The Food Stamp Program provides low-income households with paper coupons or electronic benefits that can be redeemed for food in about 156,000 stores across the nation. In fiscal year 2001, the Congress appropriated $20.1 billion for the Food Stamp Program. FNS establishes regulations for implementing the Food Stamp Program, reviews states’ operating plans to ensure compliance with the regulations, and funds food stamp benefits and about half of the states’ administrative costs. 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. Household eligibility and benefit amounts are based on nationwide federal criteria, including household size and income, assets, housing costs, and work requirements. FNS monitors states’ performance by assessing how accurately they determine food stamp eligibility and calculate benefits. Under FNS’ quality control system, the states calculate their payment errors by annually drawing a statistical sample of at least 300 to 1,200 active cases, depending on the average monthly caseload. The states review case information and make home visits to determine whether households were eligible for benefits and received the correct benefit payment. FNS regional offices validate the results by reviewing a subset of each state’s sample to determine its accuracy, and make adjustments to the state’s overpayment and underpayment errors as necessary. Until the mid-1990s, most recipients used benefits provided in the form of coupons to purchase allowable food. According to FNS, as of March 2001, 41 states, the District of Columbia, and Puerto Rico have operational food stamp EBT systems. Thirty-nine of these systems are operating statewide. All states are to implement EBT systems by October 1, 2002, unless USDA waives the requirement. By providing benefits electronically, the federal government saves time and money because the process of providing the coupons is eliminated. Furthermore, an EBT system creates an electronic record of each food stamp transaction, making it easier to identify and document instances of fraud and abuse in the program. Recent legislative initiatives to reform welfare have also affected Food Stamp Program operations. Specifically, the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), which was passed in 1996 to reform the nation’s welfare system, also modified aspects of the Food Stamp Program. To reform welfare, PRWORA replaced the Aid to Families with Dependent Children entitlement program with the TANF program and gave the states responsibility for administering TANF through block grant funding. In implementing welfare reform, the states have, for example, used PRWORA’s flexibility to (1) require that applicants look for jobs before their TANF applications are processed; (2) offer one-time, lump-sum payments (known as diversion payments) to potential applicants rather than enroll them in the TANF program; and (3) disqualify individuals from participation in the Food Stamp Program if they have committed TANF violations, thereby reducing the household’s total food stamp benefit. Almost all of the states use a single application for the food stamp and welfare programs to reduce administrative costs, even though the eligibility rules for these two programs are different. Though welfare reform retained the Food Stamp Program as an entitlement for qualifying participants, it tightened eligibility requirements and eased administrative requirements. It disqualified able-bodied adults without dependents who, during the preceding 36-month period, received food stamp benefits for at least 3 months but worked less than 20 hours per week. Similarly, the act required that the states, by August 1997, remove from their rolls most permanent resident aliens who were previously eligible to receive food stamps. In addition, PRWORA replaced several specific administrative requirements with more general standards that give states more flexibility in operating their food stamp programs. Over the years, we have reported on program integrity concerns in the Food Stamp Program. Fraud, waste, and abuse in the program generally occur in the form of either improper payments to food stamp recipients or trafficking in food stamp benefits. The states and FNS have taken steps to reduce inaccurate payments to food stamp recipients and reduce trafficking in food stamp benefits. However, all of the state officials we contacted for a recent study believe that the most effective way to reduce payment errors and program costs is to simplify food stamp rules, such as those pertaining to program eligibility. Inaccurate payments can be in the form of overpayments or underpayments to food stamp recipients. Overpayments occur when ineligible persons are provided food stamps, as well as when eligible persons are provided more than they are entitled to receive. Overpayments can be caused by inadvertent or intentional errors made by recipients and caseworkers. According to FNS’ quality control system, the states overpaid food stamp recipients about $976 million in fiscal year 2000 and underpaid recipients about $360 million. Together, overpayment and underpayment errors amounted to about 9 percent of food stamp benefits. About 54 percent of these errors occurred when state food stamp workers made mistakes, such as misapplying complex food stamp rules in calculating benefits. The remaining 46 percent of the errors occurred because participants, either inadvertently or deliberately, did not provide accurate information to state food stamp offices. While the states and FNS have taken steps to address payment errors, state officials told us that they believe simplifying food stamp rules will have the greatest impact on reducing payment errors and program cost. In a recent report we identified states’ efforts to minimize food stamp payment errors and examined what FNS has done or could do to encourage and assist the states in reducing such errors. We found that all 28 states we contacted had taken action in recent years to reduce payment errors. While these states took various actions to reduce payment error rates, most states took the following five actions: verified the accuracy of benefit payments calculated by state food stamp workers through supervisory and other types of case file reviews, provided specialized training for state food stamp workers, analyzed quality control data to identify causes of common payment errors and develop corrective actions, matched food stamp rolls with other federal and state computer databases to identify ineligible participants or verify income and asset information provided by food stamp recipients, and used computer software programs to assist caseworkers in determining benefit amounts. Some states also increased the frequency with which certain types of food stamp households must provide documentation in order to maintain their eligibility for food stamp benefits—a process called recertification. For example, even though FNS regulations require that food stamp households be recertified only annually, almost half of the states we contacted require households with earned income to be recertified quarterly because their incomes tend to fluctuate, increasing the likelihood of payment errors. More frequent certification enables caseworkers to verify the accuracy of household income and make appropriate adjustments to household benefits, possibly avoiding a payment error. However, more frequent certification can also inhibit program participation for eligible participants because it creates additional reporting burdens for food stamp recipients. FNS has taken several steps to encourage states to minimize their payment error rates, including providing financial incentives to states that have error rates substantially below the national average and imposing financial sanctions on states that exceed the national average. When error rates are too high, states are required to either pay a penalty fee or provide additional state funds—beyond their normal share of administrative costs—to be reinvested in error-reduction efforts, such as additional training in calculating benefits. In fiscal year 2000, FNS imposed $46 million in financial sanctions on 18 states whose error rates were above the national average of 9 percent. In that same year, FNS provided $55 million in enhanced funding to 11 states whose payment error rates were less than or equal to 5.9 percent—well below the national average. FNS also has reduced the opportunity for payment errors by allowing the states to reduce food stamp reporting requirements for certain recipients. For example, FNS expanded the availability of waivers related to reporting requirements, such as the waiver that raises the earned income changes that households must report. FNS was concerned that the increase in employment among food stamp households would result in larger and more frequent income fluctuations, which would increase the risk of payment errors. FNS also was concerned that the states’ reporting requirements were particularly burdensome for the working poor and may, in effect, act as an obstacle to their participation in the program because eligible households may not view food stamp benefits as worth the time and effort it takes to obtain them. As a result of these concerns, FNS established regulations in November 2000 that gave states the option to require food stamp households with earned income to report changes semiannually, unless a change would result in a household’s gross monthly income exceeding 130 percent of the monthly poverty income guideline. Finally, FNS has promoted initiatives to improve payment accuracy through the exchange of “best practices” information among states. Since 1996, FNS has compiled catalogs of states’ payment accuracy practices that provide information designed to help other states develop and implement similar initiatives. While imposing financial sanctions, offering incentives, and granting waivers related to food stamp reporting requirements can help states reduce payment errors, the 28 state officials we spoke with believed that simplifying the complex food stamp requirements for determining eligibility and calculating benefits offered the greatest potential for additional reductions in payment errors. In supporting simplification, the state officials generally cited caseworkers’ difficulty in correctly applying food stamp rules to determine eligibility and calculate benefits. Specifically, the state officials cited the need to simplify requirements for (1) determining a household’s deduction for excess shelter costs and (2) calculating a household’s earned and unearned income. The states also cited the need to simplify food stamp rules for determining the valuation of vehicles. The Food Stamp Act of 1977 was recently revised to allow the states to use the same vehicle valuation rules that they use for TANF, if these rules would result in fewer assets attributed to the household. Food stamp officials in 20 of the 28 states we contacted said simplifying the rules for determining a household’s allowable shelter deduction would be one of the best ways to reduce payment errors. The Food Stamp Program generally provides for a shelter deduction when a household’s monthly shelter costs exceed 50 percent of income after other deductions have been allowed. Allowable deductions include rent or mortgage payments, property taxes, homeowner’s insurance, and utility expenses. Food stamp officials in 18 states told us that simplifying the rules for earned income would be one of the best options for reducing payment errors because earned income is both the most common and the costliest source of payment errors. Generally, the process of determining earned income is prone to errors because caseworkers must use current earnings as a predictor of future earnings and the working poor do not have consistent employment and earnings. Similarly, officials in six states told us that simplifying the rules for unearned income would help reduce payment errors. In particular, state officials cited the difficulty caseworkers have in estimating child support payments that will be received during the certification period because payments are often intermittent and unpredictable. Because households are responsible for reporting changes in unearned income of $25 or more, unreported changes and child support payments often result in a payment error. In our view, simplifying the program’s rules and regulations offers an opportunity to, among other things, reduce payment error rates and promote program participation by eligible recipients. We have recommended that FNS develop and analyze options to simplify requirements for determining program eligibility and benefits and, if warranted, submit legislative proposals to simplify the program. As part of its preparations for the program’s upcoming reauthorization, FNS has begun to examine alternatives for improving the Food Stamp Program, including options to simplify requirements for determining benefits. While payment errors affect whether food stamp recipients receive appropriate food stamp benefits, trafficking results in the improper use of benefits. In March 2000, FNS estimated that stores trafficked in about $660 million a year in food stamp benefits, or about 3-1/2 cents of every dollar of food stamp benefits issued. In the past, we have reported on federal efforts to identify storeowners who engage in trafficking, the amount of penalties assessed and collected against these storeowners, and states’ efforts to identify and disqualify recipients who engage in trafficking. We discovered the following: FNS does not sufficiently use electronic databases to identify storeowners who engage in trafficking. While FNS and USDA’s Office of Inspector General use a variety of sources, including EBT databases, to identify suspect traffickers, we have noted in various reports that electronic data could be used more effectively to identify additional storeowners and recipients engaged in trafficking. In addition, we found that most states with statewide EBT systems were not independently analyzing EBT data to identify recipients who may be trafficking in food stamp benefits. While FNS almost always assessed penalties against storeowners when its investigations showed they had violated the program’s requirements, storeowners generally did not pay the assessed financial penalties. According to agency officials, the small percentage of fines they are able to collect reflect the difficulties involved in collecting this type of debt, such as problems in locating debtors and their refusal to pay. However, we found that weaknesses in the agency’s debt collection procedures and practices also contributed to low collections. We made several recommendations to FNS on ways it could improve the integrity of the program by more effectively using EBT data, including providing guidelines to states on reviewing electronic data. FNS has begun to take steps to implement our recommendations. In addition, along with USDA’s Office of Inspector General, we recognize the importance of improving state use of EBT data and we are working with USDA to determine best practices for using these data to identify food stamp recipients and storeowners who may be defrauding or abusing the program. Participation in the Food Stamp Program has dropped by about 33 percent during the past 4-1/2 years. The monthly average number of participants declined from 25.5 million in fiscal year 1996 to about 17.1 million in the first half of fiscal year 2001. Although factors such as the strong U.S. economy and tighter eligibility requirements have been cited as primary reasons for the dramatic decline in food stamp participation in recent years, there remains a large gap between the number of people eligible to receive benefits and the number participating in the program. Some of this gap may be explained by other factors, such as past initiatives designed to reduce TANF caseloads, confusion about eligibility requirements after the passage of PRWORA, and administrative burdens placed on food stamp participants that might discourage participation. In 1999 we reported that the strong U.S. economy was one of the primary factors contributing to the decline in food stamp participation. Since more people were employed and earning more money, the number of people who met the program’s income eligibility standard decreased. In addition, the length of time some people spent on the food stamp rolls was reduced because they found new jobs more quickly. Finally, when the economy is strong, the percentage of eligible people participating in the program may be indirectly lowered. This is because, as households’ income levels rise and food stamp benefits fall proportionally, households may decide not to apply or seek recertification for these benefits, especially when they approach the minimum benefit level of $10 per month. We also reported that tighter food stamp eligibility requirements have also contributed to the decline in food stamp participation. Specifically, the passage of PRWORA tightened eligibility requirements for able-bodied adults without dependents, making fewer people eligible for food stamps. During fiscal year 1997, participation in the Food Stamp Program by these two groups fell by about 714,000 people, accounting for about 25 percent of the decline in food stamp participation that year. While some of the decline in participation can be explained by factors that reduce the overall number of people eligible to receive benefits, an increasing percentage of people eligible for food stamp benefits are not participating in the program. Specifically, FNS estimates that only about 59 percent of eligible people in the United States received food stamp benefits in September 1998—a 12 percentage-point drop from the estimated 71 percent of eligible people participating in September 1994. In addition, there is evidence to suggest that a growing gap exists between the number of children living in poverty—an important indicator of children’s need for food assistance—and the number of children receiving food stamp assistance. Between 1995 and 1999, the number of children receiving food stamp benefits declined by 33 percent, while the number of children living in poverty declined by only 17 percent. Further, during this same period of time, the number of children served free lunches in USDA’s National School Lunch Program increased by about 4 percent. In 1999, we reported that state and local initiatives designed to reduce the TANF caseloads contributed to the decline in their food stamp rolls. In several states and localities, FNS identified barriers to food stamp participation and policies that improperly removed eligible households with children from the food stamp rolls as a sanction for a TANF violation. This occurred, in part, because FNS had still not established regulations that implemented PRWORA’s revisions to the Food Stamp Act and the guidance it had already issued was considered nonbinding. In addition, we found that only three of FNS’ seven regional offices regularly conducted annual reviews of each state in their jurisdiction, even though FNS’ regulations require such reviews. FNS regional offices had not examined program access in nine states and the District of Columbia from October 1996 through June 1999. These reviews have previously identified obstacles, such as gaining access to benefits, which might inhibit individuals from participating in the program. To ensure that eligible people receive food stamp benefits, we recommended that FNS establish regulations requiring that the states (1) inform each applicant for assistance of the right to apply for food stamps during the first meeting and (2) limit sanctions on the food stamp benefits to only the individual—not the household—who does not comply with a welfare requirement. FNS established regulations in November 2000 and January 2001 that implemented both parts of our recommendation. We also recommended that FNS give higher priority to aggressively targeting obstacles related to participants’ access to food stamp benefits in reviewing states’ food stamp operations. Since our report was issued, FNS has conducted participant access reviews in each of the 50 states; Washington, D.C.; and the Virgin Islands. A 1999 report noted that most nonparticipating households estimated to be eligible for food stamp participation—including those who had previously participated in the program—did not apply because they did not think they were eligible. The food stamp directors of four FNS regional offices agreed that implementation of TANF has been an important factor in the decline in participation in their regions. According to these directors, many people do not apply for food stamps because they assume that if they are ineligible for TANF, they are also ineligible for food stamps. We recommended that FNS publicize eligibility requirements for the Food Stamp Program and distinguish them from the eligibility requirements for TANF. Soon after that recommendation was made, FNS launched a public awareness campaign to better publicize food stamp eligibility requirements in hopes of improving participation. In addition, recent research has indicated that some eligible households may not participate in the Food Stamp Program because of the perceived difficulty of doing so. Specifically, those who were aware they were eligible for food stamps but chose not to participate most often cited reasons related to the administrative burden of applying, such as the time and costs involved. One survey found that, on average, applicants spent nearly 5 hours and made at least two trips to the local food stamp office to apply for food stamps. If states are increasing the frequency with which certain types of households must be recertified to reduce the likelihood of payment errors, program participation may be inhibited because of the additional reporting burdens for food stamp recipients. FNS and the states have taken actions to reduce fraud, waste, and abuse in the Food Stamp Program. Our past work has found that FNS and the states need to make better use of electronic data to track individuals and storeowners who may be trafficking in food stamp benefits. We also found that financial sanctions and enhanced funding have been at least partially successful in focusing states’ attention on minimizing payment errors. However, this “carrot and stick” approach can accomplish only so much. Food stamp regulations for determining eligibility and benefits are extremely complex and their application is inherently error-prone and costly to administer. Furthermore, this approach, carried to extremes, can create incentives for states to take actions that may inhibit achievement of one of the agency’s basic missions—providing food assistance to those who are in need. For example, increasing the frequency with which recipients must report income changes could decrease errors, but it could also have the unintended effect of discouraging participation by the eligible working poor. This would run counter not only to FNS’ basic mission but also to an overall objective of welfare reform—helping people move successfully from public assistance into the workforce. Simplifying the Food Stamp Program’s rules and regulations offers an opportunity to reduce payment error rates and promote program participation by eligible recipients. FNS has begun to look at options for simplifying requirements for determining benefits. However, in view of the upcoming reauthorization, it is critical that FNS follow through with this process and develop options that strike an appropriate balance between the sometimes competing objectives of ensuring program integrity and encouraging eligible individuals to participate. To be successful, this process must include a continuing dialogue with all appropriate stakeholders, including congressional members and state officials, and must ensure that actions are taken to streamline the program while at the same time improving program integrity. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions that you or other members of the Subcommittee may have. For future contacts regarding this testimony, I can be contacted at (202) 512-7215. Key contributors to this testimony were Dianne Blank, Elizabeth Morrison, Debra Prescott, and Suzanne Lofhjelm. (130054)

Summary: The Food and Nutrition Service (FNS) and the states have taken steps to reduce fraud, waste, and abuse in the Food Stamp Program. GAO's past work has found that FNS and the states need to make better use of electronic data to track individuals and storeowners who may be trafficking in food stamps. GAO also found that financial sanctions and enhanced funding have been at least partially successful in focusing states' attention on minimizing payment errors. However this "carrot and stick" approach can accomplish only so much. Food stamp regulations for determining eligibility and benefits are extremely complex and their application is inherently error-prone and costly to administer. Furthermore, this approach, carried to extremes, can create incentives for states to take actions that may inhibit achievement of one of the agency's basic missions--providing food assistance to needy persons. For example, requiring recipients to report income changes more frequently could decrease errors, but it could also have the unintended effect of discouraging participation by the eligible working poor. This would run counter not only to FNS' basic mission but also to an overall objective of welfare reform--helping people move successfully from public assistance into the workforce. Simplifying the Food Stamp Program's rules and regulations could reduce payment error rates and promote program participation by eligible recipients. FNS has begun to look at ways to simplify requirements for determining benefits. However, in view of the upcoming reauthorization, it is critical that FNS follow through with this process and develop options that strike an appropriate balance between the sometimes competing objectives of ensuring program integrity and encouraging eligible individuals to participate. To be successful, this process must include a continuing dialogue with all appropriate stakeholders, including Congress and state officials, and must ensure that steps are taken to streamline the program while at the same time improving program integrity.