State Financing Strategies That Promote More Effective Services for Children and Families

Frank Farrow

Center for the Study of Social Policy

As a growing number of states respond to the political, economic, and demographic pressures that are forcing change in children and family service systems, financing strategies are becoming an increasingly important part of their response. To some extent, this is simply because any effective service system must be adequately funded. Without sufficient dollars, no amount of improved service coordination or finely tuned response to families' needs will achieve the better outcomes for families and children that states seek. Beyond that, however, fiscal strategies are gaining attention because of recognition that methods of service finance directly affect the nature and outcomes of services. The ways in which funds are made available to state and local service systems help determine their priorities, shape the incentives that drive these systems, and ultimately influence how useful services are to families.

In the past few years, state administrators and legislators have become leaders in designing innovative financing mechanisms to reshape their service delivery systems. In conjunction with several foundation initiatives, such as those of the Edna McConnell Clark Foundation, the Annie E. Casey Foundation, and the Robert Wood Johnson Foundation, state officials are using financing changes as entry points from which to make even broader changes in state services.

This paper reviews several financing innovations that states are using to improve child and family services. It discusses the overall approach that underlies states' efforts; identifies specific fiscal strategies; and raises issues related to states' future development of financing strategies. The second paper in this volume by Drew Altman addresses financing strategies at the federal level.



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Effective Services for Young Children: Report of a Workshop State Financing Strategies That Promote More Effective Services for Children and Families Frank Farrow Center for the Study of Social Policy As a growing number of states respond to the political, economic, and demographic pressures that are forcing change in children and family service systems, financing strategies are becoming an increasingly important part of their response. To some extent, this is simply because any effective service system must be adequately funded. Without sufficient dollars, no amount of improved service coordination or finely tuned response to families' needs will achieve the better outcomes for families and children that states seek. Beyond that, however, fiscal strategies are gaining attention because of recognition that methods of service finance directly affect the nature and outcomes of services. The ways in which funds are made available to state and local service systems help determine their priorities, shape the incentives that drive these systems, and ultimately influence how useful services are to families. In the past few years, state administrators and legislators have become leaders in designing innovative financing mechanisms to reshape their service delivery systems. In conjunction with several foundation initiatives, such as those of the Edna McConnell Clark Foundation, the Annie E. Casey Foundation, and the Robert Wood Johnson Foundation, state officials are using financing changes as entry points from which to make even broader changes in state services. This paper reviews several financing innovations that states are using to improve child and family services. It discusses the overall approach that underlies states' efforts; identifies specific fiscal strategies; and raises issues related to states' future development of financing strategies. The second paper in this volume by Drew Altman addresses financing strategies at the federal level.

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Effective Services for Young Children: Report of a Workshop FINANCING AS A STRATEGIC ELEMENT IN IMPROVED STATE SERVICE SYSTEMS States' use of new financing mechanisms takes many forms. However, there is a general strategic approach toward financing that underlies many states' efforts. This approach assumes that service financing should reflect and reinforce a new set of principles and characteristics for service delivery. Consensus is emerging in many states about the directions in which child and family service systems must move if they are to be more effective. Public agencies are attempting to alter service systems to make them: Family-based, i.e., responsive to a child's needs in the context of his or her family and community; More comprehensive and flexible in meeting a child's and family's unique, specific needs; More likely to place decision making authority at the community and neighborhood levels, rather than centralizing all decision making in state agencies; More balanced in terms of greater emphasis on developmental and preventive services that support families earlier and seek to avert crisis situations; More focused on outcomes; and Better able to ensure equity in services allocation. Current financing methods undercut these directions, as is clear from numerous critiques of social service funding. The categorical nature of services financing still creates numerous specialized services in a community that defy workers' and families' best efforts to coordinate them. At the front line, families' needs usually have to be fit to available services, rather than the reverse. Since dollars are never sufficient for mandated services, allocations for developmental and preventive services remain even smaller in the context of overall service system expenditures. States' new fiscal strategies attempt to restructure funding so that it supports the service delivery principles set forth above. If better outcomes are achieved when front-line workers adapt services to individual needs, then service funding should provide that flexibility. If decisions about which services to finance can be made more perceptively by local communities than by state agencies, then these decisions should be moved to the community level. If service priorities must be redirected toward earlier interventions, then financing mechanisms need to create incentives for front-end investments. Used in this way, financing becomes a way to reinforce new policy directions. States' new funding approaches also recognize that effective fiscal strategies must incorporate multiple funding sources and cut across tradition-

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Effective Services for Young Children: Report of a Workshop ally separate service domains. Creating comprehensive service responses for children and families requires orchestration of a wide range of funding sources. States' perceptions of what constitutes an effective family service system is broadening to include social, health, education, mental health, juvenile justice, employment, housing, and other services. In the same way, states are working to coordinate (and in some cases consolidate) traditionally separate funding streams. Financing strategies are mixing funds across agency boundaries, using federal funds creatively in combination with state and local funds, and blending entitlement dollars with discretionary funds. Underlying most states' approaches is a third understanding: that financing strategies must make use of dollars already being expended in the service system. Freeing dollars previously spent for one purpose and redirecting those same dollars for another purpose is a theme of several states' funding strategies. Such redirection usually involves shifts of funds from more restrictive to less restrictive forms of care. Thus, states are redirecting out-of-home placement dollars to in-home services, institutional support dollars to community-based care, and specialized treatment funds to more preventive care. Not only does this emphasis on redirecting and redeploying funds reflect today's tight fiscal climate, but it also indicates a more general conclusion by state administrators: they can more plausibly justify increased appropriations when current dollars are spent most effectively. Finally, states' new funding approaches ensure that new financing strategies, by themselves, are unlikely to change service systems sufficiently. Fiscal changes require parallel alterations in service governance and service delivery technologies if they are to achieve states' goals for more effective service systems. For example, as state agencies pool funds in order to achieve a common goal, they must also develop new, joint service definitions, new contracting procedures, and new interagency referral mechanisms. As states shift decision making concerning fund sources from a state agency to a local authority, they must determine how this change in governance power affects other aspects of the service delivery system. Linking fiscal strategies to broader changes in service delivery is a positive step. It helps ensure that financing strategies are one part of a more fully developed service delivery system designed to achieve agreed-upon goals for children and families. PROMISING STATE STRATEGIES States' funding innovations defy neat categorization. Many developed not as completely conceptualized new funding strategies, but as specific efforts to address a state's service delivery problems. These initiatives have usually been tempered both by political realities (some, for example, were

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Effective Services for Young Children: Report of a Workshop altered substantially in the legislative process), and most are too recent for their impact to be addressed. The brief descriptions below emphasize the distinguishing characteristics of each state's approach and their potential to promote more coherent, responsive services to families. States' most basic approach to improved financing involves joint funding of services across agency lines in order to achieve common goals. The purpose here is for agencies to share the costs of services that they would otherwise provide independently, thereby reinforcing a common policy direction and increasing the likelihood of more coordinated service delivery at the local level. Tennessee's approach to funding family preservation services (crisis intervention services for families at imminent risk of having a child removed from the home) illustrates this approach. In 1988, when Tennessee's legislative and executive branch leaders decided to develop family preservation services statewide, they sought to avoid adding further fragmentation to the state's service array. Unlike other states in which these services had grown separately in the child welfare, mental health, and juvenile justice agencies, Tennessee's agencies funded these programs jointly, with each of the serving agencies contributing a share of the cost. With this pooled funding came other interagency agreements. In delivering these services, the three agencies agreed to accept a uniform program model for all of their families, decided on uniform contract specification for local programs, and are designing common training. Cross-agency financing of this type is a small step, but for that reason can be a feasible step toward more flexible, less categorical financing. It has real benefits at the local level. The result of Tennessee's financing strategy, for example, will be that all family preservation services in a community will have uniform eligibility standards, regardless of whether a family receives this service due to problems of child abuse and neglect, delinquency or youth misbehavior, or a child's emotional problems. Local agencies contracting for this service will work toward common outcomes, use common referral procedures, and accept common standards to assess service quality. Most important, the state's achievement of uniform strategies for family preservation services is leading state officials to consider more extensive joint financing and cross-agency service delivery. A second strategy that goes further to restructure service financing involves allowing greater flexibility in the use of state-appropriated funds to meet family needs, with authority over those funds delegated to local entities. This strategy represents a fundamental shift in financing arrangements—away from centralized, usually categorical state decision making, toward more flexible local control over funding decisions. Two states' different approaches illustrate the potential impact of this type of change.

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Effective Services for Young Children: Report of a Workshop Maryland recently enacted legislation that allows its Governor's Office for Children, Youth and Families (OCYF) to give local jurisdictions the authority to use funds appropriated for out-of-home care to provide in-home services for vulnerable children and families. The legislation applies to all types of out-of-home care, whether under the auspices of the child welfare, juvenile justice, mental health or education agencies. As part of Maryland's broader reform initiative (aimed at helping the local communities to develop more comprehensive, family-based service systems, the OCYF is requiring localities to use these redirected out-of-home care funds in conjunction with other changes in local service planning and delivery. Local jurisdictions must develop an interagency plan for developing better services to families most at risk; must establish a new local entity that will have authority for spending the newly flexible dollars across agency lines; and must establish several core services, including family-based case management and family preservation services. While localities have latitude in the range of services they operate, they must agree to achieve outcomes established by the state. The incentive for localities to accept these conditions is that local communities retain 75 percent of any dollars saved by more efficient use of funds for reinvestment in their local service systems. Maryland's initiative represents an attempt to redirect the state's large investment in out-of-home care to more cost-efficient and effective in-home and community services. As such, it potentially involves a large amount of state expenditures (over $200 million) but initially will affect a relatively narrow group of families, i.e., those at risk of out-of-home care. A broader attempt to make funding more flexible and shift authority to the local level is represented by Iowa's decategorization initiative, which involves a wider array of children and family funding sources. In 1987, the Iowa General Assembly passed legislation directing the state Department of Human Services to select two counties as demonstration sites for decategorizing child welfare services, with the intent of allowing the local jurisdictions to use these funds over a three-year period to develop a more client-centered as opposed to funding-stream-driven system. A wide array of funding sources have been decategorized into a single fund for use by the two local jurisdictions, including funds in the mental health, juvenile justice, and child welfare systems, as well as such related services as day care and some services for the developmentally disabled. Education, Aid to Families With Dependent Children, and primary health care dollars were not included. The fund was intended to be revenue neutral, but allowance was made for yearly growth of the combined fund sources. In each of the two pilot jurisdictions, an interagency group was established to plan the new constellation of services. A year into implementation of the new system, both jurisdictions have made changes in the allocation of

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Effective Services for Young Children: Report of a Workshop funds compared with the allocations prior to decategorization. Home-based and community services have been expanded; out-of-home care has been held steady or reduced. Most important, local jurisdictions have used the opportunity created by freeing up these dollars from past uses to rethink the values and directions underlying their service systems. Local officials feel they have charted a new course for family services, beginning to put in place a new continuum of care based on principles of supporting families in their homes and communities. Iowa's decategorization of funds, like Maryland's redirection of out-of-home care dollars, is tied closely to other service system reforms. But in both cases, a significantly different financing strategy provided impetus for changes of a more wide-ranging nature than would otherwise have been possible. A third strategy being used by a growing number of states can be categorized as front-line service financing through use of flexible dollars. This approach applies the concept of using funds to meet families' individual needs at the actual point of delivery. Workers are given access to funds in order to purchase on families' behalf the goods or services necessary to accomplish their goals. This general approach has been implemented in different ways in different states. Alaska's Youth Initiative uses a version of this concept to pull together diverse and creative service packages on behalf of adolescents in the youth service system. Kentucky's ''wraparound services'' use the same concept to meet the needs of families experiencing difficulties in the care of their children, particularly emotionally disturbed children. Maryland's use of flexible dollars began in its Intensive Family Services program for a small number of highest-risk families, but it is now used throughout its protective services system. This "flex funds" concept is a centerpiece of family-based case management in Maryland's and North Dakota's Children and Family Services Reform Initiatives. In those states, generalist family service workers use these dollars to buy goods and services (rent deposits, emergency food, alcoholism treatment, emergency child care, etc.) as needed to stabilize families. Judged by the dollars that flow through this mechanism in these states, this approach barely qualifies as a financing strategy. Dollar amounts available per family range from a low of several hundred dollars to a high of several thousand. But judged by the capacity to ensure immediate response to families—in ways that mean the most to families—this method of channeling funds, and thus financing services, warrants wider exploration. The strategies discussed to this point represent attempts to overcome the worst effects of categorical funding. A fourth group of state financing strategies involves using federal entitlement programs to expand the fund-

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Effective Services for Young Children: Report of a Workshop ing base available for child and family services. This strategy differs from the others described here. It is less concerned with restructuring funding to local communities and to families and instead aims at ensuring that all available funds are used to expand services. By using federal funds fully, states and localities can then use other dollars to pay for service costs that are not reimbursable through federal sources. Expanding states' service financing through entitlements can be done in two ways. First, states use entitlements to cover as broad a range of services as federal law will allow and as state budgets can accommodate. Many states are beginning to examine the new Medicaid provisions of the past several years to determine how to use them to underwrite services. Medicaid's targeted case management provisions are already being used to expand state services to children with emotional disturbances and developmental disabilities. Similarly, Medicaid's expanded Early and Periodic Screening, Diagnosis, and Treatment (EPSDT) provisions are being scrutinized (and in some states are already in use) for their potential to reimburse a wider range of service costs as part of the treatment plan for an eligible child. In deciding how to use Medicaid financing, states must weight such factors as whether the danger of overmedicalizing services is offset by fiscal advantages, whether the per child reimbursement of Medicaid funding undercuts family-based service planning, etc. As with other entitlement funds, Medicaid's funding potential must be examined in the context of the service delivery structure that a state is trying to establish. The second way in which states are using entitlement funding to improve service systems is by claiming entitlements more aggressively for costs previously paid by state and local funds, thereby freeing those state and local funds for reinvestment in service systems improvements. In the past few years, Title IV-E of the Social Security Act has been used in this way. By expanding Title IV-E claims to the maximum extent allowed under federal law, states can achieve a sudden and dramatic revenue increase. State funds freed by this infusion of federal funds can then be used to make more rapid and substantial changes to child and family services than might otherwise be possible. States' individual financial gains from Title IV-E in the past year have ranged from several million dollars to more than $30-40 million, depending on the size of the state. While not all of these funds have been reinvested in family services, a significant amount was. Most important, in keeping with a strategic approach to service financing, a significant number of states are using these increased Title IV-E claims to build more effective service systems. The financing strategies outlined here are just some of the states' new approaches. Other approaches are developing rapidly, raising questions about future directions of funding innovations.

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Effective Services for Young Children: Report of a Workshop ISSUES FOR THE FUTURE Several trends seem likely to influence states' financing strategies for child and family services over the next decade. The first is discernible from today's innovations. Many states are attempting to put in place financing structures that are genuinely child-and family-centered, that is, newly responsive to individual child and family needs and community priorities. The basic elements of such a system might involve: (1) front-line flexible funding that gives workers discretion over dollar expenditures; (2) noncategorial allocations to local communities, with state-established expectations and outcomes but allowing local decisions about service priorities; and (3) incremental decategorization of existing funds into these more flexible funding structures. (The states participating in the Annie E. Casey Foundation's reform initiative are building such systems, as are other states, but none is fully developed.) Many issues must be addressed as such systems grow: To what extent can and should current funding be consolidated as part of flexible funding arrangements, either at the community or the client level? How should flexible fund allocations be combined with predetermined funding levels for core, mandated services? Can alternative accountability structures be put in place (outcome expectations and measures, etc.) to replace the minimal accountability now obtained through prescriptive, categorical funding? Politically, can effective advocacy be marshaled on behalf of flexible funding? The second issue for states seeking improved service financing is how funding can be provided through a more stable, entitlement-oriented mechanism. Part of the pressure for broader use of Medicaid financing for children and family services comes from states' desire to shift away from social service funding sources to an ensured entitlement financing base. A similarly motivated (at least in part) state interest is developing to link family services to schools and to education funding. Better ties between educational services and child and family services make sense programmatically, but they also raise intriguing financing possibilities. Key questions here are: Can child and family services be more closely associated with the health care and educational systems without taking on the more negative aspects of the medical and educational models? Can states find ways to combine their greater use of entitlements with the innovative, highly flexible family service funding described above?

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Effective Services for Young Children: Report of a Workshop Fueled by simultaneous pressures to control costs and improve services, states are likely to continue their financing innovations. The challenge will be to direct these new approaches in a way that, in fact as well as in theory, makes financing structures more rather than less useful to families, and more rather than less likely to promote effective outcomes.