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 AFDC overpayment error rate; (3) the Secretary and the State to negotiate and agree upon an error rate determination plan establishing the criteria by which the State will be held accountable for errors; and (4) each 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.

Requires each State to reimburse the Federal Government 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 that are technical in nature or result from recent changes in Federal AFDC eligibility criteria or administrative policies.

Permits a State to base a request for a reduction of this Act's sanctions upon a showing that it has made a good faith effort to reduce overpayments or that the Secretary incorrectly calculated its overpayment error rate. Directs the Secretary to reduce such sanctions by the amount of State and local funds to be expended under the State's quality improvement plan to reduce errors in a fiscal year.

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

Makes the preceding quality control standards and procedures effective after FY 1989. Eliminates the backlog of overpayment sanctions applicable to FY 1981 through 1990 by imposing such sanctions only against those States whose error rates exceed a specified amount. Allows such States to appeal the imposition of sanctions on the basis that their quality control record does not reflect a pattern of avoidable misspending of Federal funds.

Extends the AFDC quality control program to include cases involving underpayments after FY 1991. Sets forth the formula for determining the State underpayment error rate tolerance level. 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.

Includes terminations and denials of AFDC eligibility 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 submission of the Secretary's report, erroneous denials or terminations of AFDC eligibility within the definition of "underpayments" to which error rate tolerance levels apply.

Continues Federal liability to States for erroneous payments of federally-administered State supplements to Supplemental Security Income (title XVI of the Act) benefits.