A bill to amend part A of title IV of the Social Security Act to improve quality control standards and procedures under the Aid to Families with Dependent Children Program, and for other purposes.

Amends part A (Aid to Families with Dependent Children) of title IV of the Social Security Act to require, in order to establish and maintain improved AFDC quality control standards and procedures: (1) each State to collect and submit to the Secretary of Health and Human Services a statistically reliable sample of AFDC cases; (2) the Secretary to review the sample and notify the State of its error rates for overpayments and underpayments; and (3) the State to develop and submit to the Secretary a quality improvement plan for eliminating or reducing errors. Excuses a State from submitting a quality improvement plan if it has consistently had error rates below its error rate tolerance levels. Directs the Secretary to establish procedures for quality control review of AFDC cases and criteria for State quality improvement plans.

Reduces Federal AFDC payments to a State to the extent the State's overpayments exceed its overpayment error rate tolerance level. Sets State overpayment tolerance levels pursuant to a formula which takes into account variations among States in population density and caseload volume and composition. Disregards State errors resulting from recent changes in Federal AFDC eligibility criteria or administrative policies.

Permits a State to base a request for the waiver of this Act's sanctions upon a showing that it has made a good faith effort to reduce or eliminate overpayments or underpayments, or that the Secretary incorrectly calculated its overpayment or underpayment error rate. Directs the Secretary to grant such a waiver to a State which expends additional State or local funds, equal to or exceeding one-half of the sanctions which would otherwise be applied against such State, to reduce overpayments or underpayments.

Defines "overpayments" as (1) payments to ineligible families; and (2) overpayments to eligible families. Defines "underpayments" as underpayments to eligible families.

Makes the preceding quality control standards and procedures effective with respect to FY 1986 and thereafter. Eliminates the backlog of overpayment sanctions applicable to FY 1981 through 1985 by imposing such sanctions only against those States, in each such fiscal year, whose error rates are significantly outside the distribution of such rates among States.

Directs the Secretary to report to specified congressional committees, three years after this Act's enactment, regarding the appropriateness of the error rate tolerance levels established pursuant to this Act.

Sets State underpayment error rate tolerance levels, applicable beginning in FY 1989, considering the same factors used in determining overpayment tolerance levels. Requires that States set aside an amount equal to the amount by which its underpayments exceed its underpayment tolerance level and use such amount to increase AFDC payments or improve the administration of the AFDC program.

Provides an incentive payment to States whose overpayment error rate is below three percent. Sets incentive payments at one-half of the reduction in Federal payments attributable to error rates being below three percent.

Includes terminations and denials of AFDC eligiblity in this Act's data collection and quality control review requirements. Directs the Secretary to develop and report to the Congress, within two years of this Act's enactment, on an improved methodology for measuring a State's performance with respect to inappropriate denials and terminations of AFDC eligibility. Includes, beginning on the first calendar quarter beginning one year or more after this Act's enactment, erroneous denials or terminations of AFDC eligibility within the definition of "underpayments" to which error rate tolerance levels apply.