The Cosmology of Financing

Mark Friedman Publications, RBA Resources Leave a Comment

Financing Reform of Family and Children’s Services An Approach to the Systematic Consideration of  Financing Options

This paper was supported by grants from the Annie E. Casey Foundation and the Foundation Consortium. This paper was also supported in part by  the Improved Outcomes for Children Project, which is funded by  the New America School Development Corporation, the Lily Endowment,  the Carnegie Corporation, the Danforth Foundation and the Pew Charitable Trusts.


There is a broad and growing consensus that the current systems of services for families and children must change and that it is both imperative and possible to better support families and achieve positive outcomes for families and children. This is one in a series of papers intended to assist states, counties, cities and communities in advancing that process of change. It is designed to help jurisdictions build a financial strategy to support a reform agenda for families and children by identifying several ways in which funds can be made available to pay for new, improved or transformed services and supports for families and children. This paper will be most useful to those who have already begun the work of developing a reform agenda and have begun thinking about the requisite fiscal and political strategies to put that agenda in place.

States and localities throughout the country are engaged in a variety of efforts to improve the way they administer, finance and deliver services to vulnerable families and children in order that more children grow up in stable, nurturing families and become healthy, productive adults. Many of these reform efforts share the following principles including:

Services and supports should be rooted in the community, easily accessible to families, and delivered in a manner that respects cultural and community differences;

Services and supports should be focused on the whole family, with professionals working in partnership with families to identify their strengths and needs as well as to secure assistance;

Services and supports should be established as part of a comprehensive array of community services rather than narrowly drawn as discrete, isolated services;

Services and supports should be offered to families early in order to avoid crises or at least lessen their intensity; and

There should be agreement on the desired outcomes to be achieved for children and families and on the ways that progress will be measured.

Although these principles are enunciated by many state and local reform efforts today, different jurisdictions have chosen different programmatic entry points for change. Some states such as Missouri and Maryland are emphasizing the needs of children in the deepest parts of the service system – those in out-of-home care and especially out-of-state care. Reforms are being advanced to move these children back into families in their home communities. Iowa is similarly addressing children who would previously have been placed in out-of-home care through their “decategorization” initiative in which out-of-home funds are pooled and used to support children closer to home. Other jurisdictions are starting with early identification of high risk populations and trying to bring together new, improved services to head off negative outcomes for children. The New Futures initiative in five cities is an example of this type of reform effort which seeks to reduce dropout and teen pregnancy rates in disadvantaged communities. The Healthy Start Program in California is supporting cross system partnerships at the school and school district level to meet the needs of low-income children, youth, and their families through school-linked services. Still other jurisdictions have chosen to launch neighborhood-based prevention programs targeted on residents in low-income communities. Vermont’s Success by Six initiative and Kentucky’s Family Resource Centers located in or near schools are examples of this type of reform venture.

Regardless of the specific programmatic agenda chosen, all of these initiatives involve readjusting relationships between local, state, and federal governments. Localities find themselves working much more closely with their state counterparts who in turn must often develop new partnerships with the federal government. The financing strategies that are developed to support the site’s programmatic agenda also involve shifts among the various levels of government and between governmental agencies, as will be shown later in this paper.

In all cases, states and localities are seeking new funding sources to help support their programmatic reform initiatives. Especially in times of tight budgets, most jurisdictions have few if any new dollars to invest in systemwide reform. This means they must create political and financial strategies that use current and future resources in new ways and that maximize all available sources of revenue. This paper explores some of the major financing strategies that states and localities can use as they restructure the ways services are delivered to needy children and families.

Several essential points should be kept in mind as states and localities embark on major human service reform efforts. First is the central principle of all good financial planning, that programs drive financing, not the other way around. Financial strategies must be used to support improved outcomes for families and children. And financing strategies which cannot be adequately adapted to program ends should not be used, even if they happen to generate more money than other approaches.

Second, no single financing approach will serve to support an ambitious agenda for change. Financing packages should be developed by drawing from the widest possible array of resources. Many individuals or organizations are stuck on one approach to financing (usually the one that involves asking for more state or local general funds). Yet there are many alternatives. Financing is an art not a science, and creativity is the order of the day. In the end, more general funds may be necessary to support system changes, but these will only be forthcoming and deserved if states first make the best use of existing resources and use other approaches at their disposal.

Finally, this technical assistance guide for considering financing options is a work in progress, not a finished set of answers. It is not possible to describe all financing strategies or options in a single document. This paper cannot, in its current form, fully present or justify the examples used to illustrate financing strategies. In some cases there are small libraries devoted to these program approaches. And the circumstances of federal, state, and local funding are constantly changing. The paper is set up in the form of a four part check list of financing strategies, with examples of how such strategies can be applied to finance a program reform agenda. We think the four part framework (Redeployment, Refinancing, Revenue Raising, and Restructuring) presented here is one which can provide a home for new approaches and new opportunities as they develop.



Redeployment means using the monetary and non-monetary resources already available in the service system. Redeployment should always be the financing option of first choice for two reasons.First, the use of existing resources for new purposes involves changing the way we do business, the essence of reform itself. The second reason has to do with accountability. Before asking for new funds – and new funds may be necessary for any ambitious agenda – there is a programmatic and political imperative to make the best use of existing resources.

Redeployment applies not just to state and local general funds, but also to the large array of capped federal fund sources which are used to finance health, education, and social services (including such diverse fund sources as the Social Services Block Grant, Maternal and Child Health funds, and Chapter I funds).

There are at least four different forms of redeployment to consider:

A. Investment Based Redeployment

This is redeployment based on the concept of return on investment common to all business financing. In the world of human services, investment based redeployment depends on an understanding of the cause and effect relationship between a service intervention (investment) and some future reduction in the demand for service and cost of entitlement spending (return). If properly structured, investment based redeployment can pay for itself in combined cost savings and cost avoidance over a period of one or more fiscal years.

Under this approach, investments in prevention measures are financed by using the prevention savings generated in other parts of the budget, most importantly entitlement line items. For example, investments in routine preventive health care for low income families have been financed in part from reduced use of emergency and in patient care. Employment training and transitional wage supplementation have been financed from reduced or avoided AFDC costs. In some few cases, these kinds of transfers can be accomplished in a single budget year. In most cases, savings take longer to accrue and a multi-year approach is required. Unfortunately, multi-year investment financing is uncommon in most public budgeting systems, outside of capital budgets (e.g., bonds for bridge construction secured with toll revenue). And multi-year investment based redeployment requires strong executive and legislative leadership support, and a working partnership between those with program responsibility and those with financial responsibility.

Investment based redeployment also requires agreement on the baseline forecasts of entitlement expenditures which will occur without change in policy. (Such forecasts are sometimes known as “cost of failure” analyses, or “cost of bad outcome” analyses.) A baseline forecast is necessary so that parties to the investment can quantify the benefits of prevention investments and agree on how cost savings and cost avoidance will be calculated and credited. Baseline forecasts allow the consideration of expected increases in cost, and the potential redeployment of funds which are, or will be, dedicated to cover those costs. For example, funds included in a proposed (balanced) budget to cover foster care caseload increases, can be considered a source of investment funds for measures which might prevent or diminish the expected caseload growth. For some program components, such as AFDC or Foster Care caseloads, baseline forecasts for one or two fiscal years may be produced as part of the annual budget process. Forecasting, however, is a complex and often controversial process, and forecasts are rarely produced for more than a handful of programs. Forecasting requires a good base of historical information, and an understanding of the controllable and uncontrollable factors which influence future cost. The best forecasting processes involve building consensus among stakeholders (i.e., executive and legislative budget offices) about high, medium, and low estimates. An investment of time in such consensus building can sometimes serve to shift the discussion from short term stop-gap measures to longer term solutions.

Finally, investment based redeployment requires a base of research or experience which links investments to savings. Reliable research on cost/benefit relationships is rare, but should be among the highest priorities for researchers in the human services field as well as those, in the public and private sectors, who fund research.

At the bottom line, the layman’s version of investment based redeployment is based on the simple question: “If we are going to spend all this money anyway, can’t we do better?” As a general rule, it should be possible to create an investment based redeployment strategy which finances prevention of any expensive entitlement service.

Some important examples of investment based redeployment include:

1. Out-of-Home Care Entitlements

Out-of-home care for children is one of the largest entitlement expenditures of state and local government. The full cost of such care averages over $10,000 per year per child, and can exceed $100,000 for children in the most expensive forms of care. Total government expenditures for out-of-home care costs exceed $3 billion per year, and involve all major child serving systems, including Child Welfare (CW), Juvenile Justice (JJ), Public Health (PH), Mental Health (MH) and Education (ED). There are at least two investment based redeployment strategies which utilize savings in the out-of-home care budget:

a. Preventing out-of-home care and reducing length of stay. Services which prevent or lessen stays in out-of-home care can produce savings in the cost baseline for out-of-home care. If services are targeted to children who would otherwise enter care, or who are already in care, it may be possible to save (or avoid) out-of-home care costs in excess of service cost. It is important to note that such services can be difficult and costly to implement, and require careful planning and oversight. There is also some controversy over the extent to which various program models actually save or avoid cost. And efforts to reduce entry into foster care must not serve to diminish the clear first priority given to child safety. Nevertheless, some jurisdictions such as Prince George’s County, Maryland and Michigan have implemented programs based on established service models that have helped change the pattern of caseload growth. At least three out-of-home care redeployment approaches can be considered:

Family Preservation Services: services designed to prevent unnecessary foster care, group home or other out-of-home care placement.

Reunification Services: services designed to return children safely to their homes.

Post Adoption Services: services designed to preserve high-risk adoptions and prevent return to out-of-home care as a result of disrupted adoptions.

b. Stepping Down Levels of Care. It is not uncommon for children to be placed in more expensive care (e.g., residential treatment, emergency facilities) for longer periods than necessary. The causes for this phenomenon are complex, but a major factor is often the lack of available community-based alternatives. Development of less expensive community-based care can sometimes be financed by systematic efforts to “step down” levels of placement where this is appropriate for individual children. Out-of-home care funds can be used to finance the start-up and continuing costs of newer forms of care. In some cases this form of financing can be applied on a child by child basis using a “wrap around” approach to tailor an individual plan of care for a child with funds currently devoted to his or her care. Implementing these changes requires the system-wide commitment of those involved in the placement system, including judges, front-line workers, and private agencies. And careful planning is required to assure that newly vacated beds are not simply refilled. As discussed in Section II below, Medicaid funding can sometimes be used to help finance the therapeutic components of services in the placement continuum.

At least three step down approaches can be considered:

Out-of-state to in-state: Where children are placed in expensive out-of- state facilities, it may be possible to return children to less expensive, newly developed or specially tailored in-state care.

Institutional care to therapeutic foster care: Therapeutic foster care can be used to replace or shorten stays in more expensive institutional care.

Group care to supported family foster care: Neighborhood based family foster care, connected to services which support the foster family and meet the special needs of the child, may be used to replace or shorten stays in more expensive group care.

2. Health Care Entitlements

The health care system provides some of the best examples of the relationship between preventive and remedial costs. Using high cost entitlement expenditures as the signal of redeployment potential, it may be possible to disaggregate publicly supported health costs, build strategies which reduce the need for each high cost component of care, and redeploy saved and avoided costs to fund preventive services. Approaches which are often cited to illustrate this strategy include:

Prenatal care and teen pregnancy prevention: It may be possible to shift saved or avoided health care funds for intensive care for premature births to targeted low birth weight prevention efforts and teen pregnancy prevention.

Immunization: The cost associated with treating preventable illness could be shifted to support expanded immunization efforts. Since the benefits of immunizations take several years to materialize, this may require some form of multi-year bridge financing. (See the discussion of loans and bond financing in Section IV below.)

The following idea illustrates the possibility of a more experimental approach to investment based redeployment.

Violence prevention: Violence is increasingly viewed as a priority public health problem. There is, at best, conflicting evidence on what approaches to violence prevention work. If successful strategies can be identified, it may be possible to package saved or avoided violence related costs (including such things as direct emergency room costs, costs of incarceration, and indirect savings in public and private insurance costs) and use these savings to support violence prevention efforts.

B. Capitation Based Redeployment

A second approach to redeployment involves the use of capitation strategies. Capitation means packaging services (ideally the related elements of prevention and treatment costs) into a single fixed per person payment for a class of individuals. This structure creates a fiscal mechanism and a fiscal incentive which encourages controlling costs and shifting fund use toward preventive services.

The basic questions to be answered in capitation approaches involve what service costs to include in the package, how to set rates fairly, and what provider or service structure to use. There is a growing body of experience with capitation approaches. The best known include the emerging forms of managed health care, including health maintenance organizations and other provider networks. Capitation approaches are also being used for the treatment costs of special populations, such as children in out-of-state out-of-home care (as in Maryland), or children in high cost out-of-home placements (as in Arizona, California, New Mexico, Ohio, and others). These are often implemented within the Medicaid program in conjunction with one or more refinancing strategies described in Section II. They typically involve packaging all costs of care for a defined group of children, with the state agency or provider then given wide flexibility in crafting a plan of community-based care. Savings from these approaches can be used for preventive services both for children inside and outside the capitation plan. Another example of capitated services is the use of a capitation rate for Medicaid reimbursement of special education ancillary services in the Boston education system.

Section 1915(a) of the Medicaid program provides a particularly useful tool to implement capitation models. This section of the Social Security Act provides states the option to establish capitated contracts for service for specified populations and designated geographic areas. While rate setting methods and other components of the contracts may require federal approval, use of 1915(a) is a state option under Medicaid and does not require a state plan waiver. The option provides a useful means to test capitation approaches under Medicaid in one or several jurisdictions before committing to statewide implementation.

C. Cut Based Redeployment

This is the traditional method of moving money – cutting one thing to fund another. Most often there is little relationship between the program cut and the program funded. Savings from cuts are often used to fill budget gaps or add to the funds available for discretionary spending by the Governor or Legislature. It is, of course, possible to be more deliberate about the business of identifying cuts and using those funds for new purposes. This more deliberate process involves setting priorities, reducing low priority expenditures and using freed funds to support an agenda of program and system change.

Many systems have now been through so many rounds of budget cuts that the choice of priorities is stark. Where efficiencies or cuts are still possible, administrators often hoard these actions to offer up in the inevitable next round. But in spite of these strains, there is broad agreement that money currently in the human services system is not being used very well, that inefficiencies do exist and that spending patterns are often out of synch with current needs. This view applies not just to state and local general funds, but to the wide array of federal block grants and capped federal funding sources as well. The Social Services Block Grant (SSBG), for example, has been part of the Social Security Act for over 20 years, and fund allocation in most states reflects a 20 year accumulation of budget and political compromise. Members of the education community will admit privately, if not publicly, that some Chapter I and Drug Free Schools funding could be put to better use. Many are skeptical that historical patterns of fund use can be reconsidered, but this should not deter consideration of new choices.

The most important issue in cut-based redeployment is establishing the set of principles used to set priorities. One approach is to sort expenditures into “mandatory” and “non-mandatory” categories and then further subdivide programs in terms of low, medium, and high impact on life, health, and safety. Most cut processes quickly focus on the non-mandatory – low life/health/safety set of services. These are often the prevention expenditures where increased investments are necessary. A better approach is to look at the system’s use of funds through a very particular lens: How does each expenditure contribute to achieving the outcomes we want for families and children? Where does each expenditure fit in our overall strategy to improve outcomes? Low impact strategies can be cut in favor of those more likely to succeed. Funding for similar functions across systems can be combined. Waivers can be obtained for mandated expenditures or service delivery patterns which are inefficient or unnecessary. Where expenditures are reviewed against common goals which are articulated and applied to multiple systems of care, it is less likely that individual agencies will see the process as unfair or unproductive. Funding pool structures discussed below can provide a framework within which to pursue this kind of redeployment.

D. Material Redeployment

This type of redeployment involves the transfer or reuse of existing positions or other tangible resources. This approach becomes more important for administrators closer to the front line, who may not have the discretion to shift dollars but can shift staff. It is possible, for example, to outstation workers in schools or other community settings, or combine resources across systems to create common intake and assessment capacity. These types of changes may be possible without any new expenditure of funds.

The most ancient form of financing is a form of material redeployment called bartering. The application of bartering to human services is illustrated by a case in Chicago where local program directors arranged a trade of day care services for drug treatment services. Young mothers in the drug treatment program gained access to day care. And day care parents gained access to drug treatment. The trade was mutually beneficial, as all good trades are. No money changed hands. Other trades are of course possible: space for services (as in Florida’s rebuilding of schools destroyed by Hurricane Andrew where space for community service providers is part of the new building design); equipment for services; or land for services (as in the case of an agreement exchanging a day care center for a 99 year lease on Native American land).

Bartering is possible even at the state or federal level. But at the local level it can be a simple answer to a complex problem. Organizational deals which could take years to hammer out in budget or legislative processes can be done in practice with a minimum of bureaucracy. Such actions can also be the first step to other forms of working together for mutual benefit. In fact, some of the best forms of collaboration resemble simple markets where organizations bring resources to the table and trade those resources for the benefit of their clients and organizations.


By refinancing we mean claiming open ended (i.e., not limited by federal appropriation) federal funds to pay for services now financed entirely with state and local funds, freeing those funds for reinvestment. Freed state and local funds can be rematched with federal funds when used for federally eligible expenditures.(1) Refinancing efforts generally make use of the remaining open ended federal titles of the Social Security Act. The most important of these titles include: Title IV-E Foster Care; Title IV-A Emergency Assistance and Child Care; Title XIX Medicaid (in states without voluntary caps adopted as part of waiver programs); Title IV-D Child Support Enforcement; and Title XVI SSI benefits. In many cases, services or activities can be funded under more than one Title. It is important to consider the best mix of federal claiming, and, most importantly, the claiming approach which best supports service goals.

One of the great dangers of refinancing work is the risk that money produced by such efforts will not be used to advance the reform agenda for families and children. Refinancing proceeds usually take the form of state or local general fund revenue, which can be used for many different purposes, not necessarily those related to reform. Refinancing work should result in funds available for reinvestment in improved or expanded family and children’s services. Decisions about reinvestment must be made before work on refinancing begins. Without some way to protect the freed up money, it is likely that refinancing funds will return to the general treasury to be used for whatever priorities appear on the state or local political agenda at the time. The best way to help assure that the proceeds of refinancing go to good use is to recognize the political nature of the budget process and use that process effectively. The single best way to be effective in these processes is to have a compelling vision of change which attracts political support and makes reinvestment in families and children a winning political act. In some states and communities, political leaders have established commitments, by executive order or legislation, to reinvest funds generated by refinancing. Some of the best examples of formal reinvestment structures include the trust fund established by legislation in Colorado for reinvestment of Title IV-A refinancing funds and the community reinvestment process for federal administrative claims established in North Dakota. In other states, reinvestment commitments have been established in the budget process itself (as in Iowa, Maryland, Missouri, and Tennessee), or by contract (as in the case of school Medicaid contracts in Missouri and New Mexico).

The second essential refinancing caveat concerns the need for up-front investment in administrative capacity to assure that federal funds are properly claimed and not subject to later audit disallowance. Federal program requirements and claiming procedures can be complex and can create significant new workload. Some of the anticipated new revenue should be advanced to build staff and systems capacity to adequately cover this workload. Where direct service staff are required to perform new administrative work, additional service positions should be created at least to maintain existing service capacity. As a rule of thumb, five to ten percent of newly anticipated revenues should be invested in this kind of infrastructure support.

Following are the major refinancing options under Titles IV-E, IV-A and XIX which can be used to provide funding for reinvestment in family and children’s services.

A. Title IV-E Foster Care and Subsidized Adoption

Title IV-E is the title of the Social Security Act which provides funding for foster care and subsidized adoption. Title IV-E provides reimbursement for foster care maintenance costs (i.e., room and board and related costs) at the state’s Medicaid matching rate, which varies between 50 percent and 80 percent based on the state’s per capita income. Administrative costs are reimbursed by the Federal government for all states at 50 percent. Training claims are reimbursed at 75 percent.

There are six basic strategies for increasing IV-E claims:

1) Increase the IV-E eligibility rate. The most important element of IV-E claiming is the percentage of children in out-of-home care who are IV-E eligible. Foster care maintenance costs are reimbursed only for eligible children. And the IV-E eligibility rate is also used to calculate the federal share of IV-E administrative claims. A description of IV-E eligibility requirements is beyond the scope of this paper. The most important requirements specify that the child must have received AFDC (or been eligible to receive AFDC) at the time of placement or during the preceding six months; and placement court orders must specify that placement is in the best interest of the child, and that reasonable efforts have been made to prevent placement. Most states have made significant progress in improving Title IV-E eligibility rates. Achievable rates for most states exceed 60 percent. And in high poverty areas, achievable rates may exceed 75 percent.

2) Increase IV-E administrative claims through better time study coverage, better claiming definitions, and improved cost allocation methodology. Title IV-E administration covers a wide range of activities including eligibility determination, foster home recruitment, child placement and judicial processes, and case management. In effect, IV-E administration covers all activities in support of the out-of-home placement system except face-to-face therapy. Time studies typically find that 80 percent of child welfare worker activities can be classified as administration under IV-E. Random statistical studies of worker time are used to capture these costs, and there are there are often ways to improve the functioning of these systems and the way in which the resultant data is used to increase the size of the claim.

3) Expand IV-E coverage to the Juvenile Justice and Mental Health system, including both service and administrative claims. Many children in out-of-home care in the Juvenile Justice and Mental Health systems are potentially eligible for Title IV-E. Establishing coverage for these children involves the same rules and protections required for children in the Child Welfare system. However, IV-E claims in these systems are limited by prohibitions on payment for placement in public institutions, secure detention, and for-profit facilities.

4) Expand coverage of group and residential costs using a blended rate approach which coordinates rate setting and cost coverage with Medicaid. Many of the costs of group and residential care are potentially reimbursable under Title IV-E, Title XIX, or both. It is possible to create a rate structure which takes advantage of the optimum mix of these funding streams, and increases net federal reimbursement.

5) Improve use of IV-E training funds (at 75% FFP) through university based training or direct contracting for training services. Public universities may use approved overhead and indirect costs as match.

6) Use enhanced matching rate funds for information systems development and implementation. Seventy-five (75) percent matching funds are available for three years (Federal Fiscal Years 1994 to 1996) for planning, development and implementation of child welfare information systems. Subsequent operating costs will be reimbursed at 50 percent. A number of states are using these funds to help develop cross agency information systems which can provide the data and management support needed for family and children’s service reform.

B. Medicaid: An Overview

The Title XIX (Medicaid) program provides federal support for states’ health and rehabilitative services for low-income families and individuals. Although Title XIX is best known as a primary health care program, it actually permits considerable discretion in the structure and coverage of state programs. Federal reimbursement is provided for direct service costs at rates which vary by state from 50 percent to 80 percent based on state per capita income. Administrative costs (including training) are reimbursed for all states at 50 percent.(2) One of the most important components of Title XIX is the Early Periodic Screening Diagnosis and Treatment (EPSDT) program. This program was significantly strengthened in 1989 when states were required to bring their screening rates up to 80 percent and provide needed services identified in the screening process, whether or not such services were otherwise provided to Medicaid recipients under the state’s plan. This change in federal law served to establish EPSDT as the single most important health entitlement for poor children and created a powerful framework for covering therapeutic services provided inside and outside the traditional health system. Medicaid is a complex program, and it is beyond the scope of this paper to summarize its provisions. The best source of such information is theMedicaid Source Book published in January 1993 by the Congressional Research Service.

The following sections outline some of the most important refinancing applications of Title XIX.

Return to “Contents”

C. Medicaid in Child Welfare and Juvenile Justice

Many services in child welfare have definable therapeutic components which can be made eligible for Medicaid reimbursement. In addition, many activities within the Child Welfare and Juvenile Justice systems qualify as Medicaid administrative activities. Major options include:

1) Case management claims using Targeted Case Management (as a service) or EPSDT/Administrative case management as an administrative claim. These are two, generally mutually exclusive, ways to capture funds for case management activities under Medicaid. For states with FFP rates above 60 percent (28 states), the higher reimbursement rate under the service claim approach may offset the relatively easier implementation requirements for administrative claims, which are reimbursed at 50 percent.

2) Continuum of Care claims: It is possible to use EPSDT or the Rehabilitation option under Title XIX to claim for costs of the therapeutic components of care across the community-based care and out-of-home care service continuum, including:

a) Home and community-based services including such services as day treatment and respite care services,

b) Therapeutic foster care,

c) Non-secure group care, and

d) Residential treatment.

D. Medicaid in Health, Mental Health, Mental Retardation, and Developmental Disability Services

These are the service systems in which Medicaid claiming strategies have been most thoroughly developed by the states. In many cases, state and local governments have used existing Medicaid service definitions and claiming procedures to generate federal claims for traditional health services provided in these systems. Federal waivers for home and community-based care have been widely used for other services necessary to prevent institutionalization or allow return to less expensive home and community care. Administrative claims have, generally been less well developed in these service areas, and represent an untapped refinancing potential in many states. Under Medicaid administration, it is possible to claim for a wide range of health related activities including outreach, public education, case management, and coordination functions in addition to normal administrative overhead. Random time studies can be used to capture these costs, at both the state and local level, in the same way that such processes are used in the Child Welfare system.

Medicaid claiming potential should be reviewed in the following service areas:

1) Public health services, including services provided in public health clinics and through other direct and contract public health programs.

2) Mental health services, including both direct and contract services, and the costs of out-of-home care for Medicaid eligible clients in non-institutional settings.

3) Mental Retardation and Developmental Disability services, including such services as respite care, and the costs of out-of-home care in non-institutional settings.

4) Individuals with Disabilities Education Act (IDEA) Part H services for infants and toddlers, including services identified in the Individualized Family Service Plans for Medicaid eligible children.

E. Medicaid in the Schools

Medicaid can be used to refinance some existing costs of the education system, and provide significant new resources for reinvestment in family and children’s services. Significant claims are possible for therapeutic services provided by schools to Medicaid eligible children. Claims are also possible for EPSDT services and administrative activities when schools become partners in the EPSDT program. There are a wide range of approaches to setting up Medicaid claiming for schools. The best approaches use service definitions which are tailored to school settings (under EPSDT or the Rehabilitation option), use capitated approaches wherever possible, and generate full cost reimbursement. There are four primary areas for Medicaid claiming. The first three involve services provided to Medicaid eligible children. The last covers administrative activities in support of the EPSDT program.

1) Special Education Individualized Education Plan (IEP) related services. This includes the most common of IEP services (such as occupational therapy, physical therapy, and speech therapy) as well as the less common services (psychological services, social work, transition services, etc.) Plans developed under an EPSDT umbrella may allow any medically necessary service to be claimed.

2) EPSDT screening services. Schools can directly perform full or partial screens or serve as sites for such screenings.

3) Other School based health services (such as health clinic services) or services targeted to special populations (such as day treatment services or services for pregnant and parenting teens).

4) EPSDT Administration. A wide range of health education and support activities can be claimed as Medicaid administration using a time study to capture costs. Activities include outreach, case planning and coordination and health education.


The refinancing section above presents a very particular kind of revenue raising strategy: the use of open-ended federal revenue to free up existing state and local funds. This is only one of many revenue strategies which may be harnessed to support a reform agenda. Revenue strategies range from the traditional, though always dangerous, use of taxes to the non-traditional and still experimental use of bond authority for human services capital investment. In addition to some of the major revenue approaches discussed below, the grantsmanship marketplace provides thousands of smaller public and private sources of funding for worthy and not so worthy ideas. The following sections present three broad sets of revenue strategies which should be considered as part of any effort to develop a comprehensive program and financial plan.

A. New Federal Funding

We have already discussed new uses of existing block grant funds under redeployment, and the creative use of existing open-ended federal titles under refinancing. It does not happen often, but there are occasionally new federal fund sources to consider. Two such sources are available as a result of the passage of the Omnibus Budget Reconciliation Act (OBRA) of 1993:

1) Family Preservation and Family Support funds: For the first time, federal funds are provided for the specific purpose of supporting family preservation and family support services. The funds are a state entitlement, included in a new section of Title IV-B. Total funding under this section increases over five years from $60 million in Federal Fiscal Year (FFY) 1994 to $255 million in FFY 1998. In the first year, states are required to conduct a broadly based planning process which sets out five year goals for family preservation and family support, and identifies how state and federal resources will be used to improve the overall system of services for families and children.

2) Empowerment Zones and Enterprise Communities: These new funds present a major opportunity to combine human service reform and economic development work in local communities. Funds are provided to support 6 urban and 3 rural Empowerment Zones and 65 urban and 30 rural Enterprise Communities. Empowerment Zone awards will provide $100 million over two years to urban sites and $40 million to rural sites. The smaller Enterprise Community awards will provide grants of about $3 million plus a wide array of tax and other benefits.

B. State and Local Funding

Several approaches to increasing state and local revenue should be considered in any comprehensive multi-year financing plan.

1) Fair Share of Revenue Growth. Family and children’s services arguably have a claim to total revenue growth at least equal to the state or local growth rate in general fund revenue. While the argument only works in years of revenue increase, it can be argued that new spending for families and children should be equal to revenue growth net of inflation. These are complex positions to articulate but may represent the largest block of resources available for reform agendas over the long term.

2) Taxes. There are, of course, a wide range of tax strategies, all of which are politically risky. But taxes (particularly special purpose taxes) should not be left out of the arsenal. Special purpose taxing districts for children have operated in some Florida counties since the 1940’s. There has been more mixed success with special purpose lotteries (the only known form of popular tax), with revenues sometimes used to offset education formula funds or other base funding. Tax check-offs are used in many states allowing taxpayers to designate a portion of their taxes for special purposes. They can produce a small but useful revenue stream. If the agenda is sufficiently important and politically compelling, it may even be possible to consider mainstream tax strategies. The point is that, while tax approaches must be handled with care, they should not be ignored as part of a potential financing plan.

C. Private Funding

Private funding sources are often ignored in putting together public financing packages, but a wide range of private sources can and should be considered. By private funding we mean any funds which derive from a non-governmental source. As with other funding strategies, it is essential that private funding approaches support and not drive program goals. Following are some of the more important categories of private financial support:

1) Third Party Collections: This includes everything from child support collections to collections of health and other insurance benefits. If properly planned, revenue will almost always exceed collection costs and the net profit from such efforts can be reinvested.

2) Fees: Where appropriate, fees can be charged to recover some or all of the cost of service. Fees are commonly used in services for which there is a private market, such as child care or personal care services. Fee revenue can be obtained by increasing traditional fees (including indexing to inflation), or by considering non-traditional use of fees.

3) Donations: Foundations and businesses can provide important flexible funding particularly for leveraging other funding or gap filling purposes.

4) Volunteers: Volunteerism constitutes a form of non monetary donation which can be an important financing tool. Volunteers can be used to directly supplement the workforce, as in the case of outreach and education, or can provide services and supports, not part of the paid service system such as mentoring, recreation or peer counseling.

5) Loans: If a sound case can be made for a return on investment, then bond financing or other forms of borrowing are theoretically possible. These are, of course, fundamental approaches in business, and widely used in community and economic development but relatively new to human services. It may be possible to apply loan based financing to some of the out-of-home care or health service investments discussed in the redeployment section above. It is also possible to use revolving loan funds within the government budget structure to support the start up costs of service enterprises (such as child care), or to test the concepts of human service investment before seeking private financing.

D. Roll revenue forward. Roll expenditures back: This is borrowing against future revenue, or delaying payment on legitimate expenses. Both produce one-time increases in resources. There is, of course, a serious down side. These amounts must be paid back in a future budget. The one exception is improvements to cashflow. If such improvements can be maintained, then a one-time increase in resources will occur, which does not have to be paid back.


Even the best reform strategies may ultimately fail if financial systems and financial incentives work against reform goals. An essential part of any reform strategy is reform of the financial system itself. Following is a basic list of structural changes which may be considered as part of this process:

1) Seamless Services Design: Service structures should make financing (and federal fund claiming) invisible to families and children to the greatest extent possible. Service systems should be designed to operate with a “front room,” where families are treated with respect, the needs of all members considered, and services provided regardless of federal or state service categories. In the “back room,” the service agency should do everything possible to qualify families and children for different funding streams, and collect as much reimbursement as possible to support the services for all families.

2) Funding Pools: Funding pools can provide the flexibility necessary for communities to produce better results for less money; but only if the funding pool provides new forms of accountability to replace the old categorical accountability structures. At the bottom line, funding pools involve structuring a new “contract” between the agencies providing funds and the communities using those funds. In its best form, such a contract should represent a trade of new authority and flexibility in the use of funds for new accountability for outcomes for families and children.

3) Flexible dollars: Even without changing the whole system, it is possible to create pockets of flexible funding which can be used to fill gaps in services. Such funds are often an inexpensive way to make a categorical system more effective. As such, they remove the barriers to meeting families’ unique needs.

4) Incentives: Incentive promote change by rewarding good practice. There are a wide range of incentive structures possible from the casework level (making it easier to prevent foster care than it is to remove and place children outside the home) to the systemic level (allowing local collaboratives to keep savings from reduced placements). Ultimately systems must shift to providing incentives for improving results for families and children.

5) Trust Funds for families and children: Trust funds can provide a financial sanctuary for an investment pool for families and children. Redeployment investment schemes might actually be structured to repay trust fund “loans.”

6) Outcome (or Result) Based Budgeting: Major changes are needed in the budgeting and decision making structures which frame the long term investment decisions for families and children, and help hold us all accountable for outcomes for families and children. Major elements of an outcome based budgeting structure include a Family and Children’ Budget; a periodic consensus forecast of the cost of continuing current policy; an analysis of prevention and non prevention expenditures and a systematic assessment of investment options; a multi-year budget process which derives spending priorities from an orderly review of outcomes, indicators of outcome achievement, effective strategies which change outcomes, and the resources necessary to put effective services and supports in place.


This broad inventory of financing strategies is intended to support a systematic approach to thinking about ways to pay for family and children’s services reform. Using the document involves taking each element of an ambitious plan for change, and considering how each of the four financing strategies discussed above may be used or adapted. By working systematically through these options, and using the process to explore non-traditional approaches, it may be possible to craft a financing plan to support an ambitious programmatic agenda. Together, these financing approaches could produce a significant portion of the investment funds necessary to produce better outcomes for our families and children. And in the long run, improving outcomes for families and children, by investing in prevention and support, and lowering the cost of treating problems after they occur, may be the most important financing strategy of all.


Some state and local accounting systems permit federal fund reimbursement to be received directly as general fund revenue, in much the same way that fee payments or debt collection amounts are treated. These amounts may then be rematched with federal funds when they are used for federally eligible purposes. Alternatively, state and local accounting systems may require that federal reimbursement be credited to the specific accounts which generated the claim. In this case, an equal general fund amount can be freed, and these freed funds can be rematched with federal funds when used for federally eligible purposes. In cases where the funds freed by refinancing are federal block grant funds, it may be necessary to, first, exchange these funds for general funds by transfer between program budgets.

Administrative activities which require the skills of a medical professional (e.g., public health nurse) are reimbursed at 75 percent.

Mark FriedmanThe Cosmology of Financing

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