The Food Stamp Program provides monthly benefits to millions of needy people who meet specific income, asset, and employment-related eligibility requirements. With federal benefit payments of about $24 billion and an average monthly caseload of over 27 million individuals in fiscal year 1994, the program ranks as one of the nation’s largest welfare programs and is by far the largest food assistance program. There is abundant evidence that the coupon-based system used in delivering and redeeming food stamp benefits is vulnerable to fraud, waste, and abuse; however, the precise amount of losses that occur each year is unknown. Program data show that caseworkers’ and recipients’ errors occurring during the process of determining eligibility and benefit levels resulted in over $1.8 billion in overpayments in fiscal year 1993. This amount represents a 121-percent increase in overpayments since 1988. In addition, although there are no data available to develop a precise estimate, the number of cases being prosecuted each year suggest that a significant number of the food stamps issued each year are sold or traded for nonfood items—referred to as trafficking—thereby diverting benefits from their intended use. The Food Stamp Program is administered by the Department of Agriculture’s (USDA) Food and Consumer Service (FCS) in partnership with state and local governments. The Congress established the current Food Stamp Program in 1964 to improve the nutrition of low-income individuals by increasing their food purchasing power. The program is federally designed and generally requires applicants to apply in person at a local food stamp or welfare office and meet numerous program requirements pertaining to their household composition, financial assets, employment requirements, and income to be eligible for monthly benefits. Benefits are generally provided in the form of food stamp coupons, which are issued to recipients in person or by mail. Recipients then use their coupons to purchase food items at stores that have been authorized by FCS to redeem food stamps. Retailers deposit redeemed food stamps at financial institutions and are credited for their sales. Financial institutions then forward the redeemed stamps for credit through the banking system to the Federal Reserve—which destroys the coupons. The Food Stamp Program is the cornerstone of USDA’s food assistance programs, providing more benefits than all other federal food assistance programs combined. Although the household is the base unit to which food stamp benefits are issued, most of the people who benefit from the program are children or elderly persons. In addition, more than 20 percent of recipient households have some earnings from work, making the program a critical source of nutritional support for the nation’s working poor. The federal government funds all food stamp benefits and shares with the states in the administrative costs of distributing benefits to eligible recipients. The federal government pays all costs for printing the stamps, distributing the stamps to the states, and destroying the stamps after they are used. The government also pays all costs associated with approving and monitoring food stores authorized to redeem food stamps. In addition, the government pays roughly 50 percent of the costs incurred by the states in administering the program. These costs include certifying recipients for eligibility, distributing benefits to recipients, and conducting quality control activities. FCS prepares Food Stamp Program regulations and provides technical assistance to the states. In addition, as part of its oversight responsibilities, FCS has established a Quality Control (QC) System to monitor states’ determinations of individuals’ eligibility for benefits and the level of those benefits. Under the QC System, states are required to review a sample of their food stamp cases to test the accuracy of eligibility and benefit level determinations made by their caseworkers. The states’ error rate findings, a combination of overpayments and underpayments, are provided to FCS. FCS then reviews a subsample of each state’s sample to ensure the quality of their efforts. After disagreements with the states’ reported error rates are resolved, FCS determines the official error rate for each state. If a state’s combined error rate (both overpayments and underpayments) exceeds a national tolerance level, calculated by FCS, then the state can be required to reimburse the federal government for a portion of the erroneous payments. On the other hand, if a state’s combined error rate is less than 6 percent, the state may be eligible for enhanced federal funding. FCS is also responsible for authorizing stores to redeem food stamps and for monitoring stores to ensure that they comply with Food Stamp Program regulations. Store owners suspected of engaging in food stamp trafficking or abusing other program regulations are referred to FCS’ Compliance Branch for investigation. In addition to FCS’ oversight activities, USDA’s Office of Inspector General (OIG) investigates retailers involved in illegally using food stamp coupons. States have primary responsibility for the day-to-day administration and operation of the Food Stamp Program. Generally, a state welfare agency operates the program either directly or by delegating these responsibilities to a local government agency. Using FCS-established eligibility and benefit determination regulations, state and local government caseworkers take applications from households seeking food stamp benefits and, through face-to-face discussions and review of information provided by the applicants, determine recipient households’ eligibility for food stamp benefits and the amount of benefits to which they are entitled. Normally, a recipient is certified to receive food stamps for a specified period of time—usually between 3 and 12 months—which means that a recipient does not need to reapply for benefits each month. However, recipients must report changes in income, in the composition of their household, or other pertinent information as changes occur during the certification period. On the basis of reported changes, caseworkers make adjustments to the benefit amounts provided to the recipients. The states also share in responsibilities regarding the integrity of the Food Stamp Program. Specifically, states are responsible for investigating and prosecuting individuals suspected of falsifying information in order to obtain food stamps and misusing their benefits—such as selling their benefits for cash or trading them for other nonfood items. Also, states sometimes work with FCS or the OIG in investigating retailer abuse in the program. On numerous occasions, we and the USDA OIG have reported on fraud, waste, and abuse in the Food Stamp Program. Since 1977, we have completed over 50 reviews of the program and on several occasions pointed out that waste and abuse were costing the federal government billions of dollars in food stamp overpayments. In 1990, we reported that reducing certain major types of overpayment errors, such as those associated with recipients’ income, was very difficult for the states because state caseworkers did not have access to the information necessary to prevent these errors. In our most recent report and testimony on food stamp fraud before the House Agriculture Committee, we pointed out that the rate of overpayment errors had increased significantly in recent years and that by fiscal year 1993 overpayments exceeded $1.8 billion. We also noted that 42 percent of the overpayments resulted from errors made by state and local caseworkers in determining recipients’ eligibility and benefit levels. We also reported that 58 percent of the overpayments were the result of recipients’ errors in reporting information to caseworkers at the time of application for benefits, or in updating information on changes in a recipients’ household during the certification period. Of the fiscal year 1993 recipient-caused overpayment errors, about 60 percent were judged by state QC officials to have been inadvertent errors while about 40 percent were judged to have been deliberate, or suspected fraudulent, misrepresentations by the recipient in reporting household information. Furthermore, we reported that, according to FCS’ QC System data, about two-thirds of the overpayments occurring in 1993—regardless of whether the overpayment was caseworker- or recipient-caused—were linked to errors related to recipient income. The next largest source of overpayments, about 14 percent, involved errors associated with the composition of recipients’ households, such as number, ages, and relationships of household members. The Chairman and Ranking Minority Member of the House Committee on Agriculture asked us to determine (1) why benefit overpayments occur, (2) whether USDA controls and procedures are adequate to prevent food retailer involvement in trafficking, and (3) what can be done to reduce trafficking by food stamp recipients. In addressing these objectives, our first step was to determine how the Food Stamp Program currently works by reviewing applicable laws and regulations that govern how recipients’ eligibility and benefit levels are determined, how food stores are approved to redeem food stamps, and how food stamps are to be redeemed by recipients. We then interviewed FCS and state officials to determine how the program was being implemented on a day-to-day basis. In accomplishing this step, we met with FCS officials at headquarters and at three of its seven regional offices. We also met with FCS field office officials in each of the three regional offices. In addition to the FCS officials, we met with state and local agency officials responsible for operating the Food Stamp Program in seven states—all located within the three FCS regions we visited. Four of the states selected—Louisiana, Massachusetts, New Mexico, and South Carolina—were selected for review because they have been extremely successful in reducing error rates in recent years, and we wanted to learn how these states had lowered their error rates. South Carolina reduced its overpayment error rate from 11.66 percent in fiscal year 1986 to 7.87 percent in fiscal year 1993. Massachusetts reduced its overpayment error rate from 10.88 percent in fiscal year 1990 to 4.45 percent in fiscal year 1993. Louisiana’s overpayment rate was 9.48 percent in fiscal year 1989, but by fiscal year 1993 the state had lowered the rate to 6.88 percent. New Mexico reduced its overpayment rate from 10.28 percent in fiscal year 1987 to 7.61 percent in fiscal year 1993. We also visited three states that have historically had high overpayment error rates—Florida, New York, and Texas—to learn why overpayment errors have remained high.