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. 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. 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. 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. 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.) 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. 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. 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. 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. 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.

Summary: 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. 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. GAO is not making any recommendations.