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SUMMARY
The Office of the Auditor General has conducted a performance
audit of the Arizona Department of Economic Security’s welfare programs,
pursuant to a November 20, 2002, resolution of the Joint Legislative Audit
Committee. This is the first in a series of audits of the Department of Economic
Security (Department) and was conducted as part of the Sunset review process
prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
Arizona implemented federal welfare reform in 1996 through
its Employing and Moving People Off Welfare and Encouraging Responsibility
(EMPOWER) Redesign legislation. Before welfare reform, the federal Aid to
Families with Dependent Children (AFDC) program provided cash assistance and
other benefits to eligible families, but did not offer help or other incentives
for participants to become employed. Arizona obtained an AFDC waiver in 1995
through the original EMPOWER legislation, which made several changes designed to
reform welfare in the State. For example, it set time limits for participation,
capped family size for benefits, allowed families to save money to ease the
transition to working, and extended the length of time families who began
working could continue to receive some benefits.
In 1996, federal welfare reform changed AFDC to Temporary
Assistance to Needy Families (TANF), a block grant program that gives states
more flexibility in program administration, requires nearly all cash assistance
recipients to participate in work activities, and establishes a 5-year lifetime
limit for receiving benefits. Although Arizona had already modified its welfare
program under the 1995 AFDC waiver, the State made further modifications to
conform with the federal lifetime limit. The Legislature modified state law in
2003, effective September 2002, to conform to federal requirements. According to
the Department, it implemented the lifetime limit in October 2002, after its
waiver expired. Arizona uses block grant funding, in combination with state
monies, to pay for three of its four largest welfare programs: TANF, the Jobs
Program, and Child Care Assistance. The fourth program, Food Stamps, receives
nearly all of its funding from the U.S. Department of Agriculture.
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Jobs Program—Nearly all adult TANF recipients must
participate in work activities through the Jobs Program, which provides
training and other services intended to help families make the transition
from welfare dependence to employment. A total of 14,614 individuals were
actively participating in the Jobs Program during June 2003.
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Child Care Assistance—The Department pays all or
part of day care costs for some Jobs Program participants, other low-income
families, and families referred by Child Protective Services to enable them
to work or participate in training. A total of 46,522 children were
authorized to receive day care through this program in June 2003.
Department should ensure proper
oversight of privatized Jobs Program
(see pages 13 through 21)
State law requires the Department to privatize the Jobs
Program by July 2004. The program provides job training and other services to
help TANF cash assistance recipients move off welfare by obtaining employment.
As long as participants comply with program requirements, such as searching for
a job or obtaining training, they can receive other assistance such as
transportation assistance, clothing vouchers, and tools and equipment needed for
a job. With few exceptions, all TANF recipients are required to participate in
the Jobs Program in order to continue receiving cash assistance. Currently, the
Department provides case management for Jobs Program participants with its own
staff in most parts of the State.
To successfully meet its requirement to privatize the State’s
Jobs Program, the Department needs to ensure that it can effectively oversee the
work the contractors will perform. A portion of the Jobs Program is run by a
private contractor under a program called Arizona Works, but by statute, the
Department must change the entire Jobs Program to a contractor-operated function
by July 1, 2004. Currently, during the 2004 legislative session, the Legislature
is considering a bill to extend that deadline to July 1, 2005, or July 1, 2006.
Effective administration of the Jobs Program, whether under state or contract
employees, is important because it affects the amount of money the State
receives from the federal government. If the program is particularly well-run,
the State will receive bonuses; if it is deficient, the State could be
penalized.
Auditors identified two main areas in which the Department
needs to strengthen its preparations for privatizing the Jobs Program. First,
the Department needs to more thoroughly prepare for monitoring the contractors.
Prior to January 2003, the Department did only limited monitoring of the Arizona
Works contractor. Once the Department increased its monitoring, it found that
the contractor was not complying with court-ordered requirements, had high error
rates, and was not correctly reporting program data. Auditors’ review of the
Department’s initial request for proposals from potential contractors for the
state-wide privatized Jobs Program showed that the specifications were deficient
in such matters as ways for measuring performance. The Department has since
withdrawn the request for proposals and has yet to release a new one. The
Department needs to step up its efforts to train its own monitoring staff, train
contractors in procedures for complying with federal requirements, and develop
specific monitoring plans. Second, the Department needs effective internal
controls to secure its data. In addition, the Department needs to develop
additional security and training requirements for its contractors to protect
sensitive data.
Department can more effectively manage
its food stamp eligibility determination process
(see pages 23 through 27)
The Department’s Division of Benefits and Medical Eligibility
(Division), while successful in the past in lowering its food stamp eligibility
determination error rate, needs to take steps to counter expected increases in
this rate. The Division successfully reduced its food stamp error rate from
15.42 percent in 1994 to 5.27 percent in 2002, and received several bonuses from
the federal government for keeping the error rate below federal thresholds.
However, according to division management, the error rate for federal fiscal
year 2003, which is required to be certified by June 2004, is expected to rise
because of increasing total caseloads coupled with reductions in eligibility
determination staff, which resulted in higher caseloads for eligibility
interviewers.
Using a focus group of local office managers within the
Division, auditors identified several areas in which the Division can more
effectively manage its eligibility determination process. The Division’s local
office managers identified barriers to accurate eligibility determinations,
including frequent policy changes and clarifications, the absence of a local
office manager’s training program, and supervisors’ failure to meet quotas for
case file reviews. To address these issues, division management should ensure
that local office supervisors consistently review case files to help ensure that
eligibility determination errors are identified and corrected, continue its
efforts to improve its policy change notification process, and establish a
management training program for local office managers.
Department should improve management
of its benefit overpayment referrals process
(see pages 29 through 33)
The Division should establish a more reliable and effective
system for managing its benefit overpayment referral process. As of December
2003, internal reports compiled by the Division indicated that its offices had
accumulated a backlog of more than 7,700 TANF and food stamp overpayment
referrals that had not yet been assessed and confirmed as claims. Based on an
analysis of the Division’s internal reports, auditors estimate that the more
than 7,700 referrals could potentially represent approximately $2 million in
overpayments. During the past year, the Division increased the number of
overpayment specialists from 19 to 44 to help process overpayment referrals. As
a result, the Division was able to reduce its pending overpayment referrals from
more than 13,000 in July 2003 to its December 2003 level of 7,700. After audit
work was conducted, the Division reported that it further reduced its pending
overpayment referrals to approximately 1,800, as of February 2004.
It is important that the Division process its backlog of
overpayment referrals in a timely manner to increase the likelihood that the
monies will be repaid and because the federal government allows states to keep a
portion of their overpayment collections. In fiscal year 2003, the collections
office collected nearly $2.7 million in food stamp overpayments and slightly
more than $1.7 million in TANF overpayments. The food stamp collections were
consistent with collection rates for past fiscal years and met federal food
stamp overpayment collection standards. The State retains TANF overpayment
collections and uses them for program costs. In federal fiscal year 2003, the
federal government allowed the State to retain more than $420,000 of its food
stamp overpayment collections. The federal government does not restrict the
states’ use of retained food stamp collections.
The Division should also improve its process for managing
overpayment referrals. During fiscal year 2003, the Division’s internal reports
indicate that over 50 percent of overpayment referrals were not pursued as
claims. Some overpayment units reported dropping a substantial portion of these
overpayment referrals because the necessary case files could not be located.
Therefore, to help the Department collect more overpayments, the Division should
continue its efforts to implement an electronic document-scanning system to
limit the number of overpayment referrals that are dropped because of
inaccessible case files.
Other pertinent information
(see pages 35 through 41)
Welfare reform impact—Auditors
developed information about the requirements and effects of welfare reform in
Arizona and nationally. Welfare reform’s primary purpose was to end dependence
on government benefits by promoting job preparation, work, and marriage. The
1996 Personal Responsibility and Work Opportunity Reconciliation Act changed
welfare funding to a block grant that gives states more flexibility in
implementing welfare programs, and established new requirements such as work
participation and a lifetime limit for receiving benefits. The Department
operates the State’s welfare programs under a program called EMPOWER Redesign.
EMPOWER has a work-first orientation that requires nearly all TANF cash
assistance recipients to participate in work activities in order to receive
benefits. It also established Arizona’s cash benefit amount, and caps benefit
levels according to the family’s size when it begins receiving benefits. The
Jobs Program, which provides training and other services to help participants
obtain work, and the Child Care Assistance Program, which pays all or part of
day care costs to enable participants to work or attend training, are integral
parts of Arizona’s welfare program under EMPOWER. As of March 2002, Arizona’s
TANF cash assistance recipients received a monthly average of $272.23 per family
(33rd nationally), compared to the national average of $412.40. Arizona's amount
is based on raising eligible families’ income to 36 percent of the 1992 Federal
Poverty Level.
Between 1996, when the new program began, and March 2002,
average caseloads nationally dropped by 53.8 percent, and Arizona’s welfare
caseload fell by 39.2 percent. With the drop in caseloads, Arizona accumulated
some reserves from the federal funding provided to operate the program, and it
has been able to use these reserves to supplement its budget in subsequent
years.
According to federal studies, welfare reform has had a
positive impact on family income. For example, average monthly earnings for
employed welfare recipients rose 49 percent from federal fiscal years 1996 to
2001. However, moving from welfare to work does not guarantee that single
mothers will be able to lift their families out of poverty. Auditors were unable
to obtain data to show the impact on income for Arizona recipients.
Employee fraud—Auditors
also gathered information about recent welfare-related employee fraud cases in
the Department. During fiscal year 2003, the Department investigated and
substantiated 13 welfare-related employee fraud cases. The cases involved at
least 15 division employees who allegedly circumvented internal controls and
fraudulently obtained TANF and food stamp benefits for themselves and their
accomplices. Although the value of several cases will not be determined until
prosecution is complete, the Department estimates that the values of some cases
ranges from $586 to $57,010. The Attorney General’s Office is preparing several
of these cases for criminal prosecution. The Division has developed a corrective
action plan that includes improving the Division’s Electronic Benefit Transfer
policies and procedures, increasing security controls, and creating
system-generated reports to monitor for unusual benefit issuance activity at the
local offices. The Office of the Auditor General is examining the adequacy of
the Division’s newly implemented procedures for monitoring, identifying, and
preventing employee welfare fraud, and will report its finding in March 2004.
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