Welfare Reform: Federal Oversight of State and Local Contracting
Can be Strengthened (11-JUN-02, GAO-02-661).
The Personal Responsibility and Work Opportunity Reconciliation
Act of 1996 (PRWORA) changed the nation's cash assistance program
for needy families with children. The former program, Aid to
Families with Dependent Children (AFDC), was replaced with the
Temporary Assistance for Needy Families (TANF) block grant, which
provides states with $16.5 billion each year through 2002 to
serve this population. TANF's goals include ending the dependence
of needy families on government benefits by promoting job
preparation, work, and marriage; preventing and reducing the
incidence of nonmarital pregnancies; and encouraging two-parent
families. PRWORA expanded the scope of services that could
potentially be contracted out, such as determining eligibility
for TANF, which had traditionally been done by government
employees. Moreover, with the large drop in TANF caseloads
nationally, a greater share of federal TANF block grant funds and
state funds is now devoted to various support services that are
typically contracted out. Although PRWORA expanded the
flexibility of states to design and administer TANF programs, its
also limited the ability of the Department of Health and Human
Services (HHS) to regulate states' TANF programs. Contracting
with nongovernmental entities to provide TANF-funded services
occurs in almost every state and exceeds $1.5 billion in federal
TANF and state maintenance-of-effort funds for 2001. HHS relies
primarily on state single audit reports to oversee TANF
contracting by states and localities. Their regional offices
follow up on the TANF deficiencies identified by these reports,
and HHS focuses on reported deficiencies that involve unallowable
or questionable costs. However, HHS does not know the extent and
nature of problems pertaining to the oversight of nongovernmental
TANF contractors that have been cited by state single audits
because they do not analyze the reports in a comprehensive
manner. State and local governments rely on third parties to help
ensure compliance with bid solicitation and contract award
procedures, including bid protests, judicial processes, and
external audits. State and local government agencies use various
approaches to oversee TANF contractors, and problems have been
identified with both contract oversight and contractor
performance. State and local governments have primarily
responsibility for overseeing TANF contractors, and they rely on
various approaches, including reviewing contractor-provided
information and performing on-site reviews. However, auditors in
four of the six states identified deficiencies in state or local
oversight of TANF contractors, such as uneven oversight by local
contracting agencies.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-661
ACCNO: A03532
TITLE: Welfare Reform: Federal Oversight of State and Local
Contracting Can be Strengthened
DATE: 06/11/2002
SUBJECT: Federal aid programs
Welfare benefits
Welfare recipients
Workfare
Disadvantaged persons
Block grants
Contracts
Intergovernmental relations
Income maintenance programs
Aid to Families with Dependent Children
Program
Temporary Assistance for Needy Families
Program
Temporary Assistance for Needy Families
Block Grant
******************************************************************
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GAO-02-661
WELFARE REFORM Federal Oversight of State and Local Contracting Can Be
Strengthened
Report to Congressional Requesters
United States General Accounting Office
GAO
June 2002 GAO- 02- 661
Page i GAO- 02- 661 State and Local Welfare Contracting Letter 1
Results in Brief 3 Background 5 TANF- Funded Contracts Exceed $1.5 Billion
Nationally and Cover
an Array of Services 8 HHS Relies Primarily on State Single Audit Reports to
Oversee
TANF Contracting but Does Not Use Them Systematically 18 Different
Approaches Have Been Used To Help Ensure Compliance
with, and Identify Problems in, Implementing Bid Solicitation and Contract
Award Processes 24 Deficiencies Have Been Identified with Contract Oversight
and
Contractor Performance in the States and Localities We Reviewed 26
Conclusions 38 Recommendation for Executive Action 40 Agency Comments and
Our Evaluation 40
Appendix I Scope and Methodology 43
Appendix II National Survey on TANF- Funded State and Local Government
Contracting 45
Appendix III Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000 52
Appendix IV Comments from the Department of Health and Human Services 56
Appendix V GAO Contacts and Staff Acknowledgments 59 GAO Contacts 59 Staff
Acknowledgments 59 Contents
Page ii GAO- 02- 661 State and Local Welfare Contracting Related GAO
Products 60
Tables
Table 1: TANF Contracting Levels by State, 2001 12 Table 2: Number of State
Single Audit Reports that Cited
Subrecipient Monitoring or Procurement Problems in Six Social Service
Programs, 1999 and 2000 21 Table 3: Independent Audits Have Identified
Problems with the
Oversight of TANF Contractors in Several States that We Reviewed 28 Table 4:
Contractor Performance in Meeting Work Participation
Rates 33 Table 5: Contractor Performance in Meeting Job Placement Rates 34
Table 6: Contractor Performance in Meeting Job Retention Rates 36
Figures
Figure 1: Percentage of Federal and State TANF Funds and TANF Contracts with
Different Types of Contractors for StateLevel Contracting, 2001 10 Figure 2:
TANF Services Contracted Out Most Frequently by State
Governments 16 Figure 3: Types of Contracts Used for TANF Contracting by
State
Governments 18
Abbreviations
AFDC Aid to Families with Dependent Children HHS Health and Human Services
OMB Office of Management and Budget PRWORA Personal Responsibility and Work
Opportunity
Reconciliation Act TANF Temporary Assistance for Needy Families WIA
Workforce Investment Act
Page 1 GAO- 02- 661 State and Local Welfare Contracting
June 11, 2002 The Honorable Tom Barrett The Honorable Jerry Kleczka The
Honorable Carolyn Maloney House of Representatives
The Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA)
of 1996 dramatically changed the nation?s cash assistance program for needy
families with children. The former program, Aid to Families with Dependent
Children (AFDC), was replaced with the Temporary Assistance for Needy
Families (TANF) block grant, which provides states with $16.5 billion each
year through 2002 to serve this population. As specified in PRWORA, TANF?s
goals include ending the dependence of needy families on government benefits
by promoting job preparation, work, and marriage; preventing and reducing
the incidence of nonmarital pregnancies; and encouraging two- parent
families.
While state and local governments have contracted out welfare services for
quite some time, PRWORA expanded the scope of services that could
potentially be contracted out, such as determining eligibility for TANF,
which had traditionally been done by government employees. Moreover, with
the large drop in TANF caseloads nationally, a greater share of federal TANF
block grant funds and state funds, known as state ?maintenance- of- effort?
funds, is now devoted to various support services that are typically
contracted out. Contracting out social services can potentially result in
several benefits, such as more efficient and effective delivery of services.
While PRWORA expanded the flexibility of states to design and administer
their TANF programs, it also limited the ability of the Department of Health
and Human Services (HHS) to regulate states? TANF programs. PRWORA also
established new accountability measures, such as minimum mandated work
participation rates for states and a 5- year lifetime limit on assistance
for TANF recipients. These measures heighten the importance of holding TANF
contractors accountable for performance.
In light of the upcoming reauthorization of TANF, you asked us to review the
procedures in place to manage TANF contracting and the problems that have
been identified in this area, particularly with regard to for- profit
organizations. We determined (1) the extent and nature of state and local
government contracting with for- profit and nonprofit organizations, using
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 02- 661 State and Local Welfare Contracting
federal and state TANF funds to provide services to eligible recipients; (2)
what approaches are used by the federal government to oversee TANF
contracting with nongovernmental entities and what problems have been
identified in this area nationally; (3) what approaches are used by state
and local governments to ensure compliance with bid solicitation and
contract award requirements and what violations of these requirements have
been identified involving the awarding of contracts funded by TANF in
selected jurisdictions; and (4) what approaches are used by state and local
governments to ensure that organizations contracted to provide services
funded by TANF comply with the terms of their contracts and what major
instances of noncompliance with such requirements have been identified in
selected jurisdictions.
To respond to the first objective, we conducted a national survey of all 50
states, the District of Columbia, and the 10 counties with the largest
federal TANF- funding allocations in each of the 13 states that administer
TANF locally. To respond to the second objective, we interviewed HHS
officials in Washington, D. C., and in several regional offices and reviewed
policies and other documentation related to federal TANF oversight. We also
examined audits performed under the Single Audit Act of 1984. These
comprehensive audits of expenditures of various federal program funds by
state and local governments and nonprofit organizations conducted by
nonfederal auditors or public accounting firms assess compliance with
federal financial requirements, including those for TANF. 1 To respond to
the third and fourth objectives, we conducted state and local site visits in
California (Los Angeles County and San Diego County); the District of
Columbia; Florida (Palm Beach and Miami- Dade); New York (New York City);
Texas (Austin and Houston); and Wisconsin (Milwaukee). 2 We selected these
states because of their substantial contracts with large forprofit
organizations to provide services funded by TANF, large share of the
national TANF caseload, and geographic dispersion. In each of these states
and respective localities, we interviewed key officials, including
procurement officers, contract managers, auditors, and contractors. In
addition, we obtained and analyzed numerous documents, including reviews of
contractors and contracting agencies. We conducted our review from January
2001 through March 2002 in accordance with generally
1 These organizations are required to have single audits if they expend at
least $300,000 in federal funds in a year. For- profit organizations are not
covered under the Single Audit Act. 2 In two of these states- Florida and
Texas- our local visits were to workforce boards whose jurisdiction in some
cases extended beyond a single county or city.
Page 3 GAO- 02- 661 State and Local Welfare Contracting
accepted government auditing standards. (See app. I for a more detailed
discussion of our scope and methodology.)
Contracting with nongovernmental entities to provide TANF- funded services
occurs in almost every state and exceeds $1. 5 billion in federal TANF and
state maintenance- of- effort funds for 2001. This level of contracting
represents at a minimum 13 percent of total federal TANF and state
maintenance- of- effort funds expended for services. About 87 percent of the
total funds contracted by state governments- and 73 percent of the
contracts- are with nonprofit providers, which include national
organizations, faith- based organizations, and community- based
organizations. The remainder of the funds and contracts are with for- profit
organizations, including several organizations that have contracts in
multiple states. Although contractors provide a wide range of services, the
most commonly contracted services reported by our survey respondents include
education and training, job placement, and support services to promote job
entry or retention. The determination of eligibility for services supported
with TANF funds has been contracted out in one or more locations in at least
18 states. In at least 4 of these states, contracting agencies contracted
out the determination of eligibility for cash assistance under TANF. Most
state TANF contracting agencies pay contractors a fixed overall contract
price or reimburse them for their costs. However, some contracts have
performance incentives, whereby contractors are paid in part or whole on the
basis of achieving program objectives for TANF recipients, such as meeting
work participation, job placement, or job retention rates.
HHS relies primarily on state single audit reports to oversee TANF
contracting by states and localities. HHS officials told us that their
regional offices follow up on the TANF deficiencies identified by these
reports and that HHS focuses on reported deficiencies that involve
unallowable or questionable costs. However, HHS officials said that they do
not know the extent and nature of problems pertaining to the oversight of
nongovernmental TANF contractors that have been cited by state single audits
because they do not analyze the reports in such a comprehensive manner.
State single audit reports have cited deficiencies with states? monitoring
of subrecipients of TANF funds for 15 different states- 9 states in 1999 and
12 states in 2000- and with states? procurement of TANF services less
frequently (3 states in 1999 and 4 states in 2000). Our review of single
audit reports found internal control weaknesses for over a quarter of states
nationwide that potentially affected the states? ability to effectively
oversee nongovernmental TANF contractors. The reports cited Results in Brief
Page 4 GAO- 02- 661 State and Local Welfare Contracting
a range of weaknesses, including inadequate state reviews of the single
audits of subrecipients, failure of states to inform subrecipients of the
sources of federal funds they received, and inadequate state fiscal and
program monitoring of local workforce boards that contract for services.
State and local governments rely on third parties to help ensure compliance
with bid solicitation and contract award procedures, including bid protests,
judicial processes, and external audits. In 2 of 10 separate TANF
procurements- specific instances in which government entities had solicited
bids and awarded one or more contracts- in the local sites that we visited,
contract award decisions were modified as the result of thirdparty
challenges. These problems affected 5 of the 58 TANF contracts awarded in
the 10 procurements. Procurement issues were raised in 2 other procurements
but did not result in the modification of contract award decisions.
State and local government agencies use various approaches to oversee TANF
contractors, and problems have been identified with both contract oversight
and contractor performance. State and local governments have primary
responsibility for overseeing TANF contractors, and they rely on various
approaches, including reviewing contractor- provided information and
performing on- site reviews. However, auditors in four of the six states we
reviewed identified deficiencies in state or local oversight of TANF
contractors, such as uneven oversight by local contracting agencies. Various
factors have contributed to such deficiencies, such as the need in some
states to create and support new local entities that contract for TANF
services and oversee contractors. With regard to contractor performance,
several contractors at two of the local sites that we visited were found to
have had certain unallowable costs. Moreover, at five of the eight local
sites that had established performance levels for contractors, most
contractors did not meet one or more of their performance levels. In light
of the extent to which single audits and other sources have identified
internal control weaknesses related to state oversight of TANF contractors,
coupled with HHS?s lack of a comprehensive perspective on these problems, we
are recommending that HHS use state single audit reports in a more
systematic manner to identify the extent and nature of these problems.
While HHS said that our report provides useful information on an important
topic, the agency did not agree with our recommendation. HHS questioned
whether the recommendation is consistent with provisions of the Single Audit
Act and with the clear emphasis on state flexibility in the TANF statute.
However, we believe that our recommendation is consistent
Page 5 GAO- 02- 661 State and Local Welfare Contracting
with these laws and that it would contribute to the stated objective of the
Single Audit Act of ensuring that federal agencies use single audit reports
to the maximum extent practicable in overseeing federal programs. In
addition, HHS said that it did not see what value our recommendation would
add to the TANF program and added that the cost/ benefit ratio must be
considered. We believe that implementing our recommendation would enable HHS
to obtain information that could be shared with its state TANF partners to
facilitate better oversight of nongovernmental contractors, such as national
patterns in the problems that single audit reports have cited with state
monitoring of TANF subrecipients. Furthermore, we believe that our
recommendation is cost- effective, in that it would involve making fuller
use of existing information at little additional cost.
State and local governments that receive grants from HHS must follow the
uniform administrative requirements set forth in federal regulations. 3 When
procuring property and services, these regulations require that states
follow the same policies and procedures they use for procurements supported
with nonfederal funds. Under HHS?s regulations, states must also ensure that
contracts include any clauses required by federal statutes and executive
orders. Grantees other than states and subgrantees, such as local
governments, rely on their own procurement procedures, provided that they
conform to applicable federal laws and the standards identified in the
regulations, including standards of conduct, requirements of full and open
competition in contracting, procedures for different types of procurements,
and bid protest procedures to handle and resolve disputes relating to their
procurements. Grantees and subgrantees must maintain a contract
administration system that ensures that contractors perform in accordance
with the terms, conditions, and specifications of their contracts.
The procurement of contracts typically follows a process that comprises
several phases, including bid solicitation and contract award processes. The
bid solicitation process will begin with the development of a work plan by
the contracting agency that outlines the objectives contractors will be
expected to achieve and the manner in which they will be expected to achieve
them. The state or locality will then issue a request- for- proposals to
inform potential bidders of the government?s interest in obtaining
3 These requirements are specified in 45 C. F. R. 92. Background
Page 6 GAO- 02- 661 State and Local Welfare Contracting
contractors for the work specified. A request- for- proposals is a publicly
advertised document that outlines information necessary to enable
prospective contractors to prepare proposals properly. After these
activities are completed, the contract award process begins. Once proposals
have been submitted, they are evaluated to assess their relative merit.
Several key criteria are almost always considered in evaluating proposals,
including price/ cost, staffing, experience, and technical and/ or other
resources.
The environment for administering social services such as TANF has been
affected by changes to the nation?s workforce system. Through the Workforce
Investment Act (WIA) of 1998 (P. L. 105- 220), the Congress sought to
replace the fragmented training and employment system that existed under the
previous workforce system. WIA requires state and local entities that carry
out specified federal programs to participate in local one- stop centers-
local centers offering job placement assistance for workers and
opportunities for employers to find workers- by making employment and
training- related services available. While TANF is not a mandatory partner
at one- stop centers, some states are using one- stop centers to serve TANF
recipients. WIA called for the development of workforce investment boards to
oversee WIA implementation at the state and local levels. 4 WIA listed the
types of members that should participate on the workforce boards, such as
representatives of business, education, labor, and other segments of the
workforce investment community, but did not specify a minimum or maximum
number of members. Local workforce boards can contract for services
delivered through one- stop centers.
PRWORA broadened both the types of TANF services that could be contracted
out and the types of organizations that could serve as TANF contractors. The
act authorized states to contract out the administration and provision of
TANF services, including determining program eligibility. Under the prior
AFDC program, the determination of program eligibility could not be
contracted out to nongovernmental agencies. 5 In addition,
4 For information on the implementation of WIA, see U. S. General Accounting
Office,
Workforce Investment Act: Better Guidance Needed to Address Concerns Over
New Requirements, GAO- 02- 72, (Washington, D. C.: 2001).
5 This administrative function is not allowed to be contracted out to
nongovernmental agencies in the Medicaid or Food Stamp Programs. HHS has
contracted with Mathematica Policy Research, Inc., to study state and local
contracting for case management under TANF, and the study includes plans to
assess the contracting out of eligibility determination in the TANF program.
Page 7 GAO- 02- 661 State and Local Welfare Contracting
under the PRWORA provision commonly referred to as charitable choice, states
are authorized to contract with faith- based organizations to provide TANF
services on the same basis as any other nongovernmental provider without
impairing the religious character of such organizations.
Such changes in the welfare environment have affected the involvement of
for- profit organizations in TANF contracting. Prior to PRWORA, contracting
in the welfare arena was mainly for direct service delivery such as job
training, job search instruction, and child care provision. While some for-
profit companies provided services, service providers were mostly nonprofit.
Large for- profit companies were mainly involved as contractors that
designed automated data systems. In the broader area of social services,
large for- profits were also involved in providing various services for
child support enforcement. Now that government agencies can contract out
their entire welfare systems under PRWORA, there has been an increase in the
extent to which large for- profit companies have sought out welfare
contracts, in some cases on a large scale that includes determining
eligibility and providing employment and social services. 6
Federal and state funds are used to serve TANF recipients. For federal
fiscal years 1997 to 2002, states received federal TANF block grants
totaling $16.5 billion annually. With respect to state funding, PRWORA
includes a maintenance- of- effort provision, which requires states to
provide 75 to 80 percent of their historic level of funding. 7 States that
meet federally mandated minimum participation rates must provide at least 75
percent of their historic level of funding, and states that do not meet
these rates must provide at least 80 percent. The federally mandated
participation rates specify the percentages of states? TANF caseloads that
must be participating in work or work- related activities each year.
HHS oversees states? TANF programs. In accordance with PRWORA and federal
regulations, 8 HHS has broad responsibility to oversee the proper
6 This historical overview of social service contracting with for- profit
organizations is from Demetra Smith Nightingale and Nancy M. Pindus,
Privatization of Public Social Services: A Background Paper, prepared for
the U. S. Department of Labor, Office of the Assistant Secretary for Policy
(Washington, D. C.: The Urban Institute, Oct. 15, 1997). http:// www. urban.
org/ template. cfm? Template=/ TaggedContent/ ViewPublication. cfm&
PublicationID= 6213
7 As used in this report, the term ?TANF funds? includes federal TANF block
grant funds and state maintenance- of- effort funds. 8 45 C. F. R. Part 92.
Page 8 GAO- 02- 661 State and Local Welfare Contracting
state expenditure of TANF funds and the achievement of related program
goals. While TANF legislation prohibits HHS from regulating states in areas
that it is not legislatively authorized to regulate, it must still oversee
state compliance with program requirements, such as mandated work
participation rates and other program requirements.
Nearly all states and the District of Columbia contract with nongovernmental
entities for the provision of TANF- funded services at the state level,
local level, or both levels of government. In 2001, state and local
governments spent more than $1.5 billion on contracts with nongovernmental
entities, or at least 13 percent of all federal TANF and state maintenance-
of- effort expenditures (excluding those for cash assistance). The majority
of these contracts are with nonprofit organizations. Although TANF
contractors provide a wide array of services, the most commonly contracted
services reported by our survey respondents include employment and training
services, job placement services, and support services to promote job entry
or retention. In addition, eligibility determination for cash assistance
under TANF or other TANF- funded services has been contracted out in one or
more locations in some states. Most state TANF contracting agencies pay
contractors a fixed overall price or reimburse them for their costs rather
than base contract payments on achieving program objectives for TANF
recipients.
Contracting for TANF- funded services occurs in the District of Columbia and
every state except South Dakota. However, the level of government at which
contracting occurs varies, which complicates efforts to provide
comprehensive information on TANF- funded contracts. Contracting occurs only
at the state level in 24 states, only at the local level in 5 states, at
both levels in the remaining 20 states, and in the District of Columbia.
Moreover, contracting at the local level encompasses contracting by agencies
such as county departments of social or human services as well as workforce
development boards whose jurisdiction may include several counties. Our
national survey of TANF contracting provides comprehensive information on
contracting at the state level but incomplete and nonrepresentative
information on local contracting. 9
9 See app. I for information on the geographic scope of the data that we
obtained on stateand local- level contracting. TANF- Funded
Contracts Exceed $1.5 Billion Nationally and Cover an Array of Services
TANF Contracting Occurs at Different Levels of Government and with Various
Types of Organizations
Page 9 GAO- 02- 661 State and Local Welfare Contracting
In 2001, state and local governments expended at least $1.5 billion in TANF
funds for contracted services. With respect to state- level contracting,
contracts with nonprofit organizations accounted for 87 percent of TANF
funds while contracts with for- profit organizations accounted for 13
percent of funds (see fig. 1). Seventy- three percent of state- level
contracts are with nonprofit organizations and 27 percent are with for-
profit organizations. Under PRWORA?s charitable choice provision, some
states have established initiatives to promote the use of faith- based
organizations. 10 Contracts with faith- based organizations constitute a
smaller proportion of all contracted TANF funds than contracts with secular
nonprofit organizations and for- profit organizations. As shown in figure 1,
contracts with faith- based organizations account for 8 percent of TANF
funds spent by state governments on contracts with nongovernmental entities
nationally.
10 Faith- based organizations include churches, congregations, and
religiously affiliated nonprofit organizations.
Page 10 GAO- 02- 661 State and Local Welfare Contracting
Figure 1: Percentage of Federal and State TANF Funds and TANF Contracts with
Different Types of Contractors for StateLevel Contracting, 2001
Note: Our national TANF contracting survey also identified 1,517 TANF
contracts at the local level, which accounted for $525 million in federal
and state funds.
Source: GAO?s national survey of TANF contracting.
In several states, large percentages of the funds contracted by states and
localities that were identified by our national survey are in contracts with
for- profit organizations. As shown in table 1, at least half of the
contracted funds in 8 states are with for- profit organizations. 11
Moreover, in 11 states, more than 15 percent of all TANF- contracted funds
identified by our survey went to faith- based organizations. 12
11 The states are Florida, Hawaii, Nevada, New Mexico, Utah, Nebraska, and
Wyoming and the District of Columbia. 12 The states are Delaware, Iowa,
Kansas, Michigan, New Jersey, New Mexico, North Carolina, North Dakota,
Oklahoma, and Washington and the District of Columbia.
79% * Secular nonprofit organizations
13%
All nonprofit organizations All for- profit organizations
66% Secular nonprofit organizations
7%
Faith- based organizations
27%
For- profit organizations
Federal and State TANF Funds
(Total = $1.0 Billion)
Number of TANF Contracts
(Total = 5,277 Contracts)
8%
Faith- based organizations
For- profit organizations
Page 11 GAO- 02- 661 State and Local Welfare Contracting
The proportion of TANF funds expended for contracted services with
nongovernmental entities varies considerably by state. Nationally, at least
13 percent of TANF funds expended for services other than cash assistance
have been contracted out. As shown in table 1, the proportion of funds
contracted out in 10 states in 2001 exceeded 20 percent of their fiscal year
2000 TANF fund expenditures (excluding the portion of expenditures for cash
assistance). 13 Idaho, Mississippi, New Jersey, Wisconsin, and the District
of Columbia expended more than 40 percent of their TANF funds on contracted
services. On the other hand, Iowa, Kansas, North Carolina, New Mexico, and
Oregon spent the smallest proportion (2 percent or less of their TANF funds)
on contracts with nongovernmental entities.
13 Since national data are not yet available on states? federal TANF and
maintenance- ofeffort expenditures for federal fiscal year 2001, we used
data on expenditures for fiscal year 2000. As a result, the percentages
provide an estimate of the relative levels of TANF contracting in 2001.
Page 12 GAO- 02- 661 State and Local Welfare Contracting
Table 1: TANF Contracting Levels by State, 2001
Dollars in millions
State Total value of TANF contracts, 2001 a
Total value of TANF contracts as a percentage of fiscal year 2000 federal
TANF and state maintenance- of- effort expenditures (excluding
expenditures for basic assistance) b
Percent of contracted funds with nonprofit
entities c Percent of contracted
funds with for- profit entities c
District of Columbia
$46.0 74 46 54 Mississippi 49.0 71 d 75 25 Idaho 17.3 43 83 17 Wisconsin
152.9 43 82 18 New Jersey 41.6 42 100 0 Pennsylvania 157.8 39 97 3 Montana
7. 5 32 100 0 Tennessee 41.9 31 100 0 Vermont 6.6 29 100 0 Minnesota 39.3 21
100 0 Louisiana 11.5 20 74 26 Nebraska 7.1 20 50 50 Washington 44.8 20 82 18
Massachusetts 66.9 19 98 2 Illinois 111.9 18 96 4 Ohio 98.3 16 90 10 South
Carolina 15.4 16 97 3 Delaware 5.5 15 94 6 West Virginia 10.8 13 52 48
Arkansas 9.2 11 63 37 Colorado 17.1 11 98 2 Nevada 4.1 11 43 57 Georgia 24.0
10 57 43 Arizona 13.7 9 77 23 Indiana 23.3 9 95 5 Maine 3. 1 9 83 17 New
Hampshire 3. 5 9 100 0 New York 149.5 9 75 25 Maryland 10.6 8 54 46 Rhode
Island 5.3 8 86 14 Texas 37.6 8 73 27 Utah 3.9 8 25 75 California 157.9 7 64
36 Missouri 13.1 7 77 23 North Dakota 1.4 7 100 0
Page 13 GAO- 02- 661 State and Local Welfare Contracting
Dollars in millions
State Total value of TANF contracts, 2001 a
Total value of TANF contracts as a percentage of fiscal year 2000 federal
TANF and state maintenance- of- effort expenditures (excluding
expenditures for basic assistance) b
Percent of contracted funds with nonprofit
entities c Percent of contracted
funds with for- profit entities c
Michigan 52.8 6 98 2 Virginia 7.1 6 93 7 Alabama 2. 9 5 92 8 Alaska 1.3 4
100 0 Connecticut 11.7 4 94 6 Florida 21.4 4 30 70 Oklahoma 2. 6 4 79 21
Hawaii 0.7 3 0 100 Kentucky 3.2 3 52 48 Wyoming 0. 4 3 0 100 Iowa 1.8 2 100
0 Kansas 2.1 2 58 42 North Carolina 7. 1 2 75 25 New Mexico 0.5 1 40 60
Oregon 0.9 1 100 0 South Dakota e eee
a This is the amount of federal TANF and state maintenance- of- effort funds
contracted out to nongovernmental entities by states and localities and
represents the maximum amount that contractors could receive in a single
year for services provided under their TANF contracts. The amounts listed
for each of the 21 states for which we did not receive complete information
on locallevel contracting likely understate the total value of TANF
contracts. These states are Arizona, Arkansas, California, Colorado,
Florida, Georgia, Kentucky, Maryland, Massachusetts, Minnesota, Mississippi,
Nevada, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Texas,
Utah, Virginia, and Wisconsin. b To calculate these percentages, we used
data reported by HHS on each state?s total federal TANF
and state maintenance- of- effort expenditures for federal fiscal year 2000.
We then subtracted the portion of these expenditures that were for basic
assistance, a category used by HHS that includes benefits in the form of
cash, payments, vouchers, or other forms designed to meet recipients?
ongoing basic needs. We excluded basic assistance in our calculations of
TANF contracting levels because recipients receive these expenditures. Since
national data are not yet available on states? federal TANF and maintenance-
of- effort expenditures for federal fiscal year 2001, the percentages
provide an estimate of the relative levels of TANF contracting in 2001. The
percentages may be understated for each of the 21 states for which we did
not receive complete information on local- level contracting (see table note
?a? for a list of these states). c These percentages are based on the TANF
contracts that were identified in the responses to our
national survey on TANF contracting. d We used data on the state?s federal
TANF and state maintenance- of- effort expenditures obtained
from Mississippi state officials to calculate this figure. e South Dakota
does not contract for TANF services.
Page 14 GAO- 02- 661 State and Local Welfare Contracting
Source: Data on states? federal TANF and maintenance- of- effort
expenditures are from HHS, and other data are from GAO?s national survey of
TANF contracting.
Several large for- profit organizations and nonprofit organizations have
large TANF contracts in multiple states. Our national survey of TANF
contracting asked state and local respondents to identify the names of the
contractors with the three largest dollar contracts in their jurisdictions.
Four for- profit organizations- Curtis & Associates, Inc.; Maximus; America
Works; and Affiliated Computer Services, Inc.- have contracts with the
highest dollar values in two or more states. 14 Among this group, Curtis &
Associates, Inc., had the TANF contracts with the highest dollar value
relative to other contractors in their respective locations. Among nonprofit
contractors, Goodwill Industries, YWCA, Catholic Charities, Lutheran Social
Services, Salvation Army, Urban League, United Way, Catholic Community
Services, American Red Cross, and Boys & Girls Clubs all have TANF- funded
contracts in two or more states. 15 Among this group, Goodwill Industries
had the TANF contracts with the highest dollar value relative to other
contractors in their respective locations.
States and localities contract with nongovernmental entities to provide
services to facilitate employment, administer program functions, and
strengthen families. Overall, states and localities rarely contract
different types of services to nonprofit and for- profit organizations.
Government entities contract out most often for services to facilitate
employment. As shown in figure 2, over 40 percent of state respondents
reported that half or more of their TANF- funded contracts ask for the
provision of education and training activities, job placement services, and
support services that address barriers to work and help clients retain
employment. These support services include substance abuse treatment,
assistance with transportation, and other services that facilitate job entry
and retention. Childcare services are less common. While the responses we
obtained from local respondents about types of services contracted out may
not be representative of local TANF contracting, they revealed a similar
overall pattern to the responses by state respondents presented in figure 2.
In some cases, states and localities have contracted with nongovernmental
entities to provide program administrative functions that were required to
14 Affiliated Computer Services, Inc., acquired Lockheed Martin IMS, a
wholly owned subsidiary of Lockheed Martin, in August 2001. 15 The names of
nonprofit contractors as listed do not necessarily include designated local
affiliations. Services Contracted Out
Typically Include Job Preparation, Placement, and Retention
Page 15 GAO- 02- 661 State and Local Welfare Contracting
be performed by government workers in the past, such as determining
eligibility. The determination of eligibility for TANF- funded services
provided to low- income families who are ineligible for cash assistance has
been contracted out in one or more locations in at least 18 states. For
example, one Ohio county, which offers a variety of services with varying
eligibility criteria to the working poor, contracts with nongovernmental
organizations to both provide and determine eligibility for the services.
Contractors in at least 4 states are contracting out eligibility for cash
assistance under TANF, an option authorized under TANF. Finally, some states
and localities are using TANF funds to contract for services related to the
TANF objectives of preventing and reducing the incidence of nonmarital
pregnancies and encouraging the formation and maintenance of two- parent
families. For example, 20 percent of state respondents reported that half or
more of their TANF contracts call for the provision of services pertaining
to stabilizing families.
Page 16 GAO- 02- 661 State and Local Welfare Contracting
Figure 2: TANF Services Contracted Out Most Frequently by State Governments
Note: Responses from state respondents in five states covered both their
state- level and local- level contracting. These states are Connecticut,
Missouri, New Jersey, New Mexico, and Washington.
Source: GAO?s national survey of TANF contracting.
We asked state and local governments about the use of four common types of
contracts for TANF services: cost- reimbursement, fixed priced, incentive,
and cost- reimbursement plus incentive. Under costreimbursement contracts,
contracting agencies pay contractors for the allowable costs they incur,
whereas under fixed- price contracts, contracting agencies pay contractors
based on a pre- established overall contract price. As figure 3 shows,
almost 60 percent of state respondents said that half or more of their TANF
contracts are cost- reimbursement. Far fewer respondents report that half or
more of their TANF contracts were incentive or cost- reimbursement plus
incentive. Under incentive Many Contracting
Agencies Pay Contractors Based on Costs Incurred, Rather Than on Program
Objectives Achieved
Page 17 GAO- 02- 661 State and Local Welfare Contracting
contracts, the amount paid to contractors is determined based on the extent
to which contractors successfully achieve specified program objectives for
TANF recipients, such as job placements and the retention of jobs. Cost-
reimbursement plus incentive contracts pay contractors for costs they incur
and provide payments above costs for the achievement of specific objectives.
While the responses we obtained from local respondents may not be
representative of local TANF contracting, they revealed a similar pattern to
the responses by state respondents. Our survey disclosed that many state and
local governments have chosen to use a contract type- cost- reimbursement-
under which the government assumes a relatively high level of financial
risk. Contracting agencies assume greater financial risk when they are
required to pay contractors for allowable costs under cost- reimbursement
contracts than when overall contract payments are limited to a pre-
established price.
Page 18 GAO- 02- 661 State and Local Welfare Contracting
Figure 3: Types of Contracts Used for TANF Contracting by State Governments
Note: Responses from state respondents in five states covered both their
state- level and local- level contracting. These states are Connecticut,
Missouri, New Jersey, New Mexico, and Washington.
Source: GAO?s national survey of TANF contracting.
HHS relies primarily on state single audit reports to oversee state and
local procurement of TANF services and monitoring of TANF contractors. State
single audit reports identified TANF procurement or subrecipient monitoring
problems for about one- third of the states for the period 1999 to 2000, and
subrecipient monitoring problems were identified more frequently. However,
HHS officials told us that they do not know the overall extent to which
state single audits have identified problems with the monitoring of
nongovernmental TANF contractors or the nature of these problems because
they do not analyze the reports in such a comprehensive manner. Our review
of state single audit reports for 1999 and 2000 found internal control
weaknesses for over a quarter of states HHS Relies Primarily
on State Single Audit Reports to Oversee TANF Contracting but Does Not Use
Them Systematically
Page 19 GAO- 02- 661 State and Local Welfare Contracting
nationwide that potentially affected the states? ability to effectively
oversee TANF contractors. 16
HHS relies primarily on state single audits to oversee TANF contracting by
states and localities. The Single Audit Act of 1984 (P. L. 98- 502), as
amended, requires federal agencies to use single audit reports in their
oversight of state- managed programs supported by federal funds. The
objectives of the act, among others, are to (1) promote sound financial
management, including effective internal controls, with respect to federal
funds administered by states and other nonfederal entities; (2) establish
uniform requirements for audits of federal awards administered by nonfederal
entities; and (3) ensure that federal agencies, to the maximum extent
practicable, rely on and use single audit reports. In addition, the act
requires federal agencies to monitor the use of federal funds by nonfederal
entities and provide technical assistance to help them implement required
single audit provisions. The results of single audits provide a tool for
federal agencies to monitor whether nonfederal entities are complying with
federal program requirements. To help meet the act?s objectives, Office Of
Management and Budget (OMB) Circular A- 133 requires federal agencies to
evaluate single audit findings and proposed corrective actions, instruct
states and other nonfederal entities on any additional actions needed to
correct reported problems, and follow up with these entities to ensure that
they take appropriate and timely corrective action. States, in turn, are
responsible for working with local governments to address deficiencies
identified in single audits of local governments. 17
Single audits assess whether audited entities have complied with
requirements in up to 14 managerial or financial areas, including allowable
activities, allowable costs, cash management, eligibility, and reporting.
Procurement and subrecipient monitoring constitute 2 of the 14 compliance
areas most relevant to TANF contracting. Audits of procurement requirements
assess the implementation of required procedures, including whether
government contracting agencies awarded
16 Internal controls are defined as management practices intended to provide
reasonable assurance that effective and efficient operations, reliable
financial reporting, and compliance with applicable laws and regulations
will be achieved.
17 For information on the implementation of the Single Audit Act, see U. S.
General Accounting Office, Single Audit: Update on the Implementation of the
Single Audit Act Amendments of 1996, GAO/ AIMD- 00- 293, (Washington, D. C.:
Sept. 29, 2000) and Single Audit: Refinements Can Improve Usefulness, GAO/
AIMD- 94- 133, (Washington, D. C: June 21, 1994). Single Audits Assess TANF
Procurement and Subrecipient Monitoring
Page 20 GAO- 02- 661 State and Local Welfare Contracting
TANF contracts in a full and open manner. Audits of subrecipient monitoring
requirements examine whether an entity has adequately monitored the entities
to whom it has distributed TANF funds. Subrecipients of TANF funds from
states can include both local governments and nongovernmental entities with
whom the state has contracted. Subrecipients of TANF funds from localities
can include nongovernmental TANF contractors.
State single audit reports identified TANF subrecipient monitoring or
procurement problems for one- third of the states. Single audits identified
subrecipient monitoring deficiencies for 9 states in 1999 and 12 states in
2000. 18 Of the 15 states that had subrecipient monitoring deficiencies in
either 1999 or 2000, 6 states were cited for deficiencies in both years.
State single audits identified procurement problems less frequently: for 3
states in 1999 and 4 states in 2000. 19
The extent to which state single audits have identified problems with
subrecipient monitoring involving TANF funds is generally equal to or
greater than for several other social service programs in which contracting
occurs with nongovernmental organizations. As shown in table 2, the number
of state single audits that identified deficiencies in subrecipient
monitoring for the 1999 to 2000 time period is similar for TANF, child care,
and the Social Services Block Grant. Fewer state audits identified such
problems for child support enforcement, Medicaid, and Food Stamps. With
regard to procurement, the frequency of identified deficiencies in state
audits for TANF was fewer than that for Medicaid but about the same as for
several other programs. 20
18 At the time of our review, single audit reports for 1999 and 2000
represented the 2 most recent years for which a complete set of such reports
was available for review through the single audit database.
19 The states were Connecticut, Michigan, and New York (1999) and
Connecticut, Kentucky, Mississippi, and New Hampshire (2000). 20 Single
audits of local governments identified TANF subrecipient monitoring problems
in 13 localities in 1999 and 6 in 2000 and identified TANF procurement
problems in 7 localities in 1999 and 2 in 2000. Over this 2- year period,
single audits cited more localities with subrecipient monitoring problems
for TANF than for each of the other five social service programs except
Medicaid. Similarly, single audits of local governments cited more
localities with procurement problems for TANF than for each of the other
five social service programs, except Medicaid and food stamps. For this
analysis, the scope of local governments included tribal organizations.
State Single Audits Have
Identified TANF Monitoring and Procurement Problems
Page 21 GAO- 02- 661 State and Local Welfare Contracting
Table 2: Number of State Single Audit Reports that Cited Subrecipient
Monitoring or Procurement Problems in Six Social Service Programs, 1999 and
2000
Numbers of reports that cited problems with subrecipient monitoring
(percentages a of audited programs that cited
problems) b Numbers of reports that cited
problems with procurement (percentages a of audited programs that cited
problems) b Social service program 1999 2000 1999 2000
TANF 9 (22 percent) 12 (29 percent) 3 (7 percent) 4 (10 percent) Child Care
8 (23) 11 (29) 4 (11) 1 (3) Child Support Enforcement
5 (15) 11 (28) 2 (6) 6 (15) Medicaid 7 (16) 7 (15) 7 (16) 7 (15) Food Stamps
2 (5) 4 (12) 2 (5) 0 (0) Social Services Block Grant
6 (21) 14 (47) 2 (7) 4 (13) a In some cases, a state?s single audit may not
cover every social service program each year. The figures in parentheses
represent the numbers of single audit reports that cited problems as a
percentage of the single audit reports in which the program was audited. b
For this analysis, the scope of state single audit reports included the 50
states and the District of
Columbia but not Puerto Rico and the United States territories. Source: GAO
analysis of the single audit database.
HHS officials told us that state single audits during this time period had
identified TANF subrecipient monitoring problems in only two states- Florida
and Louisiana- that involved unallowable or questionable costs and that also
pertained to the oversight of nongovernmental TANF contractors. However, HHS
officials also said that they do not know the overall extent to which state
single audits have identified problems with the monitoring of
nongovernmental TANF contractors or the nature of these problems because
they do not analyze the reports in such a comprehensive manner. Our analysis
of the state single audit reports that cited TANF subrecipient monitoring
problems in 1999 or 2000 indicates that the reports for 14 of the 15 states
identified internal control weaknesses that potentially affected the states?
ability to adequately oversee nongovernmental TANF contractors. 21 Thus,
internal control
21 The single audit report for Missouri identified a problem that appears to
be less relevant to the monitoring of TANF contractors.
Page 22 GAO- 02- 661 State and Local Welfare Contracting
weaknesses pertaining to contractor oversight have been reported for more
than a quarter of all states nationwide. (See app. III for a summary of the
problems reported in each of the state single audits.)
The reported deficiencies in states? monitoring of subrecipients cover a
wide range of problems, including inadequate reviews of the single audits of
subrecipients, failure to inform subrecipients of the sources of federal
funds they received, and inadequate fiscal and program monitoring of local
workforce boards. The audit reports for some states, such as Alaska,
Kentucky (2000 report), and Louisiana (1999 and 2000 reports) specified that
the monitoring deficiencies involved or included subrecipients that were
nongovernmental entities. For example, the 2000 single audit for Louisiana
reported that for 7 consecutive years the state did not have an adequate
monitoring system to ensure that subrecipients and social service
contractors were properly audited, which indicates that misspent federal
funds or poor contactor performance may not be detected and corrected.
The audit reports for other states, including Arizona, Michigan, Minnesota,
and Mississippi do not specify whether the subrecipients that were
inadequately monitored were governmental or nongovernmental entities.
However, the reported internal control weaknesses potentially impaired the
ability of these states to properly oversee either their own TANF
contractors or the monitoring of TANF contractors that have contracts with
local governments. For example, the 2000 single audit report for Minnesota
found that the state agency did not have policies and procedures in place to
monitor the activities of TANF subrecipients. The 2000 audit report for
Mississippi found that the state did not review single audits of some
subrecipients in a timely manner and did not perform timely follow- up in
some cases when subrecipients did not submit their single audits on time.
Even if the subrecipients referred to in both of these audit reports were
solely local governmental entities, the deficiencies cited potentially
limited the states? abilities to identify and follow- up in a timely manner
on any problems with local monitoring of TANF contractors.
HHS follows up on a state- by- state basis on the TANF- related problems
cited in state single audits and focuses primarily on the problems that
involve monetary findings. However, HHS does not use these reports in a
systematic manner to develop a national overview of the extent and nature of
problems with states? oversight of TANF contractors. HHS officials said that
HHS regional offices review state single audits and perform follow- up
actions in cases where deficiencies were identified. These actions include
sending a letter to the state acknowledging the reported problems and any
HHS Does Not Use State
Single Audits in a Systematic Manner to Oversee TANF Contracting
Page 23 GAO- 02- 661 State and Local Welfare Contracting
plans the state may have submitted to correct the identified deficiency. HHS
officials told us that their reviews of single audit reports focus on TANF
audit findings that cited unallowable or questionable costs, and that HHS
tracks such findings in its audit resolution database. The officials
explained that their focus on monetary findings stems from the need to
recover any unallowable costs from states and from HHS?s oversight
responsibility under PRWORA to determine whether to impose penalties on
states for violating statutory TANF requirements. If the deficiency
identified by a single audit involves monetary findings, HHS takes actions
to recover the costs within the same year, according to HHS officials. HHS
officials told us that if the identified deficiency does not involve
monetary findings but pertains to a programmatic issue such as subrecipient
monitoring, HHS generally relies on the state to correct the reported
problem and would initiate corrective action if the same problem were cited
in the state?s single audit the following year. However, HHS does not use
state single audit reports in a systematic manner to oversee TANF
contracting, such as by analyzing patterns in the subrecipient monitoring
deficiencies cited by these reports.
HHS auditors and program officials also told us that inconsistent auditing
of nongovernmental entities and state monitoring of these entities affects
HHS?s use of single audits as a management tool. For example, HHS officials
said that the same nongovernmental entity might be treated as a subrecipient
by one state and as a vendor by another state, which could limit HHS?s
ability to determine whether the entity has consistently complied with all
applicable federal and state requirements. HHS officials told us that they
plan to work, in conjunction with OMB, to explore the reasons for the
inconsistencies and, where appropriate, to identify ways to better assure
compliance with audit requirements applicable to nongovernmental entities.
Page 24 GAO- 02- 661 State and Local Welfare Contracting
State and local governments rely on third parties to help ensure compliance
with procurement requirements, including bid protests, judicial processes,
and external audits. Procurement problems that resulted in the modification
of contract award decisions surfaced in 2 of the 10 TANF procurements we
reviewed. These problems affected 5 of the 58 TANF contracts awarded in the
10 procurements. Procurement issues were raised in 2 other procurements but
did not result in the modification of contract award decisions.
State and local governments have primary responsibility for overseeing
procurement procedures, and they use several approaches to identify problems
with procurement processes. In some cases, contracting agencies rely on
aggrieved third parties to identify procurement problems through bid
protests or lawsuits. In other cases, organizations outside the procurement
process may review bid solicitation and contract award procedures. A bid
protest occurs when an aggrieved party- a bidder who did not win a contract
award- protests the decision of the local or state agency to award another
bidder a contract. The process usually has several tiers, starting with a
secondary review by the agency that denied the contract award. If the
protest cannot be resolved internally, it can be brought to a higher level
of authority. Contract agency officials said that bidders frequently protest
contract award decisions. However, state and local officials also said that
many bid protests are based more on bidder disgruntlement with award
decisions than on corroborated instances of noncompliance with procurement
processes. However, these protests do occasionally result in a resolution
that favors the bid protester. Different Approaches
Have Been Used To Help Ensure Compliance with, and Identify Problems in,
Implementing Bid Solicitation and Contract Award Processes
Oversight Approaches Include External Reviews and Administrative and
Judicial Processes
Page 25 GAO- 02- 661 State and Local Welfare Contracting
We reviewed 10 separate procurements- specific instances in which government
agencies had solicited bids and awarded one or more TANF contracts- in the
local sites that we visited. 22 Procurement problems identified in San Diego
and Los Angeles resulted in contract award decisions being modified. In San
Diego, the county employees union filed a lawsuit against the county
maintaining that the county had failed to conduct a required cost analysis
to determine whether it was more or less efficient to contract out services
than it would be to provide them by county employees. The union won the
case, and the county was required to perform a cost analysis and, upon
determination that contracted services would be more cost- efficient than
publicly provided services, resolicit bids from potential contractors. In
Los Angeles County?s procurement of TANF services, one bidder filed a bid
protest, claiming that the contracting agency had failed to properly
evaluate its bid. As the final contract award authority, the County Board of
Supervisors ordered the Director of Public Social Services to negotiate
separate contracts for TANF services to the original awardee and protesting
bidder.
While procurement issues were raised in the District of Columbia and New
York City, their resolution did not result in contract award decisions being
modified. In the District of Columbia, the city Corporation Counsel raised
concerns regarding the lack of price competition and the lack of an
evaluation factor for price. For example, the District?s contracting agency
set fixed prices it would pay for TANF services and did not select
contractors based on prices they offered. District officials said that they
set fixed prices so that contractors would not submit proposals that would
unrealistically underbid other contractors. In addition, the agency did not
include price as a factor in its evaluation of proposals. As a result of
these and other factors, the Corporation Counsel concluded that the
District?s procurement of TANF services was defective and legally
insufficient. However, the city, operating under the authority of the
mayor?s office to make final contract award decisions, approved the contract
awards and subsequently implemented regulations changing the way price is
used in making contract award decisions.
22 We selected procurements in which contract awards were made to large for-
profit and nonprofit organizations. We reviewed one TANF procurement in each
of 8 localities and 2 TANF procurements in Palm Beach. In Palm Beach, one
procurement was for employment and case management services and the other
was for determining eligibility for TANF as part of a pilot project to
contract out this function in selected locations in Florida. Procurement
Problems
Were Identified in Some Cases
Page 26 GAO- 02- 661 State and Local Welfare Contracting
In New York City, the TANF contracting process was alleged to have violated
certain requirements, but these charges were not confirmed upon subsequent
legal review and a resulting appellate court decision. The New York City
Comptroller reported that the contracting agency had not disclosed the
weights assigned to evaluation criteria for assessing bids, provided
contract information to all bidders, and assessed each bid equitably. With
regard to the assessment of bids, the comptroller maintained that the city?s
Human Resources Administration (HRA) had deemed as unqualified some
proposals that clearly ranked among the most technically qualified and
recommended contract awards for other proposals that were much less
qualified. The comptroller also maintained that HRA had preliminary contact
with one of the potential contractors, reporting that HRA had held
discussions and shared financial and other information with the contractor
before other organizations had been made aware of the same information. The
comptroller concluded that these actions constituted violations of city
procurement policies. Utilizing its authority to make final contract award
decisions, the mayor?s office subsequently overruled the comptroller?s
objections and authorized the contract agency to award contracts to the
organizations it had selected. A later court appeal found in favor of the
mayor?s office. 23
State and local governments use a variety of approaches to help ensure that
TANF- funded contractors expend federal funds properly and comply with TANF
program requirements, such as on- site reviews and independent audits. Four
of the six states that we visited identified deficiencies in their oversight
of TANF contractors. Various factors have contributed to these deficiencies,
such as the need in some states to create and support local workforce boards
that contract for TANF services and oversee contractors. With regard to
contractor performance, several contractors at two local sites were found to
have had certain disallowed costs and were required to pay back the amounts
of these costs. Moreover, in five of the eight locations that established
performance levels for TANF contractors, most contractors, including both
nonprofit and for- profit contractors, did not meet one or more of their
performance levels.
23 Two judicial rulings affected New York City?s procurement of TANF
services. In the first case, Guliani v. Hevesi, the court found in favor of
the New York City Comptroller regarding the alleged violations of the city?s
procurement process. The appellate court ruling, Guliani, etc., et. al. v.
Hevesi, etc., and Maximus, Inc. (Non- Party Intervenor), overturned the
initial court decision, thereby supporting HRA?s contract award
recommendations. Deficiencies Have
Been Identified with Contract Oversight and Contractor Performance in the
States and Localities We Reviewed
Page 27 GAO- 02- 661 State and Local Welfare Contracting
State and local oversight approaches that we found being used originate from
organizations external to contracting agencies and these include independent
audits and program evaluations. State and local government auditors,
comptrollers, treasurers, or contracted certified public accounting firms
audit contractors. Independent auditors conduct financial and programmatic
audits of compliance with contract specifications. Similarly, evaluators
from outside the contracting agency generally evaluate various aspects of
program implementation, including financial, programmatic, and operational
performance by contractors and other entities responsible for achieving
program goals.
State and local government auditors in several states have identified
shortcomings in how contracting agencies oversee TANF contractors. As shown
in table 2, auditors reported oversight deficiencies in four of the six
states that we visited- Florida, New York, Texas, and Wisconsin. Audit
reports cited uneven oversight coverage of TANF contractors over time or
across local contracting agencies. We did not identify any audit reports
that assessed the oversight of TANF contractors in California or the
District of Columbia. States and Localities Use
Various Approaches to Oversee TANF Contractors
Problems Have Been Cited with State and Local Oversight of TANF Contractors
Page 28 GAO- 02- 661 State and Local Welfare Contracting
Table 3: Independent Audits Have Identified Problems with the Oversight of
TANF Contractors in Several States that We Reviewed
State government Audit agency (year of audit
report) Overview of problems identified
Florida State Inspector General?s Office (2000) Contract monitoring
conducted by Florida?s 24 local workforce boards was
inconsistent. Some of the boards failed to develop a monitoring plan to
document and follow- up on oversight activities. In addition, some of the
boards that were monitoring contractors did not assess financial and
programmatic performance. State Legislative Offices (2000) Lack of a fully
integrated system for reporting and resolving instances of
contractor noncompliance. State agencies primarily serve in a policy making,
administrative, support, or oversight capacity, including oversight of local
workforce boards. The boards, in turn, contract with nongovernmental
entities to provide direct services or administrative functions. To improve
oversight of contractors, the report recommended that the state develop an
integrated automated system to, among other things, generate performance
information on service providers and workforce development outcomes at both
the state and local levels. New York State Comptroller?s Office (2000) The
state contracting agency devoted its limited resources to implementing
welfare employment programs and did not give appropriate priority to
monitoring the outcomes of these programs. Similarly, counties have not
devoted sufficient priority or resources to carry out their monitoring
responsibilities effectively. In addition, the state contracting agency did
not have adequate information systems to monitor and report on work
participation by TANF recipients. State Auditor?s Office (1999) The state?s
financial and program monitoring of local workforce boards did not
provide reasonable assurance that TANF funds were being spent appropriately.
The state performed only limited program monitoring of 4 of the 18 local
boards that had TANF contracts at the time. In addition, financial
monitoring procedures were inconsistent and lacked certain attributes, such
as assessing whether the boards passed funds to their contractors as
required. Local workforce boards were not meeting their responsibility to
monitor their TANF contractors. Only 5 of 15 boards contacted by the state
auditor had reviewed their TANF contractors and issued a monitoring report,
and only 1 of these 5 had performed any fiscal monitoring. Texas
State Auditor?s Office (2001) While the state has improved its oversight of
local workforce boards, the local boards audited for this report continue to
provide insufficient oversight of TANF contractors. For example, the boards
lacked knowledgeable staff to oversee contractors and did not have adequate
coverage of contractors, thus increasing the risk of not detecting or
correcting major problems. Wisconsin State Legislative Audit Bureau
(2001) The organization contracted to oversee TANF contractors in Milwaukee
County did not review case management information through monthly desk
reviews and on- site visits for all clients reaching the 24- month time
limit, as contractually required.
Source: State government audit reports.
Evolving TANF program structures, resource constraints, and data quality
issues contributed to the deficiencies in contractor oversight. In Florida
and Texas, for example, new TANF program structures entailed establishing
local workforce boards throughout the state as the principal entity for TANF
contracting and the subsequent oversight of TANF
Page 29 GAO- 02- 661 State and Local Welfare Contracting
contractors. In both states, local workforce boards varied significantly in
their capability to oversee TANF contractors and ensure compliance with
contract requirements. According to New York State program officials,
contracting agencies in the state continue to experience ongoing shortfalls
in staff resources necessary to provide sufficient oversight of contractor
performance. In addition, Wisconsin?s Legislative Audit Bureau reported in
2001 that the Private Industry Council had not provided the requisite
oversight of five TANF- funded contractors in Milwaukee County. In addition,
state and local officials in other states frequently told us that data
quality issues complicated efforts to monitor contractors effectively. For
example, officials told us that case file information on job placements or
job retention frequently differed from data in automated systems maintained
by state or local contracting agencies. In New York City, such discrepancies
required the Human Resources Administration to conduct time- consuming
reviews and reconciliations of the data. Such inaccuracies forced delays in
New York City?s payments to contractors, estimated by city officials to
total several million dollars.
States and localities have taken actions in response to some of the reported
contract oversight deficiencies. For example, state of Florida officials
worked with local workforce boards to integrate the operations of welfare
and employment offices to improve oversight of service providers, including
nongovernmental contractors. In Texas, the Texas Workforce Commission issued
new oversight policies and provided technical assistance and guidance to
help local workforce boards oversee the performance of TANF contractors. For
example, the commission?s prior monitoring had identified inappropriate cost
allocations across programs and other financial management problems by local
boards. The commission subsequently issued guidance on how boards and their
contractors can meet cost allocation requirements. Commission officials told
us that they use a team approach to monitor workforce boards and provide
technical assistance.
Auditors disallowed significant costs by TANF contractors at two of the
locations that we visited: Milwaukee County, Wisconsin, and Miami- Dade
County, Florida. 24 In the first location, Wisconsin?s State Legislative
Audit Bureau reported that one for- profit contractor had disallowable and
24 Unallowable costs can involve either contractor costs expended on
prohibited activities or program costs for allowable activities that are
overstated by contractors. Contractors at Two
Locations Had Unallowable Costs
Page 30 GAO- 02- 661 State and Local Welfare Contracting
questionable costs 25 totaling $415, 247 (of which 33 percent were
disallowable) and one nonprofit contractor had disallowable and questionable
costs totaling $367, 401 (of which 83 percent were disallowable). 26 State
auditors reported that a large proportion of the disallowable costs resulted
from the contractors claiming reimbursement from Wisconsin for expenses
incurred while attempting to obtain TANF contracts in other states. Auditors
said that generally accepted contract restrictions prohibit the use of
contract funds obtained in one state from being used to obtain new contracts
in other states. State auditors also said they examined whether there had
been any preconceived intent underlying these prohibited contract practices,
which could have led to charges of fraud. However, the auditors could not
demonstrate preconceived intent or any related allegations of fraud.
The for- profit contractor also had costs disallowed for expenditures that
supported TANF- funded activities involving a popular entertainer who had
formerly received welfare benefits. The contractor believed the activity
would provide an innovative, motivational opportunity for TANF recipients.
While the contractor claimed that Wisconsin officials had not provided
sufficient guidance about allowable activities, state officials subsequently
found the costs associated with the entertainment activities to be
unallowable. Costs incurred by the for- profit contractor that state
auditors cited as questionable included charges for a range of promotional
advertising activities, restaurant and food purchases for which there was no
documented business purpose, and flowers for which documentation was
inadequate to justify a business purpose. Costs incurred by the nonprofit
contractor that were cited as questionable included funds spent on
advertising, restaurant meals and other food purchases that were not a
program need, and local hotel charges for which there was inadequate
documentation. At the time of our review, the contractors had repaid all
unallowable and questionable costs. In 2001, Wisconsin enacted a state law
that requires TANF contracts beginning on January 1, 2002, and ending
25 Questionable costs relate to expenditures for which the auditor,
contracting agency, and contractor must reach a final determination as to
whether such costs are strictly prohibited, and if so, which costs must be
repaid to the contracting agency.
26 See Administration of the Wisconsin Works Program by Maximus, Inc.
(http:// www. legis. state. wi. us/ lab/ reports/ ltrmaximus. htm) and
Administration of the Wisconsin Works Program by Employment Solutions, Inc.,
and Other Selected Agencies
(http:// www. legis. state. wi. us/ lab/ reports/ ltrempsolutions. htm) for
more information on the audit findings. The latter report also identified
questionable costs totaling $76, 023 for three other nonprofit TANF
contractors in Milwaukee.
Page 31 GAO- 02- 661 State and Local Welfare Contracting
on December 31, 2003, to contain a provision stating that contractors that
submit unallowable expenses must pay the state a sanction equal to 50
percent of the total amount of unallowable expenses.
Auditors also disallowed some program costs claimed by several contractors
under contract with the Miami- Dade Workforce Development Board in Florida.
The auditors found instances in which several contractors had billed the
contracting agency for duplicate costs. On the basis of these findings, the
auditors recommended that the contractors repay the board about $33,000 for
the costs that exceeded their valid claims. At the time of our review,
arrangements had been made for the contractors to repay the disallowed costs
to the contracting agency.
Many TANF contractors at the sites that we reviewed are not meeting their
established performance levels in the areas of work participation, job
placement, or job retention rates. Contracting agencies in eight of the nine
localities we reviewed (all except the District of Columbia) have
established expected levels of performance for their TANF contractors, and
these performance levels vary by locality. At two of the eight sites-
Milwaukee and Palm Beach- all contractors met all specified performance
levels. However, at five of the other sites, most contractors did not meet
one or more of their performance levels, indicating that state and local
governments did not achieve all anticipated performance levels by
contracting for TANF services. 27 Tables 4, 5, and 6 indicate the overall
extent to which contractors met performance levels and the actual
performance achieved by individual contractors with respect to measures for
work participation, job placement, and job retention rates in each location
that had established these performance levels. 28 In contrast, at the two
local sites that either established performance measures for the percentage
of job placements that pay wages of at least a specified level (Milwaukee
and Palm Beach) or offered health benefits (Milwaukee), all contractors met
these measures.
27 At the remaining site, Los Angeles County, one contractor met the
established performance level and the other contractor did not. 28
Differences in the levels of performance achieved by contractors may reflect
variations in several factors, such as contractor capabilities and
resources, caseload characteristics, and coordination among service
providers. We did not identify any differences in the types of services that
nonprofit and for- profit providers had been contracted to provide in these
localities. Many TANF Contractors at
Localities that We Reviewed Are Not Achieving Performance Levels Specified
in Contracts
Page 32 GAO- 02- 661 State and Local Welfare Contracting
Payments to contractors at the eight localities that established performance
levels are based either entirely or in part on whether contractors meet
their specified performance levels. The measures most often used in the
locations we visited mirror PRWORA?s emphasis on helping TANF recipients
obtain employment. The most common performance measures are work
participation, job placement, and job retention rates. Work participation
rates stipulate that contractors engage a specified percentage of TANF
recipients in work- related activities such as job search or community work
experience. Job placement rates specify that contractors place a specified
percentage of recipients in jobs and job retention rates specify that
contractors ensure that recipients retain employment (but not necessarily at
the same job) for a specified period, typically ranging from 30 to 180 days.
In addition, some localities have established performance levels that
require contractors to place TANF recipients in certain types of jobs, such
as jobs that pay wages of at least a specified level or offer health
benefits.
Page 33 GAO- 02- 661 State and Local Welfare Contracting
Table 4: Contractor Performance in Meeting Work Participation Rates Overall
contractor performance Individual contractor performance a Localities (total
number of contractors) and performance levels established for contractors
Percentage of for- profit contractors that
met the established
level Percentage of
nonprofit contractors that
met the established
level Percentage of all
contractors that met the established level
Percentage achieved by each
for- profit contractor
Percentage achieved by each nonprofit contractor Austin, Texas (1)
Participation in work activities by 90 percent of two- parent families
0 b 0 82 b Participation in work activities by 45 percent of all families
0 b 0 31 b
San Diego County, California (3)
Participation in work activities by 90 percent of two- parent cases
0 0 0 64, 39 63 Participation in work activities by 75 percent of one-
parent cases
0 0 0 49, 33 44
Miami- Dade, Florida (19)
Participation in work activities by 45 percent of all families
100 81 84 65, 63, 55 83, 75, 72, 68 67, 65, 63, 60 59, 59, 58, 55 48, 42,
33, 31 No more than 5 percent of the caseload in no recorded work activity
33 25 26 7, 7, 3 33, 20, 19, 18 17, 17, 12, 11
11, 8, 7, 7 5, 4, 1, 1 No more than 1 percent of the caseload in no recorded
work activity for more than 30 days
100 31 42 1, 1, 0 25, 5, 4, 4 3, 3, 3, 2 2, 2, 2, 1 1, 1, 0, 0 a Contractor
performance information is expressed in terms of the percentage of the
specified
population participating in work activities, except for the last two rows of
the table, in which the information is expressed in terms of the percentage
of the specified population that is not participating in work activities.
Comparing contractor performance across localities can be problematic
because key aspects of the performance measures may vary by locality, such
as the percentage of all TANF families that are required to participate in
work activities. b Not applicable.
Source: State and local government contract performance data.
Page 34 GAO- 02- 661 State and Local Welfare Contracting
Table 5: Contractor Performance in Meeting Job Placement Rates Overall
contractor performance Individual contractor performance a Localities (total
number of contractors) and performance levels established for contractors
Percentage of for- profit contractors that
met the established
level Percentage of
nonprofit contractors that met the
established level
Percentage of all contractors that met the established level Percentage
achieved by
each for- profit contractor Percentage
achieved by each nonprofit contractor Austin, Texas (1)
50 percent of program participants placed in jobs
100 b 100 69 b
Houston, Texas (6)
50 percent of program participants placed in jobs
100 0 17 62 47, 42, 35, 33, 29
Los Angeles County, California (2)
At least 3 percent higher than the TANF job placement rate achieved by
county employees, which was 10 percent
50 b 50 12, 8 b
Milwaukee County, Wisconsin (5)
35 percent of program participants placed in jobs
100 100 100 43 45, 43, 41, 39
Page 35 GAO- 02- 661 State and Local Welfare Contracting
Overall contractor performance Individual contractor performance a
Localities (total number of contractors) and performance levels established
for contractors
Percentage of for- profit contractors that
met the established
level Percentage of
nonprofit contractors that met the
established level
Percentage of all contractors that met the established level Percentage
achieved by
each for- profit contractor Percentage
achieved by each nonprofit contractor Palm Beach, Florida (1)
22 percent of program participants placed in jobs
100 b 100 26 b
New York City, New York (11)
Equal to or higher than the average job placement rate achieved by all TANF
contractors in the city, which was 55 percent
0 13 9 54, 51, 50 91, 54, 54, 53 50, 49, 49, 45
a Contractor performance information is expressed in terms of the percentage
of program participants placed in jobs. Comparing contractor performance
across localities can be problematic because key aspects of the performance
measures may vary by locality, such as the percentage of all TANF families
that are required to participate in work activities. b Not applicable.
Source: State and local government contract performance data.
Page 36 GAO- 02- 661 State and Local Welfare Contracting
Table 6: Contractor Performance in Meeting Job Retention Rates Overall
contractor performance Individual contractor performance a Localities (total
number of contractors) and performance levels established for contractors
Percentage of for- profit contractors that met the
established level
Percentage of nonprofit contractors that
met the established level
Percentage of all contractors that met
the established level
Percentage achieved by each for- profit
contractor Percentage
achieved by each nonprofit contractor Milwaukee County, Wisconsin (5)
75 percent of program participants who entered employment must retain
employment for 30 days
100 100 100 80 92, 89, 85, 85 50 percent of program participants who entered
employment must retain employment for 180 days
100 100 100 56 72, 66, 62, 55
New York City, New York (11)
Equal to or higher than the average job retention rate achieved by all TANF
contractors in the city, which was 75 percent of program participants who
entered employment retaining employment for 30 days
100 13 36 94, 79, 76 92, 74, 73, 72 70, 69, 68, 65
San Diego County, California (3)
90 percent of program participants who entered employment must retain
employment for 30 days
0 0 0 71, 67 58
Page 37 GAO- 02- 661 State and Local Welfare Contracting
Overall contractor performance Individual contractor performance a
Localities (total number of contractors) and performance levels established
for contractors
Percentage of for- profit contractors that met the
established level
Percentage of nonprofit contractors that
met the established level
Percentage of all contractors that met
the established level
Percentage achieved by each for- profit
contractor Percentage
achieved by each nonprofit contractor
70 percent of program participants who entered employment must retain
employment for 90 days
0 0 0 66, 60 57 60 percent of program participants who entered employment
must retain employment for 180 days
100 100 100 69, 68 65 a Contractor performance information is expressed in
terms of the percentage of program participants entering employment who
retained employment for the specified time period. Comparing contractor
performance across localities can be problematic because key aspects of the
performance measures may vary by locality, such as the percentage of all
TANF families that are required to participate in work activities.
Source: State and local government contract performance data.
The localities varied in the types of measures and levels of performance
they established. For example, the specified levels for job placements
ranged from 22 percent of program participants in Palm Beach to 50 percent
in Austin and Houston. 29 Performance levels established for job retention
also varied by jurisdiction. For example, the specified performance levels
for contractors in Milwaukee County are that 75 percent of TANF recipients
who entered employment retain employment for 30 days and 50 percent retain
employment for 180 days. In comparison, contractors in San Diego County face
a 90- percent level for 30- day employment retention and a 60- percent level
for 180- day retention. 30
In most cases, nonprofit and for- profit contractors had similar performance
with respect to meeting the performance levels established
29 However, the established performance levels in Los Angeles County and New
York City, which are expressed in terms of the relative performance to other
contractors, actually fell outside of this range.
30 A San Diego County official informed us that the county subsequently
revised its established performance levels for job retention and work
participation for TANF contractors when the contracts were renegotiated.
Page 38 GAO- 02- 661 State and Local Welfare Contracting
for them. Across the locations we reviewed, there are 14 instances in which
a local site had data on the comparable performance of nonprofit and for-
profit contractors. In 11 of these instances, the percentages of nonprofit
and for- profit contractors that met the measures were similar. In each of
the remaining three instances, for- profit contractors performed
substantially better overall. 31
In two locations we reviewed- Los Angeles County and San Diego County-
county governments also provided TANF services. Overall, the relative
performance levels of county- provided services and contracted services were
mixed. For example, in San Diego County, the county performed better than
one for- profit contractor and worse than another for- profit contractor in
meeting performance levels for certain job retention rates. In Los Angeles
County, one of two for- profit contractors performed better than the county
in placing TANF recipients in jobs while one of the two county providers
achieved higher placement rates than the other for- profit contractor.
At the remaining site, the District of Columbia, contracting officials were
unable to provide information on how well TANF contractors met expected
levels of performance. While the District has not established contractually
specified performance levels for TANF contractors, these contractors do have
performance- based contracts. 32 For example, contractors receive a
specified payment for each TANF recipient who becomes enrolled in work-
related activities, placed in a job, or who retains employment for a certain
period of time. However, District officials were unable to provide us with
an assessment of TANF contractors? performance in serving TANF recipients.
The contracting out of TANF- funded services is an important area for
several reasons. First, the magnitude of TANF contracting is substantial,
involving at least $1.5 billion in federal and state funds in 2001, which
represents at a minimum 13 percent of the total amount states expended for
TANF programs (excluding expenditures for cash assistance). In 2001, about a
quarter of the states contracted out 20 percent or more of the
31 The three instances are the work participation rate in Miami pertaining
to recipients in no recorded work activity for more than 30 days, job
placement rate in Houston, and job retention rate in New York City.
32 There are four nonprofit and six for- profit TANF contractors in the
District of Columbia. Conclusions
Page 39 GAO- 02- 661 State and Local Welfare Contracting
amounts they had expended for TANF programs in fiscal year 2000, ranging up
to 74 percent. Second, PRWORA expanded the scope of services that could be
contracted out to nongovernmental entities, such as determining eligibility
for TANF. Third, some states are using new entities- local workforce boards-
that procure TANF services and are responsible for overseeing TANF
contractors.
Problems with the performance of TANF contractors have been identified in
some cases, but there is no clear pattern of a greater incidence of these
problems with nonprofit versus for- profit contractors. At two of the nine
localities we reviewed, auditors had disallowed certain costs by several
contractors, and arrangements had been made for the contractors to repay
unallowable costs. We found more widespread instances of contractors at the
local sites not meeting their contractually established performance levels
in areas such as work participation, job placement, and job retention rates.
Contracting agencies at the local sites had established financial incentives
for contractors by basing payments to contractors in whole or part on their
performance in such areas. While meeting the service needs of TANF
recipients can present many challenges for contractors, this has become even
more important now that these recipients face time limits on the receipt of
TANF.
Effective oversight is critical to help ensure contractor accountability for
the use of public funds, and our review identified problems in some cases
with state and local oversight of TANF contractors. At the national level,
our review of state single audit reports found internal control weaknesses
for over a quarter of the states that potentially affected the states?
ability to effectively monitor TANF contractors. The extent to which state
single audits have identified problems with subrecipient monitoring
involving TANF funds is generally equal to or greater than for several other
social service programs in which contracting occurs with nongovernmental
organizations. Moreover, in four of the six states we visited, independent
audits have identified deficiencies in state or local oversight of TANF
contractors. However, HHS officials told us that they do not know the extent
and nature of problems pertaining to the oversight of TANF contractors that
state single audit reports have cited because HHS does not analyze these
reports in such a comprehensive manner. This is due, in part, to HHS?s focus
on those problems identified by single audit reports that involve
unallowable or questionable costs. While such problems certainly warrant
high priority, the result is that there is not adequate assurance that
identified deficiencies pertaining to the monitoring of TANF contractors are
being corrected in a strategic manner. Greater use of single audits as a
program management tool by HHS would provide
Page 40 GAO- 02- 661 State and Local Welfare Contracting
greater assurance that TANF contractors are being held accountable for the
use of public funds. For example, HHS could use state audit reports more
systematically in ways such as obtaining additional information about the
extent to which nongovernmental TANF contractors are involved in the
subrecipient monitoring deficiencies cited in these reports, identifying the
most commonly reported types of deficiencies, and tracking how often the
same deficiencies are cited recurrently for individual states.
To facilitate improved oversight of TANF contractors by all levels of
government, we recommend that the Secretary of HHS direct the Assistant
Secretary for Children and Families to use state single audit reports in a
more systematic manner to identify the extent and nature of problems related
to state oversight of nongovernmental TANF contractors and determine what
additional actions may be appropriate to help prevent and correct such
problems.
HHS provided written comments on a draft of this report, and these are
reprinted in appendix IV. HHS said that the report addresses an important
topic and provides useful information in describing the reasons that have
prompted the rise in contracting, as well as the associated issues and
challenges. However, HHS did not agree with our recommendation to the
Assistant Secretary for Children and Families to use state single audit
reports in a more systematic manner with regard to problems related to state
oversight of nongovernmental TANF contractors. After evaluating HHS?s
comments, we continue to believe that our recommendation is warranted.
HHS questioned whether our recommendation is consistent with the provisions
of the Single Audit Act and whether the recommendation is necessary, in
light of the current responsibilities that federal agencies and other units
of government have for using single audit reports. HHS elaborated by
explaining that OMB Circular A- 133 requires federal agencies to take
actions such as ensuring that audits of recipients of federal funds are
completed and reports are received in a timely manner, issuing management
decisions on audit findings within 6 months after receipt of the audit
report, and ensuring that recipients take appropriate and timely corrective
actions. HHS said that it performs such actions. HHS also said that Circular
A- 133 assigns these same responsibilities to other entities (e. g., state
and local governments) for oversight of their subrecipients of federal
funds. In addition, HHS said that there is some Recommendation for
Executive Action Agency Comments and Our Evaluation
Page 41 GAO- 02- 661 State and Local Welfare Contracting
question about whether it is appropriate under the TANF statute, with its
clear emphasis on state flexibility, for HHS to assume substantial new
responsibilities that could interfere with states? methods of monitoring
their subrecipients or contractors.
We believe that our recommendation is consistent with the Single Audit Act,
Circular A- 133, and the TANF statute. Moreover, we view our recommendation
as contributing to the stated objective of the Single Audit Act of ensuring
that federal agencies use single audit reports to the maximum extent
practicable in overseeing federal programs. In the TANF block grant
environment, the rise in contracting brings with it new challenges at all
levels of government regarding accountability for use of federal funds by
nongovernmental entities. While states have a great deal of flexibility in
using TANF funds, HHS continues to have a fiduciary responsibility to ensure
that states properly account for their use of federal funds and maintain
adequate internal controls over the use of funds by their subrecipients. HHS
follow- up on individual state single audit reports does not preclude the
agency from analyzing these reports in a more systematic manner to meet its
oversight responsibilities, as we recommend. Furthermore, our recommendation
does not call for HHS to usurp any oversight responsibilities from the
states for overseeing their subrecipients.
Finally, HHS said that it failed to recognize what value our recommendation
would add to the TANF program. HHS said that because its staffing level for
administering TANF has been greatly reduced, the value and cost- benefit of
our recommendation must be considered before adding or redirecting staff to
gain a comprehensive perspective on the extent and nature of problems with
the monitoring of subrecipients and contractors. In response, we believe
that implementing our recommendation could strengthen HHS?s oversight of
this important area and facilitate improved oversight of TANF contractors by
states. For example, more systematic analysis of state single audit reports
by HHS could help identify national patterns in the problems with states?
monitoring of their TANF subrecipients cited by these reports. This
information would be valuable to states working to improve their oversight
of these subrecipients. Moreover, users of single audit reports can now
analyze information more quickly than ever before by using the Internet to
access a single audit database established by the Bureau of the Census. In
addition, more systematic analysis by HHS of the subrecipient monitoring
problems reported by state single audits could also provide useful
information on the extent to which these problems involve nongovernmental
contractors and are recurring in the same states. Such
Page 42 GAO- 02- 661 State and Local Welfare Contracting
information could help HHS ascertain whether or not this is a growing
problem area that may warrant closer scrutiny. By disseminating the results
of its analysis of single audit reports to states through existing venues
such as audit forums and conferences with state TANF officials, HHS could
share information with its TANF partners to facilitate better oversight of
contractor- provided services.
In addition, we believe that our recommendation represents a costeffective
approach to improving oversight of TANF contractors because the
recommendation involves making fuller use of information that is already
collected. The national analysis of state single audit reports that we
performed for this report took less than a month and involved using the
single audit database to identify reports that cited problems with TANF
subrecipient monitoring, reviewing these reports to extract the specific
problems, and identifying some of the most commonly cited problems. It may
be possible for HHS regional office staff to perform some of this type of
analysis, as well as to obtain any needed additional information about
specific problems, in the course of their current reviews of state single
audit reports for their regions. Such an approach could reduce the amount of
analysis by HHS headquarters staff needed to obtain a comprehensive
perspective on the extent and nature of problems related to state oversight
of TANF contractors.
We are sending copies of this report to the Secretary of HHS and the
department?s Assistant Secretary for Children and Families, appropriate
congressional committees, and other interested parties. We will also make
copies available to others upon request.
Please contact me on (202) 512- 7215 if you have any questions about this
report. Other GAO contacts and staff acknowledgments are listed in appendix
V.
Sigurd R. Nilsen Director, Education, Workforce, and
Income Security Issues
Appendix I: Scope and Methodology Page 43 GAO- 02- 661 State and Local
Welfare Contracting
To identify the extent and nature of Temporary Assistance for Needy Families
(TANF) contracting, we conducted a national survey of all 50 states, the
District of Columbia, and the10 counties with the largest federal TANF-
funding allocations in each of the13 states that administer their TANF
programs locally. Contracting for TANF- funded services occurs at different
levels of government- the state, the local, or both- and data on TANF-
funded contracts are maintained at various levels of government. We
developed three survey instruments to accommodate these differences. The
first survey instrument, which requested state data only, was sent to the 13
states that contract at both levels of government or locally only, but
maintain data separately. For these 13 states, a second survey instrument,
which requested data on contracts entered into at the local level, was sent
to 10 counties that receive the largest TANF allocations in each of these 13
states to determine how much contracting takes place in their larger
counties. The third survey instrument, which requested data on state- level
and local- level contracts, was sent to the remaining 37 states and the
District of Columbia (see app. II for this survey instrument). All three
survey instruments were pretested with appropriate respondents in six
states. In addition to obtaining data through our national survey, we also
obtained data from HHS on federal TANF and state maintenance- of- effort
funds for fiscal year 2000. We did not independently verify these data.
The response rate for the survey instrument sent to the counties in the 13
states was 78 percent. 1 The response rate for the remaining survey
instruments sent to state governments was 100 percent. Since our survey did
not cover all counties in the 13 states that contract for TANF services
locally, the total number of TANF- funded contracts and their dollar value
may be understated. In addition, eight states that maintain data on
locallevel contracting did not provide us with these data. We subsequently
contacted survey respondents who had indicated that the determination of
eligibility had been contracted out to confirm that this was for the TANF
program and determine whether contractors determined eligibility for cash
assistance or other TANF- funded services.
To obtain information on approaches used by the federal government to
oversee TANF contracting, we met with officials in HHS?s Administration for
Children and Families in Washington, D. C., and conducted telephone
1 This group consisted of counties in Arkansas, California, Colorado,
Florida, Georgia, Maryland, Massachusetts, Minnesota, New York, North
Carolina, Ohio, Texas, and Virginia. Appendix I: Scope and Methodology
Appendix I: Scope and Methodology Page 44 GAO- 02- 661 State and Local
Welfare Contracting
interviews with staff in HHS regional offices in Atlanta, Chicago, Dallas,
New York, Philadelphia, and San Francisco. We also interviewed the director
of HHS?s National External Audit Review Center to learn how the agency uses
single audit reports to oversee procurement processes and contractor
monitoring. In addition, we analyzed the single audit database and reviewed
state single audit reports.
To obtain information on approaches used by state and local governments to
ensure compliance with bid solicitation and contract award requirements and
to oversee contractor performance, we conducted site visits to California,
the District of Columbia, Florida, New York, Texas, and Wisconsin. We met
with state TANF officials in these states. In addition, we met with
procurement officers, contract managers, auditors, and private contractors
in the following nine locations: Austin and Houston, Texas; the District of
Columbia; Los Angeles County and San Diego County, California; Miami- Dade
and Palm Beach, Florida; Milwaukee, Wisconsin; and New York City, New York.
We elected to visit these localities because they all serve a large portion
of the TANF population and have at least one large contractor providing
TANF- funded services. To obtain additional perspectives on TANF
contracting, we interviewed representatives from government associations
(American Public Human Services Association, Council of State Governments,
National Conference of State Legislatures, and the National Association of
Counties) and unions (American Federation of State, County, and Municipal
Employees at the national office and in Milwaukee County, Wisconsin). We
also reviewed various audit reports for the state governments, local
governments, and nonprofit contractors that we interviewed in the nine
locations to determine whether auditors found instances of noncompliance
with bid solicitation and contract award requirements or contract
monitoring. In addition, we selected 7 TANFfunded contracts with nonprofit
organizations and 10 TANF- funded contracts with for- profit organizations
to obtain information on their contract structure, services provided, and
other relevant information.
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Page 45 GAO- 02- 661 State and Local Welfare Contracting
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Page 46 GAO- 02- 661 State and Local Welfare Contracting
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Page 47 GAO- 02- 661 State and Local Welfare Contracting
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Page 48 GAO- 02- 661 State and Local Welfare Contracting
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Page 49 GAO- 02- 661 State and Local Welfare Contracting
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Page 50 GAO- 02- 661 State and Local Welfare Contracting
Appendix II: National Survey on TANFFunded State and Local Government
Contracting
Page 51 GAO- 02- 661 State and Local Welfare Contracting
Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000
Page 52 GAO- 02- 661 State and Local Welfare Contracting
State 1999 2000
Alaska a The state lacked procedures to ensure that subrecipient nonprofit
organizations used TANF funds only for allowable purposes as required by
TANF regulations. The state failed to inform nonprofit subrecipients of the
source and amount of TANF funds they received. As a result, the state cannot
provide assurance that nonprofit organizations are complying with federal
requirements, including TANF requirements for allowable activities,
allowable costs, and suspension and debarment of contractors. Arizona In
some cases, the state did not provide
subrecipients with information about the sources of federal funds they
received. The lack of proper notification to subrecipients of federal award
information increases the risk of the improper use and administration of
federal funds.
a Colorado a The state has not ensured that significant deficiencies related
to electronic benefit transfer cards are corrected on a timely basis. The
state did not issue monitoring reports to counties within a consistent
timeframe. Florida In some cases, the state did not notify subrecipients
that the funding they received originated from TANF. The lack of proper
notification to subrecipients of federal award information increases the
risk of the improper use and administration of federal funds, including
limited assurance that proper audits are conducted of those funds. The
single audit report references a state inspector general report that
identified inadequate state oversight of local workforce coalitions that
administer TANF funds and inadequate procurement and cash management
practices by the local coalitions.
The 1999 finding on not notifying subrecipients of the federal funding
sources from which they received funds was subsequently reported in 2000,
including the associated risks reported in the prior year.
Illinois a The state did not provide information to some subrecipients on
the sources of federal funds it distributed to them. The state did not
provide this information because it initially considered the service
providers to be vendors rather than subrecipients, and as such, the state
did not believe it was necessary to notify the service providers of the
federal award information. Failure to inform subrecipients of the federal
award information could result in subrecipients improperly reporting
expenditures of federal awards, expending federal funds for unallowable
purposes, or not receiving a single audit in accordance with federal
requirements. Kentucky The state contracts with the Kentucky
Transportation Cabinet, which subcontracts with 16 different regions to
provide transportation services to TANF recipients. However, the state
failed to monitor these subrecipients due to understaffing. As
The state did not ensure that all nongovernmental contractors submitted
their required audit reports or requested an extension. As a result, the
state cannot be assured that subrecipients expended federal awards for their
intended purpose and complied with federal requirements.
Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000
Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000
Page 53 GAO- 02- 661 State and Local Welfare Contracting
State 1999 2000
a result, the state cannot be assured that subrecipients spent grant monies
for their intended purpose and complied with federal requirements. Louisiana
The state continues to lack an adequate monitoring
system to ensure that federal subrecipients and social services contractors
are audited in accordance with federal, state, and department regulations.
For the seventh consecutive year, the state does not have an adequate
monitoring system to ensure that federal subrecipients and social services
contractors are audited in accordance with federal, state, and department
regulations. In addition, the audit identified $267,749 in questionable
costs for TANF. For 35 percent of the contracts audited, the contract did
not include required federal award information and information on applicable
compliance requirements. The state cannot determine if all required audit
reports are received and lacks review procedures to ensure that the
information entered into the audit tracking system is accurate and complete.
State policy and procedures relating to audit follow- up for subrecipient
audits need to be revised to include current official policies. The state is
not able to ensure the completeness or accuracy of its system for tracking
the total amount of funds provided to subrecipients. Michigan b The state?s
internal control mechanisms did not provide for the
proper identification, monitoring, and reporting of payments to all
subrecipients. The state?s contract management database excludes several
entities that received payments of federal funds. As a result, the state
could not be assured that all entities receiving funds were identified as
subrecipients, when appropriate, and monitored. In addition, self-
certification of entities as subrecipients or vendors increases the risk
that the state is not properly identifying and monitoring subrecipients. b
Minnesota a While OMB Circular A- 133 requires states to monitor
subrecipients to ensure compliance with laws, regulations, and provisions of
contracts, the state agency did not have policies and procedures in place to
monitor the activities of subrecipients. Mississippi a The state did not
verify the amount of federal financial
assistance expended by subrecipients, which should be done to determine
which subrecipients require an audit. The state had not implemented an
effective procedure for documenting the fiscal year- end for each new
subrecipient. 2 of 15 subrecipients tested did not submit their 1998 audit
reports in a timely manner, and the state did not perform follow up
procedures in a timely manner. For 5 of 15 subrecipients tested, the state?s
review of the audit reports was performed 6 months or more after the state
received the reports. Without adequate control over the submission of audit
reports and prompt follow- up of audit findings, noncompliance with federal
regulations by subrecipients could occur and not be detected.
Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000
Page 54 GAO- 02- 661 State and Local Welfare Contracting
State 1999 2000
Missouri Local offices of the state agency reported that they could not
locate over 6 percent of the case files requested for detailed review.
Without case files, adequate documentation is not available to verify the
eligibility of clients and the appropriateness of benefits paid.
a New Jersey The state did not properly monitor the federal funds
expended by the Essex County Welfare Board for the Public Assistance
Program. While an independent auditor issued a single audit report for Essex
County, the audit excluded the Public Assistance Program because of the lack
of internal controls related to some components of the program. Payments to
public assistance recipients are made through an electronic benefit transfer
(EBT) system administered by a contractor, but EBT account activity has not
been reconciled to the state?s automated system for the public assistance
program.
The state did not maintain sufficient documentation to adequately monitor
advance payments to, and expenditures of, contractors providing child care
services.
New York Eleven of the 58 local districts did not submit their single audit
reports within the required 13- month period.
Eleven of the 58 local districts did not submit their single audit reports
within the required 13- month period. The state does not perform an adequate
desk review of local districts? single audit reports to ensure that
submitted reports were performed in accordance with federal requirements.
North Carolina The state?s procedures for reviewing subrecipient
audit reports were inadequate. Errors and omissions in reports on
subrecipient expenditures went undetected. The state did not conduct
expenditure reviews to ensure that amounts disclosed in subrecipient audit
reports agreed with expenditure records maintained by the state. As reported
in the prior audit, the state did not perform sufficient monitoring
procedures to provide reasonable assurance that subrecipients administered
federal awards in compliance with federal requirements. The reported problem
remains unresolved, as the state did not provide reasonable assurance that
services and assistance were provided to eligible families.
The state did not always perform or document a review of the counties?
eligibility determination process to provide reasonable assurance that
services and assistance were provided to eligible families. The state did
not always monitor to ensure that sanctions were imposed on TANF recipients
who did not cooperate with the child support enforcement office. The state
did not perform monitoring procedures to provide reasonable assurance that
the counties used Social Services Block Grant funds for only eligible
individuals and allowable service activities.
Appendix III: Problems Cited with TANF Subrecipient Monitoring by State
Single Audits, 1999 and 2000
Page 55 GAO- 02- 661 State and Local Welfare Contracting
State 1999 2000
Texas The state?s fiscal and program monitoring of local workforce boards
does not provide reasonable assurance that TANF funds are being spent
appropriately. Current fiscal monitoring procedures are inconsistent and
lack program- specific attributes. For example, state fiscal monitors
generally do not compare a local workforce board?s funding allocation for
specific programs to its subcontractor?s budget to ensure that the board is
passing on the funds as required. Federal and state compliance is not
ensured by the limited scope of reviews. The state conducted limited program
monitoring of only 4 of 18 boards that had TANF contracts in place.
c a No problems were cited. b Michigan prepares biennial single audit
reports, and the report prepared for 2000 covers the period October 1998
through September 2000. c While the 2000 state single audit did not report
monitoring problems, another state audit issued in
March 2001 reported that local workforce boards still needed to make
significant improvements in their contract monitoring. The audit reported
that improvements are needed to ensure proper accounting for program funds,
management of contracts with service providers, and achievement of data
integrity.
Source: Single audit reports.
Appendix IV: Comments from the Department of Health and Human Services
Page 56 GAO- 02- 661 State and Local Welfare Contracting
Appendix IV: Comments from the Department of Health and Human Services
Appendix IV: Comments from the Department of Health and Human Services
Page 57 GAO- 02- 661 State and Local Welfare Contracting
Appendix IV: Comments from the Department of Health and Human Services
Page 58 GAO- 02- 661 State and Local Welfare Contracting
Page 59 GAO- 02- 661 State and Local Welfare Contracting
Andrew Sherrill, (202) 512- 7252, sherrilla@ gao. gov Mark E. Ward, (202)
512- 7274, wardm@ gao. gov
The following individuals made important contributions to this report:
Barbara Alsip, Elizabeth Caplick, Mary Ellen Chervenic, Joel Grossman, Adam
M. Roye, Susan Pachikara, Daniel Schwimer, and Suzanne Sterling. Appendix V:
GAO Contacts and Staff
Acknowledgments GAO Contacts Staff Acknowledgments
Page 60 GAO- 02- 661 State and Local Welfare Contracting
Welfare Reform: Interim Report on Potential Ways to Strengthen Federal
Oversight of State and Local Contracting. GAO- 02- 245. Washington, D. C.:
2002.
Welfare Reform: More Coordinated Federal Effort Could Help States and
Localities Move TANF Recipients With Impairments Toward Employment. GAO- 02-
37. Washington, D. C.: 2001.
Workforce Investment Act: Better Guidance Needed to Address Concerns Over
New Requirements. GAO- 02- 72. Washington, D. C.: 2001.
Welfare Reform: Moving Hard- to- Employ Recipients Into the Workforce.
GAO/ HEHS- 01- 368. Washington, D. C.: 2001.
Welfare Reform: Progress in Meeting Work- Focused TANF Goals. GAO01- 522T.
Washington, D. C.: 2001.
Welfare Reform: Improving State Automated Systems Requires Coordinated
Federal Effort. GAO/ HEHS- 00- 48. Washington, D. C.: 2000.
Social Service Privatization: Ethics and Accountability Challenges in State
Contracting. GAO/ HEHS- 99- 41. Washington, D. C.: 1999.
Social Service Privatization: Expansion Poses Challenges in Ensuring
Accountability for Program Results. GAO/ HEHS- 98- 6. Washington, D. C.:
1997.
Managing for Results: Analytic Challenges in Measuring Performance.
GAO/ HEHS/ GGD- 97- 138. Washington, D. C.: 1997.
Privatization: Lessons Learned by State and Local Governments.
GAO/ GGD- 97- 48. Washington, D. C.: 1997.
Child Support Enforcement: Early Results on Comparability of Privatized and
Public Offices. GAO/ HEHS- 97- 4. Washington, D. C.: 1996. Related GAO
Products
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