[Federal Register Volume 68, Number 189 (Tuesday, September 30, 2003)]
[Rules and Regulations]
[Pages 56449-56466]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 03-24291]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Administration for Children and Families

45 CFR Part 260

RIN 0970-AC12


Charitable Choice Provisions Applicable to the Temporary 
Assistance for Needy Families Program

AGENCY: Administration for Children and Families (ACF), Department of 
Health and Human Services (HHS).

ACTION: Final rule.

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SUMMARY: This final rule implements the Charitable Choice statutory 
provisions in the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 (PRWORA) as amended. The statutory and 
regulatory provisions apply to the Temporary Assistance for Needy 
Families (TANF) program administered by ACF. The statute and final rule 
establish requirements for State and local governments that administer 
or provide TANF services and benefits through contracts or through 
certificates, vouchers, or other forms of disbursement. The 
requirements and protections also apply to organizations, including 
faith-based organizations, that provide services and benefits with TANF 
funds and to the beneficiaries of those services.
    The TANF Charitable Choice provisions of PRWORA were enacted to 
ensure that low-income families receive effective needed services, 
including services provided by faith-based organizations. In creating a 
Faith-Based and Community Initiative, President Bush has said: ``* * * 
when we see social needs in America, my administration will look first 
to faith-based programs and community groups, which have proven their 
power to save and change lives. We will not fund the religious 
activities of any group. But when people of faith provide social 
services, we will not discriminate against them.'' To carry out that 
commitment and to implement the statute, the final rules clarify the 
protections for beneficiaries of services, the rights and obligations 
of religious organizations that provide TANF-funded services, and the 
requirements and limitations of State and local governments.

EFFECTIVE DATE: October 30, 2003.

FOR FURTHER INFORMATION CONTACT: April Kaplan, Deputy Director, Office 
of Family Assistance, ACF, at (202) 401-5138. Deaf or hearing-impaired 
individuals may call the Federal Dual Party Relay Service at 1-800-877-
8339 between 8 a.m. and 7 p.m. Eastern time.

SUPPLEMENTARY INFORMATION: On December 17, 2002, ACF published a Notice 
of Proposed Rulemaking (NPRM) to implement the ``Charitable Choice'' 
statutory provisions of section 104 of the Personal Responsibility and 
Work Opportunity Reconciliation Act of 1996 (PRWORA) (Pub. L. 104-193). 
67 FR 77362 (2002). We provided a 60-day comment period that ended on 
February 18, 2003. We offered the public the opportunity to submit 
comments by surface mail, E-mail, or electronically via our Web site.

Comment Overview

    After accounting for duplications, we received 38 comments on the 
NPRM. We heard from faith-based groups and associations, State welfare 
agencies and social services departments, national associations, 
advocacy groups, other State-level organizations, and the general 
public. Most commenters addressed all aspects of the statutory and 
regulatory framework and offered extensive suggestions. Some comments 
were generally positive, supportive of specific provisions and 
appreciative of our attempt to clarify the statutory requirements. In 
general, many commenters had mixed views on both the statutory 
provisions and proposed regulatory policies (where we had exercised 
regulatory discretion), supporting some provisions and opposing others. 
We have summarized the public comments and our response to them 
throughout sections I through XIII of the preamble of this final rule.

Table of Contents

I. The Charitable Choice Statutory Framework
II. Regulatory Authority
III. Constitutional Issues--Establishment and Free Exercise Clauses
IV. Equal Treatment for Religious Organizations
V. Restrictions on Inherently Religious Activities by Organizations 
that Receive Direct TANF Funding
VI. Religious Character and Independence of Religious Organizations
VII. Employment Practices
VIII. Nondiscrimination Against Beneficiaries
IX. Notice, Referral, and Provision of Services from Alternative 
Providers
X. Fiscal Accountability
XI. Effect on State and Local Funds
XII. Treatment of Intermediate Organizations
XIII. Regulatory Analyses
    [sbull] Paperwork Reduction Act of 1995
    [sbull] Regulatory Flexibility Analysis
    [sbull] Regulatory Impact Analysis
    [sbull] Unfunded Mandates Reform Act of 1995
    [sbull] Congressional Review
    [sbull] Assessment of Federal Regulation and Policies on 
Families
    [sbull] Executive Order 13132
XIV. Final Rule

I. Charitable Choice Statutory Framework

    Title I of the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996 (PRWORA) (Pub. L. 104-193) sets forth 
certain ``Charitable Choice'' provisions in section 104, entitled 
``Services Provided By Charitable, Religious, or Private 
Organizations.'' This section clarifies State authority to administer 
and provide TANF services through contracts with charitable, religious, 
or private organizations and to provide beneficiaries with 
certificates, vouchers, or other forms of disbursement, which are 
redeemable with such organizations. The provisions of section 104 are 
hereinafter referred to as ``TANF Charitable Choice provisions.'' In 
addition to giving States the ability to contract with a range of 
service providers and use optimal funding mechanisms, and giving 
families a greater choice of TANF-funded providers, section 104 sets 
forth certain requirements to ensure that religious organizations are 
able to compete on an equal footing for funds under the TANF program, 
without impairing the religious character of such organizations or 
diminishing the religious freedom of TANF beneficiaries.
    President Bush has made it one of his Administration's top 
priorities to ensure that Federal programs are fully open to faith-
based and community groups in a manner that is consistent with the 
Constitution. It is the Administration's view that faith-based 
organizations are an indispensable part of the social services network 
of the United States. Faith-based organizations, including places of 
worship, non-profit organizations, and neighborhood groups, offer a 
myriad of social services to those in need. The TANF Charitable Choice 
provisions are consistent with the Administration's belief that there 
should be an equal opportunity for all organizations--both faith-based 
and non-religious--to participate as partners in Federal programs to 
serve Americans in need.
    This final rule implements the TANF Charitable Choice provisions 
applicable to State and local governments and to religious 
organizations in their use of

[[Page 56450]]

Federal TANF and State maintenance-of-effort (MOE) funds. The objective 
of this rule is to ensure that the TANF program is open to all eligible 
organizations, regardless of their religious affiliation or character, 
and to establish clearly the proper uses to which funds may be put and 
the conditions for receipt of funding.
    This final rule adds Sec.  260.34, ``When do the Charitable Choice 
provisions of TANF apply?'' to 45 CFR Part 260, ``General Temporary 
Assistance For Needy Families Provisions.'' The introductory language 
addresses the applicability of the Charitable Choice provisions to the 
TANF program. We have slightly reformatted the flow of the regulatory 
provisions. The introductory language is now under Sec.  260.34(a). 
Section 260.34(a) also includes the definitions of ``direct'' funding 
and ``indirect'' funding, originally proposed as additions to the 
definitions in 45 CFR 260.30. We placed the definitions under Sec.  
260.34 because these terms are used exclusively in this section and are 
not common terms used throughout parts 260-265.
    Specifically, the rules provide that Charitable Choice applies 
whenever a State or local government:
    [sbull] Uses Federal TANF funds or expends State or local funds 
claimed to meet the State's MOE requirement to procure services and 
benefits from non-governmental organizations; or,
    [sbull] Provides clients with certificates, vouchers, or other 
forms of disbursement that can be redeemed for services in connection 
with the TANF program.
    When State or local funds are used to meet the TANF MOE 
requirements, the provisions apply irrespective of whether the State or 
local funds are commingled with Federal funds, segregated, or expended 
in separate State programs. However, pursuant to section 104(k) of 
PRWORA as amended (42 U.S.C. 604a(k)), nothing in the Charitable Choice 
requirements shall be construed to preempt any provision of a State 
constitution or State statute that prohibits or restricts the 
expenditure of State funds in or by religious organizations. 
Accordingly, States that are subject to such restrictions should 
segregate their Federal funds from the funds which are subject to the 
provisions of the statute.
    The word ``assistance'' is used throughout the Charitable Choice 
provisions in section 104 of PRWORA as amended (42 U.S.C. 604a). When 
``assistance'' is used in the Charitable Choice statutory provisions, 
it broadly refers to all kinds of help, services, and benefits. In 
other words, it is broader than the definition of ``assistance'' under 
45 CFR 260.31(a) of this part. The Charitable Choice provisions apply 
to any and all of the services and benefits available to clients, 
through contracts, certificates, vouchers, or other forms of 
disbursement of TANF funds. Thus, we have used the term ``benefits'' 
and ``services'' in the final regulation to refer to the broad range of 
activities or help available to clients. We also want to avoid any 
misunderstanding that Charitable Choice is solely limited to the 
provision of the types of services that constitute ``assistance'' as 
defined in 45 CFR 260.31(a).
    However, because the Charitable Choice provisions refer only to 
State and local governments, Sec.  260.34 does not apply to Tribal 
governments operating TANF programs under section 412 of the Social 
Security Act.

II. Regulatory Authority

    We are issuing this final regulation under the authority granted to 
the Secretary of Health and Human Services (the Secretary) by 42 U.S.C. 
1302 and 42 U.S.C. 604a. Section 1302 of 42 U.S.C. authorizes the 
Secretary to publish regulations that may be necessary to the efficient 
administration of the functions for which he is responsible under this 
chapter--i.e., 42 U.S.C., chapter 7 (Social Security). Section 604a of 
Title 42, chapter 7 of the United States Code sets forth provisions 
authorizing States to use faith-based groups, as well as other non-
governmental charities, community groups and private organizations, to 
provide benefits and services under the TANF program that help families 
achieve self-sufficiency, and includes certain conditions related to 
such authority.
    As we indicated in the NPRM, section 417 of the Social Security Act 
provides that the Federal government may not regulate the conduct of 
States under this part or enforce any of the provisions in this part, 
except to the extent expressly provided by law. Section 417 applies 
only to Federal regulation or enforcement of TANF provisions in Title 
IV, part A of the Social Security Act.
    Comment: Several commenters questioned our authority to regulate 
under the Charitable Choice statutory provisions. Specifically, the 
commenters maintained that, while the Charitable Choice provisions are 
not part of Title IV-A of the Social Security Act (the TANF program), 
the provisions appear in the U.S. Code ``under this part''--i.e., 42 
U.S.C., Chapter 7 (Social Security), Subchapter IV (Grants to States 
for Aid and Services to Needy Families With Children and for Child-
Welfare Services), Part A (the TANF program), section 604a. The 
limitation on our authority to regulate is also in this part of the 
U.S. Code, at 42 U.S.C. 617, which provides that ``no officer or 
employee of the Federal Government may regulate the conduct of States 
under this part or enforce any provision of this part, except to the 
extent expressly provided in this part.'' Since section 604a is a 
provision ``of this part,'' and there is nothing in 604a that expressly 
provides for regulations, the commenters said that we have exceeded our 
authority.
    Response: We disagree with the commenters' position that we have no 
authority to regulate in this area. The limitation on our authority to 
regulate was enacted as part of the Social Security Act, Title IV, Part 
A, Section 417. The provision limits our authority to issue regulations 
implementing any provision in ``this part'' of the Social Security Act 
(i.e., Part A, Title IV). Since the Charitable Choice provisions are 
not in this, or any, part of the Social Security Act, they are not 
subject to the limitation on our authority to regulate.
    Codification of both the limitation on our regulatory authority and 
the Charitable Choice provisions in the same section of the U.S. Code 
(Chapter 7, Part A) does not broaden the restriction on our authority 
to regulate. Nor does the codification make the Charitable Choice 
provisions a part of the Social Security Act that is subject to section 
417. The Charitable Choice provisions remain distinguishable from those 
found in Part A, Title IV, of the Social Security Act notwithstanding 
the fact that both are codified in the same chapter. As recognized in 
The Historical and Statutory Notes accompanying the Charitable Choice 
provisions as codified, 42 U.S.C. section 604a, they were ``enacted as 
part of the Personal Responsibility and Work Opportunity Reconciliation 
Act of 1996 and not as part of the Social Security Act which comprises 
this chapter.'' We believe the placement of the Charitable Choice 
provisions in the same chapter as section 417 does not change the 
meaning of either provision.
    In summary, Congress did not intend for the Charitable Choice 
provision to be included in the Social Security Act since PRWORA did 
not amend the Social Security Act to include Charitable Choice. 
Therefore, we conclude that the limitation on Federal authority to 
regulate conduct or enforce the Charitable Choice provisions does not 
apply.
    Because the limitation in section 417 of the Social Security Act 
does not apply, the Secretary has used the

[[Page 56451]]

authority granted to him in 42 U.S.C. chapter 7, section 1302, to 
publish this regulation, necessary to the efficient administration of 
the functions for which he is responsible under chapter 7. The 
Charitable Choice provisions have been codified under chapter 7 of the 
United States Code at 42 U.S.C.604a.
    Comment: One commenter pointed out that section 104 of PRWORA, as 
amended, begins as a State option. Therefore, it is not mandatory, as 
the NPRM implies.
    Response: We recognize that section 104(a) of PRWORA as amended (42 
U.S.C. 604a(a)(1)) does provide that a ``State may (A) administer and 
provide services * * * through contracts with charitable, religious, or 
private organizations; and (B) provide beneficiaries of assistance * * 
* with certificates, vouchers, or other forms of disbursement which are 
redeemable with such organizations.''
    Essentially, this subsection permits a State to choose to conduct 
its TANF program by providing funding to help beneficiaries directly 
(e.g., through contracts with social service providers) or indirectly 
(e.g., with certificates, vouchers, or other forms of disbursement 
which are redeemable with charitable, religious, or private 
organizations). In other words, the State is not limited to providing 
all of the needed services itself, nor must it retain the 
administration of any or all of its TANF activities.
    If a State does choose to involve any non-governmental providers, 
however, then the Charitable Choice provision at section 104(c) of 
PRWORA as amended (42 U.S.C. 604a(c)) requires involving religious 
organizations on the same basis as any other non-governmental 
providers. Therefore, when a State chooses to involve the non-
governmental sector in the provision of benefits and services for or on 
behalf of TANF-eligible beneficiaries, then the TANF Charitable Choice 
provisions stipulate that a religious service provider may not be 
excluded from eligibility for contracts, subcontracts, vouchers, or the 
like.

III. Constitutional Issues--Establishment and Free Exercise Clauses

Background

    The TANF Charitable Choice statutory provisions were enacted within 
the constitutional framework of government interaction with religious 
organizations. The goal of Charitable Choice is not to support or 
sponsor religion, but to ensure fair competition among providers of 
services for low-income families, whether they are public or private, 
secular or faith-based. The statute, the proposed rule, and this rule 
each requires that contracts with or vouchers redeemable with religious 
organizations must comport with the constitutional framework. Patterned 
after the statutory language, the proposed rule at Sec.  260.34(a)(1) 
(now Sec.  260.34(b)(1)) explicitly provided that: ``Religious 
organizations are eligible, on the same basis as any other 
organization, to participate in TANF programs as long as their TANF or 
MOE-funded services are provided consistent with the Establishment 
Clause and the Free Exercise Clause of the First Amendment to the 
United States Constitution.''
    Comment: Several commenters opined that the proposed rule was an 
unconstitutional breach of the principle of separation of church and 
State, because it would allow public funds to be given to ``pervasively 
sectarian'' organizations, contrary to longstanding judicial precedent.
    Response: We do not agree with the commenters. Religious 
organizations that receive direct TANF funds for social services cannot 
use such funds for inherently religious activities. These organizations 
must ensure that religious activities are separate in time or location 
from the treatment services and they must also ensure that 
participation in such religious activities is voluntary. Furthermore, 
they are prohibited from discriminating against a program beneficiary 
on the basis of religion, a religious belief, a refusal to hold a 
religious belief, or a refusal to actively participate in a religious 
practice.
    The Supreme Court's ``pervasively sectarian'' doctrine--which held 
that there are certain religious institutions in which religion is so 
pervasive that no government aid may be provided to them, because their 
performance of even ``secular'' tasks will be infused with religious 
purpose--no longer enjoys the support of a majority of the Court. Four 
Justices expressly abandoned it in Mitchell v. Helms, 530 U.S. 793, 
825-829 (2000) (plurality opinion), and Justice O'Connor's opinion in 
that case set forth reasoning that is inconsistent with its underlying 
premises, see id. at 857-858 (O'Connor, J., concurring in judgment, 
joined by Breyer, J.) (requiring proof of ``actual diversion of public 
support to religious uses''). Thus, six members of the Court have 
rejected the view that aid provided to religious institutions will 
invariably advance the institutions' religious purposes, and that view 
is the foundation of the ``pervasively sectarian'' doctrine. We 
therefore believe that when current precedent is applied to a social 
service program, or to the TANF Charitable Choice provisions, 
government may fund all service providers, without regard to religion 
and free of criteria that require the provider to abandon its religious 
expression or character.
    Comment: Several commenters asked that the final rule include a 
more comprehensive definition and examples of a ``religious 
organization'' and a ``faith-based organization.''
    Response: Throughout the proposed rule, we used the term 
``religious organization'' and the term ``faith-based organization'' 
interchangeably. Neither the U.S. Constitution nor the relevant Supreme 
Court precedents contain a comprehensive definition of religion or a 
religious organization that must be applied to this rule. Yet, an 
extensive body of judicial precedent provides the practical guidelines 
that States and religious organizations need to conform to the 
Establishment and the Free Exercise Clauses of the First Amendment to 
the U.S. Constitution. Under the TANF Charitable Choice provisions, and 
as explained in the section that discusses fiscal accountability, a 
religious organization is not restricted to those that are ``non-
profit.'' We have deleted the definition of ``religious organization'' 
from the final rule.
    Comment: Several commenters asked that the final rule provide 
additional guidance on how to comply with the Establishment Clause and 
that it detail the scope of religious content that must be excluded 
from public funding.
    Response: In enacting the Charitable Choice provisions, Congress 
did not include specific statutory provisions with guidance on how to 
meet constitutional requirements. Like Congress, we do not believe it 
is appropriate in this rule to provide either States or religious 
organizations with detailed guidance on how to comply with the 
Establishment or Free Exercise Clauses of the Constitution. States and 
faith-based organizations have years of experience and extensive 
practice in following case law and adhering to judicial precedent to 
conform to these provisions. In enacting PRWORA, Congress sought to 
conform the law to this precedent while providing maximum flexibility 
to States in carrying out statutory requirements. The requirement in 
the proposed rule closely mirrors the statutory provision and we have 
retained the identical language of the proposal in the final rule.

[[Page 56452]]

IV. Equal Treatment for Religious Organizations

Background

    Under Sec.  260.34(a)(2) of the proposed rule (Sec.  260.34(b)(2)), 
we clarified that organizations are eligible to participate in the TANF 
program without regard to their religious character or affiliation, and 
may not be excluded because they are religious. Federal, State and 
local governments administering TANF funds are prohibited from 
discriminating against organizations on the basis of religion or their 
religious character.
    Comment: One commenter suggested that the final rule should also 
prohibit discrimination ``in favor of'' faith-based organizations. In 
selecting contractors, a government entity should not allow a 
provider's religious character to influence its selection.
    Response: Like the commenter, we believe congressional intent was 
to ensure neutrality and to prohibit any discrimination. Therefore, we 
have modified the language of the final rule to read, ``Neither the 
Federal government nor a State or local government in its use of 
Federal TANF or State MOE funds shall, in the selection of service 
providers, discriminate for or against an organization that applies to 
provide, or provides TANF services or benefits on the basis of the 
organization's religious character or affiliation.''
    Comment: A couple of commenters, noting the importance of this 
provision, which prohibits Federal, State and local governments 
administering TANF funds from discriminating against organizations on 
the basis of religion or their religious character, observed that the 
proposed rule is consistent with the statute and strongly supported 
retention in the final rule.
    Response: We agree with these comments and have retained similar 
language in the final rule.
    Comment: One commenter noted that the provisions under Sec.  
260.34(a)(1) and (2) (now Sec.  260.34(b)(1) and (2)) equate religious 
and non-religious providers and seek to treat them as equals, thereby 
failing to recognize the unique place that religion has in our society. 
Religion should be above the fray of government funding, regulation and 
auditing, not reduced to it.
    Response: This rule does not present any violation of the 
Establishment Clause or Free Exercise Clause. Rather, this rule governs 
the conscious decision of a religious organization to administer 
regulated activities, by accepting public funds to do so. Therefore, we 
have retained language that enables faith-based organizations to 
compete on an equal footing for funding, within the framework of 
constitutional church-State guidelines.

V. Restriction on Inherently Religious Activities by Organizations That 
Receive Direct TANF Funding

Background

    Section 260.34(c) of this rule describes limitations on the use of 
Federal TANF and State MOE funding provided directly to an organization 
by a governmental entity or by an intermediate organization that has 
the same duties as a governmental entity, as opposed to those funds 
that an organization receives indirectly as the result of the genuine 
and independent private choice of a beneficiary. The Charitable Choice 
provisions allow, at State option, for direct or indirect forms of 
funding, or both, to provide benefits and services. Under a ``direct'' 
funding method, the government or an intermediate organization with the 
same duties as a governmental entity purchases the needed services 
straight from the provider (e.g., via a contract). Under this scenario, 
there are no intervening steps in which the beneficiary's choice comes 
into play. The government or intermediate organization selects the 
provider which the beneficiary must attend. With an ``indirect'' 
funding method, by contrast, there is an intervening step in 
determining which social service provider receives the Federal TANF or 
State MOE funds. Under indirect funding, the individual in need of the 
service is given a voucher, coupon, certificate, or other means of free 
agency such that he or she has the power to select for himself or 
herself from among providers, whereupon the coupon (or other method of 
payment) may be ``redeemed'' and the services rendered. Hence, indirect 
funding means that individual private choice, rather than the 
government, determines which social service provider eventually 
receives the funds.
    Section 260.34(c) states that Federal TANF and State MOE funds that 
are provided directly to a participating organization may not be used 
to support inherently religious activities, such as worship, religious 
instruction, or proselytization. If an organization engages in such 
activities, the activities must be offered separately, in time or 
location, from the programs or services for which it receives direct 
Federal TANF or State MOE funds, and participation must be voluntary 
for the beneficiaries. This requirement ensures that such funds are not 
used to support inherently religious activities. Thus, direct Federal 
TANF and State MOE funds may not be used, for example, to conduct 
prayer meetings, devotional studies of sacred texts, or any other 
activity that is inherently religious.
    This restriction does not mean that an organization that receives 
direct Federal TANF or State MOE funds may not engage in inherently 
religious activities. It simply means that such an organization may not 
fund these activities with direct Federal TANF funds. Additionally, an 
organization may not fund these activities with funds that are used to 
meet the MOE requirements, since those funds must be spent consistent 
with the Charitable Choice requirements.
    For example, suppose a church has a contract with the State's TANF 
agency to provide job preparation classes. The classes are held in the 
finished basement of the church, the same place where the pastor of the 
church holds a Bible study group at the end of the day, when all other 
classes have ended. The pastor has extended an open invitation for 
anyone who wishes to attend the study group. The church must use 
private funds to pay for the Bible study activity. Thus, faith-based 
organizations that receive direct Federal TANF or State MOE funds must 
take steps to separate, in time or location, their inherently religious 
activities from the Federal TANF or State MOE-funded services that they 
offer.
    In addition, any participation by a program beneficiary in such 
religious activities must be voluntary. An invitation to participate in 
an organization's religious activities is not in itself inappropriate. 
However, directly funded religious organizations must be careful to 
inform program beneficiaries that their decision will have no bearing 
on the services they receive. In short, any participation by recipients 
of services in such religious activities must be voluntary and 
understood to be voluntary.
    On the other hand, these restrictions on inherently religious 
activities do not apply where Federal TANF or State MOE funds are 
indirectly provided to religious organizations as a result of a genuine 
and independent private choice of a beneficiary. A religious 
organization may receive such funds as the result of a beneficiary's 
genuine and independent private choice if, for example, a beneficiary 
redeems a voucher, coupon, certificate, or similar funding mechanism 
that was provided to that individual using Federal TANF or State MOE 
funds under a program that is designed to give that individual a choice 
among providers. Thus, religious organizations that receive Federal 
TANF

[[Page 56453]]

or State MOE funds to provide services as a result of a beneficiary's 
genuine and independent private choice need not separate, in time or 
location, their inherently religious activities from the Federal TANF 
or State MOE funded services they provide, provided they otherwise 
satisfy the requirements of the program.
    Comment: Some commenters expressed concern that the ``inherently 
religious activities'' only need to be offered separately in time or 
location from the benefits and services provided with direct Federal 
TANF or State MOE funds. They recommended modifying the regulations to 
stipulate that if an organization conducts inherently religious 
activities, then it must offer them separately in both time and 
location.
    Response: We decline to accept this recommendation. HHS believes 
that this is legally unnecessary and that it would impose an 
unnecessarily harsh burden on small religious organizations, which may 
have access to only one location that is suitable for the provision of 
the service(s). However, this does not preclude an organization that 
receives direct Federal TANF or State MOE funds from choosing to set 
apart such activities in both time and location.
    Comment: One commenter considered the requirement of separating the 
inherently religious activities in time or location as insufficient 
guidance, and recommended that we define religious content and context 
and add these terms to the regulation. Another commenter asked what 
constituted an inherently religious activity. The commenter further 
stated that the exclusion of all ``inherently religious'' activities 
from government funding is flawed, and puts many faith-based 
organizations in the position of having to choose either to deny their 
core religious perspectives on social issues or to reject government 
funds for their programs that accomplish the government's objectives. A 
third commenter noted that the phrase ``inherently religious 
activities,'' coupled with ``such as'' opens the door to concluding 
that activities like providing food for the hungry, or shelter for the 
homeless, could be considered an inappropriate use of TANF funds, if 
such activities have been undertaken for religiously informed reasons.
    Response: We decline to add definitions of religious content and 
context into the regulation. We also decline to define ``inherently 
religious,'' except through the examples given in the regulation. The 
examples are not all-inclusive, as indicated by the introductionary 
phrase ``such as.'' The examples include worship, religious 
instruction, or proselytization. These are the very examples given in 
PRWORA as amended, section 104(j) (42 U.S.C. 604a(j)), in the provision 
limiting the use of Federal TANF or State MOE funds provided directly 
to institutions or organizations for the delivery of services to TANF-
eligible beneficiaries. (Other basic examples include prayer meetings 
and devotional studies of sacred texts.) As some of the commenters 
noted, it would be difficult to establish an acceptable list of all 
inherently religious activities. Inevitably, the definition would fail 
to include some inherently religious activities or include certain 
activities that are not inherently religious. Our approach is 
consistent with Supreme Court precedent, which likewise has not 
comprehensively defined inherently religious activities. The Court has 
explained, however, that prayer and worship are inherently religious, 
but that social services do not become inherently religious merely 
because they are conducted by individuals who are religiously motivated 
to undertake them or view the activities as a form of ``ministry.'' We 
have added ``Federal'' and ``State'' where applicable, to clarify that 
the rule applies to both Federal TANF and State MOE funds.
    In using the term ``inherently religious,'' we simply wanted to set 
forth a basic framework of understanding as to appropriate and 
inappropriate uses of direct Federal TANF or State MOE funds. In other 
words, direct Federal TANF and State MOE funds may only be used for the 
non-religious services and functions offered by a religious 
organization, but not for any part of those services constituting the 
group's ``inherently religious'' beliefs or practices. Hence, the 
organization's inherently religious functions must be separated--i.e., 
in time or location, as expressed by the regulation. Any inherently 
religious activities must be funded entirely by private funds.
    Some organizations may be unable or unwilling to structure their 
program by separating its inherently religious activities in time or 
location, as required. These organizations would not qualify to provide 
any of the State's directly funded social service activities, but could 
be considered candidates for providing assistance through indirect 
funding methods.
    This limitation on the use of the direct funds is not meant to put 
an organization in the position of having to deny its core religious 
perspectives on social issues or reject government funds for its 
programs that are consistent with the purposes of the TANF program. We 
recognize that while the government regards services like feeding the 
hungry and housing the poor as social services or secular work, some 
organizations may regard these same activities as acts of mercy, 
spiritual service, fulfillment of religious duty, good works, or the 
like. Nevertheless, as a general matter, an activity such as providing 
food for the hungry or shelter for the homeless would constitute an 
appropriate use of funds, as long as any inherently religious 
activities offered by the organization are separate, privately funded, 
and voluntary.
    Comment: One commenter hoped that we would retain the requirement 
that organizations offer inherently religious activities separately in 
time or location from the social services funded with direct Federal 
TANF or State MOE funds. The commenter also agreed that the 
beneficiary's participation must be voluntary. Other commenters 
expressed concern that Sec.  260.34(b) (now Sec.  260.34(c)) does not 
adequately protect participants who do not wish to participate in 
inherently religious activities. The commenters suggested that we 
strengthen the provision in this subsection so clients may not be 
coerced, explicitly or tacitly, to participate in religious activities, 
or feel pressured to participate in such activities. These commenters 
argued that individuals in need are not always in a condition to make a 
thoughtful and well-considered decision whether or not to participate 
in worship or similar activities offered by a religious social service 
provider, particularly when the individual is in great need of the 
service.
    Response: We believe that the provision suffices as written. 
However, we will use this opportunity to reaffirm that a person's 
participation in any religious activities must be entirely voluntary or 
noncompulsory. Beneficiaries of directly funded Federal TANF or MOE 
social services have the right not to take part in any unwanted 
religious practice. Therefore, they may, at any time, refuse to 
participate in inherently religious activities. We recommend that 
States and organizations help to ensure that clients and prospective 
clients have a clear understanding of the services offered by an 
organization by having literature available to give to the client which 
fully explains the services offered, including any inherently religious 
activities, as well as the individual's rights.
    Comment: One commenter wrote that the rules should clarify that 
individuals who refuse to participate in the inherently religious 
activities will not

[[Page 56454]]

be excluded from the program and will not suffer any discrimination in 
the administration of the program. Congress specified that Federal 
funds may not be used for religious purposes, but the rules provide no 
enforcement mechanism, so beneficiaries have no administrative relief 
if violations occur.
    Response: The TANF Charitable Choice provision at section 104(g) of 
PRWORA as amended (42 U.S.C. 604a(g)) explicitly prohibits a religious 
organization from discriminating against a participant on the basis of 
religion, religious belief, or refusal to participate in a religious 
practice. The final rule reiterates this requirement in Sec.  
260.34(f). For example, if the service provider is a faith-based 
organization (FBO), the FBO may not discriminate against the individual 
on account of religion, a religious belief or a refusal to hold a 
religious belief. In addition, the FBO may not turn away a beneficiary 
from the organization's program solely because the beneficiary refuses 
to participate in an inherently religious practice. Hence, this 
provision insures the beneficiary's right not to take part in any 
unwanted religious practices. The individual's participation in an 
inherently religious activity must be entirely voluntary or 
noncompulsory. Under the TANF Charitable Choice provisions, government 
may not compel an individual, through loss of public benefit or 
advantage, to profess a religious belief or to observe an inherently 
religious practice. Furthermore, the TANF Charitable Choice provision 
at section 104(i) of PRWORA as amended (42 U.S.C. 604a(i)) states ``Any 
party which seeks to enforce its right under this section may assert a 
civil action for injunctive relief exclusively in an appropriate State 
court against the entity or agency that allegedly commits such 
violation.'' ``Any party'' includes the beneficiary. We inadvertently 
omitted the statutory right to assert a civil action in State court 
from the proposed regulation. We have added this provision to the final 
regulation at Sec.  260.34(l).
    Comment: One commenter wrote that individuals actually providing 
government-funded social services should not be involved in 
``offering'' an inherently religious activity to program recipients. 
Another commenter expressed concern over allowing recipients to 
volunteer to participate in religious practices or services, because 
this will force administrative complexity on the State. A third 
commenter asked whether a participant could volunteer to participate in 
a religious activity in lieu of or during the time that TANF-funded 
activities are conducted.
    Response: If the opportunity to participate in inherently religious 
activities is offered at all, then it would be the organization 
receiving the Federal TANF or State MOE funds that would offer it. 
Thus, while we recognize that staff working for the organization might 
offer the TANF beneficiary the opportunity to participate in an 
inherently religious activity, we believe that the act of ``offering'' 
is attributable to the organization and its own staff, not to the TANF 
agency. Therefore, we conclude that the ``offer'' does not violate the 
Charitable Choice requirement at Sec.  260.43(c) provided participation 
is voluntary. The regulation at Sec.  260.34(c) requires that ``If an 
organization conducts such (inherently religious) activities, it must 
offer them separately * * * and participation must be voluntary for the 
beneficiaries of those programs or services.''
    In providing the direct funding to pay for social service benefits, 
the TANF agency or any other part of the government must neither 
support nor sponsor any of the organization's inherently religious 
activities. Also, the government may not encourage (or, for that 
matter, discourage) the beneficiary to participate in any inherently 
religious activities. Hence, we see no reason why a beneficiary's own 
choice to participate in an inherently religious activity provided by 
an organization should present an administrative complexity to the TANF 
agency. Additionally, neutral direct aid to an organization does not 
mean, absent evidence to the contrary, that the organization will 
divert any part of the Federal TANF or State MOE funds to pay for 
inherently religious activities that a beneficiary attends voluntarily. 
And, there is nothing in the TANF Charitable Choice provisions that 
prevents States from implementing reasonable and prudent procurement 
policies to prevent funds from being misapplied to finance such 
activities.
    Finally, under TANF, States generally have broad discretion in 
establishing the objective eligibility criteria that the individual or 
family must meet in order to receive particular benefits (whether that 
benefit is directly or indirectly funded). We do not prescribe how a 
State determines the beneficiary's eligibility or continued eligibility 
for the benefits. States may even attach conditions to the 
beneficiary's receipt of the TANF or MOE-funded benefit (e.g., 
attendance requirement/absentee limits for participation in a job 
training or job skills upgrade class). If the individual does not 
satisfy the conditions established for the receipt of the benefit, then 
the State could treat the expenditure as an overpayment subject to 
recovery.
    Comment: One commenter wrote that the definition and distinction 
between direct funding and funding an organization receives as a result 
of the independent private choice of a beneficiary has significance for 
constitutional reasons and should be retained.
    Response: We agree, and have retained the distinction applicable to 
the funding restrictions on inherently religious activities.
    Comment: One commenter asked us to clarify that, where assistance 
is ``indirect,'' a faith-based organization may, consistent with the 
Establishment Clause, require beneficiaries to participate in its 
entire program, including the inherently religious components.
    Response: Indirect Federal TANF or State MOE funding methods enable 
the individual to choose where he or she wants to receive the needed 
services. Therefore, the organization providing the service to the 
beneficiary may invite (not require) the beneficiary to participate in 
inherently religious activities as part of its entire program. This is 
because the statute at section 104(g) of PRWORA (42 U.S.C.604a(g)) 
prohibits an organization from discriminating against an individual in 
rendering assistance on the basis of religion, a religious belief, a 
refusal to hold a religious belief, or refusal to actively participate 
in a religious practice. So, the individual has the right to refuse to 
participate in the religious practice and may not be deprived of the 
offered social services. Or, if the individual wants to receive the 
service from an alternative provider because he or she objects to the 
religious character of the organization or institution, then the State 
must use an alternative provider to furnish the service.
    The TANF Charitable Choice prohibition at section 104(j) of PRWORA 
as amended (42 U.S.C. 604a(j)) speaks to funds ``provided directly to 
institutions or organizations.'' It does not include ``indirect 
funding.'' As a result, organizations that receive funds indirectly 
(e.g., by means of vouchers or certificates) do not have to separate, 
in time or location, their inherently religious activities from the 
Federal TANF or State MOE funded services they furnish--provided they 
otherwise satisfy the requirements of the program.
    However, the alternative provider requirement at section 104(e) of 
PRWORA as amended (42 U.S.C.

[[Page 56455]]

604a(e)) does not differentiate between direct and indirect funding of 
services. Therefore, we conclude that the alternative provider 
requirement applies whether Federal TANF or State MOE funds are 
provided directly or indirectly to the institution or organization. The 
beneficiary has a right to an alternative provider, regardless of 
funding method.
    We recommend that States and organizations help to ensure that 
clients and prospective clients have a clear understanding of the 
services offered by an organization by having literature available to 
give to clients which fully explains the services offered, including 
any inherently religious activities, as well as expectations and 
requirements.
    Comment: One commenter asked us to clarify the definition of 
indirect funding and its application to service providers and to 
provide examples.
    Response: Essentially, indirect funding places the choice of 
service provider in the hands of the beneficiary. Then, the State pays 
for the cost of that service through a voucher, certificate, or other 
means of free agency. In this way, the government is providing 
assistance to beneficiaries by dealing ``indirectly'' with independent 
providers and directly with beneficiaries. For example, the TANF 
agency, operating under a neutral program of aid, could present the 
beneficiary with a list of all qualified providers at which the 
beneficiary could obtain services using a government-provided 
certificate. Or, the State could choose to allow the beneficiary to 
secure the needed service on his/her own. Either way, the State 
empowers the beneficiary to choose for himself or herself to receive 
the needed services through a religious organization or through some 
other provider. The State could pay for the individual's choice of 
provider by giving the individual a voucher or other business form that 
tells the provider that the TANF agency will pay for the service. Or, 
the State could choose to pay the provider directly after asking the 
beneficiary to indicate his/her choice. We have added the above 
definition in Sec.  260.34(a) of the final regulation.
    Comment: Several commenters wrote that the voucher program 
authorized by the proposed rule lacks adequate constitutional 
safeguards, including legitimate secular options and secular purpose. 
Another commenter wrote that the proposed rule did not mention the 
provision of secular alternatives in cases where the voucher provider 
is religious. Without reasonable secular alternatives, beneficiaries 
may be forced to use religious providers. Yet another commenter 
expressed concern that the ability of individuals to use government-
sponsored vouchers for religiously based services erodes the 
traditional American value of separation of church and State. The 
commenter thinks that State and local governments will be subject to 
numerous lawsuits challenging the legality of the use of government 
funds for religiously-based programs.
    Response: The TANF Charitable Choice provision at section 
104(a)(1)(B) (42 U.S.C. 604a(a)(1)(B)) authorizes the use of 
``certificates, vouchers, or other forms of disbursement,'' as a State 
option. But, neither the statute, the NPRM, nor the final rule, 
``require'' a voucher program. Although States must have a policy of 
inclusion as discussed below, they also have the flexibility to decide 
the best methods of delivering the services to or on behalf of their 
clientele. States are obligated to ensure that they provide options in 
a manner consistent with the Establishment Clause of the First 
Amendment and may review any relevant precedents concerning vouchers to 
do so.
    We do not agree with the contentions that vouchers for religiously 
based services erode the value of separation of church and State, force 
individuals to attend ``pervasively sectarian'' institutions, or lack 
secular purpose for the following reasons. First, the Supreme Court has 
consistently upheld the constitutionality of mechanisms of indirect 
aid, such as vouchers, distributed without regard to religion. 
Therefore, we think that it is reasonable to conclude that neutral, 
indirect aid to a religious organization does not violate the 
Establishment Clause.
    Second, the goal is secular, namely, to fund social services that 
help TANF-eligible individuals and families attain and maintain self-
sufficiency. The Charitable Choice provisions level the playing field 
for qualified providers of these services who are faith-based, by 
giving them the right to participate in the provision of those 
services. The TANF Charitable Choice provisions simply stipulate that a 
religious service provider may not be excluded from eligibility for 
contracts, subcontracts, vouchers, or the like, on the grounds that the 
provider is religious, too religious, or ``pervasively sectarian.'' 
This does not mean that the object of Charitable Choice is to support 
or sponsor religion or participating religious providers.
    Furthermore, the TANF Charitable Choice provisions do not guarantee 
that Federal TANF or State MOE funds must automatically flow to 
religious providers. Whether funding is direct or indirect, the 
Charitable Choice provisions simply guarantee that religious providers 
will not be discriminated against in the procurement process, by 
requiring government to stop ``picking and choosing'' among groups on 
the basis of religion.
    Finally, Sec.  260.34 (g) states that if the applicant or recipient 
objects to the religious character of a TANF service provider, he or 
she is entitled to an alternative provider to which the individual has 
no religious objection. This is in keeping with the TANF Charitable 
Choice provision at section 104(e)(1) (42 U.S.C. 604a(e)(1)), which 
requires that the State provide the individual with assistance from 
``an alternative provider.'' Hence, the alternative provider could, but 
does not have to be secular.
    Comment: One commenter contends that there are numerous unresolved 
issues concerning the funding for the vouchers. For example, how would 
local governments measure ``comparable services'' between secular and 
religious-based programs if the individual used the TANF voucher in a 
``pervasively sectarian'' program? Or, if the beneficiary redeems a 
voucher and dissents from the program because of its religious tone, is 
that voucher transferable? This commenter also asked whether a local 
government may object to the individual's ``genuine and independent 
private choice'' with regard to the program. Would such an act by the 
local government subject it to the loss of Federal funding?
    Response: States may establish their own policies and procedures 
for establishing eligibility or continued eligibility for a particular 
social service benefit, as well as the method of delivery, management, 
and disposition of the benefit. In keeping with the flexibility 
afforded to States, States may determine for themselves how best to 
define which services are comparable to those that the TANF agency has 
determined an individual is eligible to receive.
    We are confident that States are well-versed in collaborating with 
local jurisdictions, other State agencies, and appropriate social 
service providers, and therefore we do not anticipate problems with the 
quality of a person's free and independent choice under an indirect aid 
scenario.
    Comment: One commenter wrote that the indirect-funding definition 
opens the door to government-funded worship and proselytization. This 
commenter asked us to require that all government-funded services are 
free of religious content. In addition, the commenter thinks that 
``free and independent choice'' is a myth which incorrectly

[[Page 56456]]

assumes that people in need will be able to shop for services. Social 
services are not available on a scale that makes ``choice'' real. 
People use the most geographically accessible providers.
    Response: We find no basis to require that indirectly funded 
services be free of religious content. Furthermore, we disagree that 
funding services indirectly opens the door to government-funded worship 
and proselytization. The Supreme Court has consistently held that 
governments may fund programs that place the benefit in the hands of 
individuals, who in turn have the freedom to choose the provider to 
which they take their benefit and ``spend'' it, whether that 
institution is public or private, nonreligious or religious. Therefore, 
any consequential aid to religion having its origin in such a program 
is the result of the beneficiary's own choice. In other words, indirect 
funding means that individual private choice, rather than the 
government, determines which social service provider eventually 
receives the funds. As a general matter, this removes involvement on 
the part of the government in worship and proselytization. We believe 
that this thinking played a part in Congress limiting the prohibition 
in section 104(j) of PRWORA as amended (42 U.S.C. 604a(j)), on the use 
of Federal TANF or State MOE funds for worship, religious instruction, 
or proselytization, to the direct funding of benefits and services.
    One of the aims of Charitable Choice is that faith-based and 
community-based organizations will be able to expand their capacity to 
provide for the social service needs of under-served areas. Also, in 
soliciting competition for possible Federal TANF or State MOE funds, a 
State could, for example, include among the factors that it will weigh 
toward choosing a provider, the ability of a potential provider to 
provide beneficiaries with transportation to and from the point of 
service.
    Additionally, even when a State operates within the required level 
playing field, there may still be occasions where no faith-based 
organizations successfully compete to provide the needed service, 
regardless of whether the State has chosen to pay for the service 
directly or indirectly. We expect and understand this. As we previously 
mentioned, Charitable Choice is not a guarantee that Federal TANF or 
State MOE funds must automatically flow to faith-based organizations. 
The TANF Charitable Choice provisions do not require that States favor 
religious organizations. The provisions simply require a level playing 
field in the procurement of benefits and services.
    Also, the TANF Charitable Choice provisions leave it up to States 
to decide whether to involve the non-governmental social service sector 
or to provide all services through government agencies. In some areas, 
the latter may be the State's only choice, until non-governmental 
providers expand their service capabilities. But, if a State does 
choose to involve any non-governmental providers, then the Charitable 
Choice provision at section 104(c) of PRWORA as amended (42 U.S.C. 
604a(c)) requires involving religious organizations on the same basis 
as any other non-governmental providers.
    In addition, indirectly funded organizations must of course satisfy 
secular requirements of the program and provide otherwise eligible 
services through their programs.

VI. Religious Character and Independence of Religious Organizations

Background

    Section 260.34(d) of the final rule clarifies that a religious 
organization that participates in the TANF program retains its 
independence from Federal, State, and local governments, provided that 
it does not use direct Federal TANF or MOE funds to support inherently 
religious activities. It may continue to carry out its mission, 
including the definition, practice and expression of its religious 
beliefs. Among other things, religious organizations may use their 
facilities to provide TANF-funded services, without removing religious 
art, icons, scriptures, or other symbols. In addition, a religious 
organization that receives Federal TANF or State MOE funds may retain 
religious terms in its organization's name, select its board members on 
a religious basis, and include religious references in its 
organization's mission statements and other governing documents.
    Comment: A number of commenters expressed concern that a religious 
organization in receipt of Federal TANF or State MOE funds does not 
have to remove the religious art, icons, scriptures, or other symbols. 
The commenters think that this provision is too broad. It could result 
in the organization providing services in a setting that may well 
constitute a ``pervasively sectarian'' atmosphere in which members of a 
different religion may not feel comfortable or welcome to receive their 
TANF-funded benefits. For example, the organization could conduct the 
government-funded program in a chapel, leading to a reasonable 
misperception of government endorsement of or support for religion.
    Response: Section 104(d) of PRWORA as amended (42 U.S.C. 604a(d)) 
imposes on the government a duty not to intrude into the institutional 
autonomy of religious organizations. Each participating faith-based 
organization in receipt of Federal TANF or State MOE funds, whether 
directly or indirectly, shall retain its independence from Federal, 
State and local governments. This independence includes their control 
over the definition, development, practice, and expression of its 
religious beliefs. In addition, the statute expressly prohibits State, 
Federal, and local governments from requiring a religious organization 
to alter its form of internal governance or to remove religious art, 
icons, scripture, or other symbols in order to be eligible to receive 
directly or indirectly funded Federal TANF or State MOE funds to 
provide help to beneficiaries. If the beneficiary objects to the 
religious character, then he or she is entitled to receive the social 
service benefit at an alternate provider to which the beneficiary has 
no religious objection. In addition, as noted above, the Supreme 
Court's ``pervasively sectarian'' doctrine no longer enjoys the support 
of a majority of the Court. See Mitchell v. Helms, 530 U.S. 793, 825-
829 (2000) (plurality opinion), id. At 857.858 (O'Connor, J.,) 
(requiring proof of ``actual diversion of public support to religious 
uses'').
    Comment: Several commenters noted that the protections afforded in 
this subsection are consistent with the statute and should be 
maintained. One of the commenters requested that we add a statement 
essentially stating that ``contrary State and local procurement laws 
that would otherwise prohibit faith-based organizations (FBOs) from 
continuing to staff on a religious basis'' are preempted. Another 
commenter asked that we add language essentially stating that nothing 
in this section shall be construed to affect any State or local law or 
regulation that relates to discrimination in employment, including the 
provision of employee benefits.
    Response: The protections in Sec.  260.34(d) have been retained. We 
believe that the content of this subsection suffices as written.
    As discussed under ``Employment Practices,'' the FBOs enjoy an 
exemption ``with respect to the employment of individuals of a 
particular religion,'' under Title VII of the Federal Civil Rights Act 
of 1964. Therefore, in keeping with the guarantees of institutional 
autonomy, a

[[Page 56457]]

religious organization may continue to select its own staff in a manner 
that takes into account its faith, without violating Title VII.
    The Charitable Choice provision at section 104(f) of PRWORA as 
amended (42 U.S.C. 604a(f)) expressly guarantees that a religious 
organization's Title VII exemption shall not be affected by its 
participation in or receipt of TANF funds, whether the State or local 
government directly or indirectly uses Federal TANF funds or expends 
State or local funds claimed to meet the State's MOE requirement to pay 
for the services.
    Comment: One commenter believes that all organizations receiving 
government funds to provide social services must be subject to 
consistent levels of government oversight so that standards and 
regulations pertaining to safety, performance, non-proselytization, 
quality of care, and financial management are followed.
    Response: States are subject to an audit of their TANF programs in 
accordance with Office of Management and Budget (OMB) Circular A-133 
(Audits of States, Local Governments, and Non-Profit Organizations). 
The audit examines use of Federal TANF and State MOE funds in 
accordance with applicable cost accounting and financial principles, as 
well as programmatic principles. The State is responsible for the 
appropriate use of its Federal TANF and State MOE funds. Therefore, any 
organization that receives Federal TANF or State MOE funds needs to be 
able to show to the State and the auditor that it used the funds, 
whether provided directly or indirectly, for the purpose intended by 
the State. These requirements are also addressed in our response to 
comments in Section X below, ``Fiscal Accountability.''
    This is in keeping with the TANF Charitable Choice provision at 
section 104(h) of PRWORA as amended (42 U.S.C. 604a(h)) and this 
regulation in Sec.  260.34(h), in which we stipulate that religious 
organizations receiving Federal TANF or State MOE funds will be subject 
to audit, just like any other non-governmental organization receiving 
such funds. Thus, all organizations receiving government funds to 
provide social services are subject to consistent levels of government 
oversight.

VII. Employment Practices

Background

    In language similar to that in the statute, the proposed rule at 
Sec.  260.34(d) (now Sec.  260.34(e)) specified that the receipt of 
TANF or MOE funds does not affect a participating religious 
organization's exemption provided under 42 U.S.C. 2000-e regarding 
employment practices. Title VII of the Federal Civil Rights Act of 1964 
permits a religious organization to hire employees who share its 
religious beliefs. This helps enable faith-based groups to promote 
common values, a unity of purpose, and shared service--thus protecting 
the religious liberty of communities of faith.
    Comment: Several commenters agreed that the proposed rule reflects 
a proper understanding of civil rights law. When a faith-based 
organization receives government funding and hires staff on a religious 
basis, the law is not violated.
    Response: We agree with these commenters and have retained the 
identical language in the final rule. This statutory and regulatory 
provision of Charitable Choice does not change the status quo; it 
simply clarifies the applicability of the exemption to the TANF 
program.
    Comment: Several commenters believed that the proposed rule allows 
employment discrimination in violation of constitutional prohibitions 
and court decisions that have struck down government-funded 
discrimination. One commenter explicitly stated that this provision 
runs afoul of the ``no-religious-tests clause'' of the Constitution 
under which ``no religious test shall ever be required as a 
qualification to any office or public trust under the United States.''
    Response: We do not agree with these commenters. The Equal 
Employment Opportunity Act of 1972 broadened Title VII of the Civil 
Rights Act of 1964 to free religious organizations from charges of 
religious discrimination, regardless of the nature of the job. In 1987, 
the Supreme Court addressed and unanimously upheld the 
constitutionality of the 1972 amendment or exemption for religious 
organizations. In addition, it is well settled that the receipt of 
government funds does not convert the employment decisions of private 
institutions into ``state action'' that is subject to constitutional 
restrictions such as the ``no religious test'' clause of the 
Constitution.
    Comment: A number of commenters stated that the exemption from 
Title VII of the Civil Rights Act was never intended to permit a 
religious organization to favor co-religionists in hiring when using 
Federal funds to pay the salaries and wages of employees who are 
carrying out governmentally-funded social service programs.
    Response: We do not agree that these comments accurately portray 
the law. Title VII of the Civil Rights Act, which applies to 
organizations regardless of whether they receive Federal funds, 
contains an explicit exemption for religious organizations, which 
allows them to hire, promote, and fire staff on a basis that takes into 
consideration the organization's religious beliefs and practices 
without violating Title VII. That exemption is not lost when a faith-
based organization receives Federal TANF funds or State MOE funds to 
provide a secular service. Also, we would note that section 702(a) of 
the Civil Rights Act of 1964 is permissive. It allows religious 
staffing, but does not require it. And, religious organizations are 
subject to Federal civil rights laws that prohibit employment 
discrimination on the basis of race, color, national origin, sex, age, 
and disability.
    Comment: Several commenters noted that State and local governments 
have contracting laws that prohibit employment discrimination, beyond 
the Civil Rights Act of 1964. These commenters asked that the final 
rule clarify that nothing in the rule is intended to modify or affect 
any State law or regulation that relates to discrimination in 
employment.
    Response: The Charitable Choice provision at section 104(f) of 
PRWORA as amended (42 U.S.C. 604a(f)) expressly guarantees that a 
religious organization's Title VII exemption shall not be affected by 
its participation in or receipt of TANF funds. Hence, Charitable Choice 
applies whenever a State or local government uses Federal TANF funds or 
expends State or local funds claimed to meet the State's MOE 
requirement to procure services and benefits from non-governmental 
organizations, or provides clients with certificates, vouchers, or 
other forms of disbursement that can be redeemed for services in 
connection with the TANF program. When State or local funds are used to 
meet the State's MOE requirement, the provisions apply irrespective of 
whether the State or local funds are commingled with Federal funds, 
segregated, or expended in separate State programs.
    The only exception is found in section 104(k) of PRWORA as amended 
(42 U.S.C.604a(k)), which clarifies that the Charitable Choice 
requirements do not preempt any provision of a State constitution or 
State statute that prohibits or restricts the expenditure of State 
funds in or by religious organizations. We do not believe that this 
``preemption'' provision can be interpreted to cover State or local 
employment discrimination laws. (For a more detailed analysis of the

[[Page 56458]]

implications of Charitable Choice on State and local laws, see the 
analysis provided under the heading ``Effect on State and Local 
Funds''.)

VIII. Nondiscrimination Against Beneficiaries

Background

    This provision applies to individuals who receive Federal TANF or 
State MOE-funded services. In Sec.  260.34(f) of the final rule, we 
state that religious organizations are prohibited from discriminating 
against beneficiaries or potential beneficiaries on the basis of 
religion, a religious belief, refusal to hold a religious belief, or a 
refusal to actively participate in a religious practice. Accordingly, 
religious organizations, in providing services funded in whole or in 
part by Federal TANF or State MOE funds, may not discriminate against 
current or prospective program beneficiaries on the basis of religion, 
a religious belief, a refusal to hold a religious belief, or a refusal 
to actively participate in a religious practice.
    Comment: Many of the commenters expressed concern over the use of 
the word ``active'' in setting forth the prohibition from 
discriminating against beneficiaries or potential beneficiaries on the 
basis of religion, a religious belief, a refusal to hold a religious 
belief, or a refusal to actively participate in a religious practice. 
They interpreted the word ``active'' to allow the delivery of religious 
messages using facilities and equipment funded by the government, and 
they believed that this word opens the door wherein vulnerable clients 
may be exposed to inappropriate ``passive'' religious practices. The 
commenters recommended removing the word ``actively'' from the final 
regulations.
    Response: We disagree. In section 104(g) of PRWORA as amended (42 
U.S.C. 604a(g)), Congress prohibited religious grantees from 
discriminating against program beneficiaries on three related grounds: 
``religion, a religious belief, or refusal to actively participate in a 
religious practice.'' In addition, section 104(b) of PRWORA as amended 
(42 U.S.C. 604a(b)) stipulates that the religious freedom of 
beneficiaries may not be diminished, and section 104(e)(1) of PRWORA as 
amended (42 U.S.C. 604a(e)(1) provides that beneficiaries who object to 
the religious character of a service provider have a right to an 
alternative provider. These provisions are straightforward and are 
sufficient to protect the religious freedom of program beneficiaries. 
Accordingly, we have retained the language of the proposed rule, which 
is based on Congress's own language.
    Comment: One commenter stated that it is unclear whether the 
discrimination prohibition applies to funds provided both directly and 
indirectly to the religious organization. The commenter also asked us 
to prohibit providers from inquiring about the religious affiliation of 
applicants, and to require a notice advising that any religious 
services offered to the beneficiary are voluntary.
    Response: The prohibition in section 104(g) of PRWORA as amended 
(42 U.S.C. 604a(g)) makes no distinction in funding source or funding 
method. Therefore, religious organizations, in providing services 
funded directly or indirectly, in whole or in part, with Federal TANF 
or State MOE funds, may not discriminate against current or prospective 
beneficiaries on the basis of religion, a religious belief, a refusal 
to hold a religious belief, or a refusal to actively participate in a 
religious practice. As we mentioned in the discussion regarding 
``Restrictions on Religious Activities By Organizations that Receive 
Direct TANF Funding,'' when Federal TANF or State MOE funds are 
disbursed indirectly to the organization providing the service, then 
the organization may invite (not require) the beneficiary's 
participation in inherently religious activities. But, if the 
individual objects to the religious character of the organization or 
institution, then he or she has a right to receive the services from an 
alternative provider. This allows the beneficiary to avoid unwanted 
religious practices and prevents the individual's religious freedom 
from being diminished.
    We decline to add a statement prohibiting providers from inquiring 
about the religious affiliation of applicants. We believe that the 
provision as written, is adequate.
    We also decline to require that religious organizations provide a 
notice to a beneficiary or potential beneficiary assuring that 
participation in religious activities would be entirely on a voluntary 
basis. We recommend that States and participating organizations work 
together to ensure that clients and potential clients have a clear 
understanding of the services offered by the organization, including 
any religious activities, as well as the organization's expectations 
and requirements. The requirement that participation be voluntary, 
however, is sufficient to address concerns about the religious freedom 
of program beneficiaries.
    Comment: One commenter wrote that the proposed rule does not 
require a secular alternative. Therefore, it lacks constitutionally-
required safeguards for beneficiaries.
    Response: The proposed rule at Sec.  260.34(f) (now Sec.  
260.34(g)(2)) provided that if the applicant or recipient objects to 
the religious character of a TANF service provider, he or she is 
entitled to an alternative provider to which the individual has no 
religious objection. This is in keeping with the TANF Charitable Choice 
provision at section 104(e)(1) (42 U.S.C. 604a(e)(1)), which requires 
that the State provide the individual with assistance from ``an 
alternative provider.'' Hence, the alternative provider could, but does 
not have to be, a secular alternative; it need only be a provider to 
which the beneficiary has no religious objection. We have retained the 
wording of this provision.
    Comment: One commenter asked us to clarify that a beneficiary has 
the right to choose indirect government funding to enroll in a program 
that has a religious component. The commenter also asked us to add that 
``nothing in this section shall be construed to prohibit a program 
beneficiary from using indirect government assistance to receive 
services from a participant whose program has a required religious 
component or to prohibit such participant from offering the required 
religious component.''
    Response: We decline to add the suggested sentence to the final 
rule. The welfare reform law of 1996 (PRWORA) gave States unprecedented 
flexibility to design and conduct their own TANF programs. In addition, 
the TANF Charitable Choice provision at section 104(a)(1) (42 U.S.C. 
604a(a)(1)) gave States the option to administer and provide services 
directly and/or indirectly. Further, each State is responsible for its 
own decisions regarding how to use its Federal TANF and State MOE 
funds, including the range of services it elects to provide and the 
method of paying for those services. But, this does not preclude a 
beneficiary from personally choosing to participate in any inherently 
religious activities that an organization offers, even if the social 
service benefit provided to him or her is directly funded by the TANF 
agency. It just means that, for directly funded social services, the 
inherently religious activities must take place separately, in time or 
location, from the provision of the Federal or State MOE funded social 
service benefit.
    Comment: One commenter would like us to recognize that religious 
organizations and secular organizations sometimes discriminate on the 
basis of sexual orientation or gender identity. The commenter suggested 
that we

[[Page 56459]]

develop a regulation banning religious, sexual orientation and/or 
gender identity discrimination with Federal or other public funds.
    Response: Religious organizations and secular organizations alike 
must follow Federal civil rights laws prohibiting discrimination on the 
bases of race, color, national origin, gender, age, and disability. 
However, the Federal civil rights laws are silent on discrimination on 
the basis of sexual orientation and/or gender identity, and we decline 
to impose such restrictions by regulation.
    Comment: Several commenters noted that if religious organizations 
are providing program services and facilities, then they must be in 
compliance with the Americans with Disabilities Act (ADA). Persons with 
disabilities should not be assigned to alternative or substitute 
programs or services.
    Response: Although it is beyond the scope of these regulations to 
address how various civil rights laws might apply in all situations, 
organizations providing services must comply with Federal civil rights 
laws to the extent that those laws are applicable. In particular, we 
note that Title III (Public Accommodations and Services Operated by 
Private Entities), section 307 of the Americans with Disabilities Act 
of 1990 excludes religious organizations or entities controlled by 
religious organizations, including places of worship, from the 
provisions. Yet, religious institutions are subject to several 
requirements designed to ensure services to persons with handicaps in 
section 504 of the Rehabilitation Act of 1973, and its implementing 
regulations at 45 CFR part 84, which prohibit discrimination on the 
basis of disability in programs or activities receiving Federal 
financial assistance.

IX. Notice, Referral, and Provision of Services From Alternative 
Providers

Background

    Section 260.34(f) of the proposed rule (now Sec.  260.34(g)) 
received more comments than any other provision. In this section, we 
stated that individuals applying for or receiving Federal TANF or MOE-
funded services may object to the religious character of a religious 
provider. If so, they are entitled to receive services from an 
alternative provider. The State or local agency must refer the 
individual to an alternative provider of services within a State-
defined, reasonable period of time. Alternative providers must be 
reasonably accessible and be able to provide comparable services, which 
are at least equal in value to those the individual would have received 
from the initial provider. The alternative provider does not have to be 
a secular organization, just one to which the program beneficiary has 
no religious objection. Since effective services need to take into 
consideration local conditions, we deferred to States on how to 
accomplish these statutory and regulatory objectives.
    However, the proposed rule did clarify that State and local 
governments are responsible to ensure that clients are provided notice 
of their rights to alternative providers, and are referred to and 
provided alternative services within a reasonable period of time, if 
they object to a religious provider. And, while the responsibility for 
the notice, referral and provision of the alternative service rests 
with the State or local agency, each participating organization has a 
responsibility to help clients know and understand their rights. We 
also encouraged all involved organizations to develop and implement 
reasonable tracking procedures to ensure that clients do not ``fall 
through the cracks'' and lose timely services.
    Comment: Several commenters noted that the requirement to provide 
alternative services places additional burdens on State agencies, 
especially in rural areas. A faith-based organization may be selected 
as the service provider for a particular geographic area. Ensuring that 
an alternative service provider is available could require the State to 
make dual sets of services available, and thus increase costs. As a 
result, many of these commenters suggested that the requirement to 
provide alternative services is unreasonable. Some suggested that 
exceptions be permitted or that the requirement should be eliminated. 
Others noted that with this requirement, some States may choose not to 
contract out or provide community-based services, especially in rural 
areas.
    Response: In enacting the Charitable Choice provision, Congress had 
to carefully balance the rights of individuals with the duty of 
government to not discriminate with respect to religion when selecting 
non-governmental providers of social services. To accomplish these two 
principles, the statute imposes the requirement to provide accessible 
and comparable assistance or services within a reasonable period of 
time to an individual who has an objection to the religious character 
of an organization. In the proposed rule, with the exception of 
requiring notice and referral, we did not expand or enhance the rights 
of beneficiaries to assistance from an alternative provider, but simply 
clarified this statutory entitlement. We also left substantial 
discretion to States to define terms and carry out the statutory 
objective.
    We also believe that commenters may have overestimated the impact 
and potential burden of this requirement. Many faith-based 
organizations have a long history of contracting with State and local 
governments to address the secular purpose of providing assistance and 
services to needy families. Few beneficiaries have objected to the 
religious nature of these providers, which is perhaps unsurprising in 
light of the fact that any inherently religious activities must be 
offered separately and on a voluntary basis. We also do not believe 
States will decide not to contract out or provide community-based 
services in order to avoid this requirement. Since the statutory 
Charitable Choice requirements have applied since 1996, we believe that 
State and local governments are providing alternative services, in 
compliance with the law, and discovering and enhancing procedures that 
efficiently and effectively address this requirement.
    It is also worth noting that one of the aims of Charitable Choice 
is that faith-based and community-based organizations will be able to 
expand their capacity to provide for the social service needs of under-
served areas. Also, in soliciting competition for possible Federal TANF 
or State MOE funds, a State could, for example, include among the 
factors that it will weigh toward choosing a provider, the ability of 
potential providers to provide beneficiaries with transportation to and 
from the point of service.
    Finally, the TANF Charitable Choice provisions leave it up to 
States to decide whether to involve the non-governmental social service 
sector or to provide all services through government agencies. In some 
areas, the latter may be the State's only choice, until non-
governmental providers expand their service capabilities. But, if a 
State does choose to involve any non-governmental providers, then the 
Charitable Choice provision at section 104(c) of PRWORA as amended (42 
U.S.C. 604a(c)) requires involving religious organizations on the same 
basis as any other non-governmental provider.
    Comment: Several commenters believed that the proposed rule left 
too much discretion to States to define the terms ``reasonably 
accessible,'' ``a reasonable period of time,'' ``comparable,'' 
``capacity,'' and ``value that is not less than.'' These commenters 
asked that we either provide Federal definitions for these terms, or 
establish

[[Page 56460]]

baseline parameters or guidelines. Others appreciated the discretion we 
had provided to States, but were concerned that the expectation of 
alternative services may expose States to litigation based on 
availability and how they define comparable services.
    Response: Since the enactment of the welfare reform legislation in 
PRWORA, we have learned two clear lessons:
    [sbull] Operational details and procedures need to be developed 
taking into consideration community and local needs and constraints. 
Because State and local governments have the knowledge of these 
realities, they are better prepared to define and set realistic and 
effective parameters to meet these mandatory, statutory goals. Given 
the diverse and wide range of TANF services, benefits and programs 
offered by States, it would be nearly impossible for us to define these 
terms in ways that would accommodate the needs of different States and 
communities; and,
    [sbull] When given the flexibility, opportunity and authority 
through devolution, States and communities have demonstrated tremendous 
creativity leading to beneficial results. When TANF was enacted, many 
people expressed concern that the flexibility granted States, without 
Federal regulation would lead to ``a race to the bottom.'' Experience 
has proven these fears to be completely unfounded; and, if anything, 
the converse is true. Through experimentation and innovation, States 
and communities have developed programs and services to enhance the 
ability of families to achieve independence--a true race to the top and 
to excellence.
    We believe that States, faced with the challenge of how to offer 
clients this option, while at the same time guaranteeing other 
alternative providers, will again rise to the occasion and develop 
reasonable and effective definitions and operational procedures. We are 
convinced that families will be better served by providing this 
discretion to States.
    Nevertheless, we do believe that States must conscientiously apply 
guidance to assure fair treatment and comparable provision of services 
to all eligible applicants and recipients requiring an alternative 
provider. We have revised Sec.  260.34(g) of the final rule to help 
ensure that States adopt reasonable definitions of the terms in this 
section and to reflect our expectation that this section is implemented 
fairly.
    Comment: One commenter, noting a potential tension between the 
protections provided to religious organizations and the alternative 
provider requirements on States, suggested regulatory language that 
explicitly prohibits governmental entities from considering the impact 
of the alternative service provider requirements when considering 
faith-based providers.
    Response: Once a State or local government elects the option to 
provide services through non-governmental entities, then the Charitable 
Choice provisions ensure that ``* * * religious organizations are 
eligible, on the same basis as any other private organization * * *'' 
Implicitly, in that requirement, State or local governments are 
prohibited from considerations other than those leading to the 
selection of providers that can best achieve the secular purposes of 
the service or benefit. ACF believes State and local governments 
clearly understand this and that an explicit addition to the rules is 
not needed.
    Comment: To protect beneficiaries, one commenter offered three 
suggestions: (1) That clients be held harmless from work requirements 
while the State seeks alternative services; (2) that there be no 
penalty for requesting alternative providers; and (3) that a State and 
Federal administrative complaint mechanism be created.
    Response: The work participation requirements are set forth in 
section 407 of the Social Security Act, with implementing regulations 
at 45 CFR part 261. Under section 407, there are limited circumstances 
under which an individual may be exempted from work requirements. The 
commenter's suggestion is not among them. Nevertheless, States have the 
flexibility to develop additional exemption criteria, with the 
understanding that the State must still meet its required work 
participation rate target. Each State may also establish its own 
criteria for determining when not to impose a penalty on an 
individual--namely, when an individual has ``good cause'' for not 
engaging in required work activities.
    Secondly, under the TANF Charitable Choice provisions, government 
may not compel an individual, through loss of public benefit or 
advantage, to profess a religious belief or to observe an inherently 
religious practice. Therefore, the State may not penalize an individual 
for requesting to receive a service from an alternative provider 
because he or she objects to the religious character of the 
organization or institution from which he or she receives or would 
receive the service.
    Finally, while the Charitable Choice provisions do not include any 
statutory basis for us to create a Federal appeal process, we are 
confident that States conscientiously provide protections to 
beneficiaries. For example, States are required to outline in a State 
plan how they will require a parent or caretaker to engage in work 
activities, the objective criteria for the delivery of benefits, and an 
explanation of how the State will provide opportunities for recipients 
who have been adversely affected to be heard in an administrative or 
appeal process. ACF has heard of few abuses or complaints about the 
adequacy of existing procedures.
    Comment: One commenter suggested that the final rules clarify that 
an individual may not object to services provided by a secular, non-
profit community-based organization and request alternative faith-based 
services.
    Response: We agree that this individual right is not provided by 
the Charitable Choice statute or regulation. The right of a beneficiary 
to an alternative provider derives only when the individual has an 
objection to the ``religious character of the organization or 
institution from which the individual receives, or would receive 
assistance * * *'' Since secular organizations, by definition, do not 
have a ``religious character'', no right to an alternative is created. 
Nonetheless, we encourage states to respect the religious or 
nonreligious choices of all beneficiaries.
    Comment: Several commenters suggested that the final rule specify 
that beneficiaries who object to the religious character of an 
organization have the right to a secular provider.
    Response: The Charitable Choice statute does not specify that the 
alternative provider needs to be a secular organization. We have chosen 
not to adopt this suggestion for three reasons. First, the purpose of 
the statute is to respect beneficiary choice, and some beneficiaries 
may prefer an alternative religious provider to an alternative secular 
provider. Second, many faith-based organizations deliver services in a 
secular manner. As a result, most beneficiaries will not object to the 
religious character of these organizations, and we do not want to 
exclude them as potential providers of service. Third, under the 
permissive statutory language that we have retained, State and local 
governments may offer a secular alternative. We believe States will 
implement this requirement in a manner consistent with their obligation 
to ensure compliance with the Establishment Clause of the First 
Amendment.
    Comment: One commenter noted that the proposed rule was unclear on 
whether the alternative provider

[[Page 56461]]

requirement applies to the designated, non-profit (under section 
501(c)(3) of the tax code) arm of a religious organization.
    Response: The statutory language clearly gives the beneficiary the 
right to object to the ``religious character of the organization or 
institution from which the individual receives, or would receive, 
assistance. * * *.'' We believe this gives the client the right to 
object, even when the services will be delivered without inherently 
religious activities by the non-profit arm of a faith-based group, so 
no clarification is necessary for the final rule.

X. Fiscal Accountability

Background

    Section 260.34(h) of this rule sets forth the financial 
responsibility incurred through the receipt of Federal TANF or State 
MOE funds. Religious organizations that contract to provide TANF 
services or benefits are subject to the same requirements as other non-
governmental organizations to account, in accordance with generally 
accepted auditing and accounting principles, for the use of such funds. 
Religious organizations may segregate their TANF accounts from non-
governmental funds for other activities. If religious organizations 
choose to segregate their Federal TANF or State MOE funds in this 
manner, only the segregated funds are subject to audit by the 
government.
    Comment: Some commenters would like ACF to require that faith-based 
organizations separate the TANF funds they receive from other funds, 
and incorporate oversight mechanisms. One of the commenters recommended 
that we revise the regulation to conform to the standards adopted by 
the Substance Abuse and Mental Health Services Administration (SAMHSA). 
Other commenters recommended making the language stronger to stress the 
importance of creating separate records. One of the commenters wrote 
that faith-based organizations and government officials need guidance 
regarding the procedures required to separately fund the activities. 
Another commenter asked us to maintain the provision that if a 
religious organization establishes a separate account, then only the 
TANF funds are subject to audit by the government.
    Response: Section 104(h)(2) of PRWORA as amended (42 U.S.C. 
604a(h)(2)) gives a religious organization the option of segregating 
the Federal funds received into a separate account. Therefore, we do 
not think it is appropriate to require separate accounts because this 
would be stricter than the law stipulates. By contrast, the Charitable 
Choice provision applicable to SAMHSA, at 42 U.S.C 290kk-1(g)(2), 
specifically requires that the religious organization program 
participant segregate the Federal funds provided under award from non-
Federal funds.
    The religious organizations are responsible for deciding whether to 
establish separate account(s) to receive and to disburse the funds and 
for developing their own means of doing so. Organizations that are able 
and willing to separate the funds received from the State into a 
separate account will have only those funds subject to audit.
    Comment: One commenter asked us to clarify whether only the Federal 
TANF funds, as opposed to State MOE funds, are subject to audit when 
religious organizations segregate the funds into a separate account.
    Response: The limited audit authority applies to Federal TANF and 
State MOE funds, whether received directly or indirectly, unless State 
law expressly prohibits this flexibility from extending to State MOE 
funds. Both Federal TANF and State MOE funds are subject to the TANF 
Charitable Choice provisions.
    We recognize that the TANF Charitable Choice provision at section 
104(h)(2) of PRWORA as amended (42 U.S.C. 604a(h)(2)) refers only to 
Federal TANF funds. But, the intent of this provision is to enable the 
organization to opt to limit the scope of fiscal audits. Therefore, we 
have concluded that extending the option to include State MOE funds is 
consistent with the statutory intent. We have clarified this point in 
Sec.  260.34(h).
    Comment: Some commenters think that the regulation does not 
adequately guard against using the funds for religious activities. One 
commenter asked us to address the accounting and/or separation 
principles which must be followed with respect to the separate funding 
of permitted and restricted activities in order to demonstrate that the 
organization has not expended any government funds on restricted 
activities. Several of the commenters requested that the final rule 
require that the religious organization establish a separate corporate 
structure (e.g., incorporate under 501(c)(3)) or other type of separate 
structure that would distinguish the religious entity from its 
government-funded social welfare organization. Another commenter is 
concerned that the option for religious organizations to commingle 
funds could make it more difficult and expensive for the State to 
ensure that public funds are not supporting ``inherently religious 
activities.'' This commenter noted that the Community Services Block 
Grant program proposed rule does not allow for the commingling of funds 
by religious organizations.
    Response: Under the TANF Charitable Choice statute, religious 
organizations may, but are not required to, establish a separate 
account structure, including incorporating or operating the separated 
part as a non-profit organization under section 501(c)(3) of the 
Internal Revenue Code. Because religious organizations do not have to 
incorporate or operate as a non-profit organization, we have deleted 
the definition of religious organization--i.e., ``a non-profit 
religious organization'' from the final regulation.
    The final rule provides that religious organizations receiving 
Federal TANF or State MOE funds will be subject to audit, just like any 
other non-governmental organization receiving such funds. The State is 
responsible for the appropriate use of its Federal TANF and State MOE 
funds, so the organization needs to be able to show to the State and 
the auditor that it used the funds, whether provided directly or 
indirectly, for the purpose intended by the State. Specifically, as 
provided in 45 CFR 92.26, TANF grantees and sub-grantees are 
responsible for obtaining audits by an independent auditor following 
generally accepted government auditing standards, in accordance with 
both the Single Audit Act and OMB Circular A-133. These require that 
grantees spending more than $300,000 in Federal funds per year must 
obtain an annual independent audit, normally conducted by a private 
firm. This authority is in 31 U.S.C. section 7502(a)(1)(A) and (c). The 
State or local government must determine whether the grantee and sub-
grantees have complied with all laws applicable to expenditures, which 
includes a determination as to whether the proscription against using 
direct funding for inherently religious practices has been followed. 
State officials may want to establish reasonable and prudent 
procurement policies, building in real and meaningful safeguards to 
prevent the diversion of funds to any ineligible purpose.
    Moreover, HHS is authorized to conduct any additional audits or 
reviews that are warranted, irrespective of the amount of Federal funds 
expended by the grantee annually, in order to ensure compliance with 
program requirements including the restriction against direct funding 
of inherently religious activities. This authority is in 45 CFR 
92.40(e). HHS may determine that such audits or reviews are warranted 
based upon any

[[Page 56462]]

information received by the agency that raises an issue concerning the 
propriety of expenditures.
    As we noted in an earlier response, we do not think it is 
appropriate to require a separate corporate or other structure because 
this would be stricter than the TANF Charitable Choice statute 
stipulates. In contrast to the TANF Charitable Choice provisions, the 
Charitable Choice provisions applicable to SAMHSA at 42 U.S.C 290kk-
1(g)(2) and the Community Services Block Grant program at 42 U.S.C. 
9920(d)(2) specifically require that the religious organization program 
participant segregate the Federal funds it receives into a separate 
account.
    Comment: One commenter noted that there is no requirement against 
using government funds to supplant church funds. Therefore, the final 
rule should make clear that ``pervasively sectarian'' organizations 
should not receive direct funding.
    Response: We disagree with this recommendation. To begin with, it 
contradicts the very purpose of the TANF Charitable Choice provisions. 
The TANF Charitable Choice provisions provide a level playing field in 
the government's procurement of benefits and services that it has 
chosen to provide to TANF-eligible families and individuals. To this 
end, the Charitable Choice provisions give qualified religious 
organizations the right to participate in the provision of these 
services. Hence, as we have indicated in Sections III and IV of these 
comments, a religious organization may not be excluded from the 
procurement process on the basis that it is religious, too religious, 
or ``pervasively sectarian.'' In addition, the Supreme Court's 
``pervasively sectarian'' doctrine no longer enjoys the support of a 
majority of the Court. See Mitchell v. Helms, 530 U.S. 793, 825-829 
(2000) (plurality opinion); id. at 857-858 (O'Connor, J., concurring in 
judgment, joined by Breyer, J. (requiring proof of ``actual diversion 
of public support to religious uses'').
    None of the Federal TANF or State MOE funds provided directly to 
the organization may be used for inherently religious activities. The 
government has purchased a service from the religious organization to 
deliver a specific social service benefit(s) to TANF applicants or 
recipients.
    Comment: One commenter recommended that we define ``non-profit'' 
organization consistent with the definition provided in the SAMHSA 
proposed rule at 67 FR 77350 regarding the Charitable Choice Clause.
    Response: We decline to add a definition of ``non-profit'' 
organization. As we explained, we have deleted the definition of 
``religious organization'' that was in the NPRM, which contained a 
reference to ``non-profit.''

XI. Effect on State and Local Funds

Background

    Section 104(a) of PRWORA as amended (42 U.S.C. 604a(a)) applies to 
``a State program funded under part A of title IV of the Social 
Security Act'' (TANF) and also to ``any other program established or 
modified under title I or title II of this Act that permits contracts 
with organizations; or permits certificates, vouchers, or other forms 
of disbursement to be provided to beneficiaries as a means of providing 
assistance.'' Title I includes all TANF provisions, including the 
maintenance-of-effort (MOE) requirement that States continue to expend 
a specified level of State or local funds. Claimed expenditures must be 
spent on eligible families for activities that achieve a TANF purpose. 
(Title II is the Supplemental Security Income program.)
    The proposed rule followed the statute in specifying that the 
Charitable Choice requirements apply both when a State or local 
government uses Federal TANF funds to procure services and benefits 
from non-governmental organizations, or to redeem certificates, 
vouchers, or other forms of disbursement or when the State claims those 
expenditures to meet the MOE requirement. We said that the Charitable 
Choice provisions apply whether the State or local funds are commingled 
with Federal funds, segregated, or expended in separate State programs.
    The proposed rule also clarified that, pursuant to section 104(k) 
of PRWORA as amended (42 U.S.C. 604a(k)), nothing in the Charitable 
Choice requirements shall be construed to preempt any provision of a 
State constitution or State statute that prohibits or restricts the 
expenditure of State funds in or by religious organizations.
    Comment: A number of commenters opposed the application of 
Charitable Choice to the State and local funds claimed to meet the MOE 
requirement. Some believed that Charitable Choice should only apply to 
the use of Federal TANF dollars. Others believed that the rule covers 
commingled funds, but asked that we modify the rule with respect to 
both segregated funds and funds expended in separate State programs. 
Still others believed the rule should apply to funds expended in the 
TANF program (Federal funds, commingled and segregated MOE 
expenditures) but that it ought not apply to expenditures in separate 
State programs, like other TANF rules.
    Response: Because ACF did not regulate on Charitable Choice or 
provide guidance earlier, we recognize that many may not have 
understood that the statutory provision applies to State and local 
funds claimed to meet the State's MOE requirement, just as it applies 
to Federal TANF funds. Given the nearly total flexibility provided to 
States with respect to separate State programs, we also acknowledge 
that the application of the Charitable Choice requirements to these 
funds is unusual, because only a few of the TANF rules apply to the 
expenditure of State funds in separate State programs.
    But, while we recognize the frustration of some of the commenters 
with the interpretation in the NPRM and the preference of others to 
modify the rule, for the reasons explained in the ``Background'' above, 
we believe the better reading of the statute is that Charitable Choice 
applies to all State funds claimed to meet the maintenance-of-effort 
requirements.
    Comment: Several commenters noted that the preemption clause did 
not address local laws and asked us to clarify in the final rule that 
the Charitable Choice provisions do not preempt any provision of a 
State constitution, State statute or local ordinances that prohibits or 
restricts the expenditure of State funds in or by religious 
organizations.
    Response: Section 104(k) (42 U.S.C. 604a(k)) preserves ``a State 
constitution or State statute that prohibits or restricts the 
expenditure of State funds in or by religious organizations''; it 
contains no reference to ``local laws'' or ``ordinances.'' In addition, 
the TANF Charitable Choice statute, read as a whole, demonstrates that 
Congress was cognizant of the distinction between State and local law. 
For example, section 104(d)(1) (42 U.S.C. 604a(d)(1)) provides that a 
religious organization participating in a TANF program ``shall retain 
its independence from Federal, State, and local governments * * *.'' We 
therefore believe that the existing language faithfully implements the 
statute.
    Comment: Several commenters noted that the proposed rule was 
confusing. If Charitable Choice applies to the use of Federal funds and 
all State and local expenditures claimed to meet MOE, what does the 
preemption provision mean?
    Response: We understand the confusion. But, Congress recognized 
that some States have enacted laws to

[[Page 56463]]

ensure a more rigorous ``separation of church and state.'' These States 
either prohibit or restrict contracts with religious organizations or 
more broadly proscribe providing any State funding to them. In enacting 
Charitable Choice, Congress explicitly allowed these State prohibitions 
or restrictions, as they apply to State funds only, to take precedence 
over this Federal provision.
    The provision at section 104(k) of PRWORA as amended (42 U.S.C. 
604a(k)) which preserves ``a State constitution or State statute that 
prohibits or restricts the expenditure of State funds in or by 
religious organizations,'' only applies to the State's own funds, but 
not to Federal TANF funds. The ``preemption'' provision also does not 
apply to State funds that have been commingled with Federal TANF funds. 
(Federal requirements only affect the use of Federal TANF funds, unless 
the State commingles its money with Federal TANF funds. If a State 
commingles its funds, the Federal and State funds become subject to the 
same rules.) A number of States may have general or specific provisions 
that prohibit or restrict providing direct or indirect State funds to 
religious organizations. Such States should use segregated Federal TANF 
funds to pay for any benefits and services provided by religious 
organizations, to avoid the risk of running afoul of a provision in 
their laws that prohibits or restricts the expenditure of State funds 
in or by religious organizations.
    So, another way of expressing the requirements is that if a State's 
constitution or law prohibits or restricts State funds from going to 
religious organizations, or proscribes contracts with religious 
organizations, the Charitable Choice requirements do not apply to those 
State funds. We defer to the State to interpret the scope of its 
constitution or law. But, if a State does not have such prohibitions or 
restrictions, then Charitable Choice applies to both Federal TANF funds 
and State and local expenditures claimed for MOE purposes. This is 
faithful to Congress' expressed intention to preserve State 
constitutional or statutory restrictions on State funds, while ensuring 
that Federal rules apply to both Federal and State MOE funds in the 
absence of such State law provisions.
    Comment: Several commenters asked that the final rule clarify that 
the provision at section 104(k) of PRWORA as amended (42 U.S.C. 
604a(k)) which preserves ``a State constitution or State statute that 
prohibits or restricts the expenditure of State funds in or by 
religious organizations,'' also includes State and local 
nondiscrimination hiring provisions.
    Response: We do not agree that the provision at section 104(k) of 
PRWORA as amended (42 U.S.C. 604a(k)) addresses employment 
nondiscrimination provisions. Rather, this provision explicitly covers 
provisions of a State constitution or State statute that prohibits or 
restricts the expenditure of State funds ``in or by religious 
organizations.'' Employment nondiscrimination provisions do not fall 
within this category.

XII. Treatment of Intermediate Organizations

Background

    Section 260.34(k) of this rule provides that, if a non-governmental 
organization (referred to here as an ``intermediate organization''), 
acting under a contract or other agreement with the Federal government 
or a State or local government, is given the authority under the 
contract or agreement to select other non-governmental organizations to 
provide services under the program, the intermediate organization must 
ensure that there is compliance with the Charitable Choice provisions. 
The intermediate organization retains all other rights of a non-
governmental organization under the Charitable Choice provisions.
    Comment: One commenter asked for clarification on whether these 
rules apply to Tribal governments that participate or contract with the 
State as part of a State's TANF program. Related to this question is 
the issue of whether these rules apply to a Tribal government or 
organization that has the authority under the contract or agreement 
with the State to select other organizations to provide services under 
the program.
    Response: Tribes that operate their own TANF program under section 
412 of the Social Security Act are not required to follow the 
Charitable Choice rules because the statutory provisions on Charitable 
Choice refer only to State and local governments. However, Tribes must 
adhere to these rules if they are under a contract or agreement with 
the State to operate some aspect of the State's TANF program and the 
Tribe has the authority to select other organizations and disburse 
funds to provide benefits and services. Under such an arrangement, a 
Tribe is functioning like any other intermediate organization and, is, 
therefore bound to ensure compliance with the statutory provisions of 
Charitable Choice and these implementing regulations.
    Comment: Six commenters raised a number of different issues with 
respect to our regulatory provision on intermediate organizations. The 
first issue is whether or not a State's use of intermediate 
organizations to select TANF service providers is unconstitutional. The 
second issue is whether or not we should specifically regulate the 
requirements that intermediate organizations be held to the same 
standards of service, care, nondiscrimination, financial management and 
accounting rules as the agency receiving the direct grant. The third 
issue is whether or not we should regulate a requirement that 
intermediate organizations identify and describe basic information on 
each subgrantee. The fourth issue is whether or not religious 
organizations should be permitted to function as intermediate 
organizations.
    Response: We do not agree that the use of an FBO as an intermediate 
organization is unconstitutional. Our review did not disclose any 
precedents, legal or otherwise, that would prevent a State from 
selecting an FBO as an intermediate organization. The purpose of the 
provision in Sec.  260.34(k) is not to delegate authority to 
organizations to carry out tasks that are traditionally reserved for a 
governmental agency. States already have the authority to procure 
needed social services through the non-governmental sector. Nor is it 
uncommon for States to authorize non-governmental intermediaries to 
select TANF service providers by contracting with them to do so. Since 
the responsibility to select service providers is often vested in non-
governmental organizations, it is not a duty that traditionally has 
been an exclusive function of the government , and intermediate 
organizations (whether religious or secular) are in any event obligated 
to act as the government itself must act when carrying out their 
intermediary functions under this program. We also wish to emphasize 
that a State's use of intermediate organizations does not relieve the 
State of its traditional responsibility to effectively monitor the 
actions of such organizations. The regulations at 45 CFR 92.40 hold a 
State accountable for managing the day-to-day operations of grant and 
subgrant supported activities to assure compliance with applicable 
Federal requirements and performance goals. Moreover, no provision of 
this rule relieves a State of its responsibility to ensure that 
providers are selected in a manner consistent with the Establishment 
Clause.
    Regarding the issues related to standards of service, financial

[[Page 56464]]

management, accounting, and reporting on subgrantee activities, an 
intermediate organization, like a State grantee, is held to the 
requirements enunciated in the Federal regulations at 45 CFR Part 92 
(which implements the provisions of OMB Circular A-103) and OMB 
Circulars A-87 and A-133 on the Single Audit Act. Given that both the 
State and its intermediate organization are subject to these existing 
requirements, we see no need to further regulate in this area. 
Regulating on nondiscrimination is also unnecessary since intermediate 
organizations are covered by the provisions at Sec.  260.34(e) and (f) 
of this rule along with the protections offered by other Federal civil 
rights laws as listed at 45 CFR 260.35.
    On the issue of whether or not we should permit an FBO to serve as 
an intermediate organization, we have decided to maintain the position 
taken in the NPRM---i.e., to allow a State to select an FBO as an 
intermediate organization. We believe that our rules on fiscal 
accountability, on the obligations of such intermediate organizations, 
and on the prohibition on the use of Federal TANF or State MOE funds 
for inherently religious activities are sufficient protections against 
the possibility that an FBO will use these funds to advance its 
religious beliefs.
    This final rule corrects a typographical error in the NPRM. The 
lead sentence after the heading ``Treatment of Intermediate 
Organizations'' in the preamble to the NPRM incorrectly referred to 
paragraph (i); the correct paragraph in the NPRM was (j). This 
provision now appears in Sec.  260.34(k) of in the final rule.

XIII.Regulatory Analysis

Paperwork Reduction Act of 1995

    No new information collection requirements are imposed by these 
regulations, nor are any existing requirements changed as a result of 
their promulgation. Therefore, the requirements of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3507(d)), regarding reporting and 
record keeping, do not apply.

Regulatory Flexibility Analysis

    The Regulatory Flexibility Act (5 U.S.C. 605(b)) requires the 
Federal government to anticipate and reduce the impact of rules and 
paperwork requirements on small businesses and other small entities. 
Small entities are defined in the Act to include small businesses, 
small non-profit organizations, and small governmental entities. This 
rule will affect primarily the 50 States, the District of Columbia, and 
certain Territories. Therefore, we certify that this rule will not have 
a significant impact on small entities.
    Comment: One commenter stated that the rule should be considered 
``major'' because it will have a significantly adverse impact on 
employment by allowing for discrimination based on religion.
    Response: We disagree. For years, section 702(a) of the Civil 
Rights Act of 1964 as amended has relieved religious organization from 
compliance with Title VII employment nondiscrimination requirements. 
Therefore, we believe that there will not be any significant adverse 
impact on employment.

Regulatory Impact Analysis

    Executive Order 12866 requires that regulations be reviewed to 
ensure that they are consistent with the priorities and principles set 
forth in the Executive Order. The Department has determined that this 
rule is consistent with these priorities and principles. This rule is 
considered a ``significant regulatory action'' under the Executive 
Order, and therefore has been reviewed by the Office of Management and 
Budget. This rulemaking implements statutory authority and reflects our 
response to comments received on the NPRM that we issued on December 
17, 2002 in 67 FR 77362 (2002).

Unfunded Mandates Reform Act of 1995

    Section 202 of the Unfunded Mandates Reform Act of 1995 requires 
that a covered agency prepare a budgetary impact statement before 
promulgating a rule that includes any Federal mandate that may result 
in the expenditure by State, local, and Tribal governments, in the 
aggregate, or by the private sector, of $100 million or more in any one 
year.
    The Department has determined that this rule would not impose a 
mandate that will result in the expenditure by State, local, and Tribal 
governments, in the aggregate, or by the private sector, of more than 
$100 million in any one year.
    Comment: Two commenters mentioned that this rule would result in 
expenditures in excess of the $100 million threshold.
    Response: We disagree. Conditions attached to federal grant 
programs are not generally considered ``mandates'' under The Unfunded 
Mandates Reform Act (UMRA) of 1995. Nevertheless, with a large program 
like the TANF program, a new grant condition or reduction in federal 
financial assistance could be considered a mandate if States lack the 
flexibility to offset the new costs or the loss of Federal funding with 
reductions or other design alternatives elsewhere in the program. For 
example, under the Charitable Choice provisions, when an otherwise 
eligible TANF applicant or recipient objects to the religious character 
of a TANF service provider, the State or local agency must refer the 
individual to an alternative provider of services. While this could be 
viewed as an additional expenditure for the State, we have concluded 
that this does not trigger the requirement under section 202 of the 
UMRA of 1995. In addition to the fixed amount of their own money that 
States must spend toward their maintenance-of-effort requirements, 
States also receive annual Federal funding. Furthermore, the welfare 
reform law gave States broad flexibility to provide a variety of 
benefits and services for their clientele. In determining which 
services to provide, States know that they have to prioritize the needs 
of their clientele by balancing funding options and strategies that 
best address these needs with budgetary considerations. For example, 
some providers are able to offer more than one service, including the 
service the individual is entitled to receive from an alternative 
provider.

Congressional Review

    This regulation is not a major rule as defined in 5 U.S.C. chapter 
8.

Assessment of Federal Regulation and Policies on Families

    We certify that we have made an assessment of this rule's impact on 
the well-being of families, as required under section 654 of The 
Treasury and General Government Appropriations Act of 1999. The purpose 
of the TANF program is to strengthen the economic and social stability 
of families, in part by supporting the formation and maintenance of 
two-parent families and reducing out-of-wedlock childbearing. This rule 
expands the pool of providers that States may contract with in order to 
deliver effective services that support the purpose of the TANF 
program.

Executive Order 13132

    Executive Order 13132, Federalism, requires that Federal agencies 
consult with State and local government officials in the development of 
regulatory policies with Federalism implications. In the NPRM, we 
specifically solicited comments from State and local government 
officials.
    Comment: Two commenters specifically mentioned that we should have 
consulted with State and local officials before the issuance of a final 
rule.
    Response: We believe that our solicitation in the NPRM satisfied 
the

[[Page 56465]]

consultation requirement of Executive Order 13132. ACF provided a 
comment period during which time, the agency heard from many State 
welfare agencies and social service departments, and the rules have 
been drafted in a manner which provides States flexibility. 
Accordingly, we certify that the requirements of Executive Order 13132 
have been satisfied.

List of Subjects in 45 CFR Part 260

    Grant programs-social programs, Loan programs-social programs, 
Public assistance programs.

    Dated: September 22, 2003.
Wade F. Horn,
Assistant Secretary for Children and Families.
Tommy G. Thompson,
Secretary of Health and Human Services.

XIV. Final Rule

0
For the reasons discussed above, title 45 CFR chapter II is amended as 
follows:

PART 260--[AMENDED]

0
1.The authority citation for 45 CFR part 260 continues to read as 
follows:

    Authority: 42 U.S.C. 601, 601 note, 603, 604, 606, 607, 608, 
609, 610, 611, 619, and 1308.

0
2. A new Sec.  260.34 is added to read as follows:


Sec.  260.34  When do the Charitable Choice provisions of TANF apply?

    (a) These Charitable Choice provisions apply whenever a State or 
local government uses Federal TANF funds or expends State and local 
funds used to meet maintenance-of-effort (MOE) requirements of the TANF 
program to directly procure services and benefits from non-governmental 
organizations, or provides TANF beneficiaries with certificates, 
vouchers, or other forms of indirect disbursement redeemable from such 
organizations. For purposes of this section:
    (1) Direct funding or funds provided directly means that the 
government or an intermediate organization with the same duties as a 
governmental entity under this part selects the provider and purchases 
the needed services straight from the provider (e.g., via a contract or 
cooperative agreement).
    (2) Indirect funding or funds provided indirectly means placing the 
choice of service provider in the hands of the beneficiary, and then 
paying for the cost of that service through a voucher, certificate, or 
other similar means of payment.
    (b)(1) Religious organizations are eligible, on the same basis as 
any other organization, to participate in TANF as long as their Federal 
TANF or State MOE funded services are provided consistent with the 
Establishment Clause and the Free Exercise Clause of the First 
Amendment to the United States Constitution.
    (2) Neither the Federal government nor a State or local government 
in its use of Federal TANF or State MOE funds shall, in the selection 
of service providers, discriminate for or against an organization that 
applies to provide, or provides TANF services or benefits on the basis 
of the organization's religious character or affiliation.
    (c) No Federal TANF or State MOE funds provided directly to 
participating organizations may be expended for inherently religious 
activities, such as worship, religious instruction, or proselytization. 
If an organization conducts such activities, it must offer them 
separately, in time or location, from the programs or services for 
which it receives direct Federal TANF or State MOE funds under this 
part, and participation must be voluntary for the beneficiaries of 
those programs or services.
    (d) A religious organization that participates in the TANF program 
will retain its independence from Federal, State, and local governments 
and may continue to carry out its mission, including the definition, 
practice and expression of its religious beliefs, provided that it does 
not expend Federal TANF or State MOE funds that it receives directly to 
support any inherently religious activities, such as worship, religious 
instruction, or proselytization. Among other things, faith-based 
organizations may use space in their facilities to provide TANF-funded 
services without removing religious art, icons, scriptures, or other 
symbols. In addition, a Federal TANF or State MOE funded religious 
organization retains the authority over its internal governance, and it 
may retain religious terms in its organization's name, select its board 
members on a religious basis, and include religious references in its 
organization's mission statements and other governing documents.
    (e) The participation of a religious organization in, or its 
receipt of funds from, a TANF program does not affect that 
organization's exemption provided under 42 U.S.C. 2000e-1 regarding 
employment practices.
    (f) A religious organization that receives Federal TANF or State 
MOE funds shall not, in providing program services or benefits, 
discriminate against a TANF applicant or recipient on the basis of 
religion, a religious belief, a refusal to hold a religious belief, or 
a refusal to actively participate in a religious practice.
    (g)(1) If an otherwise eligible TANF applicant or recipient objects 
to the religious character of a TANF service provider, the recipient is 
entitled to receive services from an alternative provider to which the 
individual has no religious objection. In such cases, the State or 
local agency must refer the individual to an alternative provider of 
services within a reasonable period of time, as defined by the State or 
local agency. That alternative provider must be reasonably accessible 
and have the capacity to provide comparable services to the individual. 
Such services shall have a value that is not less than the value of the 
services that the individual would have received from the program 
participant to which the individual had such objection, as defined by 
the State or local agency.
    (2) The alternative provider need not be a secular organization. It 
must simply be a provider to which the recipient has no religious 
objection. States may adopt reasonable definitions of the terms 
``reasonably accessible,'' ``a reasonable period of time,'' 
``comparable,'' ``capacity,'' and `` value that is not less than.'' We 
expect States to apply these terms in a fair and consistent manner.
    (3) The appropriate State or local governments that administer 
Federal TANF or State MOE funded programs shall ensure that notice of 
their right to alternative services is provided to applicants or 
recipients. The notice must clearly articulate the recipient's right to 
a referral and to services that reasonably meet the timeliness, 
capacity, accessibility, and equivalency requirements discussed above.
    (h) Religious organizations that receive Federal TANF and State MOE 
funds are subject to the same regulations as other non-governmental 
organizations to account, in accordance with generally accepted 
auditing/accounting principles, for the use of such funds. Religious 
organizations may keep Federal TANF and State MOE funds they receive 
for services segregated in a separate account from non-governmental 
funds. If religious organizations choose to segregate their funds in 
this manner, only the Federal TANF and State MOE funds are subject to 
audit by the government under the program.
    (i) This section applies whenever a State or local organization 
uses Federal TANF or State MOE funds to procure services and benefits 
from non-governmental organizations, or redeems certificates, vouchers, 
or other forms of disbursement from them whether with Federal funds, or 
State and local funds

[[Page 56466]]

claimed to meet the MOE requirements of section 409(a)(7) of the Social 
Security Act. Subject to the requirements of paragraph (j), when State 
or local funds are used to meet the TANF MOE requirements, the 
provisions apply irrespective of whether the State or local funds are 
commingled with Federal funds, segregated, or expended in separate 
State programs.
    (j) Preemption. Nothing in this section shall be construed to 
preempt any provision of a State constitution, or State statute that 
prohibits or restricts the expenditure of segregated or separate State 
funds in or by religious organizations.
    (k) If a non-governmental intermediate organization, acting under a 
contract or other agreement with a State or local government, is given 
the authority under the contract or agreement to select non-
governmental organizations to provide Federal TANF or MOE funded 
services, the intermediate organization must ensure that there is 
compliance with the Charitable Choice statutory provisions and these 
regulations. The intermediate organization retains all other rights of 
a non-governmental organization under the Charitable Choice statute and 
regulations.
    (l) Any party which seeks to enforce its right under this section 
may assert a civil action for injunctive relief exclusively in an 
appropriate State court against the entity or agency that allegedly 
commits such violation.

[FR Doc. 03-24291 Filed 9-25-03; 12:15 pm]
BILLING CODE 4184-01-P