Analysis of the 2007-08 Budget Bill: Health and Social Services

Department of Child Support Services (5175)

The Department of Child Support Services (DCSS), created on January 1, 2000, administers California’s child support program by overseeing 52 local child support offices (some small counties have joined together to form local child support agencies). The primary purpose of the program is to collect from absent parents support payments for custodial parents and their children. Local child support offices provide services such as locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting and distributing payments.

The Governor’s budget proposes expenditures totaling $974 million from all funds for support of DCSS in the budget year. The budget proposes $274 million from the General Fund for 2007-08, which is a decrease of $236 million (46 percent) compared to 2006-07. This decrease is primarily due to the elimination of General Fund expenditures to pay federal penalties for failing to complete a single statewide automation system by the required time.

Federal Penalty Held in Abeyance

In September 2006, the Department of Child Support Services applied for federal certification of the California Child Support Automated System. Once the state applied for certification, the federal penalty for not having a single statewide automation system was placed in abeyance. We discuss the current automation system and certification process.

Current Status of Automation. The California Child Support Automated System (CCSAS) consists of two major components, the State Disbursement Unit (SDU) and Child Support Enforcement (CSE). The SDU collects, processes, and distributes child support payments. The SDU was fully implemented in May 2006. The CSE component of the project provides a central database and case management system to support child support enforcement activities in all Local Child Support Agencies (LCSAs). The CSE portion of CCSAS is being implemented in two phases. The first phase of CSE is Version 1, which created a centralized database and reporting system for two preexisting systems (referred to as legacy systems). The second phase is Version 2, which will consolidate the two preexisting legacy systems and create increased child support enforcement capabilities.

Penalty Status. Once both the SDU and Version 1 were operational in September 2006, the state applied for federal certification of this “alternative” system (alternative system refers to the joined legacy systems). This application for certification means that penalties are held in abeyance pending federal certification. The roll-out of Version 2 is scheduled to begin in May 2007, with full implementation by November 2008.

Penalty Relief and Reimbursement. Since 1998, California has paid a total of nearly $1.2 billion in penalties for failing to have a single statewide automation system. The 2006-07 budget included $220 million to pay the federal penalty for federal fiscal year 2006 (October 2005 through September 2006). As previously mentioned, the state is currently in the process of becoming certified, during which time the federal penalty is not assessed. Once the system is certified, the federal government will reimburse the state 90 percent ($198 million) of the final penalty paid in 2006-07. The Governor’s budget assumes that the federal government will certify the system and reflects this reimbursement as revenue in 2007-08.

Budget Proposes to Absorb Federal Administration Fee

Pursuant to the Deficit Reduction Act of 2005, the federal government will begin to assess an annual fee on the state of $25 for most “never assisted” child support cases. This fee is deducted from California’s federal funds allocation for program administration regardless of whether the state collects this fee from the affected never-assisted families. Because the reprogramming costs would exceed the expected fee revenues from families, the budget proposes to absorb the cost of the fee ($1.8 million). We review this proposal and recommend the adoption of supplemental report language requiring the Department of Child Support Services to provide a report to the Legislature in March 2008 on the costs and benefits of collecting this fee in future years.

Background. The DCSS assists families by locating absent parents; establishing paternity; obtaining, enforcing, and modifying child support orders; and collecting and distributing payments. The DCSS serves families who are currently receiving public assistance (assistance cases), along with families who formerly or never received assistance. The total child support caseload in 2005 was comprised of 26 percent assistance cases, 48 percent former assistance cases, and 26 percent never-assisted cases (the latter two types referred to as non-assistance cases).

Mandatory Fee. Beginning in January 2008, in accordance with the Deficit Reduction Act, the federal government will assess an annual fee on the state of $25 for each never-assisted child support case for which $500 or more is collected. The state may choose to recover this fee from (1) the custodial parent or (2) the noncustodial parent. Alternatively, the state can choose to absorb this cost, thereby paying it out of state funds. For 2007-08, the fee would be $1.8 million. Because California has never collected a fee related to child support, there are significant automation reprogramming costs associated with attempting a collection from the custodial or noncustodial parents.

Decision to Cover Mandatory Fee. The DCSS is currently operating the two legacy subsystems, and the single replacement system (Version 2) will not be completed until November 2008 at the earliest. As a result, collecting the fee in the budget year would require the reprogramming of three separate systems. According to the department, it is not cost-effective to make reprogramming changes at this time.

Since the fee will not be assessed until January 2008, the 2007-08 budget includes $1.8 million General Fund to cover the fee for six months. In 2008-09, the General Fund cost to cover this fee is estimated to be about $3.5 million.

Analyst’s Recommendation. In order to avoid reprogramming costs for three separate systems, we concur with the decision to use state funds to cover the mandatory fee in 2007-08. However, in the long run, we believe that collecting a fee may have merit. This is because assessing a user fee on never-assisted families would allow the state to recover some of the costs of providing child support enforcement services for such families. Nevertheless, in deciding whether to collect a fee from the custodial or noncustodial parent, the Legislature should consider the automation reprogramming costs of enabling such a collection. Accordingly, we recommend that the Legislature adopt supplemental report language requiring DCSS to provide a report to the Legislature in 2008 on the costs and benefits of collecting a fee. The following supplemental report language is consistent with this recommendation:

Report on the Costs and Benefits of Collecting a Fee. The Department of Child Support Services shall provide a report no later than March 1, 2008 on the costs and benefits of assessing an annual fee of $25 for never assisted child support cases for which $500 or more is collected.

Child Support Pass-Through Options

The Deficit Reduction Act of 2005 increases federal participation in the amount of child support passed through to families who currently receive welfare assistance. We discuss the costs and benefits associated with various pass-through options.

Background. Since the enactment of the 1996 federal welfare reform legislation, federal law has not required states to pass through to welfare families any child support collected on their behalf. However, any amount of child support that the state decides to pass through would be supported 100 percent by the General Fund, with no federal participation. Currently, California elects to pass through the first $50 per month collected from the noncustodial parent to welfare families at an annual cost of about $30 million.

Pursuant to the Deficit Reduction Act (DRA), beginning in October 2008 the federal government will share the cost of the child support that is passed through to welfare families (California Work Opportunity and Responsibility to Kids [CalWORKs] families in California) up to specified limits. Specifically, the federal government will participate in 50 percent of the pass through of up to $100 for families with one child, and up to $200 for families with two or more children.

Potential Benefits of Increased Pass Through. Research conducted on the potential benefits of increased pass-through policies is limited, and most studies focus on the effects of full rather than partial pass-through policies. However, researchers believe that more generous pass-through policies may potentially benefit the state by (1) improving child support performance on federal measures and (2) reducing the cost of welfare programs. One study examined various state pass-through levels and found that states with higher pass-through amounts were significantly associated with increases in paternity establishment and the percentage of cases with collections—two of five federal performance measures. Improving performance in federal measures results in increased financial incentives from the federal government. Additionally, researchers have found that passing through more child support to families may result in savings in other public programs such as CalWORKs, food stamps, housing, and Medi-Cal. This is because as families become more financially stable, they may eventually rely less on these other public programs.

Alternatives. Although the federal government will participate in the pass through of up to $100 for families with one child and $200 for families with two children, the state will ultimately decide how much to pass through. A decision to increase the current pass through would result in lost General Fund revenues. This is because child support not passed through would otherwise be retained by the state as General Fund revenue, partially offsetting the cost of the grant provided to CalWORKs families. Figure 1 shows the General Fund costs (revenue losses) of various pass-through options. We note that these alternatives do not account for automation costs that may result from modifying the current pass-through policy. Additionally, DCSS estimated the cost of each alternative based on a one-month sample of children currently receiving child support, so actual costs could differ from these estimates.

As shown in Figure 1, all pass-through alternatives cost more in 2008-09 than 2009-10. This is because the federal government will not begin participating in the pass through until October 2008, which is three months into the 2008-09 fiscal year. (We note that the cost of implementing an increased pass-through policy could be lower in 2008-09, if the Legislature decides to delay any increase until federal participation begins in October 2008.) The department indicates that a pass through policy that requires it to track the number of children in the family in order to determine the amount to pass-through would result in higher automation costs. This is because the current pass-through policy allows for the distribution of the same amount to all families, and does not require a method to track the number of children in each family.

Fiscal Impact. Currently, the cost of passing through the first $50 to families results in a General Fund cost of about $30 million per year. Because DRA results in federal participation starting in October 2008, passing through $50 to all families would cost about $15 million General Fund in 2009-10 (first full-year impact of change), a savings of $15 million to the state. Alternative 1 would pass through $50 to families with one child, and $100 to families with two or more children, and results in a annual General Fund cost of about $19 million, or about $4 million more than current law. Alternative 2 would pass through $100 to all families and would have an annual cost of about $27 million General Fund. Alternative 3 is the maximum amount the state could pass through with federal participation. This alternative would cost about $34 million annually, or $19 million more than current law.

All alternatives would require some automation changes. However, automation modifications to implement alternatives 1 and 3 are likely to cost more, since these alternatives require a method to pass through a different amount to a family with one child than to a family with two or more children.

Conclusion. By increasing federal participation in the pass through of child support payments, DRA gives the state increased flexibility when establishing its pass-through policy. In deciding the most appropriate amount to pass through to child support families, the Legislature should weigh the General Fund costs of more generous policies against the potential benefits of passing through more child support to families.

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