Food Stamp Program: Payment Errors and Trafficking Have Declined despite Increased Program Participation
Published: 2007-01-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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  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.
subsections: section_title: Background
paragraphs: 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  administer the program in compliance with program rules. 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.
subsections: section_title: Program Participation
paragraphs: 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.
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.
section_title: Determination of Eligibility and Benefits
paragraphs: 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  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. If the household owns a vehicle worth more than $4,650, the  excess value is included in calculating the household’s assets.
section_title: FNS’s Quality Control System Measures Improper Payments
paragraphs: 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. 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. The  2002 Farm Bill also provided for $48 million in bonuses each year to be  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.
section_title: Trafficking
paragraphs: 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  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.
section_title: States Have Made Progress Reducing Payment Errors, and Further Challenges Remain
paragraphs: 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.
subsections: section_title: The Food Stamp Error Rate, Which Combines Overpayments and Underpayments, Has Declined to a Record Low
paragraphs: 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.
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,  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.  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.
Prticipnt ced error (35%)
Caseworker ced error (65%)
section_title: FNS and States Have Taken Steps to Increase Payment Accuracy
paragraphs: 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. 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.
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    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. FNS and Congress made several options available to the states to  simplify the application and reporting process.  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.
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. 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    sponsoring national and regional conferences and best practices  seminars;  training state QC staff;    providing state policy training and policy interpretation and guidance;    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.
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.
section_title: Estimates Suggest Trafficking Has Declined, but FNS Could Further Enhance Program Integrity
paragraphs: 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.
subsections: section_title: FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has Declined and That It Occurs More Frequently in Smaller Stores
paragraphs: 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.
section_title: FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring, while Other Federal Entities Have Focused on Fewer High- Impact Investigations
paragraphs: 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  investigations. As a result, retailers who traffic are less likely to face  severe criminal penalties or prosecution.
section_title: Despite the Progress That Has Been Made against Trafficking, Vulnerabilities Still Exist in the Program
paragraphs: 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  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.
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  money penalty, 4.3 percent had received a warning letter for program  violations, and 0.8 percent had received a temporary disqualification.  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.
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  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.
section_title: Concluding Observations
paragraphs: 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.
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 compliance- monitoring 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.
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.
section_title: GAO Contact and Staff Acknowledgments
paragraphs: 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.
section_title: Related GAO Products:
paragraphs: 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.
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