A Critical Look At The Foster Care System
Foster Care Financing


The Federal government provides tremendous financial incentives to maintain foster care programs. One Federal program that helps states cover the cost of foster care grew from about $300 million in 1981 to nearly $2.7 billion in 1991.[1]

According to the General Accounting Office, in 1993 nearly $1.3 billion Federal dollars went to foster care maintenance, while an additional $1.1 billion in reimbursements went to states for foster care related administrative activities.[2]

According to the GAO report, while states provide the majority of funds for foster care and child welfare services, by 1995 the Federal share of expenditures for these services reached $4.1 billion.

The Congressional Budget Office estimated the Federal government will spend over $9.2 billion between fiscal year 1991 and 1996 for foster care programs.[3]

In 1995, states received more than $2.8 billion in federal assistance for approximately half of the estimated 494,000 children in foster care.

The Congressional Budget Office estimates that by 2001, federal costs will rise to $4.8 billion with caseloads of federally assisted foster care children increasing by almost 26 percent.[4]

According to an analysis done for TIME Magazine by the Child Welfare League of America, the annual welfare cost of one child living with his or her mother is $2,644, while the average cost for the child's care in residential group care is $36,500.[5]

The best estimates currently available of the total of all annual expenditures on foster care services nationwide is in the range of ten to twelve billion dollars.[6]

These are national averages. For a closer look at how these funds are being disbursed, we turn to the States.


That many states and municipalities have arranged their affairs in order to maximize the influx of Federal dollars is without question.

The Texas Comptroller of Public Accounts, for example, recommended in a 1993 report that the Texas Department of Protective and Regulatory Services should: "enlist a contractor to take on an agency wide Federal funds maximization effort on a no-risk, contingency basis." Result?

A fixed-price contract was awarded by DPRS in 1993, and the contractor has worked with the agency to implement Federal revenue maximization efforts in many programs. As a result, DPRS has made a significant move to maximize Federal funds and estimated $84 million would be achieved by the end of the current biennium.[7]

In a recent edition of the annual Texas Performance Review, the Comptroller of Public Accounts devotes a chapter to foster care, entitled "Maximize Federal Funding for Child Welfare Programs." Among his conclusions:

Classifying children in the conservatorship of the state who are placed in the homes of relatives as "children in foster care" would make them eligible for Medicaid, while the state would be able to receive matching Federal funds for associated administrative expenses.
Cost shifting arrangements such as these are often considered as legal. But are they? The U.S. Department of Health and Human Services Office of the Inspector General issued an Audit Report in February of 1996, the result of a three year study of the Texas Foster Care System. Among its conclusions:
This final report points out that over a 3-year period at least $2.7 million (Federal share $1.7 million) was improperly retained by 9 child placing agencies in Texas for unallowable services under the Title IV-E Foster Care program. The retained funds were used for such services as costs of operations, case management, therapy, counseling, respite care, psychiatrists, training, transportation, day care assistance, and administrative costs.[8]

The use of such funding to offset "administrative costs" and other expenses associated with foster care and child welfare is not uncommon, according to a recent study issued by the Office of the HHS Inspector General, Review of Rising Costs in the Emergency Assistance Program.

According to the report, the State of New York diverted more than half of its claim for Emergency Assistance funds, over $230 million, to offset administrative costs for child protective workers in Fiscal Year 1994.[9]

New York State projects the total of its foster care costs shifted to the Emergency Assistance Program to be $107 million during Fiscal Years 1995-96, according to the report.

Similar creative financing efforts can be found throughout the states, and the Emergency Assistance funds provide just one of the means by which many states seek to offset administrative expenses associated with their foster care and child protective systems, while maximizing Federal revenue.

In Arizona, in Fiscal Year 1994, of the state's total claim of $6,770,648 in Emergency Assistance funds, only $1 million were shifted to the state foster care program. The Fiscal Year 1995 and 1996 projections were for $10 million per year, a tenfold increase, according to the Inspector General.

California has taken an even more creative approach to maximizing Federal revenue. The state first set the income standard for eligibility for Emergency Assistance at 200 percent of the median income level for a family-of-four, an income of $92,800.

When that failed to produce the desired Federal revenue, the state amended its definition of a family unit to a family-of-one effective late September of 1994. Notes the Inspector General: "As such, the income of only the child facing the emergency is currently measured against the $92,800."

Colorado has taken a similar approach, setting the family income requirements for Emergency Assistance at $75,000 a year.

Why such high income limits for a program intended to provide short term emergency relief to those in need? According to the report:

As a result of lengthening EA eligibility periods, defining emergencies broadly, and setting high income limits for determining eligibility, States amended their respective EA Programs to shift State funded long-term services to the EA Program, thereby maximizing Federal revenue.
The State of Connecticut projected the shifting of $41 million in foster care costs to the Emergency Assistance Program during the years 1995 and 1996.

Pennsylvania projected that it will shift $70 million in Emergency Assistance funds toward its foster care programs during the same period. All of these funds are in addition to the Federal Foster Care funds being received by the states.

The projections provided in the report indicate that during Fiscal Years 1995 through 1996 these Emergency Assistance expenditures will exceed $2 billion. Where is all of this money going? "The EA expenditures are escalating at a rapid pace due mainly to three types of costs, juvenile justice, foster care, and child welfare services."

In Maryland, another recent Inspector General's Audit Report details a review of payments made by the Department of Human Resources under the Emergency Assistance to Needy Families With Dependent Children program for the period October 1, 1990 through September 30, 1992. During this period the Department was reimbursed $5,380,658 in Federal Financial Participation.

It was found that: "of 220 EAFC payments, 55 payments, or 25 percent, were either not supported by a case file and/or a client application form, or were otherwise ineligible for FFP under the EAFC program."[10]

The State of Illinois was the subject of another HHS Inspector General's Audit. The report, issued in August of 1996, details a similar pattern of cost shifting to Federal programs:

This final audit report points out that the State agency allocated joint training costs to the Federal Foster Care program only, although the State Foster Care program also benefited. As a result, the Federal program was overcharged approximately $5.8 million during the period January 1, 1992 through December 31, 1994.[11]


Illinois is no stranger to misappropriating funds. About $1 million from a fund intended for recruiting and training foster parents was used by DCFS to pay bills that had nothing to do with the program.

At least 20 percent of the $4.6 million fund, known as the Foster Care Initiative, was used to pay bills for security guards, temporary secretaries, bottled water, accounting fees, trash collection, equipment, furniture, utility bills and office rent, according to state records.

Nearly all of the payments were authorized by Sue Suter, the former director of the Illinois Department of Children and Family Services. Suter resigned in August of 1992, because, she said, she didn't have enough money to carry out the court-ordered reforms instituted by an ACLU lawsuit. Those reforms included finding more foster parents.

"This agency has a history of taking funds intended for foster parents and children, and, through one ruse or another, using it to support the bureaucracy," said Benjamin Wolf, the ACLU attorney who instituted the suit.[12]


But what of the therapy, counseling, respite care, psychiatrists, and other services spoken of in the Inspector General's Audit in Texas? The answer may be found in California.

The Santa Clara Grand Jury determined that the local child welfare agency puts too much money into "back-end services," such as therapists, counselors and attorneys, and not enough money into those "front-end" services which would help prevent foster care placement. The reason?

The county does not receive as much in Federal funds for 'front-end' services, which could help solve the problems causing family inadequacies, as it receives for out-of-home placements or Foster Care services. In other words, the Agency benefits, financially, from placing children in foster homes.[13]

How does this work in practice?

A recent South Carolina audit of its Department of Social Services reports that 73% of foster care children were in "regular" foster homes, yet these placements consumed only 15% of the state's annual foster care budget.

The auditors found that 85% of foster care expenditures went to cover the costs of the special need placements in therapeutic and residential treatment centers, which can cost more than $10,000 per month.

It was found that at least 15% of these placements were questionable or inappropriate. It was also determined that children are often placed in such facilities by county agencies because there is a shortage of "regular" foster homes available.[14]

These huge financial incentives also offer opportunities for gain beyond the warehousing of children. In January of 1996, Federal prosecutors filed a civil suit against the New York City Child Welfare Administration and the State, charging that during a four-year period they knowingly defrauded the U.S. government of $37 million in Federal funds for foster care services never provided.[15]

Meanwhile, back at the ranch, the Texas Comptroller of Public Accounts also provides the means whereby the State may maximize Federal participation in non-recurring adoption expenses, through retroactive filings. From whom did the Texas Comptroller of Public Accounts determine that he could accomplish this creative, albeit apparently legal financial maneuver? The answer is to be found in a footnote to his latest report:

Interviews with Lyle L. Koenig, Minnesota Department of Human Services, and Timothy Dutra, Rhode Island Department of Children and Their Families, September 1994.
All of this serves to illustrate what the States themselves are doing to maximize Federal revenues, and this report is by no means comprehensive.

The opportunities for such creative financing and diversion of funds are even greater at the municipal level, where there is considerably less accountability. There is also mounting public concern over the numerous "public-private partnerships" that have developed between municipalities and private foster care and child welfare service providers. A variety of special interest groups also lobby for additional funds for the services they provide.

Copyright 1996 - 2002 Rick Thoma

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Last Updated November 15, 2002