TANF Electronic Benefit Cards: Some States Are Restricting Certain TANF Transactions, but Challenges Remain
Published: 2012-07-20T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The TANF block grant program provides federal grants to states for various benefits and activities, including cash welfare for needy families with children. TANF is overseen at the federal level by HHS, and administered by states. Most states disburse TANF cash assistance through electronic benefit cards, which can be used to withdraw money or make purchases. Media coverage highlighted cases of cardholders accessing benefits at casinos and other locations that were considered inconsistent with the purpose of TANF. In February 2012, Congress passed a law requiring states to prevent certain transactions at casinos, liquor stores, and adult-entertainment establishments. Within 2 years of enactment, the law also requires HHS to oversee states compliance with these requirements.
GAO was asked to review the ability of TANF recipients to withdraw TANF funds at certain locations inconsistent with the purpose of TANF, such as gambling or other establishments. To do so, GAO reviewed documentation and interviewed officials from HHS, key industry stakeholders, and the top 10 states in TANF basic block grant dollars. GAO also assessed the completeness and accuracy of EBT transaction data from federal fiscal year 2010 from 4 of the 10 states selected. GAO selected these 4 states on the basis of geographical diversity, and the results of this data analysis cannot be generalized to other states.
section_title: What GAO Found
paragraphs: Six of the 10 states reviewed by GAO took steps aimed at preventing certain Temporary Assistance for Needy Families (TANF) transactions determined to be inconsistent with the purpose of TANF, despite no federal requirement to do so at the time. Restrictions are based on selected states laws, executive orders, and other regulations, and generally cover certain locations or certain types of purchases such as alcohol. In some cases, states restrictions are broader than the new federal requirements. These restrictions vary in their degree and means of implementation, including widespread disabling of Electronic Benefit Transfer (EBT) access at automated teller machines located at certain locations across a state, such as at casinos. The other 4 states had no restrictions because no laws, executive orders, or other regulations prohibited certain transactions based on the location of the transactions or the nature of the goods or services purchased. These states did not implement restrictions due to concerns about cost-effectiveness or technical limitations, according to state officials.
Challenges experienced by states in implementing their current restrictions could inhibit future restriction efforts, including those intended to address new federal requirements. These challenges included difficulties with identifying certain locations that could be prohibited and limitations in available data. For example, the transaction data states receive do not contain information that is accurate or detailed enough for them to identify locations that can potentially be prohibited or restricted. State officials suggested that improvements in the completeness and accuracy of transaction data might better enable them to prevent such transactions. In its assessment of the EBT transaction data from 4 states, GAO found that the data are insufficient for systematic monitoring. To effectively conduct systematic monitoring, including the identification of locations that could be blocked from TANF access, data should be complete and accurate. However, addressing the limitations that GAO found in the transaction datasuch as requiring accurate merchant category codes for retailerscould involve significant resources. States that prohibit certain types of purchases generally do not have ways to track what items recipients buy with their cards, partially due to the lack of information in transaction data on specific goods or services purchased. States were also challenged in attempting to track the spending of cash withdrawn with cards. With no controls on how or where individuals spend withdrawn cash, a recipient could withdraw money at an authorized location and use it at certain locations or for certain purchases restricted by some states.
As of July 2012, the Department of Health and Human Services (HHS) was at the beginning of its rulemaking process and did not yet know what form its regulations would take. Until HHS issues regulations or provides further guidance as to what policies and practices are sufficient to comply with new federal requirements, it is unclear to what extent the various restrictions implemented by states would be in compliance. States restrictions could help inform HHSs oversight efforts, especially any information on the cost-effectiveness and success rates for various state restrictions. Restriction methods that do not rely on flawed transaction data may be the most practical.
We provided HHS with a draft of our report for comment. HHS stated that our reports findings and analysis will be helpful as it drafts implementing regulations, and it provided technical comments that we incorporated, as appropriate.
section_title: What GAO Recommends
paragraphs: GAO is not making any recommendations.

section_title: Letter
paragraphs: The Department of Health and Human Services (HHS) oversees states’  administration of the Temporary Assistance to Needy Families (TANF)  program to provide cash assistance, childcare, and other services to low- income families. Among the program’s goals are the promotion of job  preparation, employment, and marriage among parents of dependent  children. HHS oversees the program at the federal level and distributes  $16.5 billion in annual federal block grants to states to provide benefits  and services to recipients. As a federal block-grant program, TANF allows  states broad flexibility in designing and implementing their programs. To  purchase goods and services, TANF recipients receive cash assistance,  which in most states they can access at automated teller machines  (ATM), banks, or retailers, using Electronic Benefit Transfer (EBT) cards.  Cash assistance may be used for goods and services, and the amount of  cash assistance received can vary by state. The EBT cards are similar to  debit or stored-value cards, but do not carry a line of credit, and the  purchases or withdrawals made with these cards cannot exceed the  amount of recipients’ TANF benefits as determined by each state’s TANF  program.
Until February 2012, there were no nationwide federal requirements for  states to take steps aimed at preventing access to TANF cash assistance  at certain locations. However, media coverage in some states highlighted  cases of individuals accessing cash or conducting transactions at  gambling establishments, adult-entertainment establishments, and liquor  stores that could be considered inconsistent with the TANF program. In  response, some states took steps aimed at implementing certain  restrictions that would prevent such transactions. In February 2012,  Congress passed, as part of the Middle Class Tax Relief and Job  Creation Act of 2012, the Welfare Integrity and Data Improvement Act,  which requires all states to maintain policies and practices as necessary  to prevent TANF assistance from being used in any electronic benefit  transfer transaction in (1) liquor stores; (2) casinos, gambling casinos, or  gaming establishments; and (3) adult-oriented entertainment  establishments in which performers disrobe or perform in an unclothed  state for entertainment.taken to implement such policies and practices by February 22, 2014.
States must report to HHS the steps they have  In this context, you asked us to review the ability of TANF recipients to  withdraw TANF funds at certain locations inconsistent with the purpose of  TANF, such as gambling or other establishments. To understand this  ability better, we reviewed actions selected states have taken to prevent  unauthorized TANF transactions, and the challenges they can face in  taking such steps in compliance with new federal legislation.  To perform  our work, we reviewed TANF laws, regulations, and other documentation  and interviewed officials from HHS. We also reviewed documentation and  interviewed officials from the top 10 states in terms of TANF basic block- grant dollars—California, New York, Michigan, Ohio, Pennsylvania,  Illinois, Florida, Texas, Massachusetts, and Washington. These 10 states  received the greatest TANF basic block-grant dollars, and collectively  represent 66 percent of the TANF basic block grants funded in federal  fiscal year 2012. In addition, we interviewed and reviewed documentation  from key industry stakeholders, including EBT vendors, related to the  selected states’ efforts to prevent unauthorized TANF transactions.
For the purposes of this report, we consider “unauthorized” to mean all TANF  transactions that are prohibited under state laws, regulations, policies, or other actions. used a generalizable, random sample of each of the 4 selected states’  EBT transaction data and compared it to electronic geo-coding  information that pinpoints places and identifies locations. We also  assessed whether the data would allow the 4 selected states to identify  individual TANF transactions at certain types of locations by conducting  keyword searches of merchant names for terms associated with casinos,  liquor stores, and adult-entertainment establishments. We conducted  electronic data testing to determine the reliability of the California, Florida,  New York, and Texas EBT data. For all four states, we determined that  the EBT data are not sufficiently reliable for the purpose of performing  systematic monitoring of transactions in locations that are inconsistent  with the purposes of TANF. However, EBT transaction data are  sufficiently reliable for the purpose of identifying examples of transactions  with merchant names that contain words associated with casinos, liquor  stores, and adult-entertainment establishments. A more-detailed  description of our scope and methodology is provided in appendix I.
We conducted this performance audit from October 2011 to July 2012 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: TANF Funding and Program Goals
paragraphs: The Personal Responsibility and Work Opportunity Reconciliation Act of  1996 (PRWORA) significantly changed federal welfare policy for low- income families with children, from a program that entitled eligible families  to monthly cash payments to a capped block grant that emphasizes  employment and work supports for most adult recipients. As part of  PRWORA, Congress created the TANF program, through which HHS  provides states about $16.5 billion each year in block grant funds to  implement the program. To receive the TANF block grant, each state  must also spend at least a specified level of its own funds, which is  referred to as state maintenance of effort (MOE).block grant, PRWORA defines four goals for the program:  1.  provide assistance so that children could be cared for in their own  homes or in the homes of relatives;  2.  end families’ dependence on government benefits by promoting job  preparation, work, and marriage;  3.  prevent and reduce the incidence of out-of-wedlock pregnancies; and  4.  encourage the formation and maintenance of two-parent families.
TANF is a flexible funding stream that states can use to provide cash  assistance and a wide range of services that are “reasonably calculated”  to further the program’s four goals. In federal fiscal year 2011, states  used about 29 percent of their TANF funds on basic assistance that  included cash assistance for needy families, and the remaining funds  were spent on other purposes, such as child care, employment programs,  and child welfare services. Due to the flexibility given to states, TANF  programs differ substantially by state. States are required to develop  plans that outline their intended use of funds and report data on families  receiving assistance. While the federal TANF statute does not define  “assistance,” HHS defines assistance in regulation as cash payments,  vouchers, and other forms of benefits designed to meet a family’s  “ongoing basic needs,” such as food, clothing, shelter, utilities, household  goods, personal-care items, and general incidental expenses.
section_title: TANF Cash Assistance Disbursement Methods
paragraphs: Traditionally, states disbursed cash assistance benefit payments by  means of paper check. The EBT program was devised in the 1980s  originally to meet the needs of the Department of Agriculture’s (USDA)  Food Stamp Program, in which federal benefits were electronically  disbursed to eligible recipients. These cards are not tied to a consumer  asset account, and generally the account structures and processing  requirements differ from other payment cards. EBT cards can be used to  deliver benefits to banked and unbanked recipients and can be used to  deliver multiple benefits using a single card. The cost savings in the Food  Stamp Program (now known as the Supplemental Nutrition Assistance  Program or SNAP) from using electronic payments to distribute benefits  prompted states to use EBT cards to also distribute TANF benefits  electronically, leveraging the existent EBT system designed for SNAP.  Electronic benefit distribution methods also include Electronic Payment  Cards (EPC). Some EPC cards are prepaid or debit cards that are  branded with a MasterCard, American Express, Discover, or Visa logo,  which allows cardholders to conduct signature-based transactions  anywhere that those brands are accepted as well as at ATM and point-of- sale (POS) machines.
Electronic benefit cards—both EBT and EPC—generally can be used like  traditional debit or credit cards, in that recipients can use them at ATMs to  withdraw cash, or at retailers’ POS terminals for purchases or to receive  cash by selecting a cash-back option. However, there are some key  differences between the electronic benefit card and commercial credit  cards. The main difference is that electronic benefit cards do not carry a  credit line, and the purchases or withdrawals made with these cards  cannot exceed the amount of recipients’ TANF benefits. With commercial  credit cards, cardholders borrow to make a purchase and then pay the  money back later. Electronic benefit cards are more like debit or stored- value cards and provide an alternative to cash—each time that a  cardholder uses his or her electronic benefit card, the money spent or  withdrawn is deducted from the cardholder’s TANF benefits account.
States consider various factors when implementing EBT or EPC  programs, including potential financial burden to recipients, such as  transaction fees at ATMs that charge a surcharge for each transaction;  recipient characteristics, such as disabilities; implementation costs; and  fraud and security risks. States also take into account how readily  recipients can access cash assistance. For example, in some rural areas  or low-income neighborhoods the only access point for cash assistance  benefits may be a location such as a grocery store, single depository  institution, or even a liquor store. Some of the benefits to recipients from  states choosing EBT or EPC programs include quicker disbursement of  benefits, the elimination of lost or undelivered paper checks, access to  benefits without an established bank account, and no need to locate  check-cashing venues in order to access benefits.
section_title: Recent TANF Legislative Changes
paragraphs: Prior to 2012, states were not required under federal law to take steps  aimed at preventing specific TANF transactions at certain locations.  However, the Welfare Integrity and Data Improvement Act, part of the  Middle Class Tax Relief and Job Creation Act of 2012, signed into law on  February 22, 2012, introduced several changes to TANF that can affect  recipients’ ability to access cash assistance at certain locations.  Specifically, the Act requires that each state receiving a TANF block grant   maintain policies and practices as necessary to prevent TANF assistance  from being used in any “electronic benefit transfer transaction” in any liquor store; any casino, gambling casino, or gaming establishment; or any retail establishment that provides adult-oriented entertainment in  which performers disrobe or perform in an unclothed state for  entertainment.
The Act calls for HHS to determine whether states have implemented and  maintained policies and practices to prevent such transactions, within 2  years of the Act’s enactment. If HHS determines that a state has not  implemented and maintained these policies and practices, or if a state  has not reported to HHS on its policies and practices, HHS may reduce  the state’s family assistance grant by an amount equal to 5 percent of the  state’s grant amount for the federal fiscal year following the 2-year period  after enactment and each succeeding federal fiscal year in which the  state does not demonstrate that it has implemented and maintained such  policies and practices. However, HHS may reduce the amount of this  penalty on the basis of the degree of noncompliance of the state in  question. In addition, the Act specifies that states are not responsible for  individuals who engage in fraudulent activity to circumvent the state’s  policies and practices, and will not face a reduction in their family  assistance grant amounts in such cases.
The Act defines liquor store as “any retail establishment which sells exclusively or  primarily intoxicating liquor. Such term does not include a grocery store which sells both  intoxicating liquor and groceries including staple foods (within the meaning of section 3(r)  of the Food and Nutrition Act of 2008 (7 U.S.C. 2012(r))).” Id.
The Act also contains requirements for states related to maintaining  recipients’ access to TANF cash assistance. As part of the plan that each  state is required to submit to HHS, states must include policies and  procedures to ensure that recipients have adequate access to their cash  assistance. In addition, states must ensure that recipients have access to  using or withdrawing assistance with minimal fees or charges, including  an opportunity to access assistance with no fees or charges, and that  they are provided information on applicable fees and surcharges that  apply to electronic fund transactions involving the assistance, and that  such information is made publicly available.
HHS issued a request for public comment in April 2012, seeking  information by June 2012 on: how states deliver TANF assistance to  beneficiaries, whether states have implemented policies and practices to  prevent electronic benefit transfer transactions at the locations mentioned  above, states’ experiences with these policies and practices, and other  similar restrictions states place on TANF assistance usage. In its notice, HHS identified multiple questions for states to answer, including  questions on the methods states use to track the locations where  transactions occur, challenges states experienced when implementing  any restrictions on transactions at certain locations, the initial and ongoing  costs of restrictions, the effectiveness of restrictions and the factors  influencing the effectiveness, and any concerns that have been raised  about the restrictions, among other things. In addition, HHS requested  input from states’ EBT vendors on potential issues that states may face in  implementing restrictions, including technical issues, cost implications,  access implications, and mechanisms for addressing problems identified.
section_title: Some States Are Restricting Certain TANF Transactions, but Face Challenges Because of Data Limitations and Other Factors
paragraphs: Six of the 10 states we reviewed have taken steps to prevent certain  types of inappropriate TANF transactions—restrictions that in some cases  are broader than recent federal requirements that require states to take  steps aimed at preventing transactions in casinos, liquor stores, and  adult-entertainment establishments. These 6 states faced a variety of  challenges in identifying inappropriate locations and preventing  transactions at these locations. At the time these efforts were undertaken,  there were no federal requirements that required states to take steps  aimed at restricting such transactions. In addition, EBT transaction data  from federal fiscal year 2010 from 4 of the 10 selected states were  generally incomplete or unreliable, and were of limited use to the states  for systematically identifying or monitoring inappropriate locations. While  the federal requirements to restrict inappropriate transactions now exist,  data issues and other challenges, if unaddressed, may continue to affect  efforts to comply with these new requirements.
subsections: section_title: Some States Have Attempted to Restrict TANF Transactions
paragraphs: Six of the 10 states we selected and reviewed have taken steps to  prevent certain types of TANF transactions; these actions vary in their  degree and means of implementation, from widespread disabling of EBT  access at ATMs in certain locations across a state to, according to  officials from one state, passing a law without implementing steps for  enforcing it. The restrictions generally involve prohibiting the use of EBT  cards at certain locations or prohibiting purchases of certain goods or  services, or both, as shown in figure 1 below. In 4 of the 10 selected  states, there were no restrictions on TANF transactions, as no  transactions were unauthorized based on the location of the transactions  or the nature of the goods or services purchased. As mentioned above,  before the 2012 enactment of federal legislation, states were not required  by the federal government to maintain or implement policies and practices  aimed at preventing TANF transactions based on the location of the  transactions. Figure 1 below, an interactive map, provides rollover  information (see interactive instructions below) that describes the steps  that selected states have taken aimed at preventing the use of TANF  cash assistance for certain purchases or in certain locations. (See app. II  for the steps taken within each selected state.)
section_title: Some States Have Taken Steps Aimed at Preventing Unauthorized TANF Transactions
subsections: section_title: Concluding Observations
paragraphs: The purpose of TANF is to help needy families achieve self-sufficiency.  Providing TANF benefits by means of electronic benefit cards helps the  banked and unbanked TANF recipients, gives TANF recipients an  alternate to cash, and allows states to use existing infrastructures.  However, any misuse of TANF funds not only deprives low-income  families of needed assistance, but also diminishes public trust in both the  integrity of the program and the federal government. Before Congress  passed the Welfare Integrity and Data Improvement Act, as part of the  Middle Class Tax Relief and Job Creation Act of 2012, some states acted  independently to implement restrictions on certain TANF transactions. As  a result, their approach to enacting restrictions varies significantly.  However, until HHS issues regulations or provides further guidance as to  what policies and practices are sufficient to comply with the new federal  requirements, it is unclear to what extent the various restrictions  implemented by states would be in compliance. The experience of these  states—especially any information related to the cost-effectiveness and  success rates for various restrictions—could be beneficial for HHS to  consider as it works toward determining what policies and practices are  sufficient to comply with the new federal law. As we heard from officials in  multiple states, preventing unauthorized transactions can be time- intensive and is impaired by flaws in available transaction data and other  challenges. Addressing the limitations we found in transaction data that  impede the identification and monitoring of certain locations could require  significant resources. Therefore, restriction methods that do not rely on  flawed transaction data may be the most practical, such as Washington  state’s requirement for businesses to independently disable EBT access  or risk losing or not obtaining their state licenses to operate.
section_title: Agency and State Comments
paragraphs: We provided a draft of this report to HHS for comment. In its written  comments, reproduced in appendix III, HHS noted that our report  highlights many of the challenges and issues states and others face in  issuing the TANF requirements that Congress enacted in February 2012.  In addition, HHS stated that our report’s findings and analysis will be  helpful as HHS drafts implementing regulations relevant to these TANF  requirements. HHS also provided technical comments that we  incorporated, as appropriate.
In May 2012, we also provided the 10 selected states with an opportunity  to comment on our draft findings relevant to their specific TANF  programs. In May 2012, 7 of the 10 selected states provided us with  technical comments by e-mail, and we incorporated their technical  comments as appropriate. Three states, Illinois, Massachusetts, and  Pennsylvania, had no comments.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 7 days from the  report date. At that time, we will send copies to other interested  congressional committees and the Secretary of Health and Human  Services. In addition, the report will be available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-6722 or kutzg@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objective was to determine the extent to which selected states have  taken action to prevent unauthorized Temporary Assistance for Needy  Families (TANF) transactions. To conduct our work, we reviewed TANF  laws, regulations, and other documentation—including the Welfare  Integrity and Data Improvement Act, part of the Middle Class Tax Relief  and Job Creation Act of 2012, which introduced new state requirements  for preventing certain TANF transactions—and interviewed officials from  Health and Human Services (HHS). From each selected state, we  reviewed information related to its laws, policies, practices, and other  factors affecting its TANF program. In addition, we interviewed and  reviewed documentation from several key industry stakeholders related to  states’ efforts to prevent unauthorized TANF transactions. We also  interviewed officials from the top 10 states in terms of TANF basic block- grant dollars—California, New York, Michigan, Ohio, Pennsylvania,  Illinois, Florida, Texas, Massachusetts, and Washington. Together, these  10 states represent a total of 66 percent of TANF basic block-grant  funds. The industry stakeholders included: JP Morgan Chase and  Affiliated Computer Services, the two largest vendors providing TANF  electronic benefit card services to the states; the Electronic Funds  Transfer Association, an industry trade association that conducts work  related to electronic benefit card services for government agencies at the  federal and state level; the National Conference of State Legislatures, a  bipartisan organization that provides research and other services to state  legislators and their staff; and the American Public Human Services  Association, a bipartisan, nonprofit organization representing appointed  state and local health and human-services agency commissioners. We  obtained electronic benefit card transaction data from 4 of the 10 selected  states—California, Florida, New York, and Texas—covering transactions  from federal fiscal year 2010. We selected these 4 states based on  geographical diversity. The results of our analysis of these 4 states’ data  cannot be generalized to other states. Using these data, we assessed  the extent to which the data would allow the 4 selected states to conduct  systematic monitoring of TANF transactions. Such monitoring might  include an assessment of the prevalence of transactions at certain  locations.
To do so, we used a generalizable, random sample of each of the 4  selected states’ Electronic Benefit Transfer (EBT) transaction data and  compared it to electronic geo-coding information that pinpoints places and   Subsequent visual inspection and manual cleaning of  identifies locations.obvious address errors in the EBT data only resulted in a small portion of  corrected location addresses. We also assessed whether the data would  allow states to identify individual TANF transactions at certain types of  locations. To do so, we conducted keyword searches of merchant names  for terms that are potentially associated with casinos, liquor stores, and  adult-entertainment establishments. We performed data checks to  determine the reliability of the California, Florida, New York, and Texas  EBT data for the purposes of our engagement. For all four states, we  determined that the EBT data are not sufficiently reliable for the purpose  of performing systematic monitoring, as the selected states’ data  contained incomplete or inaccurate information for the addresses of the  locations where the transactions occurred. Given the combination of both  completeness and accuracy issues in the 4 selected states, we also  determined most of the data in the 4 selected states could not match to  address location information that would allow for suitable comparisons to  other potential data sources. However, we determined that the  transaction data would support keyword searches of merchant names for  terms that are associated potentially with casinos, liquor stores, and  adult-entertainment establishments, for records that contain merchant  names. We conducted this performance audit from October 2012 to July  2012, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Print-Friendly Version of Figure 1
paragraphs: The table below includes figure 1’s (see above) rollover information and  describes the steps that 6 of the 10 states we reviewed have taken that  are aimed at preventing the use Temporary Assistance for Needy  Families (TANF) cash assistance for certain purchases or in certain  locations.
section_title: Appendix III: Comments from the Department of Health and Human Services
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Cindy Brown Barnes, Assistant  Director; Erika Axelson, Assistant Director; Christopher W. Backley;  Melinda Cordero; Justin Fisher; Katherine Forsyth; Gale Harris; Olivia  Lopez; Grant Mallie; Flavio J. Martinez; Maria McMullen; James Murphy;  Anna Maria Ortiz; Robert C. Rodgers; Rebecca Shea; and Timothy  Walker made key contributions to this report.