United States General Accounting Office

GAO Testimony

Before the Subcommittee on Department Operations,

Nutrition, and Foreign Agriculture, Committee on

Agriculture, House of Representatives

For Release

on Delivery

Expected at

10:00 a.m. EST

Thursday

October 30, 1997

FOOD ASSISTANCE

Reducing Food Stamp

Benefit Overpayments and

Trafficking

Statement of Robert A. Robinson, Director

Food and Agriculture Issues,

Resources, Community, and Economic

Development Division

GAO/T-RCED-98-37

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to discuss our work on fraud, waste, and

abuse in the U.S. Department of Agriculture’s (USDA) Food Stamp Program.

The program is one of the nation’s largest welfare programs and the

largest single program administered by USDA. In fiscal year 1997, about $21

billion in food stamps were provided to about 24 million recipients,1

 down

slightly from recent years. Reviews by GAO, USDA’s Office of Inspector

General (OIG), and others have produced ample evidence that the system

for delivering food stamps is vulnerable to, and is being victimized by,

significant fraud, waste, and abuse.

Today, we will discuss fraud, waste, and abuse in the Food Stamp Program

from three perspectives: (1) the nature and extent of the problem, (2) the

roles and responsibilities of the major federal agencies involved in

minimizing it, and (3) the potential of electronic benefits transfer (EBT)—a

system of benefit delivery that replaces the traditional food stamp coupons

with a debit card—to reduce it.

In summary, we found the following:

• Fraud, waste, and abuse in the Food Stamp Program takes two primary

forms: (1) overpayments to food stamp recipients and (2) the use of food

stamps to obtain cash or other non-food items—a process known as

trafficking. According to USDA, in fiscal year 1996, the most current year for

which data are available, about $1.5 billion was paid out to individuals

who either should not have received any food stamps at all or who

received more than they were entitled to receive. These overpayments

represented nearly 7 percent of the approximately $22 billion in food

stamps provided. Overpayments are caused by both inadvertent and

intentional errors made by recipients and errors made by state

caseworkers. In addition, program regulations specify that recipients use

food stamps only to purchase food from authorized retailers. However,

USDA has recently estimated that up to $815 million in food stamps,

approximately 4 percent of the food stamps issued, were traded for cash in

fiscal year 1993 through retail stores participating in the program.

Numerous retailers are caught each year paying food stamp recipients a

discounted value of the stamps (for example, 70 cents on the dollar) and

then redeeming the stamps at full face value from the government. There

1

For this testimony, food stamps refers to the benefits provided in the form of coupons or through

electronic benefits transfer.

Page 1 GAO/T-RCED-98-37
are no reliable data on the extent of trafficking that occurs before the food

stamps are redeemed by an authorized retailer.

• USDA’s Food and Consumer Service (FCS) administers the Food Stamp

Program in partnership with the states. The states are responsible for the

day-to-day operation of the program, including meeting with applicants

and determining their eligibility and benefit levels. FCS provides nationwide

criteria for determining eligibility for assistance and the amount of food

stamps recipients are entitled to receive. It monitors the accuracy of state

benefit determinations and operates a system of incentives and sanctions

to encourage states to reduce the number of errors. FCS also approves

retailers to participate in the program and monitors and investigates their

activities to identify those potentially violating program regulations. The

Department’s OIG devotes a substantial share of its audit and investigative

resources to identifying program irregularities, especially trafficking.

• EBT systems have the potential to reduce some aspects of the fraud, waste,

and abuse in the Food Stamp Program but not others. By providing a clear

“paper trail” of all food stamp transactions, EBT systems help reviewers

identify trafficking activities and remove and/or prosecute retailers

engaged in such activities. These systems also address problems

associated with food stamp theft. Because EBT is a benefit delivery system,

however, it cannot address the substantial problems associated with

determining eligibility for food stamps or establishing benefit levels.

Nature and Extent of

Fraud, Waste, and

Abuse

The two main areas of fraud, waste, and abuse involve (1) overpayment of

food stamp benefits and (2) trafficking.

Concerning the first area, overpayments occur when ineligible persons are

provided food stamps and when eligible persons are provided more than

they are entitled to receive. In 1996, for example, the states overpaid

recipients an estimated $1.5 billion—or 6.92 percent—of the

approximately $22 billion in food stamps issued. Overpayments occur for

two reasons. First, recipients make errors, either inadvertent or

intentional, in providing information to the state caseworker about the

recipient household’s size, income, assets, or other pertinent information

needed to determine the household’s eligibility and benefit level. Second,

state caseworkers make errors in determining either an applicant’s

eligibility for food stamps or the appropriate level of benefits. According

to 1996 data, recipient errors accounted for 57 percent of the

overpayments—36 percent were unintentional errors and 21 percent were

intentional. The remaining 43 percent of the overpayments were caused by

caseworkers’ errors. It should be noted that errors by participants and

Page 2 GAO/T-RCED-98-37
caseworkers can also result in underpayments. FCS’ data show that food

stamp recipients were underpaid approximately $518 million in fiscal year

1996.

In March 1997, we reported on one specific example of food stamp

overpayments—payments involving violations of the federal regulations

that prohibit inmates of correctional institutions from participating in the

Food Stamp Program.2

 By matching automated food stamp and prison

records in four states—California, Florida, New York, and Texas—we

identified over 12,000 inmates who were included in the households

receiving food stamps in fiscal year 1995. These households improperly

collected an estimated $3.5 million in food stamps. Subsequently, in

August 1997, the Balanced Budget Act of 1997 (P. L. 105-33, Aug. 5,

1997) included a provision directing the states to ensure that individuals

who are under federal, state, or local detention for more than 30 days are

not participating in the Food Stamp Program. In response to a request

from the Senate Committee on Agriculture, Nutrition, and Forestry, we are

currently examining the potential for computer matching to identify other

ineligible populations participating in the program.

With respect to trafficking—the second main area of fraud, waste and

abuse—program regulations specify that participants must use food

stamps only to purchase food items from the retailers authorized by FCS to

accept food stamps. Once they receive them, authorized retailers are

required to forward food stamps directly to financial institutions for

redemption. However, numerous federal and state officials told us that

food stamps have essentially become a second currency exchanged by

some recipients for cash or non-food items. Trafficked food stamps may

change hands several times, but all food stamps must eventually flow

through an authorized retailer because only such a retailer can redeem

food stamps for cash from the government. Numerous retailers are caught

each year accepting food stamps from recipients, giving them a discounted

value of the stamps in cash (for example, 70 cents on the dollar), and then

redeeming the stamps at full face value from the government.

Data on the extent of trafficking between parties prior to reaching

authorized retailers are unavailable. However, a 1995 FCS study3

 estimated

that up to $815 million, or about 4 percent of the food stamps issued, was

2

Food Stamps: Substantial Overpayments Result From Prisoners Counted as Household Members

(GAO/RCED-97-54, Mar. 10, 1997).

3

The Extent of Trafficking in the Food Stamp Program, U.S. Department of Agriculture, Food and

Consumer Service, Aug. 19, 1995.

Page 3 GAO/T-RCED-98-37
exchanged for cash by authorized retailers during fiscal year 1993. The

study found that supermarkets, where over three-fourths of all food

stamps are redeemed, have low trafficking rates compared with other

types of retailers. The trafficking rate reported for publicly owned

supermarkets (i.e., a company whose stock trades publicly) was less than

0.1 percent of food stamp redemptions, and the rate reported for privately

owned supermarkets was 2.6 percent. By comparison, the trafficking rate

for small, privately owned food retailers and privately owned retailers that

do not stock a full line of food was 15.1 percent of the food stamps they

redeemed.

Roles and

Responsibilities of the

Federal Agencies in

Minimizing Fraud,

Waste, and Abuse

The Food Stamp Program is administered by USDA’s FCS in partnership with

the states. FCS provides nationwide criteria for determining who is eligible

for assistance and the amount of benefits recipients are entitled to receive.

The states are responsible for the day-to-day operation of the program,

including meeting with applicants and determining their eligibility and

benefit levels. In making these decisions, state caseworkers rely on

documentation provided by households and information obtained in

interviews with the applicants. FCS is also responsible for authorizing

retailers to redeem food stamps as well as for monitoring program

compliance by the approximately 190,000 stores currently authorized to

redeem food stamps. FCS and USDA’s OIG are responsible for investigating

retailers suspected of violating program regulations. The OIG performs all

the criminal investigations of the Food Stamp Program conducted by USDA

and coordinates investigative activities with other federal agencies.

Others—such as the Federal Bureau of Investigation (FBI), the U.S. Postal

Service, and the U.S. Secret Service—as well as the states assist in

combatting fraud.

The Food Stamp Program’s Quality Control (QC) System is FCS’ primary

tool for evaluating the states’ performance in issuing benefits and

determining the level of overpayments. Under the QC System, the states

must review a sample of their household cases each year to determine the

accuracy of the eligibility and benefit determinations made by state

caseworkers and the extent of payment errors—both overpayments and

underpayments. FCS reviews a subsample of each state’s sample to ensure

the accuracy of the states’ efforts. FCS then determines the official error

rate for each state and a national error rate. If an individual state’s error

rate exceeds the national error rate, FCS can sanction the state by requiring

it to reimburse the federal government for a portion of the erroneous

payments. On the other hand, states that have low error rates are eligible

Page 4 GAO/T-RCED-98-37
for additional reimbursement from the federal government—referred to as

enhanced funding.

According to USDA’s data, overpayments in the Food Stamp Program have

declined since 1993. At the national level, the overpayment error rate has

decreased from 8.27 percent in fiscal year 1993 to 6.92 percent in fiscal

year 1996. The 1996 overpayment error rate is the lowest level ever

achieved in the program. Since 1995, FCS has increased its emphasis on

achieving payment accuracy and has employed various initiatives to assist

the states in reducing the number of errors. The Congress appropriated

over $3 million for these initiatives. Specifically, FCS’ activities include

sponsoring national, regional, and state conferences; providing direct

technical assistance to the states; and facilitating the exchange of state

information on effective strategies for determining accurate payments. As

we reported in 1995,4

 while technical assistance and related steps are

undoubtedly useful, the single most critical factor in reducing

overpayments is the commitment of the managers of the states’ Food

Stamp Programs to aggressively address the error rate problem.

Supplementing its efforts to help the states reduce errors, FCS has

implemented a new strategy for conducting its sanction activities.

Historically, for a variety of reasons, the states with high error rates paid

little of the sanction penalties FCS imposed. Beginning in 1996, FCS reached

agreement with some of these states regarding more than $404 million in

penalties owed for unacceptable error rates that occurred in fiscal years

1992 through 1996. FCS agreed to reduce this penalty to $135 million and

entered into settlement agreements with these states that establish

performance goals tied to payment accuracy. Of the $135 million sanction

liability, the states are required to invest almost $35 million in activities

that directly lead to the reduction of their error rates. If a state meets its

performance goals as set out in the agreement, its share of the remaining

$100 million liability will be waived. According to FCS, as a result of these

settlements, the states are more actively engaged in activities to reduce

errors, which should continue to have a positive effect on improving

payment accuracy.

With respect to trafficking, our 1995 report stated that FCS’ controls and

procedures for authorizing and monitoring the retailers that participate in

the Food Stamp Program did not deter or prevent retailers from trafficking

in food stamps. Stores that did not meet eligibility criteria were being

4

Food Assistance: Reducing Food Stamp Benefit Overpayments and Trafficking (GAO/RCED-95-198,

June 23, 1995).

Page 5 GAO/T-RCED-98-37
admitted to the program because the process for authorizing them was

flawed. The single most effective deterrent to preventing ineligible

retailers from being authorized is a preauthorization on-site visit.

However, because of insufficient time or resources, FCS made few visits

before authorizing stores to participate in the program. Furthermore, FCS’

monitoring process was inadequate to detect authorized retailers that

were violating program regulations. Reports on retailers’ activities, such as

total food sales and food stamp redemptions, were often untimely or

inaccurate and of limited utility in identifying retailers’ trafficking. In

addition, we reported that FCS had only 46 investigators nationwide to

conduct investigations of retailers suspected of trafficking or violating

other program regulations.

Since our report, FCS has initiated several actions to reduce trafficking in

the program. For example, FCS has contracted with a number of different

companies to make 35,000 to 40,000 store visits by the end of fiscal year

1998. These visits will be made primarily to new stores requesting approval

to participate in the program and to stores requesting reauthorization to

participate in the program. In addition, FCS reports that it has improved its

Store Tracking and Redemption System by, for example, developing a

profile that enables FCS to better identify stores that may be trafficking in

food stamps or selling ineligible items. The system also includes

information on sanctions taken against the stores that violate program

regulations. The system is used to screen all new applications for

participation in the program in order to keep ineligible retailers from

returning to the program during a period in which they are disqualified.

The system is also used to monitor stores’ redemptions and to identify

retailers for investigation or other administrative actions. For the states

using EBT systems, FCS has developed an automated system that identifies

transaction patterns in EBT data that indicate trafficking violations.

In addition to FCS’ oversight activities, USDA’s OIG investigates retailers that

illegally use food stamp benefits and coordinates its investigative activities

with other federal and state agencies. For example, the OIG is currently

looking at food stamp trafficking with state and local agencies in about 30

locations nationwide. The OIG has also taken an active role in monitoring

and reviewing EBT systems and developing the automated system to

analyze EBT data to identify fraud in the Food Stamp Program.

Outside of USDA, a number of federal investigative agencies also play a role

in the process. For example, the FBI investigates criminal violations of

USDA programs if the violation has involved bribery, organized crime, or

Page 6 GAO/T-RCED-98-37
major fraud perpetrated by federal employees. The FBI focuses its

investigations on links between food stamp trafficking and other criminal

activities under the Bureau’s jurisdiction, such as narcotics, terrorism, and

white-collar crime. The U.S. Postal Inspection Service has primary

responsibility for enforcing laws concerning property in the custody of the

U.S. Postal Service. The Postal Inspection Service’s main investigative

focus for the Food Stamp Program is the theft of food stamps and EBT

cards from the Postal Service’s custody prior to receipt by the food stamp

recipient. Finally, the U.S. Secret Service investigates food stamp

counterfeiting and makes recommendations on security measures relating

to EBT cards.

States are responsible for investigating and prosecuting individuals

suspected of falsifying information in order to obtain food stamps and

misusing their food stamps—such as selling their stamps for cash. States

sometimes work with FCS or USDA’s OIG to investigate retailers’ fraud and

abuse in the program. In an effort to supplement federal efforts to

investigate retailers, FCS has used State Law Enforcement Bureau

agreements. Under these agreements, FCS provides the states with food

stamp coupons to use in conducting their own trafficking investigations.

FCS has established agreements with 32 states, but only 10 states have

conducted sustained efforts against food stamp trafficking.

Observations on the

Use of Electronic

Benefits Transfer

Systems

Food stamp benefits have historically been distributed in the form of

printed coupons. In Reading, Pennsylvania, in 1984, however, FCS piloted

the use of an alternative delivery system—EBT. Since this pilot, there has

been increasing interest in moving to EBT systems. Under such systems,

recipients receive plastic debit cards to obtain their food stamps and pay

for purchases through point-of-sale terminals installed at check-out

counters in food stores. At the time of the purchase, recipients enter a

personal identification number. The EBT computer then verifies that

sufficient funds exist in the recipient’s food stamp account, debits the

purchase amount from the recipient’s account, and credits it to the

retailer’s account. At the end of each business day, the authorized sales are

totaled and funds are transferred electronically to the retailer’s bank

account. Currently, 11 states have implemented EBT systems statewide.

Eight of these states deliver multiple program benefits with their EBT

system, including other federal and state programs. Additionally, 16 states

use EBT systems in selected counties. All the remaining states are in the

process of implementing EBT systems. Collectively, EBT systems supply

almost 20 percent of all food stamps.

Page 7 GAO/T-RCED-98-37
By eliminating paper coupons that may be lost, sold without any record of

the sale, or stolen, EBT systems can help cut back on food stamp fraud. EBT

systems reduce the likelihood of benefit theft. Of most importance,

however, EBT systems create an electronic record of each food stamp

transaction, making it easier to identify and document instances where

food stamp benefits are trafficked. EBT data include the following

information on each transaction: the exact time of day, the amount, the

recipient’s identity, the store’s identity, and the specific cash register in the

store. Reviewers can use these data to identify suspicious transactions or

transaction patterns. Since 1991, USDA’s OIG has opened 234 cases involving

food stamp trafficking as a result of analyzing EBT data. The stores

involved in these cases redeemed over $70 million in EBT food stamps, of

which the OIG identified over $27 million as being fraudulent.

The August 1996 Welfare Reform Act explicitly states that EBT data alone

can be used as evidence to take action against retailers violating the Food

Stamp Act. As a result, FCS can now use EBT data to levy administrative

sanctions against retailers caught trafficking, such as permanently barring

them from the program and imposing fiscal penalties, without the expense

of criminal investigation and prosecution. The legislation also mandated

nationwide implementation of EBT systems by October 1, 2002.

While EBT systems make a major contribution to reducing certain aspects

of food stamp fraud, they will not eliminate all fraud. Even in states where

EBT systems have been implemented statewide, trafficking is still

occurring. In such cases, a store owner accepts a card, gives the recipient

a discounted value of the benefits in the recipient’s account in cash, then

claims the full value of the benefits from the government. Furthermore,

because EBT systems are simply another vehicle for distributing benefits,

they cannot correct fraud, waste, and abuse that occurs during the process

of determining eligibility and benefit levels. Unless better ways are found

to verify applicant-supplied information and to avoid errors made by state

caseworkers, individuals will continue to receive benefits to which they

are not entitled, regardless of whether these benefits are distributed by

coupon or EBT systems.

In addition, moving to EBT systems is not without costs. Substantial

investments must be made in computer systems, point-of-sale terminals,

and other hardware. FCS reported that initially EBT systems were more

expensive to operate than conventional coupon systems. More recent

estimates suggest that EBT systems have become more cost competitive.

Page 8 GAO/T-RCED-98-37
EBT costs are expected to continue to diminish as the technology becomes

more widely used.

In any event, however, as we reported in 19945

 and continue to believe

today, EBT systems will likely be most cost effective if they are used to

deliver food stamps in conjunction with other federal and state assistance

programs such as Temporary Assistance to Needy Families and the Special

Supplemental Nutrition Program for Women, Infants and Children. In this

way, overhead costs can be spread across a larger program volume and

serve the purposes of multiple programs.

Thank you again for the opportunity to appear before you today. We would

be pleased to answer any questions you may have.

(150279)

5

Food Assistance: Potential Impacts of Alternative Systems for Delivering Food Stamp Program

Benefits (GAO/RCED-95-13, Dec. 16, 1994).

Page 9 GAO/T-RCED-98-37
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