New Challenges for States in Financing Child Support

Once viewed primarily as a system of welfare cost recovery for the federal and state governments, child support is increasingly seen as a program that provides vital income support for low-income families. The 1996 welfare reform law, in addition to overhauling the welfare system, made significant changes to the child support program. Among the changes, the law strengthened the enforcement tools available to states, required states to create an integrated information network, and amended the child support distribution rules.

Welfare reform and the subsequent decline in welfare caseloads have had important implications for the child support program. Due to the decline in welfare caseloads, the number of welfare cases in the child support caseload has decreased while the number of non-welfare cases has increased. The decrease in the number of welfare cases in the child support caseload has resulted in decreased retained welfare collections to be shared by the state and federal government. For states that have historically financed their child support enforcement programs with retained welfare collections, this revenue decline may necessitate some difficult financing decisions.

At the same time, many programs have increased the services they offer, for example, providing services to low-income noncustodial parents and in instances of domestic violence. Finally, some advocates and policymakers are proposing that families who have left welfare or are continuing to receive welfare cash assistance should receive part or all of the support payments made on their behalf; less than half of the states currently pass-through support payments to families on welfare.

Together these changes will have a significant impact on the costs of child support activities and the funds needed to support them. This Issue Note explores the changing dynamics of the child support program and discusses policy options for states interested in investing in child support. For general information on child support, see the Welfare Information Network (WIN) web page at http://www.welfareinfo.org/childsupport.htm.

How is the mission of the child support program changing? When Congress enacted the Child Support Enforcement and Paternity Establishment (CSE) program in 1975, CSE’s primary objectives were cost recovery and cost avoidance. The federal and state governments would retain child support collected on behalf of families on welfare as reimbursement for the cost of providing welfare payments to those families. Paternity would be established and support ordered for children born out of wedlock; with this support, some families might be able to avoid welfare.

Families receiving welfare continue to assign their child support rights to the state and are required to cooperate with the CSE program in order to receive Temporary Assistance for Needy Families (TANF), unless they are exempted for “good cause” (e.g., past physical harm). (Cooperation with CSE is also required for families to receive Medicaid benefits, and some states require such cooperation for the receipt of food stamps and child care subsidies.)

The mission of the child support program has evolved to encompass income support to low-income families. Its role in ensuring that all children benefit from the financial support of both parents has become as important as its role in recovering welfare expenditures and avoiding welfare costs. Toward that end, many states provide job placement, training, counseling, and other services to noncustodial parents in order to improve their ability to contribute to their children’s lives.

The current CSE program serves families regardless of their welfare status. Families receiving welfare automatically qualify for child support services at no cost. Preliminary data from 1999 indicate that just 22 percent of the 16.4 million child support cases were current welfare cases (U.S. Department of Health and Human Services, 2000). In contrast, 52 percent of the child support caseload in 1996 consisted of welfare cases. It must be noted that due to revisions in reporting requirements, most notably the elimination of the “arrears only” category, the U.S. Department of Health and Human Services (HHS) cautions that 1999 data may not be comparable to prior years.

Non-welfare families can apply for and receive child support services for an application fee of up to $25. In addition to application fees, states are permitted to try and recover the costs of these services from non-welfare families. However, many of these families have low incomes. Of the 12.8 million non-welfare cases in 1999, over half (52 percent) were former welfare recipients. An analysis of families receiving child support program services in 1995 found that 69 percent of families had incomes under $30,000 (Lyon, 1999).

What impact have changes related to welfare reform had on the child support program? Welfare reform and subsequent legislation have strengthened the enforcement tools that states are required to use in administering child support enforcement. Created by the 1996 welfare reform legislation, the National Directory of New Hires matches child support orders to employment records; in fiscal 2000, it was used to locate 3.5 million noncustodial parents. The Financial Institution Data Match Program, also part of the welfare reform law, matches the records of delinquent parents with those of financial institutions, enabling states to “freeze and seize” the dollars; in fiscal 2000, the program was used to locate accounts in excess of $3 billion. By matching delinquent parents with federal tax refunds, the federal government collected a record $1.4 billion in overdue child support in fiscal 2000. For a more detailed discussion of the innovations and changes in child support enforcement that have come about as a result of the 1996 welfare reform legislation, see the WIN publication “Innovations in Child Support Enforcement,” at http://www.welfareinfo.org/sachsmarch.htm. Unofficial fiscal 2000 data confirm the effectiveness of these new tools. The collection rate for all cases improved from 19 percent in 1995 to 42 percent in 2000. For cases with support orders, the collection rate increased from 34 percent to 68 percent.

Between 1996 and 1998, total collections grew by 19 percent, from $12 billion to $14.3 billion. During that period, non-welfare collections grew by 27 percent, from $9.2 billion to $11.7 billion. Welfare collections actually declined by 10 percent, from $2.9 billion to $2.6 billion. Consequently, the amount that the federal and state governments are retaining from welfare collections is also declining.

Since 1979, the child support program has resulted in a net cost to the federal government because the federal share of the cost of administering the child support program has exceeded the federal share of retained collections. States have received savings from the program in every year. However, since the passage of the welfare reform legislation and the resulting changes in child support caseloads and collections, state savings have fallen and in 1998 reached their second lowest level in more than 10 years. This decline in revenue has important implications for program financing.

How do states finance the child support enforcement program? The federal and state governments jointly fund the child support enforcement program. The federal government provides the largest share of funding, matching 66 percent of allowable state expenditures and providing a higher match for activities such as management information systems and blood tests for paternity establishment. States finance their share of the program using state and local government appropriations, federal child support incentive payments, the state share of retained welfare collections, and application and user fees. In 1998 it cost $3.6 billion to administer the child support program. For every dollar in administrative expenses, $4.00 was collected. Among states, the program’s cost-effectiveness ranged from a high of $7.06 to a low of $1.59.

The Lewin Group conducted a study of program financing for HHS. The researchers found that of the state and local share of program financing, nationally, 42 percent comes from state general fund appropriations, 25 percent from federal incentive payments, 15 percent from retained welfare collections, 9 percent from county general fund appropriations, and 2 percent from fees and other cost-recovery mechanisms (Fishman, Dybdal, and Tapogna, 1999). However, they found considerable diversity among states relative to the mix of funding sources that states are using to finance their child support programs.

Federal incentive payments, which totaled $395 million in fiscal 1998, are a significant source of program financing. In 1998 Congress passed legislation that will phase in a new, capped incentive system with outcome-based performance measures. Under the new system, states will compete for a fixed amount of incentive payments; under the previous system, incentive payments were open-ended. Many states have expressed concern that the new system creates uncertainty about how much money they will receive and penalizes states that have strong past performances and not as much room for improvement.

Why should states invest in child support enforcement? States have a definite financial interest in investing in child support enforcement when the program’s objectives are to recover the cost of providing welfare payments to families. However, even as the dynamics of the program are changing and the child support caseload is increasingly comprised of non-welfare families, there are still compelling reasons for states to invest in child support enforcement.

For states, investments in child support can be equated to investments in job training, child care, or other programs aimed at helping families be self-sufficient. As the role of child support as a cost-recovery mechanism diminishes, many point to the role it plays as a welfare cost-avoidance strategy. By ensuring that families receive the child support payments to which they are entitled, many of them may be able to avoid turning to the public welfare system for assistance. For more information, see the HHS report “The Potential of the Child Support Enforcement Program to Avoid Costs to Public Programs: A Review and Synthesis of the Literature (Final Report),” at http://www.acf.dhhs.gov/programs/cse/rpt/cs_cost_avoidance_finalrpt.pdf.

Child support can be a critical income support for low-income families that have left the welfare rolls or that have never received welfare but are still poor. For poor families that receive child support payments, the payments make up over a quarter of family income, as compared to 16 percent of family income for all families that receive child support payments (Sorenson and Zibman, 1999). Sorenson and Zibman estimate that child support payments lift half a million children out of poverty.

Finally, how states invest in child support may have implications for program performance. Some research points to the relationship between the level and types of investment in child support enforcement and the performance of the child support program. Fishman et al. suggest that “a greater reliance on general fund appropriations may be associated with somewhat better performance” (2000). The relationship between financing and performance will be explored in the section on Research Findings.

What changes to the child support program have been proposed or may be raised in TANF reauthorization? Several modifications to the child support program have been suggested in the past and are likely to be raised in the future, particularly during the upcoming debate on TANF reauthorization.

Simplification of Assignment and Distribution Rules. A complex set of rules governs the assignment (who has a legal claim to payments) and distribution (the order in which collections are paid based on assignment) of child support collections made on behalf of welfare or former welfare families. States track when arrears occur—during assistance, before assistance, or after assistance—and determine which distribution “bucket” toward which arrears are applied (i.e., monthly support, never-assigned arrears, permanently- assigned arrears, temporarily-assigned arrears, conditionally-assigned arrears, unassigned pre-assistance arrears, or unassigned during-assistance arrears). Advocates argue that the system needs to be simplified because it is too confusing for families and caseworkers to understand, and because of its complexity, creates an administrative burden for states. Some states have struggled unsuccessfully to bring their computer systems into compliance with the assignment and distribution rules and risk audit or litigation. In addition, a continuing subject of debate is who should receive the child support payments that are collected.

Incentives to Pass-Through Payments to Families. Many argue that states should “pass-through” to families on welfare a share of the payments made on their behalf. They believe that noncustodial parents may be more inclined to make payments if those payments are passed-through to their children rather than retained by the state. Prior to welfare reform, states were required to pass-through to families the first $50 of child support collected on their behalf, which was then disregarded in determining their eligibility for welfare. Welfare reform eliminated this requirement; under current law, states can continue to pass-through child support payments to welfare families, but the state bears the full cost of the program and must continue to pay the federal share of collections. As a result of these changes, less than half of the states now have a pass-through policy. Many believe that changes should be made to encourage states to pass-through some portion of child support payments to welfare families.

Services for Noncustodial Parents. Policymakers realize that many noncustodial fathers do not make payments because they are “dead broke” rather than “dead beat” and that many noncustodial fathers could benefit from the same services being provided to their children’s mothers through TANF (e.g., substance abuse treatment, job training and placement, and education). Several funding sources can be used to provide such services to noncustodial parents, including TANF and maintenance-of-effort funds, state general revenue funds, Welfare-to-Work grant funds, Child Support Enforcement funds, Social Services Block Grant funds, and Community Services Block Grant funds. For more information, see the WIN publication “Funding Sources for Fatherhood Programs,” at http://www.welfareinfo.org/fatherhoodprogramsresource.htm.

A bill passed by the House of Representatives in the 106th Congress, the Child Support Distribution Act of 2000, would have provided $140 million in competitive grant funds over four years for state and community-based fatherhood programs. In addition to fatherhood programs, the House-passed bill contained provisions to ensure that families leaving welfare receive payments made on their behalf. (Currently, families receive payments intercepted through income tax refunds only after the state has been reimbursed for its share of arrears; the proposed legislation would have put families first in line for payment.) The bill also included incentives for states to pass-through a greater share of payments to families receiving welfare and simplified and streamlined some of the rules concerning assignment and distribution. For a comparison of the House and Senate bills from the 106th Congress and current law, see the Center for Law and Social Policy publication “Assignment and Distribution of Child Support: Comparison of Current Law, H.R. 4678, and S. 3189 (Title I),” at http://www.clasp.org/pubs/childenforce/Tables/3189ad10_13.htm. In the 107th Congress, Representatives Nancy Johnson (R-Conn.) and Ben Cardin (D-Md.) have introduced H.R. 1471, the Child Support Distribution Act of 2001, which is almost identical to the bill passed by the House in the 106th Congress. Senator Evan Bayh (D-Ind.) has included similar provisions in S.685, the Strengthening Working Families Act of 2001, and stand-alone legislation is expected to be introduced.

Parental involvement, both emotional and financial, is critical to children’s well-being. Children who grow up living apart from at least one of their parents are three times more likely to be poor, and child support plays an important role in the lives of these children. Sorenson and Zibman analyzed 1997 data from the National Survey of America’s families (2000). Only 29 percent of children with a parent living elsewhere received child support. As noted earlier, for these children, child support accounts for 16 percent of their families’ income. Poor children are less likely than non-poor children to receive child support; but payments are an important source of income for poor children, comprising 26 percent of family income. Sorenson and Zibman estimate that without child support payments, child poverty would increase by about 5 percent.

Yet states may face difficult decisions when it comes to program financing, particularly given the changing dynamics of, and increasing expectations for, the child support program. In the HHS study on state financing, Fishman, Dybdal, and Tapogna found that states are using diverse and complex strategies to finance their share of program expenditures (1999). They also found a relationship between the financing structure a state uses to fund its child support program and the state’s anticipated need to make financing changes. This relationship was attributed to declining TANF caseloads. States that rely heavily upon federal incentives and retained welfare collections anticipate financing changes. In contrast, states that rely primarily on state and/or county general revenue fund appropriations do not anticipate financing changes. If the current trend in caseload reductions continues, states that have historically relied on retained collections for child support program financing will confront an ever-shrinking source of funds.

Fishman, Dybdal, and Tapogna’s findings led to a subsequent study to examine whether a relationship exists between program performance and financing mechanisms (Fishman et al., 2000). The researchers found an association between better performance and a greater reliance on general fund appropriations; in contrast, states that relied more on retained welfare collections did not score as well on measures of program performance. Fishman et al. speculate that states’ use of general revenue funds may reflect factors such as the quality of management or the state legislature’s level of interest in the program. They qualify their findings, however, noting that their study was conducted in fiscal 1997, before many states implemented the provisions of the 1996 welfare reform law, and emphasize that their analysis is exploratory in nature.

An analysis by Garfinkel, Heintze, and Huang suggests that sufficient expenditures and strong laws must both be present for child support enforcement programs to be successful (2000). Their study looked at the level of administrative expenditures and the number of laws in place to enforce support in order to determine child support enforcement’s effect on the incomes of single mothers and their children. They found that the largest increase in single mothers’ incomes occurs when they live in states with strong laws and medium to large expenditures to enforce them.

As more is understood about the impact of welfare reform and the needs of families leaving welfare, states are beginning to examine several supports for these families, including child support. Options that states may want to consider include implementing financing and management initiatives to improve the cost-effectiveness of the child support program and expanding services to families that are receiving welfare or to new populations.

Pass-Through to Families on Welfare. Since the elimination of the $50 pass-through requirement in federal law, less than half of the states pass-through child support payments to families on welfare. Under a federal waiver, Connecticut, Vermont, and Wisconsin are experimenting with policies to provide full current child support payments to TANF families. For a summary of state pass-through policies, see http://www.welfareinfo.org/ChildSupportProvisions.htm.

The Institute for Research on Poverty (IRP) at the University of Wisconsin-Madison is evaluating the full pass-through policy in Wisconsin (IRP, 2001). Families in the control group receive up to $50 or 41 percent of the current support payment (whichever is larger), and families in the experimental group receive the full current support payment. Based on the final report on the first group of participants in the study, mothers in the full pass-through group received about $150 more in child support than did those in the control group in 1998. Differences are somewhat smaller in 1999 but remained significant. According to the data, fathers in the full-pass through group are both more likely to make payments and make higher payments than fathers in the partial pass-through group. Researchers have found that the pass-through policy results in little or no government cost due to slight savings in other programs. For more information, contact Troy Sterr, Wisconsin Department of Workforce Development, 608/261-8860.

Services for Noncustodial Parents. The WIN publication “Funding Sources for Fatherhood Programs,” at http://www.welfareinfo.org/fatherhoodprogramsresource.htm, describes several initiatives to address the barriers that prevent noncustodial parents from financially and/or emotionally supporting their children, such as the Parents’ Fair Share program in Missouri and the Child Support Probation Unit program administered in Bexar County (San Antonio), Texas. For more information on providing services to noncustodial parents, see the National Conference of State Legislatures’ publication “Connecting Low-Income Fathers and Families: A Guide to Practical Policies,” at http://www.calib.com/peerta/policies/connect.htm.

Bonuses to Support Child Support Activities. In Minnesota counties administer and provide most of the matching funds for the child support program. The state legislature offers them bonuses for reviewing cases to determine whether child support orders should be modified, establishing paternities, and enrolling children in their noncustodial parent’s medical insurance plan. The legislature identified these goals because of their positive impact on families and the state budget (e.g., saving state Medicaid and Children’s Health Insurance Program dollars by obtaining private medical coverage for children).

Recovery of Costs and Fees. Federal law requires states to charge an application fee of up to $25 to non-TANF families. In addition, states can charge additional fees to recover costs from non-welfare families, but only a small number have chosen to do so. Some argue that states should respond to the changing caseload composition by charging increased fees to non-welfare families that receive child support services. Others caution that although many families receiving child support services may not be receiving welfare, they may have low incomes and may be struggling to make ends meet. States considering charging families for child support services may want to use a sliding-fee scale based on family income. Given the low incomes of families receiving child support services, some states have considered charging non-welfare families fees for services and have determined that such efforts are not worth the administrative costs involved. The National Conference of State Legislatures’ compilation of states’ fee collection and cost recovery policies is available at http://www.ncsl.org/programs/cyf/fees.htm.

American Public Human Services Association, Justin Latus, 202/ 682-0100, http://www.aphsa.org/.

Center for Law and Social Policy, Vicky Turetsky or Paula Roberts, 202/328-5140, http://www.clasp.org/.

Office of Child Support Enforcement, Administration for Children and Families, U.S. Department of Health and Human Services, 202/401-9383, http://www.acf.dhhs.gov/programs/cse/.

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Committee on Ways and Means, U.S. House of Representatives. 2000 Green Book: Background Material on Programs within the Jurisdiction of the Committee on Ways and Means. Washington, D.C.: U.S. Government Printing Office, October 6, 2000. Available at http://www.access.gpo.gov/congress/wm001.html.

Fishman, Michael E., Kristin Dybdal, and John Tapogna. State Financing of Child Support Enforcement Programs: Final Report. Washington, D.C.: U.S. Department of Health and Human Services, Assistant Secretary for Planning and Evaluation and Office of Child Support Enforcement, September 24, 1999. Available at http://www.acf.dhhs.gov/programs/cse/rpt/financing.htm.

Fishman, Michael E., John Tapogna, Kristin Dybdal, and Stephanie Laud. Preliminary Assessment of the Associations between State Child Support Enforcement Performance and Financing Structure. Washington, D.C.: U.S. Department of Health and Human Services, Assistant Secretary for Planning and Evaluation and Office of Child Support Enforcement, August 1, 2000. Available at http://www.acf.dhhs.gov/programs/cse/rpt/cse_working_paper_new.pdf.

Garfinkel, Irwin, Theresa Heintze, and Chien-Chung Huang. Child Support Enforcement: Incentives and Well-Being. Chicago, Ill.: Joint Center for Poverty Research, December 8, 2000. Available at http://www.jcpr.org/wp/WPprofile.cfm?ID=234.

Latus, Justin. What Profit?: The Truth About Child Support Financing. Washington, D.C.: American Public Human Services Association, 1999. Available at http://www.aphsa.org/issues/csfinanc.htm.

Lyon, Matthew. Characteristics of Families Using Title IV-D Services in 1995. Washington, D.C.: Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, May 1999. Available at http://aspe.hhs.gov/hsp/CSE-Char99/CSE-Char99.htm.

Meyer, Daniel R., and Teresa Cancian. W-2 Child Support Demonstration Evaluation Phase I: Final Report. Madison, Wisc.: Institute for Research on Poverty, April 17, 2001. Available at http://www.ssc.wisc.edu/irp/csde/phase1-tocs.htm.

Myers, Theresa. State Child Support Pass-Through Programs. Denver, Colo.: National Conference of State Legislatures, February 1999. Available at http://www.ncsl.org/programs/cyf/csissue.htm.

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National Conference of State Legislatures. State Child Support Programs: Fee Collection and Cost Recovery Policies. Denver, Colo.: National Conference of State Legislatures, February 2000. Available at http://www.ncsl.org/programs/cyf/fees.htm.

Primus, Wendell, and Kristina Daugirdas. H.R. 4678, the Child Support Distribution Act of 2000, Includes Significant Child Support Changes Benefiting Low-Income Children: A Brief Explanation. Washington, D.C.: Center on Budget and Policy Priorities, September 27, 2001. Available at http://www.cbpp.org/9-5-00wel.htm.

Sachs, Heidi. Innovations in Child Support Enforcement. Washington, D.C.: Welfare Information Network, March 2000. Available at http://www.welfareinfo.org/sachsmarch.htm.

Solomon-Fears, Carmen, Gene Falk, Michelle Ganow, and Melinda Gish. Analysis of Federal-State Financing of the Child Support Enforcement Program. Washington, D.C.: Congressional Research Service, March 24, 2000. Available from Penny Hill Press, available at http://www.pennyhill.com.

Sorenson, Elaine, and Ariel Halpern. Child Support Enforcement Is Working Better Than We Think. Washington, D.C.: Urban Institute, March 1999. Available at http://newfederalism.urban.org/html/anf_31.html.

Turetsky, Vicki. Assignment and Distribution of Child Support: Comparison of Current Law, H.R. 4678, and S. 3189 (Title I). Washington, D.C.: Center for Law and Social Policy, October 13, 2000. Available at http://www.clasp.org/pubs/childenforce/Tables/3189ad10_13.htm.

Turetsky, Vicki. You Get What You Pay For: How Federal and State Investment Decisions Affect Child Support Performance. Washington, D.C.: Center for Law and Social Policy, December 1998. Available at http://www.clasp.org/pubs/childenforce/ncsea2.htm.

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The Welfare Information Network is supported by grants form the Annie E. Casey Foundation, the Charles Stewart Mott Foundation, the David and Lucile Packard Foundation, the Edna McConnell Clark Foundation, the Ford Foundation, the Administration for Children and Families, U.S. Department of Health and Human Services, ad the U.S. Department of Labor.

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