has been established or acknowledged, bears to the total number of children in the IV-D caseload as of the end of the preceding fiscal year who were born out of wedlock.

(2) Statewide Paternity Establishment Percentage (PEP) is the ratio that the total number of minor children who have been born out-of- wedlock and for whom paternity has been established or acknowledged during the fiscal year, bears to the total number of children born out- of-wedlock during the preceding fiscal year.

Under section 452(g)(2) of the Act, the count of children will not include any child who is a dependent by reason of the death of a parent (unless paternity is established for that child), nor any child whose parent is found to have good cause for refusing to cooperate with the State agency in establishing paternity, or for whom the appropriate State agency determines it is against the best interest of the child to pursue paternity issues.

2. Cases With child support Orders

This measure is found in section 458A(b)(6)(B)(i) of the Act and shows, for incentive purposes, the percentage of cases in the IV-D caseload in which there is a support order. This proposed regulation would apply the same measure for penalty purposes.

3. Collections on Current support

The third measure is at section 458A(b)(6)(C)(i) of the Act for purposes of incentives, and is proposed as the measure for penalty purposes in this regulation. This measure focuses on the proportion of current support owed that is collected in IV-D cases during the fiscal year.

Another approach would be to look at cases with payments instead of actual collections. We invite comment on the use of "Cases with Collections" as an alternative to the "Collections on Current support" penalty measure.

4. Collections on Arrears

The fourth measure, found in section 458A(b)(6)(D) of the Act for incentive purposes, measures the total number of cases under the IV-D program in which payments of past-due child support were received in the fiscal year and part or all of the payments were distributed to the family to whom the past-due child support was owed (or, if all past-due child support owed to the family was, at the time of receipt, subject to an assignment to the State under title IV-A of the Act, part or all of the payments were retained by the State) divided by the total number of IV-D cases in which there is past-due child support.

This measure includes those cases where, during the fiscal year, all of the past-due support collected was disbursed to the family, or was retained by the State because all the support was assigned to the State. If some of the past-due support owed in a IV-D case was assigned to the State and some was owed to the family, only those cases where some of the support actually went to the family can be included.

5. Cost-Effectiveness

The final measure for incentive purposes under section 458A(b)(6)(E)(i) of the Act, compares the total amount of support collected by the State's IV-D program during the fiscal year to the total amount expended during the fiscal year in the IV-D program.

E. Weighting the Measures

The statute requires some measures to get more weight than other measures. For incentive purposes under section 458A of the Act, each State would earn five scores based on performance on each of the five measures. The statute specifies that more emphasis should be placed on some of the measures, such as those that ensure timely and consistent support for children. Therefore, in accordance with section 458A(b)(5)(A) of the Act, we propose to weight the first three measures (paternity establishment, order establishment, and collections on current support) slightly more heavily than the last two (collections on arrears and cost effectiveness). The weighted scores are used to determine a State's maximum base amount.

F. Exclusion of Other Measures From Penalty Measures

While the incentives measures, formula, and process is laid out or cross referenced explicitly in section 458A of the Act, the penalty provisions in sections 409(a)(8) of the Act allow the Secretary to set the measures, performance standards (other than those for paternity establishment), and process that will be used to determine if State performance is sufficiently inadequate to warrant a financial penalty.

As noted earlier, we based these measures on the Strategic Plan. Under this proposed regulation, penalties would be based on a State's failure to meet minimum standards on paternity establishment, support order establishment and collection on current support performance measures, which are all in the strategic plan. The remaining measures-- collections on arrears and cost-effectiveness are not included in the penalty system. We do not propose that these two measures be included for the following reasons:

(1) The child support Performance and Incentive Act of 1998 changed the recommended performance standard for

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the number of cases paying arrears. The impact of this adjustment to the proposed standard may have the effect of reducing the number of cases for which past-due support is collected which may be counted for incentives purposes. If some past due support was assigned to the State and some due to the family, the case can only be included where some of the support actually went to the family. We do not believe a State should be measured, for penalty purposes, on collection of arrears cases at this time. This is a new area of reporting for states and the impact of the statutory adjustment to this standard is not clear.

(2) We also do not propose including the cost-effectiveness measure for penalty purposes. Including it might have discouraged States from investing in program improvements that might raise program costs and might reduce cost-effectiveness or might not yield results immediately. We believe that there are other, adequate mechanisms to address concerns for cost-shifting or improper use of IV-D funds (such as financial management and administrative cost audits). In addition, State automated IV-D systems costs are expected to remain high over the next few years due to continued development and modification of statewide-automated systems to meet the requirements of PRWORA, thus making such a measure less reflective of the actual cost-effectiveness of the program.

For these reasons, we propose to begin the new penalty system with just three penalty measures and intend to evaluate the possibility of including other measures at a later time when more is known about the impact of this penalty system. For example, we are in the process of developing a recommendation to the Congress on a medical support performance measure for incentive purposes, in accordance with section 201(d)(2) of the child support Performance and Incentive Act of 1998. The Secretary's report is due to the Congress on October 1, 1999, including recommendations for incorporation of a medical support measure in a revenue neutral manner in the incentive payments system established under section 458A of the Act. When changes are made to incorporate such a measure in the statutory incentives system, it would be appropriate to consider changes to the penalty measures presented in these regulations.

G. Interaction Between Incentives and Penalties

We believe there are levels of State performance that merit an incentive payment and there are levels that warrant a penalty. However, there are also levels of State performance that neither merit an incentive nor warrant a penalty.

There is an interaction between the incentive and penalty systems proposed in this regulation. States with certain levels performance on the three penalty measures would be able to avoid a penalty and qualify for an incentive payment if a significant increase over the previous year's performance is achieved in those measures (i.e., 10 percent on the PEP, 5 percent on support orders and current support collections). However, under this alternative improvement formula the incentive payment would never be more than half of the maximum incentive possible. As a result, those States with lower performance levels would at least receive some incentive provided the program is improving sufficiently and quickly. Penalties would be assessed against States with very poor performance and decreasing, static, or minimal increases in performance over the previous year.

While Congress was clear in setting a performance standard for the paternity establishment percentage, the statute provided the Secretary with discretion to set standards for performance in other areas. State and Federal partners strongly considered the mandated paternity establishment penalty model and determined that it would not work for the other measures. Setting such a high standard for order establishment and current support would be unrealistic and would cause almost every State to be penalized.