United States Government Accountability Office

GAO Testimony before the Senate Committee 

on Agriculture, Nutrition, and Forestry

FOOD STAMP PROGRAM

Payment Errors and 

Trafficking Have Declined 

despite Increased Program 

Participation 

Statement of Sigurd R. Nilsen, Director 

Education, Workforce, and Income Security Issues 

For Release on Delivery

Expected at 9:45 a.m. EST 

Wednesday, January 31, 2007 

 

GAO-07-422T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

January 31, 2007

FOOD STAMP PROGRAM 

Payment Errors and Trafficking Have 

Declined despite Increased Program 

Participation 

Highlights of GAO-07-422T, a testimony 

before the Senate Committee on 

Agriculture, Nutrition, and Forestry 

The U.S. Department of 

Agriculture’s (USDA) Food Stamp

Program is intended to help lowincome individuals and families 

obtain a better diet by

supplementing their income with 

benefits to purchase food. USDA’s 

Food and Nutrition Service (FNS) 

and the states jointly implement 

the Food Stamp Program, which is 

to be reauthorized when it expires 

in fiscal year 2007. This testimony 

discusses our past work on two 

issues related to ensuring integrity 

of the program: (1) improper

payments to food stamp 

participants, and (2) trafficking in 

food stamp benefits.

This testimony is based on a May

2005 report on payment errors

(GAO-05-245) and an October 2006

report on trafficking (GAO-07-53). 

For the payment error report, GAO 

analyzed program quality control

data and interviewed program 

stakeholders, including state and

local officials. For the trafficking 

report, GAO interviewed agency 

officials, visited field offices, 

conducted case file reviews, and 

analyzed data from the FNS retailer 

database. 

The national payment error rate for the Food Stamp Program combines 

states’ overpayments and underpayments to program participants and has 

declined by about 40 percent between 1999 and 2005, from 9.86 percent to a 

record low of 5.84 percent, due in part to options made available to states

that simplified program reporting rules. In 2005, the program made payment 

errors totaling about $1.7 billion. However, if the 1999 error rate was in 

effect in 2005, program payment errors would have been $1.1 billion higher. 

FNS and the states we reviewed have taken several steps to improve food 

stamp payment accuracy, most of which are consistent with internal control 

practices known to reduce improper payments. These include practices to 

improve accountability, perform risk assessments, implement changes based 

on such assessments, and monitor program performance. 

FNS estimates indicate that the national rate of food stamp trafficking 

declined from about 3.8 cents per dollar of benefits redeemed in 1993 to 

about 1.0 cent per dollar during the years 2002 to 2005 and that trafficking 

occurs more frequently in smaller stores. FNS has taken advantage of 

electronic benefit transfer and other new technology to improve its ability to 

detect trafficking and disqualify retailers who traffic. Law enforcement 

agencies have investigated and referred for prosecution a decreasing number 

of traffickers; they are instead focusing their efforts on fewer high-impact 

investigations. Despite the progress FNS has made in combating retailer 

trafficking, the Food Stamp Program remains vulnerable because retailers 

can enter the program intending to traffic and do so, often without fear of 

severe criminal penalties, as the declining number of investigations referred 

for prosecution suggests.

While both payment errors and trafficking of benefits have declined in a time 

of rising participation, ensuring program integrity remains a fundamental 

challenge facing the Food Stamp Program. To reduce program 

vulnerabilities and ensure limited compliance-monitoring resources are used 

efficiently, GAO recommended in its October 2006 trafficking report that 

FNS take additional steps to target and provide early oversight of stores 

most likely to traffic; develop a strategy to increase penalties for trafficking, 

working with the Inspector General as needed; and promote state efforts to 

pursue recipients suspected of trafficking. FNS generally agreed with GAO’s 

findings, conclusions, and recommendations. However, FNS believes it does 

have a strategy for targeting resources through their use of food stamp 

transaction data to identify suspicious transaction patterns. GAO believes 

that FNS has made good progress in its use of these transaction data; 

however, it is now at a point where it can begin to formulate more 

sophisticated analyses. 

www.gao.gov/cgi-bin/getrpt?GAO-07-422T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Sigurd R. 

Nilsen at (202) 512-7215 or nilsens@gao.gov. 
Mr. Chairman and Members of the Committee: 

Thank you for inviting me here today to discuss our observations on the 

administration of the Food Stamp Program. As you know, the U.S. 

Department of Agriculture’s (USDA) Food Stamp Program is intended to 

help low-income individuals and families obtain a better diet by 

supplementing their income with benefits to purchase food. USDA’s Food 

and Nutrition Service (FNS) and the states jointly implement the Food 

Stamp Program, which is to be reauthorized after it expires in fiscal year 

2007. Participation in the program has been cyclical, with a decrease in the 

number of recipients for a few years beginning in 1996. Studies suggest 

that economic growth in the late 1990s played a major role in this 

decrease. However, in recent years, the Food Stamp Program has grown 

tremendously. From 2000 to 2005, the program has grown from $15 billion 

in benefits provided to 17 million individuals to $29 billion in benefits to 

nearly 26 million individuals. Almost 1 in every 12 Americans participates

in the program. 

The information I am presenting today is based primarily on findings from 

our past work on two issues related to ensuring integrity of the program: 

(1) improper payments to food stamp participants, and (2) trafficking in

food stamp benefits.1

 Those findings were based on multiple 

methodologies, including an analysis of program quality control data for 

fiscal years 1999 through 2003, case file reviews, data analysis of the FNS 

retailer database, and interviews and site visits with program stakeholders,

including federal agency and state and local officials. These efforts were 

conducted in accordance with generally accepted government auditing 

standards. 

In summary, both payment errors and trafficking of benefits have declined

in a time of rising participation, and although progress has been made, 

ensuring program integrity remains a fundamental challenge facing the 

Food Stamp Program. The national payment error rate for the program 

combines states’ overpayments and underpayments to program 

participants and has declined by about 40 percent between 1999 and 2005,

from 9.86 percent to a record low of 5.84 percent. If the 1999 error rate had 

been in effect in 2005, the program would have made payment errors 

 1

GAO, Food Stamp Program: States Have Made Progress Reducing Payment Errors, and

Further Challenges Remain, GAO-05-245 (Washington, D.C.: May 5, 2005); Food Stamp 

Trafficking: FNS Could Enhance Program Integrity by Better Targeting Stores Likely to

Traffic and Increasing Penalties, GAO-07-53 (Washington, D.C.: Oct. 13, 2006). 

Page 1 GAO-07-422T 
totaling over $2.8 billion rather than the $1.7 billion it experienced. FNS 

and the states we reviewed have taken many approaches to improving 

food stamp payment accuracy, most of which are similar to internal 

control practices known to reduce improper payments. In addition to 

declining payment error, FNS estimates suggest that the national rate of 

food stamp trafficking declined from about 3.8 cents per dollar of benefits 

redeemed in 1993 to about 1.0 cent per dollar during the years 2002 to 2005

and that trafficking occurs more frequently in smaller stores. FNS has 

taken advantage of electronic benefit transfer (EBT) and other new 

technology to improve its ability to detect trafficking and disqualify 

retailers who traffic, while law enforcement agencies have investigated 

and referred for prosecution a decreasing number of traffickers, instead 

focusing their efforts on fewer high-impact investigations. Despite the 

progress FNS has made in combating retailer trafficking, the Food Stamp 

Program remains vulnerable because retailers can enter the program 

intending to traffic and do so, often without fear of severe criminal 

penalties, as the declining number of investigations referred for 

prosecution suggests. To reduce program vulnerabilities and ensure 

limited compliance-monitoring resources are used efficiently, GAO 

recommended in its October 2006 trafficking report that FNS take 

additional steps to target and provide early oversight of stores most likely 

to traffic; develop a strategy to increase penalties for trafficking, working 

with the Inspector General as needed; and promote state efforts to pursue 

recipients suspected of trafficking. FNS generally agreed with our findings, 

conclusions, and recommendations. However, FNS believes it does have a 

strategy for targeting resources through their use of food stamp 

transaction data to identify suspicious transaction patterns. We believe 

that FNS has made good progress in its use of these transaction data; 

however, it is now at a point where it can begin to formulate more 

sophisticated analyses. 

The federal Food Stamp Program is intended to help low-income 

individuals and families obtain a more nutritious diet by supplementing 

their income with benefits to purchase nutritious food such as meat, dairy 

products, fruits, and vegetables, but not items such as soap, tobacco, or 

alcohol. The Food and Nutrition Service (FNS) pays the full cost of food 

stamp benefits and shares the states’ administrative costs—with FNS 

usually paying approximately 50 percent—and is responsible for 

promulgating program regulations and ensuring that state officials 

Background 

Page 2 GAO-07-422T 
administer the program in compliance with program rules.2

 The states 

administer the program by determining whether households meet the 

program’s income and asset requirements, calculating monthly benefits for 

qualified households, and issuing benefits to participants on an electronic 

benefits transfer card. 

Program Participation In fiscal year 2005, the Food Stamp Program issued almost $28.6 billion in

benefits to about 25.7 million individuals participating in the program, and 

the maximum monthly food stamp benefit for a household of four living in 

the continental United States was $506. As shown in figure 1, program 

participation increased sharply from 2000 to 2005 following a substantial 

decline, and the number of food stamp recipients follows the trend in the 

number of people living at or below the federal poverty level.

 2

Reimbursements for food stamp administrative costs in 44 states are adjusted each year to

subtract certain food stamp administrative costs that have already been factored into these 

states’ Temporary Assistance for Needy Families (TANF) grants. As a result, these states 

receive less than 50 percent of their administrative costs. See GAO, Food Stamp Program: 

States Face Reduced Federal Reimbursement for Administrative Costs, RCED/AIMD-99-

231 (Washington D.C.: July 23, 1999). 

Page 3 GAO-07-422T 
Figure 1: Food Stamp Participation and Poverty Trends

0

5

10

15

20

25

30

35

40

Number of persons (in millions)

Source: GAO analysis of FNS and U.S. Census data.

Year

Persons in poverty

Food stamp participants

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Note: Poverty data are by calendar year and participation data are by fiscal year. 

In addition to the economic growth in the late 1990s, another factor 

contributing to the decrease in number of participants from 1996 to 2001 

was the passage of the Personal Responsibility and Work Opportunity Act 

of 1996 (PRWORA), which toughened eligibility criteria and had the effect 

of untethering food stamps from cash assistance. Since 2000, that 

downward trend has reversed, and stakeholders believe that the downturn 

in the U.S. economy, coupled with changes in the program’s rules and 

administration, has led to an increase in the number of food stamp 

participants. 

Determination of 

Eligibility and Benefits 

Eligibility for participation in the Food Stamp Program is based on the 

Department of Health and Human Services’ poverty measures for 

households. The caseworker must first determine the household’s gross 

income, which cannot exceed 130 percent of the poverty level for that year 

(or about $1,799 per month for a family of three living in the contiguous 

United States in fiscal year 2007). Then the caseworker must determine 

the household’s net income, which cannot exceed 100 percent of the 

poverty level (or about $1,384 per month for a family of three living in the 

Page 4 GAO-07-422T 
contiguous United States in fiscal year 2007). Net income is determined by 

deducting from gross income expenses such as dependent care costs, 

medical expenses, utilities costs, and shelter expenses. In addition, there is 

a limit of $2,000 in household assets, and basic program rules limit the 

value of vehicles an applicant can own and still be eligible for the 

program.3

 If the household owns a vehicle worth more than $4,650, the 

excess value is included in calculating the household’s assets.4

FNS’s Quality Control 

System Measures 

Improper Payments 

FNS and the states share responsibility for implementing an extensive 

quality control (QC) system used to measure the accuracy of Food Stamp 

payments and from which state and national error rates are determined. 

Under FNS’s quality control system, the states calculate their payment 

errors by drawing a statistical sample to determine whether participating 

households received the correct benefit amount.5 The state’s error rate is 

determined by weighting the dollars paid in error divided by the state’s 

total issuance of food stamp benefits. Once the error rates are final, FNS is 

required to compare each state’s performance with the national error rate 

and imposes penalties or provides incentives according to specifications in 

law. The Farm Security and Rural Investment Act of 2002 (the 2002 Farm 

Bill) changed the Food Stamp Program’s quality control system by making 

only those states with persistently high error rates face liabilities.6

 The 

2002 Farm Bill also provided for $48 million in bonuses each year to be 

 3

Households with elderly or disabled members are exempt from the gross income limit and 

may have assets valued at $3,000. 

4

If a household has no other assets, its vehicle can be worth $6,650. States also have the 

option to replace the federal food stamp vehicle asset rule with the vehicle asset rule from

their TANF assistance program or use a categorical eligibility option as a way to exclude all 

vehicles.

5

The food stamp error rate is calculated for the entire program, as well as every state, by 

adding overpayments to those who are eligible for smaller benefits, overpayments to those 

who are not eligible for any benefit, and underpayments to those who do not get as much

as they should. The program also calculates a negative error rate, defined as the rate of 

improper denials or terminations of benefits. 

6

Before the 2002 Farm Bill, states were penalized if their combined payment error rate was 

higher than the national average. As a result, about half of states were subject to financial 

sanctions each year. States are required to either pay the sanction or provide additional

state funds—beyond their normal share of administrative costs—to be reinvested in error

reduction efforts, such as additional training in calculating benefits for certain households. 

Under the 2002 Farm Bill, a state will be subject to fiscal sanction if there is a 95 percent 

statistical probability that the state’s payment error rate exceeds 105 percent of the 

national average for 2 consecutive years. 

Page 5 GAO-07-422T 
awarded to states with high or most improved performance, including 

actions taken to correct errors, reduce error rates, improve eligibility 

determinations, and other indicators of effective administration as 

approved by the Secretary of Agriculture.7

Trafficking Every year, food stamp recipients exchange hundreds of millions of 

dollars in benefits for cash instead of food with authorized retailers across 

the country, a practice known as trafficking. In a typical trafficking 

situation, a retailer gives a food stamp recipient a discounted amount of 

cash—commonly 50 cents on the dollar—in exchange for food stamp 

benefits and pockets the difference. By trafficking, retailers commit fraud 

and undermine the primary purpose of the program, which is to help 

provide food to low-income individuals and families. Recipients who 

traffic deprive themselves and their families of the intended nutritional 

benefits. 

FNS has the primary responsibility for authorizing retailers to participate 

in the Food Stamp Program, monitoring their compliance with 

requirements, and administratively disqualifying those who are found to 

have trafficked food stamp benefits. At the end of fiscal year 2005, more 

than 160,000 retailers were authorized to accept food stamp benefits. 

Supermarkets account for only about 22 percent of the authorized stores 

but redeem the lion’s share (about 86 percent) of food stamp benefits. To 

become an authorized retailer, a store must offer on a continuing basis a 

variety of foods in each of the four staple food categories—meats, poultry 

or fish; breads or cereals; vegetables or fruits; and dairy products—or 

50 percent of its sales must be in a staple group such as meat or bakery 

items. However, the regulations do not specify how many food items 

retailers should stock. The store owner submits an application and 

includes forms of identification such as copies of the owner’s Social 

Security card, driver’s license, business license, liquor license, and alien 

resident card. The FNS field office program specialist then checks the 

applicant’s Social Security number against FNS’s database of retailers, the 

Store Tracking and Redemption System, to see if the applicant has 

previously been sanctioned in the Food Stamp Program. The application

also collects information on the type of business, store hours, number of 

 7

The 2002 Farm Bill requires the Secretary to issue regulations for fiscal year 2005 and 

thereafter that will establish criteria related to these improved performances and be used 

to award performance bonus payments. 

Page 6 GAO-07-422T 
employees, number of cash registers, the types of staple foods offered, and 

the estimated annual amount of gross sales and eligible food stamp sales. 

PRWORA required each state agency to implement an EBT system to 

electronically distribute food stamp benefits, and the last state completed 

its implementation in fiscal year 2004. Prior to EBT, recipients used highly

negotiable food stamp coupons to pay for allowable foods. Under the EBT 

system, food stamp recipients receive an EBT card imprinted with their 

name and a personal account number, and food stamp benefits are 

automatically credited to the recipients’ accounts once a month. In a 

legitimate food stamp transaction, recipients run their EBT card, which 

works much like a debit card, through an electronic point-of-sale machine 

at the grocery checkout counter, and enter their secret personal 

identification number to access their food stamp accounts. This authorizes 

the transfer of food stamp benefits from a federal account to the retailer’s 

account to pay for the eligible food items. The legitimate transaction 

contrasts with a trafficking transaction in which recipients swipe their 

EBT card, but instead of buying groceries, they receive a discounted 

amount of cash and the retailer pockets the difference. 

In addition to approving retailers to participate in the program, FNS has 

the primary responsibility for monitoring their compliance with 

requirements and administratively disqualifying those who are found to 

have trafficked food stamp benefits. FNS headquarters officials collect and 

monitor EBT transaction data to detect suspicious patterns of transactions 

by retailers. They then send any leads to FNS program specialists in the 

field office who either work the cases themselves or refer them to 

undercover investigators in the Retailer Investigations Branch to pursue 

by attempting to traffic food stamps for cash. 

The national payment error rate for the Food Stamp Program combines 

states’ overpayments and underpayments to program participants and has

declined by about 40 percent, from 9.86 percent in 1999 to a record low of 

5.84 percent in 2005, in a time of increasing participation. FNS and the 

states we reviewed have taken many approaches to improving food stamp 

payment accuracy, most of which are parallel with internal control 

practices known to reduce improper payments. Despite this progress, 

improper food stamp payments continue to account for a large amount of

money—about $1.7 billion in 2005— and similar error rate reductions may 

prove challenging given that the program remains complex. 

States Have Made 

Progress Reducing 

Payment Errors, and 

Further Challenges 

Remain 

Page 7 GAO-07-422T 
The national payment error rate for the Food Stamp Program combines 

states’ overpayments and underpayments to program participants and has

declined by about 40 percent over the last 7 years, from 9.86 percent in 

1999 to 5.84 percent in 2005 in a time of increasing participation (see figure

2 below). If the 1999 error rate had been in effect in 2005, the program 

would have made payment errors totaling over $2.8 billion rather than the 

$1.7 billion it experienced. 

The Food Stamp Error 

Rate, Which Combines 

Overpayments and 

Underpayments, Has 

Declined to a Record Low 

Figure 2: Food Stamp Payment Errors Have Dropped over the Last 7 Years 

0

2

4

6

8

10

12

Percent

Source: FNS.

Fiscal year

Combined

Overpayments

Underpayments

1999 2000 2001 2002 2003 2004 2005

Improper payments can be in the form of overpayments or underpayments 

to food stamp recipients. In fiscal year 2005, food stamp payment errors 

totaled about $1.7 billion in benefits. This sum represents about 6 percent 

of the total $28.6 billion in benefits provided that year to a monthly 

average of 25.7 million low-income program participants. Of the total 

$1.7 billion in payment error in fiscal year 2005, $1.3 billion, or about 

78 percent, were overpayments. Overpayments occur when eligible 

persons are provided more than they are entitled to receive or when 

ineligible persons are provided benefits. Underpayments, which occur 

when eligible persons are paid less than they are entitled to receive, 

Page 8 GAO-07-422T 
totaled $374 million, or about 22 percent of dollars paid in error, in fiscal 

year 2005. 

Error rates fell in 41 states and the District of Columbia, and 18 states 

reduced their error rates by one-third or more between fiscal years 1999 

and 2003. Further, the 5 states that issue the most food stamp benefits 

reduced their error rates by an average of 36 percent during this period. 8

For example, Illinois’ error rate dropped from 14.79 in 1999 to 4.87 in 2003, 

and New York’s error rate dropped from 10.47 to 5.88 in those same years. 

In addition, 21 states had error rates below 6 percent in 2003; this is an 

improvement from 1999, when 7 states had error rates below 6 percent. 

However, payment error rates vary among states. Despite the decrease in 

many states’ error rates, some states continue to have high payment error 

rates. 

We found that almost two-thirds of the payment errors in the Food Stamp 

Program are caused by caseworkers, usually when they fail to act on new 

information or when they make mistakes when applying program rules, 

and one-third are caused by participants, when they unintentionally or 

intentionally do not report needed information or provide incomplete or 

incorrect information (see fig. 3). As shown below, 5 percent of 

participant-caused errors were referred for potential fraud investigations 

in fiscal year 2003. Program complexity and other factors, such as the lack

of resources and staff turnover, can contribute to caseworker mistakes. 

Despite the decrease in error rate in recent years, these factors remained 

the key causes of payment error between 1999 and 2003. We also found 

that income-related errors account for more than half of all payment 

errors. 

 8

These states are New York, Florida, Illinois, Texas, and California. 

Page 9 GAO-07-422T 
Figure 3: Caseworker- and Participant-Caused Errors in Fiscal Year 2003

5% 26%

23%

Source: FNS and GAO analysis.

4%

Incomplete/incorrect information provided

20%

13%

9%

Incomplete/incorrect information provided

and case referred for potential fraud

investigation

Information not reported

Other

Failure to follow up on or verify information

Policy incorrectly applied

Failure to act on reported information

Participant caused error (35%)

Caseworker caused error (65%)

FNS and States Have 

Taken Steps to Increase 

Payment Accuracy 

We found that FNS and the states we reviewed have taken many 

approaches to increasing food stamp payment accuracy, most of which are 

parallel with internal control practices known to reduce improper 

payments.9

 These include practices to improve accountability, perform 

risk assessments, implement changes based on such assessments, and 

monitor program performance. Often, several practices are tried 

simultaneously, making it difficult to determine which have been the most 

effective. 

 9

See GAO, Strategies to Manage Improper Payments: Learning From Public and Private 

Sector Organizations, GAO-02-69G (Washington, D.C.: October 2001). 

Page 10 GAO-07-422T 
States we reviewed adopted a combination of practices to prevent, 

minimize, and address payment accuracy problems, such as 

• increasing the awareness of, and the accountability for, payment error; 

• analyzing quality control data to identify causes of common payment 

errors and develop corrective actions; 

• making automated system changes to prompt workers to obtain 

complete documentation from clients; 

• developing specialized change units that focus on acting upon reported 

case changes; and 

• verifying the accuracy of benefit payments calculated by state food 

stamp workers through supervisory and other types of case file 

reviews. 

For example, in California, state and local officials employed a 

combination of practices under each internal control component over the 

last several years to bring about their improved error rate. State officials 

reported expanding state oversight, hiring a contractor to perform 

assessments and provide training to larger counties with higher error 

rates, preparing detailed error analyses, and implementation of a quality 

assurance case review system in Los Angeles County, which accounted for 

40 percent of the state’s caseload. California state officials credit the 

adoption of a combination of approaches as the reason for the state’s 

dramatic error rate reduction from 17.37 percent in fiscal year 2001 to 

6.38 in fiscal year 2005 as the number of cases increased. 

In addition, 47 states have adopted some form of simplified reporting, one 

of the options FNS and Congress made available to states, which has since 

been shown to have contributed to the reduction in the payment error 

rate.10 FNS and Congress made several options available to the states to 

 10If simplified reporting had not been implemented, FNS estimates suggest that the

payment error rate would likely be 1.2 to 1.5 points higher. However, differences in policies 

and the prevalence of errors considerably affect the potential gains from simplified 

reporting. For example, effects are generally larger in states with policies that cover a large

percentage of the caseload and in those states that do not have the waiver to act on all 

reported changes. FNS estimated that if all states adopted policies to maximize the impact 

of simplified reporting, the payment error rate reduction could have been larger, dropping

by as much as 2.2 points. 

Page 11 GAO-07-422T 
simplify the application and reporting process. 11 Under the simplified 

reporting rule issued in November 2000 and expanded under the 2002 

Farm Bill, most households need only report changes between 

certification periods if their new household income exceeds 130 percent of 

the federal poverty level. This simplified reporting option can reduce a 

state’s error rate by minimizing the number of income changes that must 

be reported between certifications and thereby reducing errors associated 

with caseworker failure to act as well as participant failure to report 

changes. 

FNS has taken several steps to increase payment accuracy, such as using

its quality control system to provide sanctions and incentives to encourage 

states to reduce their payment error rates, tracking the success of state 

initiatives, and providing information needed to facilitate program 

improvement. FNS has long focused its attention on states’ accountability 

for error rates through its QC system by assessing penalties and providing 

financial incentives. The administration of the QC process and its system 

of performance bonuses and sanctions is credited as being the single 

largest motivator of program behavior. In fiscal year 2005, 8 states were 

found to be in jeopardy of being penalized if their fiscal year 2006 error 

rates do not improve. Some states have expressed concern that they may 

improve their error rates and yet still be penalized because the national 

rate continues to drop around them. In addition, under its new 

performance bonus system, each fiscal year FNS has awarded a total of 

$48 million to states, including $24 million to states with the lowest and 

most improved error rates and $6 million to states with the lowest and 

most improved negative error rate.12

 11The 2002 Farm Bill also gave states the option of adopting provisions that could simplify 

program administration and possibly reduce error rates. These options include simplifying 

income and resources, housing costs and deductions, reporting requirements, and utility 

allowances. See GAO, Food Stamp Program: Farm Bill Options Ease Administrative 

Burden, but Opportunities Exist to Streamline Participant Reporting Rules among 

Programs, GAO-04-916 (Washington, D.C.: September 2004). 

12The remaining $18 million was awarded for improvements not related to error rates—the 

highest and most improved ratio of food stamp participants compared with the number of

persons in poverty and the highest percentage of timely completed applications. Also, in 

addition to monitoring the payment error rate, FNS estimates the rate at which eligible 

households are improperly denied benefits, which is called the negative error rate.

According to a FNS QC official, this rate is not included in the national food stamp payment

error rate because it counts the number of cases affected rather than the number of dollars 

given in error. 

Page 12 GAO-07-422T 
FNS has also taken many actions to track the success of improvement 

initiatives and to provide the information needed to facilitate program 

improvement. FNS managers and regional office staff use QC data to 

monitor states’ performance over time, conduct annual reviews of state 

operations, and where applicable, monitor the states’ implementation of 

corrective action plans. FNS, in turn, requires states to perform 

management evaluations to monitor whether adequate corrective action 

plans are in place at local offices to address the causes of persistent errors 

and deficiencies. In addition, in November of 2003, FNS created a Payment 

Accuracy Branch at the national level to work with FNS regions to suggest 

policy and program changes and to monitor state performance. The 

branch facilitates a National Payment Accuracy Workgroup with 

representatives from each FNS regional office and headquarters who use 

QC data to review and categorize state performance into one of three 

tiers.13 FNS has recommended a specific level of increasing intervention 

and monitoring approaches for each tier when error rates increase, and 

the FNS regional offices report to headquarters on both state actions and 

regional interventions quarterly. 

FNS also provides and facilitates the exchange of information gleaned 

from monitoring by 

• publishing a periodic guide to highlight the practices states are using to 

address specific problems;14

• sponsoring national and regional conferences and best practices 

seminars; 

• training state QC staff; 

• providing state policy training and policy interpretation and guidance; 

and 

• supporting adoption of program simplification options. 

Once promising state practices have been identified, FNS also provides 

funding to state and local food stamp officials to promote knowledge 

sharing of good practices. 

 13Tier 1 states have an error rate under 6 percent, and tier 2 states have an error rate of 

6 percent or greater but do not fall into tier 3. States are assigned to tier 3 when the lower 

limit of their error rate estimate at the 90 percent confidence level is higher than 

105 percent of the national error rate estimate. 

14U.S. Department of Agriculture, Food and Nutrition Service, Payment Accuracy in the 

Food Stamp Program (Alexandria, Va.: September 2004).

Page 13 GAO-07-422T 
Despite the progress in reducing payment errors, future similar error rate 

reductions may prove challenging. The three major causes of errors have 

remained the same over time and are closely linked to the complexity of 

program rules and reporting requirements. As long as eligibility 

requirements remain so detailed and complex, certain caseworker 

decisions will be at risk of error. Moreover, participant-caused errors, 

which constitute one-third of the overall national errors, are difficult to 

prevent and identify. 

Since the early 1990s, trafficking has declined by about 74 percent. FNS 

estimates that between 2002 and 2005, about $241 million in food stamp 

benefits was trafficked annually, or about 1.0 cent per dollar of benefits 

issued. Trafficking occurs more frequently in small convenience stores, 

and often, we found, between store owners and food stamp recipients with 

whom they were familiar. FNS has taken advantage of EBT and other new 

technology to improve its ability to detect trafficking and disqualify 

retailers who traffic, while law enforcement agencies have investigated 

and referred for prosecution a decreasing number of traffickers, instead 

focusing their efforts on fewer high-impact investigations. Despite the 

progress FNS has made in combating retailer trafficking, the Food Stamp 

Program remains vulnerable because retailers can enter the program 

intending to traffic and do so, often without fear of severe criminal 

penalties, as the declining number of investigations referred for 

prosecution suggests. 

Estimates Suggest 

Trafficking Has 

Declined, but FNS 

Could Further 

Enhance Program 

Integrity 

FNS Estimates Suggest 

That the Rate of Food 

Stamp Trafficking Has 

Declined and That It 

Occurs More Frequently in 

Smaller Stores 

The national rate of food stamp trafficking declined from about 3.8 cents 

per dollar of benefits redeemed in 1993 to about 1.0 cent per dollar during 

the years 2002 to 2005, as shown in table 1. Overall, the estimated rate of

trafficking at small stores is much higher than the estimated rate for 

supermarkets and large groceries, which redeem most food stamp 

benefits. The rate of trafficking in small stores is an estimated 7.6 cents 

per dollar and an estimated 0.2 cents per dollar in large stores.

Page 14 GAO-07-422T 
Table 1: FNS Estimates Suggest That the Trafficking Rate Has Declined

Calendar year

period 

Estimated 

trafficking rate 

percentage

Food stamp 

benefits issued

annually

(Millions of dollars) 

Estimated amount 

of benefits

trafficked annually

(Millions of dollars)

1993 3.8 21,100 812

1996-1998 3.5 19,627a657

1999-2002 2.5 16,139a393

2002-2005 1.0 23,213a241

Source: FNS studies and GAO calculation. 

a

FNS reported that it annualized redemption data over the period of the study but did not provide the

annualized figures. We calculated the 3- and 4-year average of benefits redeemed for comparative 

purposes. 

FNS Has Taken Advantage 

of New EBT Data to 

Improve Retailer 

Monitoring, while Other 

Federal Entities Have 

Focused on Fewer HighImpact Investigations 

With the implementation of EBT, FNS has supplemented its traditional 

undercover investigations by the Retailer Investigations Branch with cases 

developed by analyzing EBT transaction data. The nationwide 

implementation of EBT has given FNS powerful new tools to supplement 

its traditional undercover investigations of retailers suspected of 

trafficking food stamp benefits. FNS traditionally sent its investigators into 

stores numerous times over a period of months to attempt to traffic 

benefits. However, PRWORA gave FNS the authority to charge retailers 

with trafficking in cases based solely on EBT transaction evidence, called 

“paper cases.” A major advantage of paper cases is that they can be 

prepared relatively quickly and without multiple store visits. 

These EBT cases now account for more than half of the permanent 

disqualifications by FNS (see fig. 4). Although the number of trafficking 

disqualifications based on undercover investigations has declined, these 

investigations continue to play a key role in combating trafficking. 

However, as FNS’s ability to detect trafficking has improved, the number 

of suspected traffickers investigated by other federal entities, such as the 

USDA Inspector General and the U.S. Secret Service, has declined. These 

entities have focused more on a smaller number of high-impact 

Page 15 GAO-07-422T 
investigations. As a result, retailers who traffic are less likely to face 

severe criminal penalties or prosecution.15

Figure 4: As Trafficking Disqualifications Based on EBT Data Have Increased, 

Those Based on Undercover Investigations Have Decreased

0

100

200

300

400

500

600

700

800

900

1,000

2000 2001 2002 2003 2004 2005

Trafficking disqualifications

Fiscal year

Undercover investigations

Paper cases

Source: FNS.

Despite the Progress That 

Has Been Made against 

Trafficking, Vulnerabilities 

Still Exist in the Program 

Despite the progress FNS has made in combating retailer trafficking, the 

Food Stamp Program remains vulnerable because retailers can enter the 

program intending to traffic and do so, often without fear of severe 

criminal penalties, as the declining number of investigations referred for 

prosecution suggests. FNS field office officials told us their first priority is 

getting stores into the program to ensure needy people have access to 

food, and therefore they sometimes authorize stores that stock limited 

 15When trafficking is proved, FNS penalizes the store owners, usually by permanent 

program disqualification. In limited circumstances, traffickers may receive civil penalties. 

These penalties may be imposed if the retailer had taken proper measures and can prove he 

was not involved in trafficking. Civil money penalties may also be imposed against 

disqualified owners who sell their stores before the expiration of the disqualification 

period, because they have not completed their program suspension penalty. 

Page 16 GAO-07-422T 
food supplies but meet the minimum requirements in areas with few larger 

grocery stores. However, once authorized, some dishonest retailers do not 

maintain adequate food stock and focus more on trafficking food stamp 

benefits than on selling groceries, according to FNS officials, and 5 years 

may pass before FNS checks the stock again unless there is an indication 

of a problem with the store. 

Oversight of retailers’ entry into the program and early operations is 

important because newly authorized retailers can quickly ramp up the 

amount of food stamps they traffic, and there is no limit on the value of 

food stamps a retailer can redeem in 1 month. At one field office location 

where retailers are often innovative in their trafficking schemes, FNS 

officials noticed that some retailers quickly escalated their trafficking 

within 2 to 3 months after their initial authorization. As shown in figure 5,

one disqualified retailer’s case file we reviewed at that field office showed 

the store went from $500 in monthly food stamp redemptions to almost 

$200,000 within 6 months. Redemption activity dropped precipitously after 

the trafficking charge letter was sent to the retailer in late October of 2004. 

In its application for food stamp authorization, this retailer estimated he 

would have $180,000 of total annual food sales, yet the retailer was 

redeeming more than that each month in food stamp benefits before being 

caught in a Retailer Investigations Branch investigation. 

Page 17 GAO-07-422T 
Figure 5: Food Stamp Redemptions of a Newly Authorized Store Disqualified for

Trafficking

0

50,000

100,000

150,000

200,000

Monthly food stamp redemptions (in dollars)

Source: GAO analysis of FNS case file.

Year 2004

Mar. Apr. May June July Aug. Sept. Oct. Nov.

FNS has made good use of EBT transaction data. However, FNS has not 

conducted the analyses to identify high risk areas and to target their 

compliance-monitoring resources to the areas of highest risk. For 

example, our analysis of FNS’s database of retailers showed that of the 

9,808 stores permanently disqualified from the Food Stamp Program, 

about 35 percent were in just 4 states: New York, Illinois, Texas, and 

Florida, yet about 26 percent of food stamp recipients lived in those states. 

However, FNS headquarters officials did not know the number of program 

specialists in the field offices in these states who devote a portion of their 

time to monitoring food stamp transactions and initiating paper cases. 

In addition, some retailers and store locations have a history of program 

violations that lead up to permanent disqualifications, but FNS did not 

have a system in place to ensure these stores were quickly targeted for 

heightened attention. Our analysis showed that, of the 9,808 stores that 

had been permanently disqualified from the program, about 90 percent 

were disqualified for their first detected offense. However, 9.4 percent of 

the disqualified retailers had shown early indications of problems before 

being disqualified. About 4.3 percent of these retailers had received a civil 

Page 18 GAO-07-422T 
money penalty, 4.3 percent had received a warning letter for program 

violations, and 0.8 percent had received a temporary disqualification.16

Most of these stores were small and may present a higher risk of future 

trafficking than others, yet FNS does not necessarily target them for 

speedy attention. 

Further, some store locations may be at risk of trafficking because a series 

of different owners had trafficked there. After an owner was disqualified, 

field office officials told us the store would reopen under new owners who 

continued to traffic with the store’s clientele. As table 2 shows, our 

analysis of FNS’s database of retailers found that about 174, or 1.8 percent, 

of the store addresses had a series of different owners over time who had 

been permanently disqualified for trafficking at that same location, totaling 

369 separate disqualifications. In one case, a store in the District of 

Columbia had 10 different owners who were each disqualified for 

trafficking, consuming FNS’s limited compliance-monitoring resources. 

Table 2: Some Store Locations Have Had Multiple Retailers That Engaged in 

Trafficking

Number of different owners at same 

address disqualified

Number of 

disqualified addresses

2 162

3 10

5 1

10 1

Total 174

Source: GAO analysis of FNS data. 

Our analysis of the data on these stores with multiple disqualified owners 

indicates that FNS officials found this type of trafficking in a handful of 

cities and states. Almost 60 percent of repeat store locations were in 6 

states, and 44 percent were in 8 cities, often concentrated in small areas. 

For example, 14 repeat store locations were clustered in downtown areas 

 16Civil money penalties may be imposed against a store in lieu of disqualification. FNS

collected almost $1.7 million in civil money penalties in fiscal year 2005. Also, warning 

letters are sent for lesser violations of program regulations such as charging food stamp 

recipients higher prices than other customers or when the evidence is too limited to 

warrant a disqualification. Temporary disqualifications are generally for selling ineligible 

goods such as paper plates, tobacco, or alcohol or providing credit to food stamp 

recipients. 

Page 19 GAO-07-422T 
of both Brooklyn and Baltimore. However, it is not clear whether these 

data indicate heightened efforts of compliance staff or whether trafficking 

is more common in these areas. Regardless, early monitoring of high-risk 

locations when stores change hands could be an efficient use of resources. 

In addition, states’ lack of focus can facilitate vendor trafficking. Paper 

cases often identify recipients suspected to have trafficked their food 

stamp benefits with a dishonest retailer, and some FNS field offices send a 

list of those recipients to the appropriate state. In response, some states 

actively pursue and disqualify these recipients. However, FNS field offices

do not always send lists of suspected individual traffickers to states or 

counties administering the program, and not all states investigate the 

individuals on these lists. Instead of focusing on food stamp recipients 

who traffic their benefits, states are using their resources to focus on 

recipients who improperly collect benefits, according to FNS officials. 

This inaction by some states allows recipients suspected of trafficking to

continue the practice, and such inaction also leaves a pool of recipients 

ready and willing to traffic their benefits as soon as a disqualified store 

reopens under new management. 

Finally, FNS penalties alone may not be sufficient to deter traffickers. The 

most severe FNS penalty that most traffickers face is disqualification from 

the program, and FNS must rely on other entities to conduct investigations

that could lead to prosecution. For example, in the food-stamp-trafficking 

ramp-up case previously cited, this retailer redeemed almost $650,000 of 

food stamps over the course of 9 months before being disqualified from 

the program in November 2004. As of August 2006, there was no active 

investigation of this retailer. 

Improper food stamp payments and trafficking of benefits have declined in

a time of rising participation, and although progress has been made, 

ensuring program integrity will continue to be a fundamental challenge 

facing the program. We found that payment error rates have declined 

substantially as FNS and states have taken steps to improve payment 

accuracy and that future reductions may prove challenging. Attention from 

top USDA management as well as continued support and assistance from 

FNS will likely continue to be important factors in further reductions. In 

addition, if error rates continue to decrease, this trend will continue to put 

pressure on states to improve because penalties are assessed using the 

state’s error rate as compared with the national average. We also found 

that FNS, using EBT data, has made significant progress in taking 

advantage of new opportunities to monitor and disqualify traffickers. 

Concluding 

Observations 

Page 20 GAO-07-422T 
However, a more focused effort to target and disqualify these stores could 

help FNS meet its continuing challenge of ensuring that stores are 

available and operating in areas of high need while still maintaining 

program integrity. Given the size of the Food Stamp Program, the costs to

administer it, and the current federal budget deficit, achieving program 

goals more cost-effectively may become more important. FNS and the 

states will continue to face a challenge in balancing the goals of payment 

accuracy, increasing program participation rates, and the need to contain 

program costs. 

To reduce program vulnerabilities and better target its limited compliancemonitoring resources, we recommended in our October 2006 report on 

trafficking that FNS develop additional criteria to identify stores most 

likely to traffic; conduct risk assessments, using compliance and other 

data, to systematically identify stores and areas that meet these criteria, 

and allocate resources accordingly; and provide more targeted and early 

oversight of stores determined most likely to engage in trafficking. 

To provide further deterrence for trafficking, we recommended that FNS 

work to develop a strategy to increase the penalties for trafficking, 

working with the Inspector General as needed, and consider developing

legislative proposals if the penalties entail additional authority. 

To promote state efforts to pursue recipients suspected of trafficking and

thereby reduce the pool of recipient traffickers, we recommended that

FNS ensure that FNS field offices report to states those recipients who are 

suspected of trafficking, and revisit the incentive structure to encourage 

states to investigate and take action against recipients who traffic. 

Department of Agriculture officials generally agreed with our findings, 

conclusions, and recommendations but raised a concern regarding our 

recommendations on more efficient use of their compliance-monitoring 

resources. They stated that they believe they do have a strategy for 

targeting resources through their use of EBT transaction data to identify

suspicious transaction patterns. We believe that FNS has made good 

progress in its use of EBT transaction data. However, it is now at a point 

where it can begin to formulate more sophisticated analyses. For example, 

these analyses could combine EBT transaction data with other available 

data, such as information on stores with minimal inventory, to develop

criteria to better and more quickly identify stores at risk of trafficking. 

Page 21 GAO-07-422T 
Mr. Chairman, this concludes my prepared statement. I will be happy to 

answer any questions that you or other members of the Committee may 

have. 

For future contacts regarding this testimony, I can be contacted at (202) 

512-7215. Key contributors to this testimony were Diana Pietrowiak and 

Cathy Roark. 

GAO Contact and 

Staff 

Acknowledgments 

Page 22 GAO-07-422T 
Page 23 GAO-07-422T 

Related GAO Products: 

Food Stamp Trafficking: FNS Could Enhance Program Integrity by 

Better Targeting Stores Likely to Traffic and Increasing Penalties. 

GAO-07-53. Washington, D.C.: October 13, 2006. 

Improper Payments: Federal and State Coordination Needed to Report 

National Improper Payment Estimates on Federal Programs. 

GAO-06-347. Washington, D.C.: April 14, 2006. 

Food Stamp Program: States Have Made Progress Reducing Payment 

Errors, and Further Challenges Remain. GAO-05-245. Washington, D.C.: 

May 5, 2005.

Food Stamp Program: Farm Bill Options Ease Administrative Burden,

but Opportunities Exist to Streamline Participant Reporting Rules 

among Programs. GAO-04-916. Washington, D.C.: September 16, 2004. 

Food Stamp Program: Steps Have Been Taken to Increase Participation 

of Working Families, but Better Tracking of Efforts Is Needed. 

GAO-04-346. Washington, D.C.: March 5, 2004. 

Financial Management: Coordinated Approach Needed to Address the 

Government’s Improper Payments Problems. GAO-02-749. Washington, 

D.C.: August 9, 2002. 

Food Stamp Program: States’ Use of Options and Waivers to Improve 

Program Administration and Promote Access. GAO-02-409. Washington, 

D.C.: February 22, 2002. 

Executive Guide: Strategies to Manage Improper Payments: Learning 

from Public and Private Sector Organizations. GAO-02-69G. Washington,

D.C.: October 2001. 

Food Stamp Program: States Seek to Reduce Payment Errors and 

Program Complexity. GAO-01-272. Washington D.C.: January 19, 2001. 

Food Stamp Program: Better Use of Electronic Data Could Result in 

Disqualifying More Recipients Who Traffick Benefits. GAO/RCED-00-61. 

Washington D.C.: March 7, 2000. 

Food Assistance: Reducing the Trafficking of Food Stamp Benefits. 

GAO/T-RCED-00-250. Washington D.C.: July 19, 2000. 
Food Stamp Program: Information on Trafficking Food Stamp Benefits.

GAO/RCED-98-77. Washington D.C.: March 26, 1998. 

(130640) Page 24 GAO-07-422T 
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