The two main areas of fraud, waste, and abuse involve (1) overpayment of food stamp benefits and (2) trafficking. Concerning the first area, overpayments occur when ineligible persons are provided food stamps and when eligible persons are provided more than they are entitled to receive. In 1996, for example, the states overpaid recipients an estimated $1.5 billion—or 6.92 percent—of the approximately $22 billion in food stamps issued. Overpayments occur for two reasons. First, recipients make errors, either inadvertent or intentional, in providing information to the state caseworker about the recipient household’s size, income, assets, or other pertinent information needed to determine the household’s eligibility and benefit level. Second, state caseworkers make errors in determining either an applicant’s eligibility for food stamps or the appropriate level of benefits. According to 1996 data, recipient errors accounted for 57 percent of the overpayments—36 percent were unintentional errors and 21 percent were intentional. The remaining 43 percent of the overpayments were caused by caseworkers’ errors. It should be noted that errors by participants and caseworkers can also result in underpayments. FCS’ data show that food stamp recipients were underpaid approximately $518 million in fiscal year 1996. In March 1997, we reported on one specific example of food stamp overpayments—payments involving violations of the federal regulations that prohibit inmates of correctional institutions from participating in the Food Stamp Program. By matching automated food stamp and prison records in four states—California, Florida, New York, and Texas—we identified over 12,000 inmates who were included in the households receiving food stamps in fiscal year 1995. These households improperly collected an estimated $3.5 million in food stamps. Subsequently, in August 1997, the Balanced Budget Act of 1997 (P. L. 105-33, Aug. 5, 1997) included a provision directing the states to ensure that individuals who are under federal, state, or local detention for more than 30 days are not participating in the Food Stamp Program. In response to a request from the Senate Committee on Agriculture, Nutrition, and Forestry, we are currently examining the potential for computer matching to identify other ineligible populations participating in the program. With respect to trafficking—the second main area of fraud, waste and abuse—program regulations specify that participants must use food stamps only to purchase food items from the retailers authorized by FCS to accept food stamps. Once they receive them, authorized retailers are required to forward food stamps directly to financial institutions for redemption. However, numerous federal and state officials told us that food stamps have essentially become a second currency exchanged by some recipients for cash or non-food items. Trafficked food stamps may change hands several times, but all food stamps must eventually flow through an authorized retailer because only such a retailer can redeem food stamps for cash from the government. Numerous retailers are caught each year accepting food stamps from recipients, giving them a discounted value of the stamps in cash (for example, 70 cents on the dollar), and then redeeming the stamps at full face value from the government. Data on the extent of trafficking between parties prior to reaching authorized retailers are unavailable. However, a 1995 FCS study estimated that up to $815 million, or about 4 percent of the food stamps issued, was exchanged for cash by authorized retailers during fiscal year 1993. The study found that supermarkets, where over three-fourths of all food stamps are redeemed, have low trafficking rates compared with other types of retailers. The trafficking rate reported for publicly owned supermarkets (i.e., a company whose stock trades publicly) was less than 0.1 percent of food stamp redemptions, and the rate reported for privately owned supermarkets was 2.6 percent. By comparison, the trafficking rate for small, privately owned food retailers and privately owned retailers that do not stock a full line of food was 15.1 percent of the food stamps they redeemed. The Food Stamp Program is administered by USDA’s FCS in partnership with the states. FCS provides nationwide criteria for determining who is eligible for assistance and the amount of benefits recipients are entitled to receive. The states are responsible for the day-to-day operation of the program, including meeting with applicants and determining their eligibility and benefit levels. In making these decisions, state caseworkers rely on documentation provided by households and information obtained in interviews with the applicants. FCS is also responsible for authorizing retailers to redeem food stamps as well as for monitoring program compliance by the approximately 190,000 stores currently authorized to redeem food stamps. FCS and USDA’s OIG are responsible for investigating retailers suspected of violating program regulations. The OIG performs all the criminal investigations of the Food Stamp Program conducted by USDA and coordinates investigative activities with other federal agencies. Others—such as the Federal Bureau of Investigation (FBI), the U.S. Postal Service, and the U.S. Secret Service—as well as the states assist in combatting fraud. The Food Stamp Program’s Quality Control (QC) System is FCS’ primary tool for evaluating the states’ performance in issuing benefits and determining the level of overpayments. Under the QC System, the states must review a sample of their household cases each year to determine the accuracy of the eligibility and benefit determinations made by state caseworkers and the extent of payment errors—both overpayments and underpayments. FCS reviews a subsample of each state’s sample to ensure the accuracy of the states’ efforts. FCS then determines the official error rate for each state and a national error rate. If an individual state’s error rate exceeds the national error rate, FCS can sanction the state by requiring it to reimburse the federal government for a portion of the erroneous payments. On the other hand, states that have low error rates are eligible for additional reimbursement from the federal government—referred to as enhanced funding. According to USDA’s data, overpayments in the Food Stamp Program have declined since 1993. At the national level, the overpayment error rate has decreased from 8.27 percent in fiscal year 1993 to 6.92 percent in fiscal year 1996. The 1996 overpayment error rate is the lowest level ever achieved in the program. Since 1995, FCS has increased its emphasis on achieving payment accuracy and has employed various initiatives to assist the states in reducing the number of errors. The Congress appropriated over $3 million for these initiatives. Specifically, FCS’ activities include sponsoring national, regional, and state conferences; providing direct technical assistance to the states; and facilitating the exchange of state information on effective strategies for determining accurate payments. As we reported in 1995, while technical assistance and related steps are undoubtedly useful, the single most critical factor in reducing overpayments is the commitment of the managers of the states’ Food Stamp Programs to aggressively address the error rate problem. Supplementing its efforts to help the states reduce errors, FCS has implemented a new strategy for conducting its sanction activities. Historically, for a variety of reasons, the states with high error rates paid little of the sanction penalties FCS imposed. Beginning in 1996, FCS reached agreement with some of these states regarding more than $404 million in penalties owed for unacceptable error rates that occurred in fiscal years 1992 through 1996. FCS agreed to reduce this penalty to $135 million and entered into settlement agreements with these states that establish performance goals tied to payment accuracy. Of the $135 million sanction liability, the states are required to invest almost $35 million in activities that directly lead to the reduction of their error rates. If a state meets its performance goals as set out in the agreement, its share of the remaining $100 million liability will be waived. According to FCS, as a result of these settlements, the states are more actively engaged in activities to reduce errors, which should continue to have a positive effect on improving payment accuracy. With respect to trafficking, our 1995 report stated that FCS’ controls and procedures for authorizing and monitoring the retailers that participate in the Food Stamp Program did not deter or prevent retailers from trafficking in food stamps. Stores that did not meet eligibility criteria were being admitted to the program because the process for authorizing them was flawed. The single most effective deterrent to preventing ineligible retailers from being authorized is a preauthorization on-site visit. However, because of insufficient time or resources, FCS made few visits before authorizing stores to participate in the program. Furthermore, FCS’ monitoring process was inadequate to detect authorized retailers that were violating program regulations. Reports on retailers’ activities, such as total food sales and food stamp redemptions, were often untimely or inaccurate and of limited utility in identifying retailers’ trafficking. In addition, we reported that FCS had only 46 investigators nationwide to conduct investigations of retailers suspected of trafficking or violating other program regulations. Since our report, FCS has initiated several actions to reduce trafficking in the program. For example, FCS has contracted with a number of different companies to make 35,000 to 40,000 store visits by the end of fiscal year 1998. These visits will be made primarily to new stores requesting approval to participate in the program and to stores requesting reauthorization to participate in the program. In addition, FCS reports that it has improved its Store Tracking and Redemption System by, for example, developing a profile that enables FCS to better identify stores that may be trafficking in food stamps or selling ineligible items. The system also includes information on sanctions taken against the stores that violate program regulations. The system is used to screen all new applications for participation in the program in order to keep ineligible retailers from returning to the program during a period in which they are disqualified. The system is also used to monitor stores’ redemptions and to identify retailers for investigation or other administrative actions.