LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Adoptions Program

The department administers a statewide program of services to parents who wish to place children for adoption and to persons who wish to adopt children. Adoptions services are provided through state district offices, 28 county adoptions agencies, and a variety of private agencies. Counties may choose to operate the Adoptions Program or turn the program over to the state for administration.

There are two components of the Adoptions Program: (1) the Relinquishment (or Agency) Adoptions Program, which provides services to facilitate the adoption of children in foster care and (2) the Independent Adoptions Program, which provides adoption services to birth parents and adoptive parents when both agree on placement.

In addition to the Adoptions Program, the Adoptions Assistance Program (AAP) provides grants to parents who adopt "difficult to place" children. State law defines these children, as those who, without assistance, would likely be unadoptable because of their age, racial or ethnic background, handicap, because they are a member of a sibling group that should remain intact, or because they come from an "adverse parental background."

The Governor's budget proposes expenditures of $104 million ($59 million General Fund) for the Adoptions Program in 2004-05. This represents a 12 percent increase in General Fund expenditures from the current year. This increase is primarily attributable to offsetting the reduction of federal incentive funding for adoptions. Overall, program funding for adoptions remains virtually the same.

The Governor's budget proposes expenditures of $577 million ($248 million General Fund) for the AAP in 2004-05. This represents an 11 percent increase in General Fund expenditures from the current year. This increase is primarily attributable to an increase in caseload and an increasing average monthly grant amount.

Reforming the Adoptions Assistance Program

The current Adoptions Assistance Program (AAP) provides the maximum foster care grant for virtually every child who is adopted from the foster care program, regardless of whether or not that child would be "hard to place" in an adoptive home. This policy has turned AAP into one of the fastest growing social services programs in terms of caseload and cost.

In order to improve the program's cost effectiveness, we recommend enactment of legislation that (1) sets grant levels at an amount that recognizes the adoptive parents' financial responsibility for their adoptive children, (2) better ties benefit levels to the needs of adoptive children, and (3) narrows the definition of "special needs" so as to focus the program's financial assistance on those children who are likely to benefit the most from such aid. These changes will save approximately $2 million General Fund in 2004-05, growing to approximately $12 million in 2005-06. (Reduce Item 5180-101-0001 by $2 million.)


The AAP was established in 1982 to provide monthly cash grants to parents who adopt difficult to place children. State law (Welfare and Institutions Code Section 16120) defines difficult to place children as those who, without financial assistance to defray costs associated with the children's special needs, would likely be unadoptable because they are:

Adoptive parents receive these grants until their child is 18 years of age or until age 21 if the child has a chronic condition or disability that requires extended assistance. The adopted children remain eligible for Medi-Cal benefits as long as their adoptive parents are receiving an Adoption Assistance grant on their behalf. Another option is for parents to defer their child's enrollment in AAP. This option allows parents to avail themselves of the program at a later date, should their child need the assistance payments for unforeseen expenses.

Adoption Assistance grants are limited to the amount of the foster family home rate that the child would have received if she or he had remained in foster care. The foster family home rate ranges from $425 to $597 per month depending on the age of the child. Also, if the child has specialized care needs that would have been covered had the child remained in foster care, the adoptions worker can set the grant as high as the foster family home rate plus a specialized care increment. This increment can range up to $2,097 per month. As with foster care grants, the AAP grants are not subject to state or federal income tax.

For federally eligible children, the federal government pays 50 percent of the grant, the state pays 37.5 percent, and the counties pay 12.5 percent. Approximately 87 percent of AAP children are federally eligible. Nonfederally eligible children (referred to as state-only) receive the same benefits in AAP as federally eligible children. The state-only program is funded 75 percent from the state General Fund and 25 percent from county funds.

To be federally eligible, a child must come from a family that would have met all of the eligibility requirements for the Aid to Families with Dependent Children (AFDC) program as it was defined as of July 16, 1996. Typically, a child could not come from a two-parent family or a family whose income exceeded specified levels. Other than these two federal requirements, the children in the state-only program are virtually identical to the federally eligible children.

Growth of AAP

Historical Caseload Growth Rates. The AAP caseload has been growing steadily and rapidly since 1995-96. Until recently, the caseload was growing at an increasingly larger percentage rate each year, peaking in 2000-01 at a 21 percent growth rate. For 2001-02, the rate of increase slowed slightly to 16 percent. Finally, for 2002-03 the growth had slowed to 13 percent. Despite the slowing caseload growth, AAP continues to be one of the fastest growing programs in the Department of Social Services (DSS). The department's most recent forecast projects that the caseload will grow by 13 percent in 2003-04 and 10 percent for 2004-05.

Growth in Average Monthly Grants. During the same period, from 1995-96 through 2003-04, the average grant for AAP grew from $447 for federally eligible children and $459 for state-only children, to an estimated $704 and $756, respectively. This represents increases of 58 per cent and 65 percent, or approximately 30 percent more than the rate of inflation.

A significant portion of that increase is probably due to the Mark A. et al v. Davis court settlement. This settlement limited the ability of counties to negotiate with adoptive parents for grant amounts that would be lower than the maximum amount that the child would have received in Foster Care. While the Mark A. settlement limits the flexibility of the administration and counties, it is not binding for the Legislature. The Legislature could choose to make changes to the program, which are contrary to the Mark A. settlement, as long as those statutory changes are consistent with federal law. However, none of the recommendations presented later in this analysis are in conflict with the Mark A. settlement.

Increasing General Fund Commitment. While caseload and grant costs have grown rapidly, the General Fund commitment to the program has grown at an even faster rate. In 1995-96, the state spent $57.6 million from the General Fund for AAP grants. On average, the General Fund investment has grown by approximately 20 percent each year. By 2002-03, the General Fund amount had grown to $196 million. That amount is estimated to grow by an additional $27 million in 2003-04 and by $25 million in 2004-05 (as shown in Figure 1).

Examining AAP Eligibility and Payment Levels

Universal Eligibility for Foster Care Children. Under the current AAP program, virtually all children being adopted out of the foster care program are eligible for and receive AAP benefits at least until the age of 18. In 2000-01 (the latest year for which data are available), 93 percent of the children adopted from foster care received AAP benefits, another 3 percent of families opted to defer their AAP benefits, leaving only 4 percent of the children who did not receive AAP benefits. This 4 percent may have been eligible and their parents may have chosen not to apply for benefits or the parents may have been unaware of AAP benefits.

No Income Determination Is Used for Eligibility or Grant Levels. Adoptions Assistance is not a means-tested program. This means that eligibility for the program is not based on the adoptive parents' income nor is the income of the adoptive family considered in determining the monthly payment amount. Eligibility is solely determined by whether or not the child meets California's definition of special needs. Under current California law, a child meets the definition of special needs if he or she has one or more of the following characteristics:

The inclusion of adverse parental background in the definition of special needs allows virtually all children adopted out of the foster care system to qualify for AAP, regardless of whether or not they would otherwise be a hard to place child. This is because any child removed from his or her parents and placed in foster care, by definition, must have had an adverse parental background. Thus under the current program, a healthy infant would be considered as hard to place as would three teenage, physically, or developmentally disabled siblings. Both types of children would be eligible for monthly AAP payments until they reach the age of 18.

The most recent statistical information available shows that the largest qualifying characteristic of children in AAP is adverse parental background, as shown in Figure 2. The next largest qualifying characteristic is being a member of a sibling group.

Profile of a Typical Child and Adoptive Family. According to 2000-01 data, the typical child adopted through the Department of Social Services Agency Adoption program is white, experienced an adverse parental background, and did not have a sibling placed with them. They began living with their adoptive family at about 2 years old and were adopted when they were 5 years old. The adoptive family is a white, married couple, with some college education. They were not related to the child and had other children in their home. The median age for the adoptive mother and father was 44 years old. Their median gross annual income was $41,000 and they received adoptions assistance benefits for the child.

Federal AAP Requirements Provide Latitude in Two Key Areas. The federal government gives states significant latitude in two areas of the AAP program: (1) to define special needs broadly or narrowly and (2) to decide the amount of benefits provided to adoptive parents. Because of this latitude, states vary widely in their definitions of special needs and in the ways that they determine grant amounts.

As regards the definition of special needs, a publication of the United States House of Representatives Committee on Ways and Means indicates that, generally, hard to place children would include older children, sibling groups, children with physical or mental disabilities, or membership in a minority group. However, under federal law, states are free to define special needs more expansively or restrictively. California has chosen to expand eligibility by adding adverse parental background to the definition.

As regards the grant amounts, federal law gives states flexibility in the amount of benefits paid to families, although it does restrict the maximum allowable amount to no more than what the child would have received in a foster family home. States may choose to pay less than that amount.

In determining the amount of the AAP grant for an individual family, federal law requires that the family's circumstances must be taken into consideration. The law further defines family circumstances to mean "the family's ability to incorporate the child into the household in relation to the lifestyle, standard of living, and future plans and to the overall capacity to meet the immediate and future plans and needs, including education, of the child." Based on our review, we conclude that this definition allows the income of the family to be used in determining the grant amount as long as it is done in conjunction with the needs of the child. As a publication of the United States House of Representatives Committee on Ways and Means states, "No means test can be used to determine eligibility of parents for the program; however, States do consider the adoptive parents' income in determining the payment." In fact, our review of other states' programs shows that in 2000-01, 20 states used income in some capacity to determine the grant amount paid to the adoptive family. The State of Ohio, for example, considers the circumstances of the children, the income of the adoptive parents, and the current expenses of the adoptive parents during their grant negotiations.

Substantial Variation in Eligibility Among the States. Because of the flexibility allowed by the federal government, there is substantial variation in AAP programs throughout the country. For example, some states choose to limit their caseload by more narrowly defining special needs while others, like California, define special needs in such a way to include every child in the foster care system. Colorado, for example, limits special needs to children who are over age 7, a member of a sibling group that should remain intact, have a physical, emotional, or mental disability or have documented hereditary risk factors. On the other hand, Illinois broadly defines special needs. Its definition includes children over age 1; or are members of a sibling group; or have an irreversible physical, mental, or emotional disability or one that is correctable through surgery; or have a judicial determination that the child is abused, neglected, or dependent; or where efforts have been made to place the child without providing a subsidy. Both states' definitions are allowable under federal law.

Variation in AAP Benefits Among the States. States also vary significantly in the amount that they are willing to pay for AAP grants. Many states, including California, have chosen to pay the same amount to AAP families as the child would have received in Foster Care. However, other states have chosen to cap the amount they will pay for AAP. Ohio, for example, has chosen to cap the federal/state funding at $250 per child. If a county is willing to supplement the nonfederal share with county funds, they may draw down additional federal funds. Another state that has chosen to limit AAP grants is Minnesota. In Minnesota, the maximum basic AAP grant is capped below the foster care basic rate. For example, according to the most recent data available, children younger than age 5 can receive $473 per month in a basic foster care grant. However, in AAP, children in the same age group cannot receive more than $247 per month.

Another significant variation among states is in the amount of specialized care funding that the program pays. A specialized care increment is funding provided above and beyond the base foster care amount for children with extraordinary needs. In California and several other states, specialized care increments are established by individual counties and vary significantly across the state. In the case of California, the specialized care increment ranges up to $2,097 per month, depending on the county. However, in Texas, for example, no specialized rates are paid in the adoption assistance program. On the other hand, Michigan has established a statewide "difficulty of care" supplement amount, which ranges from $5 to $18 per day depending on the age of the child, medical fragility, and three established levels of medical or behavioral needs. Finally, North Carolina offers a specialized adoptions assistance payment for HIV-positive children only.

Other Differences. Other variations among states include whether or not they offer funds to offset adoption expenses, the provision of respite care for adoptive parents, and whether or not benefits are provided for children over 18 years of age. In California, parents are allowed a maximum of $400 for nonrecurring adoption expenses, benefits for children between the ages of 18 and 21 are provided if there are extraordinary needs, and the state does not provide respite care. 

Summary. The AAP is one of the fastest growing social services programs. It is projected to cost over $500 million in 2004-05, over half of that cost is from the state General Fund. While the federal government provides states significant latitude in terms of defining the eligible population and in setting grant amounts, California has chosen to develop one of the most generous programs in the country. The current definition of special needs allows virtually every child that is adopted out of the foster care system to qualify for the program. Further, the settlement of the Mark A. court case has probably contributed to our rising grants because counties can no longer use a family's resources or income as a tool for determining grant levels. Other states, even when they have generous eligibility requirements, tend to set the grant amount so that it is below the maximum foster family home rate.

Overarching Considerations

In thinking about how best to restructure the AAP program, we recommend that the Legislature weigh the following considerations.

Adoption Means the State Is No Longer the Parent. As children leave the foster care system through adoption, the parenting responsibility shifts from the state to the adoptive parents. Under the foster care system, the state has taken on the financial role of the parent and, as such, the state pays for the basic needs of the child. However, once the child is adopted, the state is no longer functioning as the parent. The responsibility moves to the adoptive parents. Further, legally, adoptive parents take on the same responsibilities as parents who give birth to their own children. Part of that responsibility includes financially providing for their children. Adoptions literature distributed by DSS echoes this expectation. Specifically, DSS states that the ideal adoptive parents have a regular income and the ability to meet the needs of the adoptive child.

Parents Adopt Children Out of a Love for the Child and Desire to Be a Parent; Not Because of a Cash Incentive. Parents that adopt children, whether out of the foster care system or not, do so out of a desire to become parents and love for the child, not because they will receive on-going, tax-free money from the state. This expectation is supported by CDSS adoptions literature, which notes that the ideal adoptive parent is expected to be loving and willing to deal with changes in their lifestyles as a result of adopting a child. Finally, many people become foster parents as a route to adoption. Therefore, the "incentive" provided by AAP may be unnecessary for many families, especially those adopting children with no identifiable emotional, mental, or physical problems.

Some Children and Families Do Require Ongoing Financial Support From the State. While many children coming out of the foster care sys tem do not have any special needs which require exceptional levels of care, there are those children that do have special needs and do require additional, ongoing care. For example, a family may not be able to afford to adopt a sibling group. However, with ongoing financial assistance the family may be able to care for siblings and therefore keep the family intact. Likewise, there are children that will have ongoing health or emotional needs which do require intensive treatment that may be difficult for a family to afford. With adoption assistance payments, those children may be able to find a loving, stable, and permanent home.

Benefits Should Be Tied to Need. The AAP benefits should be limited to those children who would truly be hard to place without ongoing financial assistance, and the level of AAP benefits should be tied to the needs of the child.

Children in the State-Only Program Are No Different From Federally Eligible Children. The determination of whether or not a child is eligible for the federal AAP program is based upon the circumstances of their birth parents. The parents must meet the old AFDC eligibility criteria in order for the children to receive a federal grant. Those criteria are based upon the income of the parents and evidence of deprivation. Under these rules, deprivation means that one parent is absent or incapable of caring for the children. Essentially, the result is that the state-only children are no different from the federally eligible children. They do not come from more privileged backgrounds, nor do they have fewer special needs. The populations are virtually identical and, in our view, state policy should treat them in an identical manner.

Analyst's Recommendation

Based on our review of the program, we conclude that there are several significant ways in which the Legislature could control the costs of the AAP program. Consistent with the above considerations, we recommend enactment of legislation making a series of reforms to AAP, which would improve the cost effectiveness of the program. The specific reforms are presented below.

Set Grant Levels to Recognize Adoptive Parents' Financial Responsibility. While states may not pay more than the maximum amount that the child would have received in Foster Care, there is nothing that precludes California from capping the amount of the AAP grant at a level below the maximum foster care rate. This cap would be consistent with an expectation that adoptive parents take over the role of parenting from the state, including some measure of fiscal responsibility. If the state capped the basic rate at 75 percent of the foster care rate, prospectively, the state would save $600,000 in 2004-05 on new children entering the system and $5.5 million in 2005-06 compared to the current program. This savings would increase annually as the pre-AAP reform children age-out of the program and new children are enrolled at the 75 percent level.

Better Tie Benefit Levels to Need. Currently, parents have the option of renegotiating the AAP grant they receive for their child at least once every two years. Essentially, these AAP negotiated increases mirror increases in the Foster Care grants that occur as children age. Under the current program, children receive an average of $45 per month more as they age in the program, starting at $425 for 4 year olds and under, and ending at $597 for children over 14 years old (see Figure 3). The state is not required by the federal government to increase the AAP grant amount based upon the age of the child.

Because these age-driven grant increases are virtually automatic and not based on a demonstration of need, we recommend such increases be eliminated. Instead, the reasons for grant increases should be more narrowly defined. That more narrow definition could include increased costs due to physical, mental, emotional, or medical problems that the child may have, which are directly tied to their birth parents or preadoptive circumstances. This reform would save the state approximately $900,000 in 2004-05 and $2 million in 2005-06.

Narrow Definition of Special Needs to Children Likely to Benefit the Most. As we noted earlier, inclusion of adverse parental background as part of the definition of special needs means that virtually all children adopted from the foster care system are eligible for AAP assistance, regardless of whether they would otherwise be hard to place. In fact, one-third meet the definition through the catchall adverse parental background category. Assuming that a small percentage of those children would also qualify under another category, the incoming AAP caseload could be reduced by about 25 percent by eliminating the adverse parental background category. Specifically, under this approach, healthy children under the age of 3 that are not members of a minority group would no longer be eligible for immediate financial support. However, parents would remain eligible for deferred benefits. Specifically, if a child subsequently develops a physical, mental, emotional, or medical problem that can be traced directly to his or her birth parents or preadoptive circumstances, then those adoptive parents would be eligible to receive AAP benefits for their child. This is the approach that the State of Ohio has taken in limiting special needs, while still allowing those who may need it later to have access to the program.

This narrowing of the definition of special needs would save the state approximately $500,000 in 2004-05, growing to $4 million in 2005-06.

Implementation. The changes outlined above would require new regulations and county guidance. Assuming mid-year implementation, adopting these recommendations would result in General Fund savings of $2 million in 2004-05 and $12 million in 2005-06.

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