oversight

Food Stamp Program: Achieving Cost Neutrality in Washington's Family Independence Program

Published by the Government Accountability Office on 1990-06-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

     GAO

                           FOOD STAMP
                           PROGRAM
                           Achieving Cost
                           Neutrality in
                           Washington’s Family
                           Independence Program

                                                1
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                                         141698
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     (~Ao/lt(::EI)-!m-84
Resources, Community,   and
Economic Development    Division

B-237670

June 281990

The Honorable Patrick J. Leahy
Chairman, Committee on Agriculture,
  Nutrition, and Forestry
United States Senate

The Honorable E (Kika) de la Garza
Chairman, Committee on Agriculture
House of Representatives

This report discusses the state of Washington’s progress in achieving cost neutrality in the
Food Stamp Program component of its Family Independence Program, a E-year welfare
reform demonstration project that the state began operating on July 1, 1988.

The report recommends various actions to improve (1) the methods for establishing the
amount of benefit and administrative costs that Washington State would have incurred for
food stamps in the absence of the Family Independence Program and (2) the accuracy of the
data and the methods used to calculate cost neutrality each calendar quarter.

Copies of this report are being sent to the Secretaries of Agriculture and Health and Human
Services; the Governor of Washington State; the Director, Office of Management and Budget;
and other interested parties.

This work was performed under the direction of John W. Harman, Director, Food and
Agriculture Issues, who may be reached at (202) 2764138. Other major contributors are
listed in appendix IV.




                            /
J. Dexter Peach
Assistant Comptroller General
Executive Summary


             Breaking the “cycle of poverty” of welfare recipients has long been a
Purpose      principal, but elusive, goal of welfare reform. To test a new approach,
             the Congress authorized Washington State in 1987 to conduct the Family
             Independence Program (FIP), a S-year demonstration project that com-
             bines several welfare-related programs, including the Food Stamp Pro-
             gram, into a single grant package for recipients. Under FIP, food
             assistance is provided in the form of cash instead of food stamp cou-
             pons. The authorizing act requires (1) the state to assure that the cash
             approach is not more costly to the federal government than the tradi-
             tional coupon program would have been and (2) GAOto report to cogni-
             zant congressional committees and federal agencies on whether this
             “cost-neutral” requirement is being met.

             As a result of discussions with the responsible congressional oversight
             committees, GAOagreed to (1) verify the reasonableness and accuracy of
             the state’s methodologies and calculations made to measure cost neu-
             trality and (2) report on problems or unresolved issues that may impede
             the state from complying with the authorizing act’s requirement or
             affect its measurability.


                 combines three federally supported programs: Aid to Families with
Background   FIP
             Dependent Children (AFDC), Medicaid, and food stamps into one grant
             package for welfare recipients. The project, which provides education,
             training, employment opportunities, and support services, is designed to
             test whether a coordinated approach works better than separately
             administered programs to reduce recipients’ long-term dependence on
             welfare.

             FIP was authorized in the Omnibus Budget Reconciliation Act of 1987
             and was implemented under special terms and conditions developed in
             March 1988 by Washington State and the U.S. Departments of Agricul-
             ture (USDA) and Health and Human Services (HHS), The program began
             operations in July 1988.

             By July 1989 the state had implemented FIP at 20 (this number varies
             from the state’s count of 16 because of different calculation criteria)
             local welfare offices. These 20 offices will be the only ones included
             under FYP during the &year demonstration. Originally, the state had
             planned to adopt the program at all 66 of its local offices by the end of
             the S-year period; this plan was changed by the state in June 1989.




             Page2                    GAO/RCEDflO-84 Wa&in#t&#   Fmlly   Independence Program




                                 i
                             ExecutiveSummary




                             The 1987 act’s requirement for an assurance of cost neutrality probably
Results in Brief             cannot be fully satisfied. Instead, a reasonable approximation of pro-
                             gram costs is probably the best that can be achieved. Using methodolo-
                             gies developed with the federal agencies, the state estimates the cost of
                             continuing to run a traditional Food Stamp Program statewide and uses
                             the estimates as ceilings for the amount it can claim from the federal
                             government for combined food stamp and FIP food cash reimbursement.
                             For the first 3 quarters of FIP operation (July 1988 through March 1989
                             with 16 local welfare offices operating under the project), the state
                             claimed $145.4 million for food benefit costs and administrative
                             expenses, or about $2.5 million below the total allowed under the
                             ceilings.

                             GAOcited several problems with the methods that the state and the fed-
                             eral agencies used to set the program’s benefit and administrative ceil-
                             ings and with the cost-neutral calculations made for the first 3 quarters.
                             For example, because FIP will no longer be implemented statewide, the
                             state no longer needs to project the possible food stamp benefit costs
                             that would have occurred statewide. Consequently, using alternative
                             methodologies, as well as other actions that GAOis recommending, could
                             help improve the accuracy of the calculations and help better ensure
                             that the cost-neutrality requirement is being met.



Principal Findings

Estimating Cost Neutrality   In absolute terms, the cost-neutrality requirement in the 1987 act prob-
                             ably cannot be ensured. Where the FIP demonstration has replaced the
                             Food Stamp Program, the state and the federal agencies cannot deter-
                             mine with certainty what the benefit and administrative costs would
                             have been if the change had not occurred. Given the uncertainties and
                             risks of errors associated with estimating the costs of a replaced pro-
                             gram, a reasonable approximation of possible program costs, using
                             sound estimates, is probably the best that can be achieved.

                             To determine the cost of food stamp benefits, the state provides an
                             approximation by making statewide estimates based on costs incurred at
                             seven “control” welfare sites. The estimates serve as ceilings for the
                             amount of money the state can request from the federal government as
                             reimbursement for food stamp coupon and FIP food cash costs combined.
                             The state is using a different methodology for setting the reimbursement


                             Page 3                   GAO/RCED-90-34 Washington’s Family Independence Program
                            Executive Summary




                            ceiling for food stamp administrative costs, The ceiling is based on his-
                            torical food stamp administrative costs during a fixed baseline period,
                            as adjusted and updated for current conditions.

                            The state calculated that for the first 3 quarters of FIP operation, a tradi-
                            tional statewide Food Stamp Program would have cost $141.7 million in
                            benefits and $6.2 million in administrative expenses. During this period,
                            actual expenses for food stamp coupons and FIP food cash were $139.7
                            million in benefits and $5.7 million for administration, or about $2 mil-
                            lion and $500,000, respectively, below the ceilings.


Estimating Benefits         GAOfound several problems with the state’s current methodology for
                            estimating the statewide benefit cost of a traditional Food Stamp Pro-
                            gram. For example, the state’s method was developed when plans called
                            for all 65 local welfare offices to switch to FIP. Since the number of
                            offices converting to FIP was limited to 20, the continued use of the
                            statewide method increases the risk of establishing inaccurate cost
                            ceilings.

                            GAObelieves the state needs to consider alternate methodologies that do
                            not establish a statewide cost ceiling. Such alternatives may enable the
                            state to lower the risk of making inaccurate cost estimates and better
                            determine whether the cost-neutrality requirement is being met. For
                            example, when cost estimates are made for only 20 sites, the potential
                            additional cost to the federal government or penalty to the state
                            resulting from any variation or inaccuracy in the estimation technique is
                            significantly less than when costs for the state’s entire 65 sites are esti-
                            mated, as is done now.

                            GAOalso found several problems with the calculations of ceiling amounts
                            and cost neutrality for the first 3 quarters of FIP operation. The use of
                            inconsistent data sources, data, and calculation techniques reflects the
                            need to use the best available data and to improve internal controls that
                            will reduce errors in data-gathering and reporting.


Estimating Administrative   In May 1988 the state submitted a proposed method for calculating the
costs                       program’s administrative cost-neutral ceiling to USDAand HHSfor their
                            approval. GAOfound that the proposed method contained a number of
           v
                            questionable assumptions. It assumes, for example, that FIP will be
                            implemented statewide and that all eligible welfare recipients will even-
                            tually convert to FIP. These and other assumptions may be invalid and


                            Page 4                    GAO/RCEDBO-84 Washington’s Family Independence Program
                  Executive   Sumnuuy




                  increase the risk that administrative cost neutrality will not be deter-
                  mined as accurately as possible. In August 1989 the state submitted a
                  revised proposal that corrected some of the weaknesses GAOidentified.
                  As of March 1990 Washington State had not received a response from
                  either USDAor HHSregarding its May 1988 or August 1989 proposed
                  administrative methodology. GAOalso found problems with the calcula-
                  tions used to determine the ceiling amount under the proposed adminis-
                  trative cost method.


                  FIP faces the inherent problems associated with the demonstration of
Recommendations   any new welfare assistance approach. While aware of these problems,
                  GAOis making several recommendations to the Secretaries of Agriculture
                  and Health and Human Services to improve (1) the methods for estab-
                  lishing the amount of the state’s food stamp benefit and administrative
                  costs in the absence of FIP and (2) the accuracy of the data and the
                  methods used to calculate cost neutrality.


                  Commenting on a draft of this report, USDA’SFood and Nutrition Service,
Agency Comments   HHS,and Washington State generally agreed with GAO’Sfindings and con-
                  clusions. Both federal agencies and the state agreed that since there are
                  no plans to operate FIP on a statewide basis, as originally anticipated, a
                  review of the cost-neutrality methodology is warranted. However, all
                  three organizations commented that it was unclear whether the several
                  alternative methods cited by GAOfor modifying cost-neutrality calcula-
                  tions would provide a more accurate cost ceiling than the current meth-
                  odology. As stated in the report, the alternative methods discussed are
                  only examples and are not intended as specific recommendations.

                  According to Washington State, the report provides an excellent over-
                  view of the many methodological and data issues that are connected
                  with measuring FIP cost neutrality and is also relevant for the AFDCand
                  Medicaid program portions of FIP. State officials pointed out, however,
                  that two broader issues must be examined before a final consensus on
                  cost neutrality for food stamps, AFDC,or Medicaid can be reached. The
                  first is HHS’refusal to include the costs associated with the recent unan-
                  ticipated caseload growth in the state’s welfare system as part of its FIP
                  cost calculation. The second is HHS’refusal to allow the state to change
                  the method of accounting for welfare costs of FIP participants who
                  migrate (move permanently) from FIP sites to control sites. (See apps. I-
                  III.)



                  Page 5                   GAO/RCED-fJO-84 Washington’s Family Independence Frogram
Contents


Executive Summary                                                                                     2

Chapter 1                                                                                             8
Introduction             Washington State’s Family Independence Program                               8
                         Food Stamp Program                                                          10
                         FIP Agreements                                                              12
                         Objectives, Scope, and Methodology                                          13

Chapter 2                                                                                            17
State’s Estimating       Extent of Cost Neutrality Can Only Be Estimated
                         State’s Method for Estimating Benefit Costs
                                                                                                     17
                                                                                                     18
Methods Show FIP Is      State’s Method for Estimating Administrative Costs                          20
Cost-Neutral             Comparison of Cost Ceilings and Actual Costs for First 3                    22
                              Quarters of FIP Operation

Chapter 3                                                                                            26
Alternative Estimating   Benefit Cost-Neutral Methodology Based on Questionable                      26
                              Assumptions
Methods May Better       Alternative Methods Exist for Setting Benefit Ceilings                      29
Ensure Benefit Cost      State and Federal Quarterly Calculations Differed                           32
Neutrality               Conclusions                                                                 36
                         Recommendations                                                             37
                         Agency and State Comments and Our Evaluation                                38

Chapter 4                                                                                            44
Cost Neutrality of       Federal Review of State Proposal Is Slow
                         Proposed Methodology Uses Questionable Assumptions
                                                                                                     45
                                                                                                     46
Administrative           State’s Quarterly Calculations Need to Be Viewed With                       60
Expenses Is Still             Caution
Unclear                  FNS Not Making Required Calculations                                        61
                         Conclusions                                                                 62
                         Recommendations                                                             63
                         State Comments and Our Evaluation                                           63

Appendixes               Appendix I: Comments From the U.S. Department of                            66
                             Agriculture’s Food and Nutrition Service
                         Appendix II: Comments From the Department of Health                         60
           Y                 and Human Services
                         Appendix III: Comments From the State of Washington                         63
                         Appendix IV: Major Contributors to This Report                              76


                         Page 6                   GAO/RCED-!XMM Washington’s Family Independence Program
   .     Contents




Tables   Table 2.1: Washington State’s Cost-Neutral Calculations                     22
              for Food Assistance Benefit Costs
         Table 2.2: FNS’ Cost-Neutral Calculations for Food                           22
             Assistance Benefit Costs
         Table 2.3: Washington State’s Cost-Neutral Calculations                      23
              for Food Assistance Administrative Costs
         Table 2.4: Washington State’s Cost-Neutral Calculations                      24
             for Food Assistance Benefit and Administrative Costs
             Combined
         Table 3.1: Proportion of State Food Stamp Costs                              27
             Represented by the Seven Control Sites
         Table 3.2: Impact of a 1 Percentage Point Variation in                      31
             Costs on Cost-Ceiling Estimates
         Table 3.3: Comparison of the State’s and FNS’ Benefit                       33
             Cost-Neutral Calculations for the First 3 Quarters of
             FIP Operation




         Abbreviations

                    Aid to Families with Dependent Children
         FIP        Family Independence Program
         FNS        Food and Nutrition Service
         GAO        General Accounting Office
         HHS        Department of Health and Human Services
         USDA       US. Department of Agriculture


         Page 7                  GAO/RCEDW44   WaAington’r   Family Independence Program
Chapter 1

Introduction


                          The Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203) author-
                          ized the state of Washington to conduct the Family Independence Pro-
                          gram (FIP), a 5-year welfare reform demonstration project. Under the
                          project, the federally supported Aid to Families with Dependent Chil-
                          dren (AFDC), Medicaid, and Food Stamp Programs are combined into a
                          unified grant assistance package for Al%&eligible welfare recipients. As
                          a part of the FIP grant, the recipients are provided with food assistance
                          in the form of cash instead of food stamp coupons (a concept referred to
                          as “food stamp cash-out”).

                          The 1987 act amended the Food Stamp Act of 1977 (section 21(b)(4)) to
                          require Washington State to ensure that the federal government’s cost
                          for the cash food assistance provided under FIP does not exceed what its
                          cost would have been under the traditional food stamp coupon program.
                          Section 21(g) of the Food Stamp Act of 1977, as amended, requires GAO
                          to conduct periodic audits to determine whether this “cost-neutral”
                          requirement is being met,’ and to report the results to the Senate Com-
                          mittee on Agriculture, Nutrition, and Forestry, the House Committee on
                          Agriculture, and the Secretaries of Agriculture and Health and Human
                          Services. This report discusses our observations on the extent to which
                          Washington State is complying with the cost-neutral requirement and on
                          issues that may impede or otherwise affect its ability to do so.


                                purpose is to test an approach to breaking the cycle of poverty and
Washington State’s        FIP’S
                          reducing recipients’ long-term dependence on welfare. To this end, it
Family Independence       provides current and new welfare recipients with financial incentives
Program                   for attaining training and employment, and it increases the range of sup-
                          port services available to them. The program, which was authorized
                          both by the Congress and the Washington State Legislature, generally
                          covers welfare recipients in certain areas of the state who qualify for
                          AFLKT. Most of the recipients are members of single-parent, low-income
                          families.

                          Among FIP’S incentives and support services are the following:

                      l   increased program funding for training, education, and job search
                          activities;
                      l   cash incentives (up to 35 percent of the combined AFDCgrant and food
                          stamp benefit amounts) for recipients who are in training or working;

                          ‘Also referred to by state and federal officials and documents as a “budget-neutral” and a “revenue-
                          neutral” requirement. For consistency, this report uses the terms “cost-neutral” and “cost neutrality.”



                          Page 8                             GAO/RCED-SO-84 Washington’s Family Independence Program
  Cha9t.m 1
  introduction




9 increased child care benefits;
9 extended child care and Medicaid benefits for 1 year after recipients
  cease to receive FIP cash benefits as a result of increased earnings; and
9 replacement of food stamp coupons with an equivalent amount of cashe2

  Although the “cash-out” of food stamps is a highly visible feature of                               FIP,
  state officials do not expect it to have as significant an impact in
  changing the current welfare system as some of the programmatic
  changes made to the AF’DCportion of the project.

  FIP was initially implemented in 9 of the state’s 65 local welfare offices
  on July 1, 1988.” Seven more offices were converted to the FIP program
  on October 1, 1988. FIP was to have continued to be phased in at addi-
  tional local offices during the first 3 years until most of the 66 offices
  were converted to the demonstration project. However, in June 1989,
  concerned about the demonstration’s escalating costs, Washington State
  limited the number of additional offices to be converted to 4, for a total
  of 20 local welfare office sites. The four additional offices began FIP
  operations on July 1,1989, near the completion of our field workm4

  After a site implements FIP, participation in the program is mandatory
  for all new AFDC applicants. Existing AFDC recipients have the option to
  convert to FIP at the time of their next annual face-to-face review with
  their welfare office caseworker or to remain on the regular AFDC, Medi-
  caid, and Food Stamp programs. As of March 31,1990, about 30,000 of
  the approximately 83,000 Washington families on AFDC were on PIP.

  At the state level, the program is administered through the Department
  of Social and Health Services and the Employment Security Department.
  Several local, regional, and state advisory groups, including a joint
  House-Senate legislative budget committee, also participate in aspects of
  FIP design and implementation. Final authority for FIP policy decisions
  lies with the state legislature, which receives policy recommendations

  ‘Although PIP participants receive food assistance in the form of cash, food stamp coupons are still
  used in the state for non-AFDC households and for AFDC households that do not convert to FIP.

  “Although 68 local welfare offices were listed in state statistical tables as of April 1989, 1 of the
  offices had been closed and 2 others were specialized offices that did not have Food Stamp Program
  activity. Thus, the state could convert 66 local welfare offices to the FIP program.

  %ur count of the number of local welfare offices in the state and in FIP differs from the count
  normally used by the state, because we counted each local office individually whereas the state
  counts two or more offices ln several locations as a single office. For example, as discussed in this
  paragraph, 16 local offices were ln FIP as of October 1,1988, and 20 in FIP as of July 1,1989. The
  state’s count of these FIP offices for the same periods was 11 and 16, respectively.



  Page 9                             GAO/RCED-99-84 Washingt.on’s Family Independence program
                     Chapter 1
                     Introduction




                     from an Executive Committee comprised of representatives from the
                     two administering state departments, the state’s Office of Financial
                     Management, and the welfare community. Day-to-day activities of the
                     Executive Committee, including policy coordination, fiscal, and commu-
                     nity development functions, are carried out by an executive director and
                     staff.

                     At the federal level, FIP oversight is the responsibility of the Department
                     of Health and Human Services (HHS) as the lead agency and, for the food
                     stamp cash-out component, the U.S. Department of Agriculture’s (USDA)
                     Food and Nutrition Service (FNS)." Key agreements between the state
                     and the federal agencies that supplement the 1987 authorizing act,
                     including stipulations the state had to meet to obtain final federal
                     approval to operate the FIP demonstration, are contained in a special
                     terms and conditions document dated March 9,1988.”


                     The Food Stamp Program is a food assistance program available to all
Food Stamp Program   applicants who meet its eligibility criteria. The program is administered
                     as a cooperative federal/state effort. It was designed to increase the
                     food purchasing power of low-income households to permit them to buy
                     a more nutritious, low-cost diet. To be certified as eligible for food
                     stamps, a household must meet income and resource requirements
                     unless all members receive AFDCor Supplemental Security Income, in
                     which case the household is automatically eligible for food stamps.
                     Unless exempted for reasons such as age, disability, current employ-
                     ment, or AFDC work program registration, household members must reg-
                     ister for work and comply with the requirements of a training and
                     employment program. In addition, the household must (1) meet several
                     other nonfinancial standards, including citizenship or eligible alien
                     status; (2) provide social security numbers; and (3) if a student, meet

                     “During the pre-implementation phase of FIP, the lead federal agency was the Interagency Low
                     Income Opportunity Advisory Board. The Board was established in July 1987 to help carry out the
                     President’s welfare reform initiatives by providing a focal point for coordinating state welfare reform
                     proposals that affect more than one federal program. The Board, which is advisory only, serves aa a
                     focal point for states in obtaining from the federal agencies the necessary statutory waivers to enable
                     them to conduct their demonstrations. On or about July 1,1988, when FIP began to be implemented
                     in Washington State’s local welfare offices, the lead was transferred from the Board to HHS. Several
                     component units of HHS share responsibility for oversight of the FIP demonstration, including the
                     Office of the Assistant Secretary for Planning and Evaluation, the Family Support Administration,
                     and the Health Care Financing Administration. Throughout this report these components are referred
                     to individually and collectively as “HHS.”

                     “The special terms and conditions agreement contains 35 provisions covering, among other matters,
                     project approval, continuation, and termination; cost neutrality; project evaluation; and reporting
                     requirements.



                     Page 10                            GAO/RCED-90-84 Washington’s Family Independence Program
chapter 1
Introduction




certain criteria. Food stamp benefits are based on household size, count-
able monthly income,7 and the cost of purchasing food using the Thrifty
Food PlanR Benefits are issued in the form of food coupons, an average
of about $139 a month per AFDC household in Washington State in fiscal
year 1988, that recipients can use to purchase food to obtain a more
nutritious diet.

The program is administered nationally by FNS, which pays for all food
stamp benefits and about half of the states’ administrative expenses.
States are responsible for local administration and day-to-day operation
of the program. Federal costs for food stamps in Washington State for
fiscal year 1988 amounted to about $176 million in benefits and $20 mil-
lion in administrative expenses.”

Under the PIP demonstration, the primary difference from the Food
Stamp Program is that eligible participants receive cash instead of food
coupons for their food assistance benefits. With minor exceptions,
changes did not occur in the rules for determining whether a household
is eligible to receive food benefits or for determining the amount of
monthly food benefits a household receives.1° However, under a “hold
harmless” provision of the authorizing legislation, FIP participants are
guaranteed to receive no less in FIP food cash assistance than they would
have received under the regular Food Stamp Program.

Despite the limited programmatic changes to the traditional coupon pro-
gram under FIP, and in three other food stamp cash-out demonstrations




7Not all of a household’s income is actually counted. Some exclusions and deductions are allowed in
determining the level of its food stamp benefits.

‘The lowest-cost USDA food plan that incorporates information on food consumption, prices, and
nutrient composition of foods and on human nutritional requirements
“Total federal dollars for the AFDC and Medicaid programs in Washington State for fiscal year 1988
were about $226 million and $633 million, respectively.
“‘An indication of the absence of eligibility and benefit differences is also reflected in state
accounting records. For example, data for June 1989 showed that each person in an AFDC household
received an average of $63.26 in food stamp coupon benefits while each person in a PIP household
received a virtually identical average of $63.62 in food cash benefits. Although the June 1989 data
showed that per capita food cash benefits were 27 cents higher than per capita coupon benefits, this
difference does not necessarily indicate a violation of the cost-neutral requirement, because cost neu-
trality applies to food assistance costs statewide for benefits and administration combined for a 3-
month period. As described in chapter 2, the state calculated that for the first 3 quarters of FIP
operation, it was more than $2.6 million below the applicable cost-neutral ceiling.



Page 11                            GAO/RCEDSO-84 Washing-ton’s Family Independence Program
                 Chapter 1
                 Introduction




                 that are underway or that FNShas approved,l’ the cash-out of food
                 stamps has always been considered controversial. Supporters contend
                 that cash-out saves money (because printed coupons no longer need to
                 be issued, transported, stored, safeguarded, redeemed, processed, and
                 accounted for), simplifies program operations (because the state no
                 longer needs to monitor the authorized use of food stamps or investigate
                 and prosecute their misuse), and reduces the welfare stigma associated
                 with food stamps. Opponents contend that cash-out eliminates the gov-
                 ernment’s control over program funds to ensure that they are used only
                 to buy food and eliminates many welfare households’ control over
                 budgeting their funds to ensure that resources are available to buy food.
                 They also believe that cash-out may lead to reduced nutritional levels
                 and ultimately a decrease in benefits because policymakers could more
                 easily cut cash benefits than food benefits. Some of these issues, as well
                 as other nutritional and expenditure impacts of the FIP food stamp cash-
                 out demonstration, are being studied by The Urban Institute, under con-
                 tract with the state of Washington, as part of a comprehensive program
                 evaluation of FIP.


                 According to the March 1988 special terms and conditions agreement
FIP Agreements   governing FIP, the state is required to achieve food stamp cost neutrality
                 each calendar quarter. Under formulas explained in more detail in
                 chapter 2, the state estimates what the federal government’s costs in
                 benefit payments and administrative expenses would have been for the
                 3-month period if the entire state had continued to operate under the
                 traditional food stamp coupon program. For that period, the estimates
                 become ceilings, or maximums, for the amount of reimbursement the
                 state can receive from the federal government for the aggregate of cash
                 food assistance for welfare recipients on FIP and food stamp coupon
                 assistance for recipients not on FIP. FNSand HHShave approved the
                 state’s method and data for estimating benefit payments. As of March
                 1990, they were still reviewing a separate method that the state pro-
                 posed for estimating administrative costs.

                 The requirement for the state to adhere to the food stamp cost-neutral
                 ceiling every 3 months contrasts with the 36-month period that the spe-
                 cial terms and conditions give the state to attain cost neutrality for the
                 AFDCand Medicaid portions of FIP. The shorter time period was imposed

                 I ‘Alabama, California’s San Diego County, and portions of New York State. According to an FNS
                 official, a second food stamp cash-out demonstration in Alabama, as well as a welfare reform demon-
                 stration program being proposed by Minnesota, do contain changes in eligibility rules and benefit
                 levels from the regular Food Stamp Program.



                 Page 12                           GAO/RCED-90-84 Washington’s Family Independence Program
                            Cheppter 1
                            Introduction




                            for the Food Stamp Program component of FIP because of federal agency
                            concern that a provision of the 1987 amendment to the Food Stamp Act
                            of 1977 authorizing FIP might result in runaway costs and make it diffi-
                            cult for the state to achieve food stamp cost neutrality once it had sig-
                            nificantly exceeded the cost-neutral ceiling. On October 11, 1988, a
                            technical amendment to the Food Stamp Act of 1977 removed that con-
                            cern by modifying the language in the authorizing legislation, prompting
                            the state to request federal approval to change the food stamp cost-neu-
                            tral period to 36 months making it the same as the AFDCand Medicaid
                            requirements. As of March 16, 1990, the request was still pending with
                            FNS and HHS.

                            If the state’s request is approved, the change in the cost-neutral attain-
                            ment period could affect the amount of funds that FNSreleases quarterly
                            to the state for the federal portion of food assistance payments. Under
                            the revised arrangement, FNSwould be permitted to release any amount
                            of food assistance funds the state requests for the first 6 quarters of PIP
                            operation, rather than releasing no more than the cost-neutral ceiling
                            amount. If, at the end of the 6 quarters, the state has incurred cumula-
                            tive costs over the cost-neutral maximum for that l&month period, the
                            state would pay back one-sixth of the overage each quarter for the next
                            6 quarters. Thus, not until the end of 12 quarters or 36 months of FIP
                            operation would the state be required to attain food stamp cost neu-
                            trality. For the final 8 quarters or 24 months of the demonstration’s 5-
                            year period, the state would be permitted to receive only the cost-neu-
                            tral maximum calculated for each quarter.


                            We conducted this review to meet the periodic audit requirement of the
Objectives, Scope,and       1987 act’s amendments to section 21(g) of the Food Stamp Act of 1977.
Methodology                 As the result of discussions with the Senate Committee on Agriculture,
                            Nutrition, and Forestry and the House Committee on Agriculture, we
                            agreed to

                        . verify the reasonableness of the methodologies and calculations that the
                          state used to establish the benefit and administrative cost-neutral ceil-
                          ings, and the accuracy of the state’s and FNS’quarterly calculations of
                          cost neutrality; and
                        l to the extent possible, report on any problems or unresolved issues that
                          may impede the state in complying with the cost control provision of the
                          authorizing legislation or affect its measurability.




                            Page 13                  GAO/RCED-SO-84 Washington’s Family Independence Program
Chapter 1
Introduction




To verify the reasonableness of the benefit and administrative cost-neu-
tral ceilings and monitor the accuracy of the state’s and FNS’quarterly
calculations of cost neutrality, we selectively reviewed the state’s cost
accounting systems, cost records and reports, and internal controls. For
food stamp benefit costs, we examined the reasonableness of the meth-
odology agreed to by the state and the federal government for using
selected “control” sites to calculate the ceiling, as well as the accuracy
of the cost data reported for the control sites.‘” We also analyzed (1) the
appropriateness of the assumptions underlying the methodologies, (2)
whether the assumptions are still valid, and (3) several examples of
alternative methodologies to determine whether they might result in
greater assurances of cost neutrality. For food assistance administrative
costs, we examined the state’s proposed methodologies and analyzed
their underlying assumptions. For both benefit and administrative costs,
we compared food stamp cost neutrality calculations made by the state
and FNSfor the state as a whole for each of the first 3 calendar quarters
of FIP operation (July 1,1988, through March 31, 1989), using state
records and the currently agreed-upon methodologies, compared our
results with calculations made by the state and FNS,and determined the
reasons for any differences. Also, we discussed plans for auditing or
evaluating FIP and examining food assistance cost neutrality with repre-
sentatives of USDA'Sand HHS’ Offices of Inspector General, the Wash-
ington State Auditor, the state agencies’ internal auditors, and FNS’
Financial Management Division and Food Stamp Program Division.

To identify and track problems or unresolved issues that could impede
the state in meeting the food stamp cost-neutral requirement or affect
the measurability of the state’s compliance, we reviewed agencies’ files
and records and interviewed state and federal agency officials and staff,
principally at state offices in Olympia, Washington; FNSheadquarters in
Alexandria, Virginia, and its Western Regional Office in San Francisco,
California; and HHSheadquarters in Washington, DC. We examined
whether necessary actions required of the state by the project’s special
terms and conditions, such as providing written assurances and main-
taining and providing cost data and other records, had been taken, and
whether the actions were correct and/or reasonable. In addition, we
interviewed advisory group representatives, welfare advocates, and
other relevant organizations that are assisting in and/or monitoring the
implementation of FIP, and we reviewed the progress and applicable

 ‘2‘Control” welfare offices or sites are also referred to by state and federal officials and documents
as “comparison” offices or sites. For consistency, we use the term “control” offices or sites
throughout the report.



Page 14                             GAO/RCED-99-94 Washington’s Family Independence FVogram
Chapter   1
Introduction




findings of evaluations being made of the program. We also visited five
local welfare offices that had implemented FIP or were serving as control
sites.

Several limitations apply to our work. First, because FIP is a 5-year pro-
ject whose development, implementation, and evaluation require coordi-
nation among many different state and federal agencies, some of its
policies and procedures were just being put into place or were being
revised, and others were still pending, at the time we completed our
field work. For some of the unresolved matters, the timing of their com-
pletion and the nature of their resolution were still uncertain, as was
their likely impact on cost neutrality. Although we continued to update
this report after completing our field work to acknowledge and, to the
extent possible, evaluate subsequent actions, some additional changes to
the FIP program that are identified in this report as pending matters may
have occurred before publication.

Second, because FNSand HHShad not yet completed their review of the
state’s proposed methodologies for calculating the cost neutrality of
administrative costs, the state’s, FNS’ and our administrative cost calcu-
lations (discussed in chs. 2 and 4) were based on the state’s proposals.
The methodology could change as a result of the federal government’s
review and approval process, or as a result of our findings and recom-
mendations, which could in turn change the cost-neutral calculations.

Finally, the legislative mandate that requires us to audit the cost neu-
trality of the FIP demonstration pertains only to the food stamp cash-out
 portion of the project. The legislation does not require us to monitor the
 state’s compliance with the cost-neutral provisions of either the AFDCor
the Medicaid portions of FIP, nor are we required to evaluate the overall
implementation, management, or results of the FIP demonstration.
Instead, the 1987 act requires the Secretary of Agriculture, in consulta-
tion with the Secretary of Health and Human Services, to conduct a pro-
ject evaluation. In April 1989, in accordance with FIP’S special terms and
 conditions, the state contracted with The Urban Institute, a research
 firm located in Washington, DC., for a comprehensive program evalua-
tion of all three components of the FIP demonstration. The Urban Insti-
tute’s evaluation was scheduled to be completed in late 1990, but
 according to FNSand HHSofficials in February 1990, it has been resched-
uled for completion in late 1993. Although our review did not cover the
state’s compliance with the AFDCand Medicaid cost-neutral require-
ments, many of the findings and recommendations in this report should



Page 15                   GAO/RCED-90-84 Washlngton’s Family Independence Program
Chapter 1
Introduction




be applicable to those programs because the state’s methods for deter-
mining cost neutrality are the same as, or similar to, those for the Food
Stamp Program component of FIP.

We conducted our review from October 1988 to July 1989 in accordance
with generally accepted government auditing standards.

Chapter 2 of this report describes the state’s methodologies for esti-
mating what benefit and administrative costs would have been in the
absence of FIP, and the resultant ceilings that were established, actual
costs incurred, and the state’s and FNS’cost-neutral calculations for the
first 3 calendar quarters, or 9 months, of FIP program operation. Chap-
ters 3 and 4 present the results of our analyses of the methodologies and
calculations for benefit costs and administrative costs, respectively.




Page 16                  GAO/RCED-90-94 Washington’s Family Independence Program
Chapter 2

&at&s Estimating Methods Show F’IP Is Cost-
Neutral

                      In absolute terms, the 1987 authorizing act’s requirement for an assur-
                      ance of cost neutrality probably cannot be fully satisfied. As the March
                      1988 special terms and conditions agreement between the state and the
                      administering federal agencies recognizes, a reasonable approximation
                      of likely program costs, using sound estimates, is probably the best that
                      can be achieved.

                      Two methods were developed for estimating what the federal govern-
                      ment’s food assistance costs would have been if the traditional Food
                      Stamp Program had been maintained statewide. One method pertains to
                      the cost of benefits to welfare recipients and the other to the state’s cost
                      of administering the program. Using these approaches, the state calcu-
                      lated for the first 9 months of FIP operation that a statewide Food Stamp
                      Program would have cost $147.9 million. The state reported that for this
                      same period its actual expenses for food stamp coupons and FIP food
                      cash were $145.4 million, or about $2.5 million below the cost-neutral
                      maximum.


                      The 1987 act required the state to ensure that the federal government’s
Extent of Cost        cost of food assistance provided under the project would not exceed the
Neutrality Can Only   sum of the anticipated value of the coupons that would have been dis-
Be Estimated          tributed, and the federal share of administrative costs that would have
                      been incurred, under the traditional Food Stamp Program. In its strictest
                      interpretation, this requirement probably cannot be fully guaranteed.
                      Because the food coupon program no longer exists for those FIP welfare
                      recipients who receive food cash benefits, the state cannot determine
                      the exact amount of costs that would have been incurred if the tradi-
                      tional program had not been replaced by FIP. Similarly, the use of esti-
                      mating methodologies cannot ensure cost neutrality conclusively
                      because the uncertainties and risks of errors associated with estimating
                      the costs of a replaced program work against such accuracy. A reason-
                      able approximation of probable costs, using sound methodologies that
                      minimize the likelihood of estimation errors, is probably the best that
                      can be achieved.

                      In accordance with the project’s March 1988 special terms and condi-
                      tions agreement, the state developed separate methodologies for deter-
                      mining cost neutrality for both benefits and administration of the Food
                      Stamp Program. Each calendar quarter the state is required to make
                      separate calculations for each of these two cost categories to arrive at
                      cost-neutral ceilings for the quarter, compare actual costs incurred
                      during the quarter with the ceilings, and determine an amount over or


                      Page 17                   GAO/RCED-90234 Washington’s Family Independence Program
                     chapter 2
                     State’s Estimating Methods Show FIP Is Cost-
                     Neutral




                     under the ceiling for each type of cost. The two amounts are then
                     summed to determine whether the state has achieved cost neutrality
                     (i.e., is at or below the ceilings) for the food assistance program as a
                     whole for the quarter. In addition to the state’s calculations, FNS’
                     Western Regional Office in San Francisco is required to make indepen-
                     dent quarterly assessments to determine whether the state is in compli-
                     ance with the authorizing act’s requirement.


                     The state and the responsible federal agencies agreed that food stamp
State’s Method for   benefit cost data from randomly selected local welfare offices that did
Estimating Benefit   not convert to FIP could be used to provide a reasonably accurate esti-
costs                mate of benefit costs for the state as a whole. Methodologies were there-
                     fore established to select sites to continue to operate the traditional
                     Food Stamp Program and to project benefit cost data from those sites to
                     the entire state.

                     Because the state planned to implement FIP in all of its local welfare
                     offices during the 5-year demonstration period, it needed a method to
                     determine, for the state as a whole, what food stamp benefits would
                     have cost in the absence of FIP. According to the methodology agreed to
                     by the state and the federal government during the design of the FIP
                     program, and subsequently prescribed in the program’s March 1988,
                     special terms and conditions agreement, the state will estimate the cost
                     of statewide food stamp benefits by using data on food stamp costs from
                     randomly selected local welfare offices in which FIP will not be imple-
                     mented for at least 3 years. These “control” offices or sites serve as sur-
                     rogates for determining what statewide food stamp costs would have
                     been without the FIP program.

                     Seven control sites were randomly selected, along with a matched group
                     of sites at which FIP was to be implemented, for program comparison
                     and evaluation purposes. The welfare offices in the second group are
                     referred to as “treatment” offices or sites. The state and the overseeing
                     federal agencies developed the methodology for randomly selecting the
                     two matched sets of sites. The site selection process contained four main
                     components: (1) the matching of welfare offices in the state on the basis
                     of a set of 11 criteria (9 measures of program similarity and 2 geo-
                     graphic measures); (2) the performance of a statistical analysis to deter-
                     mine caseload sample size; (3) the random selection of matched sites to
                     draw the caseload sample based on a probability-proportional-to-size




                     Page 18                        GAO/RCED-80434 Washington’s Family Independence Program
Chapter 2
State’s E&bating     Method8 Show FIP Is Cm&
Neutral




sampling method;’ and (4) the random assignment of the selected sites
either to the control or the treatment group. The seven offices selected
as control sites were Okanogan, Yakima, Yakima/Kittitas, Shelton,
Pierce West, King South, and Federal Wayn2The average monthly wel-
fare caseload served by the seven control offices in the fiscal year pre-
ceding the sample selection was 11,486.

After selecting the control sites for evaluation purposes and deciding,
along with the federal agencies, to use them for cost-neutrality purposes
as well,:! the state determined the proportion of its total statewide food
stamp benefit costs that these seven sites represented for the agreed-
upon 12-month baseline period of April 1987 through March 1988.
During that period the state’s total food stamp benefit costs were
$165,134,288; the seven control sites’ costs were $23,624,198, or 14.31
percent of the state’s total costs. As agreed by the state and the federal
agencies, this percentage is to be used each calendar quarter during the
S-year FIP project as a factor in estimating food stamp benefit expendi-
tures for the state as a whole. Each quarter, total food stamp coupon
expenditures in the seven control sites are to be divided by .1431 in
order to estimate food stamp benefit costs for the entire state. This esti-
mated figure then constitutes the maximum food assistance benefit cost
(covering both food cash costs for those recipients on FIP and food stamp
coupon costs for those not on FIP) for which the federal government will
reimburse the state.

For example, state accounting data showed that for the first quarter of
FIP operation (July 1, 1988, through September 30, 1988) food stamp
coupon expenditures in the seven control offices totaled $6,374,861.
That benefit amount, divided by .1431, totaled $44,548,295, which
became the ceiling or maximum amount that the state could claim from
the federal government for food assistance benefits for the quarter.



’ A sampling method in which a unit’s chance of being randomly selected is in direct proportion to its
sire or the number of its component pieces. Under this method, a welfare office with a caseload of
1,000 clients had twice the chance of being selected as a control or treatment site as an office with a
caseload of 600 clients.

“Welfare offices selected as treatment sites were Goldendale, Stevenson, White Salmon, Othello,
Moses Lake, Spokane North, Burien, West Seattle, and Everett.

“The seven control sites being used to estimate statewide food stamp benefit costs are also being used
by the state to estimate what statewide AFDC and Medicaid benefit costs would have been in the
absence of FIP. Those two FIP program components also have cost-neutral requirements included in
the Omnibus Budget Reconciliation Act of 1987.



Page 19                            GAO/RCED-90-84 Washington’s Family Independence Program
                           Chapter 2
                           State’s Estimating Methods Show FIP Is Cost-
                           Neutral




                           Unlike the method for estimating benefit costs, the method for esti-
State’s Method for         mating what the state’s costs of administering the Food Stamp Program
Estimating                 would have been in the absence of FIP was not established in advance.
Administrative Costs       Rather, the terms and conditions required the state to submit a plan
                           acceptable to USDAand HHS,within 60 days of the agreement’s March 9,
                           1988, effective date, for estimating administrative costs. Therefore, the
                           state submitted a methodology proposal to the two agencies in letters
                           dated May 3 and May 5, 1988, respectively.4

                           The state’s administrative cost-neutral proposal differs from the method
                           used for benefit costs in that it does not use cost data from the control
                           sites to estimate statewide costs. Instead, the method compares histor-
                           ical food stamp administrative costs during a fixed baseline period with
                           actual administrative costs during the FIP period, using the following
                           four steps:

                       l   First, an initial annual administrative cost ceiling is to be calculated by
                           (1) determining total Food Stamp Program administrative costs for the
                           state and the federal share thereof for the baseline period of April 1,
                           1987, to March 31, 1988; (2) adjusting the ceiling by annualizing certain
                           costs, such as salary increases and inflation that occurred during the
                           last quarter of the baseline period; and (3) determining the portion of
                           the administrative costs that relates to the FIP target population state-
                           wide. (As described in more detail in ch. 4, the state calculated this
                           amount to be 42.57 percent.)
                       l   Second, the administrative cost ceiling is to be amended as necessary to
                           account for several types of changes occurring after the baseline period,
                           such as prior period expenditure adjustments that affect the baseline
                           period; legislatively mandated state employees’ salary and/or benefit
                           increases; Social Security and other employer-paid payroll tax increases;
                           inflation; and cost increases due to federal program changes or
                           increased federal funding levels. The result of these two steps is the
                           amended annual administrative cost ceiling.”


                           41nproviding technical comments on a draft of this report, FNS headquarters officials told us that the
                           state’s methodology proposal was not submitted to USDA until August 11,1988, rather than on May
                           3, 1988, as shown ln the report. That is not correct. The state’s administrative cost-neutral proposal
                           was submitted to USDA and HHS ln attachments to its May 3,1988, and May 6,1988, letters, respec-
                           tively, as the report indicates. The August 11, 1988, submission referred to by FNS covers the state’s
                           benefit cost-neutral proposal, not its administrative cost-neutral proposal.
                           “The administrative cost ceiling is sometimes referred to by federal and state officials and documents
                           as the administrative cost “baseline.” For consistency with the terminology used for benefit costs,
                           this report uses the term “ceiling” instead of “baseline” for the administrative cost maximum calcu-
                           lated for each quarter.



                           Page 20                            GAO/RCED-90-84 Washington’s Family Independence Program
    chapter2
    State’s E&mating   Methods Show F’IP Is Cost-
    Neutral




l Third, the federal portion of actual administrative expenditures for each
  quarter is to be determined and then adjusted to exclude certain
  extraordinary costs, such as salary increases applicable to all positions
  in a given job classification, and increased staff costs caused by caseload
  or work load increases not attributable to FIP. The costs are then multi-
  plied by the percentage that relates to the FIP target population (42.57
  percent). The result of this step is the adjusted actual administrative
  expenditure chargeable to the federal government.
. Fourth, a comparison of actual costs with the ceiling is to be made quar-
  terly. Each quarter’s adjusted actual expenditure is compared with one-
  fourth of the amended annualized ceiling, and an amount over or under
  the ceiling is calculated.

    The final cost-neutral calculation for each quarter consists of summing
    the results of the benefit and administrative cost-neutral calculations to
    determine whether the state has achieved cost neutrality (i.e., is at or
    below the ceilings) for the food assistance program as a whole for the
    quarter.

    FNSofficials at headquarters and the Western Regional Office in San
    Francisco evaluated the state’s administrative cost-neutral proposal in
    August and October 1988, respectively, and internally raised several
    questions with both the methodology and the data used by the state.
    Although FNS' San Francisco office agreed with its headquarters’ recom-
    mendation that FNSand HHSjointly respond to the state’s proposal
    (because the proposal contained similar methodology covering the AFDC
    and Medicaid components of FJP),the San Francisco office expressed its
    concern that a joint response could delay approval of a methodology by
    which to evaluate FIP cost neutrality, and it urged that a joint federal
    response be issued to the state as expeditiously as possible. HHSofficials
    subsequently told us that, because this was the first administrative cost-
    neutral methodology they had ever reviewed, they wanted to see what
    the state’s application of the methodology to the first 2 quarters of
    actual expenditures looked like before they completed their review and
    responded to the state. The state submitted data to HHSon the first 2
    quarters of FIP operation, including its calculations of cost neutrality, on
    May 4,1989. From May through September 1989, according to FNSand
    HHSofficials, the agencies were discussing and reviewing the state’s May
    1988 proposal.

    On August 11, 1989, the state submitted a revised administrative cost-
    neutral methodology proposal to HHS.As discussed in chapter 4, the
    revision’s two alternatives make several changes in the methodology


    Page 21                         GAO/RCED-90-84 Washington’s Family Independence Program
                                           Chapter 2
                                           State’s Estimating Methods Show F’IP 18Cost
                                           Neutral




                                           incorporated in the first proposal. In its March 16, 1990, comments on a
                                           draft of this report (see app. III), the state indicated that it had still not
                                           received a formal response from FNSor HHSon its administrative cost
                                           proposal.


                                           Tables 2.1 through 2.4 present information on the calculated cost ceil-
Comparison of Cost                         ings and actual costs incurred during the first 3 calendar quarters of FIP
Ceilings and Actual                        operation (July 1988-Mar. 1989), using the methodologies developed.
Costs for First                            According to state calculations, the state was under the overall cost-neu-
                                           tral ceiling for benefit and administrative costs combined by about $2.5
3 Quarters of FIP                          million.
Operation

Benefit Costs                              As shown in table 2.1, the state of Washington calculated that it was
                                           slightly more than $2 million under the cost-neutral maximum for food
                                           assistance benefit costs for the first 3 quarters of FIP operation.

Table 2.1: Washington State’s Cost-
Neutral Calculations for Food Assistance   Costs and ceilings            1st Quarter     2nd Quarter    3rd Quarter            Total
Benefit Costs                              Food Stamp/ FIP food cash
                                           costs                         $43590,175      $46,900,932    $49,162,929    $139,654,036
                                           Federal maximum based on
                                           control site projections       44,560,566      47,517,140     49,590,361     141,666,067
                                           Amount over (under) cost-
                                           neutral maximum                  $(970,391)     $(616,208)     $(427,432)    $(2,014,031)


                                           Using state financial data, FNSalso calculated that the state was under
                                           the benefit cost-neutral ceiling for the first 3 quarters of FIP, although by
                                           a slightly greater amount, as shown in table 2.2.

Table 2.2: FNS’ Cost-Neutral
Calculations for Food Assistance Benefit   Costs and ceilings            1st Quarter     2nd Quarter    3rd Quarter            Total
costs                                      Food Stamp/ FIP food cash
                                           costs                         $43,685,964     $46,855,589    $48,974,319    $139,515,672
                                           Federal maximum based on
                                           control site projections       44,540,295      47504,032      49,584,284     141,636,611
                                           Amount over (under) cost-
                                           neutral maximum                 $X862,331)      $(648,443)     $(609,965)    $(2,120,739)


                                           The state’s and FNS’ calculations differ primarily because they used dif-
                                           ferent state reports and other data sources. This matter, as well as other



                                           Page 22                        GAO/RCED-90-84 Washington’s Family Independence Program
                                           chapter 2
                                           Stat& Estimating Methods Show FIP Is Cost-
                                           Neutral




                                           aspects of our evaluation of benefit costs, is described in more detail in
                                           chapter 3.


Administrative Costs                       At the time we completed our field work, the state had made administra-
                                           tive cost-neutral calculations for the first 3 quarters of FIP operation
                                           (July 1988-Mar. 1989). The state’s calculations of administrative cost
                                           neutrality are shown in table 2.3. Those computations indicated that the
                                           actual costs chargeable to the federal government for administering the
                                           food stamp coupon and FIP food cash programs for the 3 quarters were
                                           about $536,000 below the cost-neutral ceiling the state had calculated.

                                           In addition, FNShad calculated the project’s administrative cost ceiling,
                                           with results that differed slightly from the state’s determination, but it
                                           had not yet calculated actual state costs for comparison against the
                                           ceiling.

                                           Our evaluation of both the methodology and the calculations is shown in
                                           chapter 4.

Table 2.3: Washington State’s Cost-
Neutral Calculations for Food Asrlstance                                                                                                        First 3
Admlnlstratlve Costs                       Costs and ceilings                                                                 Annual          quarters
                                           Initial ceiling                                                                $8,242,105”       $6j 81,579
                                                                                                                                        b                 b
                                           Amendments to ceilina
                                           Amended ceilina                                                                $8.242,105        $6.181.579
                                           Actual costs
                                             July-September 1988                                                                            $5,323,345
                                             October-December 1988                                                                            4364,392
                                             January-March 1989                                                                               5,425,722
                                           Total actual costs                                                                               15.113.459
                                           Adiustments to actual costs                                                                       (1,852,290)
                                           Balance                                                                                          13,261,169
                                           Portion related to FIP target population                                                               42.57%
                                           Adiusted actual costs                                                                            $5.645.280
                                           Amount over (under) cost-neutral ceiling                                                          $X536,299)
                                           aCalculated by the state according to the proposed methodology described earlier in this chapter.
                                           bin its calculations   for the first 2 quarters, the state included a series of amendments that reduced the
                                           ceiling by $314,859. In its third quarter calculation documents, which show calculations cumulatively for
                                           the 3 quarters (rather than on a quarter-by-quarter basis), the state began to show the revisions as
                                           adjustments to actual costs rather than as amendments to the ceiling. This difference in treatment was
                                           necessary, according to the state, to avoid overstating some adjustments as its original methodology
                                           did.




                                           Pa@ 28                                  GAO/IKZD4lO44       Wa&ingt.on’r Family Independence Program
                                           Chapter 2
                                           State’s Estimating Methods Show FIP Is Co&
                                           Neutral




Eknefit and                                The final step in determining compliance with the food stamp cost-neu-
Administrative Costs                       tral requirement, for both the state and FNS,is to sum the results of the
                                           separate cost-neutral calculations for benefits and administrative
Combined                                   expenditures. The state’s calculations for the first 3 quarters of the FIP
                                           project showed that it was under the overall food assistance cost-neutral
                                           ceiling by about $2.6 million, as summarized in table 2.4. Because FNSdid
                                           not calculate the state’s actual performance regarding administrative
                                           cost neutrality, it did not determine conclusively whether the state was
                                           in overall compliance with the cost-neutral requirement in the author-
                                           izing legislation.

Table 2.4: Washington State’s Cost-
Neutral Calculation8 for Food Assistance   Costs and ceilings                                        Benefits      Administrative                Total
Benefit and Adminirtrative Costs           Actual costs                                         $139,654,036             $5,645,280 $145299,316
Combined
                                           Federal maximum (ceiling)                             141,668,067              6,181,579  147,849,646
                                           Amount over (under) cost-neutral ceilinaa             $(2.014.0311             Sf536.299) $12.550.330)
                                           aOn August 11, 1989, the state submitted to HHS benefit cost data for the first 3 quarters of FIP opera-
                                           tion that contained two changes from the food stamp cost data that we analyzed and discussed in this
                                           report. First, benefit cost-neutral calculations for the third quarter were revised from those shown in
                                           table 2,l by the following amounts because the state used a different set of food assistance expendi-
                                           ture records that provided greater consistency with the data used for the first 2 quarters: total costs-
                                           $227,574-decrease; federal maximum-$7,604-increase;           difference (under cost-neutral maximum)-
                                           $235,178increase. The totals for the 3 quarters combined changed by like amounts. Second, the state
                                           recalculated all benefit amounts to exclude one welfare location, Pasco, from the cost-neutral calcula-
                                           tions The state had proposed this change on April 13, 1989, because of the unique employment condi-
                                           tions relating to the Hanford nuclear facility near Pasco; HHS approved the exclusion on June 20, 1969.
                                           Together, the two changes resulted in the state’s reporting that for the first 3 quarters, it was $2,262,057
                                           below the food stamp benefit cost-neutral ceiling (rather than the $2,014,031 shown in this table and
                                           discussed in the report); $439,601 below the administrative cost-neutral ceiling (rather than $536,299);
                                           and $2,701,658 below the combined benefit and administrative cost-neutral ceilings (rather than
                                           $2,550,330).




                                           Page 24                              GAO/RCED-90-84 Washington’s Family Independence Program
Chapter 3

Alternative Estimating Methods May ISetter
Ensure Benefit Cost Neutrality

                         Our analysis revealed several questionable assumptions in the state’s
                         method for estimating the anticipated value of the coupons that would
                         have been distributed under the traditional Food Stamp Program. These
                         assumptions may undermine the accuracy of the current method of
                         assuring compliance with the cost-neutral requirement of FIP. In addi-
                         tion, we found several problems with the benefit cost-neutral calcula-
                         tions made by the state and FNSfor the first 3 quarters of FIP operation.

                         Because all methods of cost estimation carry inherent risks of inaccu-
                         racy, the state and federal goal should be to develop and use a method
                         that results in the least error. The use of an alternate method for deter-
                         mining the benefit cost ceiling and changes in procedures for making the
                         calculations could result in more accurate cost-neutral determinations.


                         The control sites were originally chosen, along with a matched group of
Benefit Cost-Neutral     treatment sites, for program evaluation purposes. Overall, the method
Methodology Based on     used by the state and federal agencies to randomly select the control and
Questionable             treatment sites for FIP program evaluation purposes was valid. We do,
                         however, question several assumptions underlying the decision to use
Assumptions              cost data from the seven control sites for cost-neutral determination
                         purposes. The following assumptions were made:

                       . That the proportion   of statewide food stamp costs represented by the
                         seven control sites was sufficiently stable in the past to justify using
                         those sites to accurately estimate statewide costs in the future.
                       . That the relationship between food stamp costs in the control sites and
                         food stamp costs in the state as a whole will remain, for the &year
                         period of the demonstration, either constant or within a small and
                         acceptable range of the 14.31-percent of statewide food costs incurred
                         by the seven control sites in the 1987-88 baseline year.
                       . That FIP would be implemented at all of the state’s local welfare offices
                         during the demonstration, thereby establishing the need to estimate food
                         stamp costs for the entire state.

                         We present our analysis of these assumptions in this chapter, together
                         with three examples of alternative estimating methods, which may pro-
                         vide greater assurance that cost neutrality will be achieved.




                         Page 26                  GAO/RCED-90-94 Washington’s Family Independence Program
                          Chapter 3
                          Altematlve Estimating Methods May Better
                          Ensure Benefit Cost Neutrality




Assumption One: Control   An essential condition in selecting a small number of sites to use in accu-
Sites’ Prior Costs Were   rately projecting future costs at a larger number of sites is that the rela-
                          tionship between costs at the two groups of sites be shown to be
Stable in Relation to     acceptably stable over an appropriate period of time. In the case of FIP,
Statewide Costs           the state and federal agencies agreed on a l-year pre-wp baseline period
                          of April 1987 through March 1988 as a representative period for estab-
                          lishing the food stamp ceiling calculation percentage. State data for that
                          period showed that the seven control sites represented 14.31 percent of
                          the state’s total food stamp expenditures, which then became the pro-
                          portion used to estimate statewide food stamp expenditures in the
                          future.

                          In our opinion, however, a longer baseline period should have been used
                          to better assess the stability of food stamp costs at the designated con-
                          trol sites. FIP was designed to operate for 6 years into the future. A base-
                          line period of 6 years prior to implementation would show whether the
                          costs at the seven control sites were sufficiently stable over time, as a
                          proportion of statewide costs, to justify their use in estimating statewide
                          costs for 6 years into the future.

                          Our review of the stability of costs over the S-year pre-FIp period from
                          April 1983 through March 1988 showed that the proportion of the
                          state’s food stamp costs represented by the control sites varied by
                          slightly over 1 percentage point, from 16.76 percent to 17.86 percent
                          (see table 3. l).’ In absolute terms this does not appear to be a large vari-
                          ation. However, because the control sites’ food stamp expenditures are
                          divided by .1431 to establish the statewide ceiling, a similar 1 per-
                          centage point difference between the proportion used in the ceiling cal-
                          culations and the actual food costs could result in an annual cost ceiling
                          that could be $12 million too high (if the actual proportion turns out to
                          be 16.31 percent instead of 14.31 percent) or $14 million too low (if the



                           ‘The difference between the 16.76 to 17.86~percentrange of control site costs shown in table 3.1 for
                          the S-year period and the 14.31 percent calculated by the state for the baseline year and discussed
                          and analyzed in this report is due to data limitations because of a geographic boundary change.
                          During May and June 1986, one of the seven control sites, Pierce West, was split into two offices,
                          Pierce North and Pierce West. Because the state could not isolate for us the food stamp costs attribu-
                          table to the Pierce North portion of Pierce West prior to the 1986 split, we had to include in our 5-
                          year analysis the costs from Pierce North after the split in order to permit us to compare consistent
                          data over the S-year period. Therefore, the percentages in table 3.1 for the year April 1986-March
                          1987 and the baseline year of April 1987-March 1988 are based on costs at eight offices rather than
                          seven and are about 3.5percent higher than the state’s calculation. However, having to add the addi-
                          tional welfare office to permit a consistent comparison for the &year period does not affect the
                          results of our analysis because state records show that Pierce North’s food stamp costs were as stable
                          as food stamp costs at all of the other control sites.



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                                       actual proportion turns out to be 13.31 percent instead of 14.31 per-
                                       cent). Because of the “multiplier effect” involved, the impact of even
                                       small errors or variations in the ceiling percentage can be considerable.2
                                       Several examples of alternative methods for setting cost-neutral ceilings
                                       that reduce the multiplier effect and could result in more accurate calcu-
                                       lations of cost neutrality are described later in this chapter.

Table 3.1: Proportion of State Food
Stamp Costs Represented by the Seven                                                                                         Control site total
Control Sites                                                                       Contrc&sii;                              as a percentage
                                       Year                                                        a       State total           of state total
                                       Amil1987-March      1988                      $29,499,199        $165.134,288                        17.86
                                       Abril1986-March     1987                       27,130,807         153;160;105                        17.71
                                       April1985-March     1986                       23,885,375         141,997,645                        16.82
                                       kpril1984-March     1985                       22,780,904         135,994,703                        16.75
                                       April 1983-March    1984                       23,411,628         136,841,914                        17.11
                                       %cludes the Pierce North portion of the Pierce West control site, which was split off in May and June
                                       1986. The state could not isolate food stamp costs attributable to the Pierce North portion prior to the
                                       split.




Assumption Two: Control                The state’s assumption that food stamp costs in the seven control sites
Sites’ Future Costs Will Be            will remain a stable percentage of statewide food stamp costs for the 5-
                                       year FIP period also carries inherent risks of errors. The factors that
Stable in Relation to                  influence food stamp expenditures in any particular local welfare office
Statewide Costs                        are numerous, complex, and often cannot be predicted. If major eco-
                                       nomic, demographic, or other changes occur in any of the control sites
                                       that do not occur in the rest of the state, or vice-versa, the proportion of
                                       food stamp costs represented by the control sites may no longer accu-
                                       rately reflect statewide costs, and these changes could affect the deter-
                                       mination of cost neutrality. For example, the opening of a large
                                       industrial plant in one of the control sites could cause food stamp
                                       expenditures in that site to decrease, while food assistance expenditures
                                       in other sites around the state may be gradually increasing. The reduc-
                                       tion of costs in the control site would lower the statewide benefit ceiling.
                                       In turn, this lower ceiling would reduce the amount of federal food assis-
                                       tance funding the state could receive, even though it may not be
                                       spending any less on food stamps and FIP food cash statewide than it
                                       would have spent on food stamps alone.



                                       “A “multiplier” of nearly 7 occurs because control site costs are divided by .1431 (i.e., multiplied by
                                       6.988) to estimate statewide costs. The “Alternative Methods” section, discussed later in this chapter,
                                       provides additional information on the multiplier effect and its consequences on cost-ceiling accuracy.



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                        It is not possible to ensure conclusively that food stamp costs in the con-
                        trol sites will continue to represent a stable percentage of the state’s
                        total food stamp costs in the future. Therefore, we believe it is impor-
                        tant that, if the state continues to use a ceiling calculation percentage,
                        such as the 14.31 percent being used at the time of our review, the per-
                        centage needs to be adjusted whenever significant economic, demo-
                        graphic, or other changes that affect food stamp expenditures occur in
                        any of the control sites that do not occur in the rest of the welfare sites,
                        or vice-versa. Currently, there are no program criteria that define what
                        constitutes an economic or other change that is significant enough to
                        warrant an adjustment to the cost ceiling calculation or an agreement
                        between the state and the federal agencies regarding the circumstances
                        under which such adjustments should be made.

                        In our opinion, such adjustments to offset the impact of any major
                        change in conditions affecting food stamp expenditures are necessary to
                        help ensure that the cost-neutral ceilings continue to reflect as closely as
                        possible what costs would have been in the absence of FIP. To facilitate
                        making any necessary adjustments, the state and the federal agencies
                        need to agree on the criteria for making adjustments and to be alert to
                        major events, as well as to monitor various types of indicators over time
                        for both control and noncontrol sites, so that they can detect any unique
                        changes occurring at one or more sites. Examples of some possible rele-
                        vant indicators include unemployment rates, population growth rates,
                        and changes affecting major employers in a local area.


Assumption Three: FIP   As originally designed, FIP was to have been implemented in all state
Will Be Implemented     welfare offices, except the control offices, in the first 3 years of the
                        demonstration, Because the converted offices would no longer have a
Statewide               food stamp coupon program for their FIP clients after they implemented
                        FIP, it was necessary to develop a method to estimate what coupon costs
                        would have been for welfare recipients in all of those sites. On June 2,
                        1989, however, Washington State limited the number of offices allowed
                        to convert to FIP to only 20 of the state’s 65 local offices.

                        With this major change in implementation, we question the need to con-
                        tinue to estimate food stamp expenditures for the entire state. Estimates
                        now only need to be made for the 20 offices, or approximately 30 per-
                        cent of the state’s welfare sites, which are operating under FIP. The
                        remainder of the state’s 45 offices, those that will not convert to FIP, do
                        not need an estimate or approximation of the food stamp ceiling estab-
                        lished for them. Because they will continue to operate a food stamp


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                          coupon program and their actual food stamp costs will be known, the
                          ceiling for the 45 non-FIP sites can be established “at cost” (i.e., at actual
                          costs incurred). We believe the shift in the state’s implementation plan is
                          sufficient reason for the state and the federal agencies to review their
                          current methodology for calculating food stamp benefit ceilings and, if
                          appropriate, to adopt an alternative method that results in more accu-
                          rate cost-neutral determinations.


                          Given the fact that FIP will no longer be implemented statewide and that
Alternative Methods       small variations in the proportion of the state’s costs represented by the
Exist for Setting         control sites can have a substantial impact upon the cost ceiling esti-
Benefit Ceilings          mates, we believe that alternative methods for establishing food stamp
                          cost ceilings need to be considered.

                          A variety of methods could be used to estimate benefit ceilings. We
                          describe and analyze only a few in this report. The alternatives that we
                          chose as examples are similar to the state’s current method in that they
                          also use a ratio of costs in two groups of sites to estimate a cost ceiling.
                          However, with our alternatives the cost ceiling would be estimated only
                          for the sites where FIP is implemented, rather than, as presently, for the
                          entire state, The cost ceiling for the non-Fm sites would be established
                          “at cost.” We considered the following:

                      l Example 1. Use costs in the 7 current control sites to establish a ceiling
                        for the 20 FIP sites only.
                      l Example 2. Use costs in the 19 paired non+m sites to establish a ceiling
                        for the 20 FIP sites only.”
                      . Example 3. Use costs in all 46 non-Fm sites to establish a ceiling for the
                        20 FIP sites only.

                          Although all estimates will contain some amount of error, a significant
                          advantage to using any of the three examples is that the estimates are
                          made for a smaller number of sites, and thus the chances of errors are
                          reduced. For example, any error or other cost variance in the calculation
                          proportion is only applied to costs at 20 sites, rather than at 66 sites as
                          in the current statewide method. Because estimates are made for a
                          smaller number of sites, all three alternatives reduce by half or more the
                          adverse “multiplier effect” that results when errors or other cost devia-
                          tions occur in one group of sites that do not occur in the other sites.

                          “The 19 non-FIP sites were paired with the 20 F’IP sites during the design of FIP, as described in
                          chapter 2 and later in this chapter.



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Under the current method, costs that are incurred in control sites are
divided by ,143l to estimate statewide costs, which results in a multi-
plier effect of nearly 7. Examples 1, 2, and 3 reduce the multiplier effect
to approximately 2.6, -9, and -6, respectively.4 As shown in table 3.2,
these lower multipliers can significantly reduce the impact of any errors
or localized changes on the overall ceiling calculations.

For example, as previously discussed, there was a l-percentage point
variation in the percent of statewide costs represented by the seven con-
trol sites over the 5-year period immediately preceding PIP implementa-
tion There is no way to determine whether a similar variation will occur
in any year during the FIP demonstration period. If it does, however,
under the current method the federal government could contribute $12
million more than it should under the concept of cost neutrality, or the
state could unfairly be denied $14 million. Smaller or larger variances
than l-percentage point would have proportionally smaller or larger
dollar impacts’. Table 3.2 shows the effect of a l-percentage point varia-
tion under the current method and under each of the three examples we
examined. As the table also shows, when cost estimates are made for
only 20 sites, the potential additional cost to the federal government or
penalty to the state resulting from any variation or inaccuracy in the
estimation technique are significantly less than when costs for the entire
state are estimated.




‘Multiplier effects are determined by dividing 1 by the divisors shown in table 3.2, as follows: For the
current method, 1 divided by .1431 = 6.988, or a multiplier of about 7. For example 1, 1 divided by
.3862 = a multiplier of about 2.6; for example 2, 1 divided by 1.1438 = a multiplier of about .9; for
example 3, 1 divided by 1.6997 = a multiplier of about .6.



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Table 3.2: impact of a 1 Percentage Point Variation in Costs on Cost-Ceiling Estimates
Oollars ~.
----    in thousands
                 ~-
                                                                          if baseline year percent                    If baseline year percent
                                                                            used is 1-percentage                        used is 1-percentage
                                             Ceiling estimate                    point too low                              point too hiah
                                               using baseline             Ceiling       Additional cost to                Ceiling Additional cost
Method of caicuiatlon                        year proportiona          estimatea      federal government              estimate’            to state
Current
.----~-“- method
Using 7 control sites’ costs to estimate
statewide costs (divisor=.1431)”                       $186,882          $174,676                      $12,206          $200,923               $14,041
Example 1
Using 7 control sites’ costs to estimate
FIP sites’ costs (divisor= .3862Y’                        69,246            67,498                        1.748            71.087                 1,841
Example 2
Using 19 non-FIP sites’ costs to estimate
FIP sates’ costs (divisor-l .1438Y’                       68.256            67.664                          592            68.858                   602
EXamDie   3
Usina 45 non-FIP sites’
costs to estimate FIP sites’ costs
(divisor= 1.6997Y’                                        67.886            67.489                          397            68.287                   401
                                            aFor the current method, the ceiling estimates are statewide ceilings for all 65sites. For examples 1, 2,
                                            and 3, the ceiling estimates are for the 20FIP sites only; statewide ceilings are determined by adding
                                            actual costs incurred at the 45 non-FIP sites.
                                            bFor the current method, the state calculated the .1431 divisor, or baseline year proportion, which it
                                            currently uses to establish the food stamp ceiling each quarter, by dividing food stamp expenditures in
                                            the 7 control sites during the 1987-88 baseline year ($23,624,198) by food stamp expenditures at all 65
                                            state welfare sites for that same period ($165,134,288). Similarly, for examples 1, 2, and 3, we calculated
                                            the divisors, or baseline year proportions, by dividing food stamp expenditures in the 7, 19, and 45 non-
                                            FIP sites, respectively, during the baseline year ($23,624,198; $69,963,897; and $103,966,834, respec-
                                            tively) by food stamp expenditures in the 20 FIP sites for that same period ($61,167,454).


                                            In addition to reducing the potential effects of errors in the estimated
                                            ceilings, it is also possible that example 2 could produce more accurate
                                            cost ceiling estimates because it uses costs from 19 non-Frp sites to esti-
                                            mate a ceiling for the 20 FIP sites with which they were matched during
                                            the FIP design period. As described in chapter 2, the state’s welfare
                                            office sites were matched in pairs by the state and the overseeing fed-
                                            eral agencies according to a set of 11 measures of program and geo-
                                            graphic similarity. Because the two sets of sites were carefully matched
                                            on a variety of programmatic factors, costs in the 19 non-HP sites might
                                            be more representative of costs in the 20 FIP sites than costs in the 7
                                            control sites currently being used.

                                            Because we examined only 1 year’s data and limited our analysis to only
                                            three potential alternatives for more accurately determining cost-neu-
                                            tral ceilings for benefits, we cannot conclusively recommend that the


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                         state and the federal agencies use example 2 or the other two alterna-
                         tives we explored. However, we do not believe there is a need for the
                         state to continue to use the seven control sites, or any other number of
                         sites, to estimate costs for the entire state. Because the state has limited
                         the number of sites that will be implementing FIP to 20 of the state’s 66
                         sites, actual food stamp costs in the remaining 46 sites will be known
                         and need not be determined by an estimate. This change should allow
                         the state and the federal agencies to limit their estimates, and therefore
                         the impact of estimation errors or other cost variations, to only those 20
                         FIP sites for which food stamp coupon costs are unknown and therefore
                         need to be approximated.


                         In addition to examining the current method for estimating the costs of
State and Federal        food stamp benefits at FIP sites, we reviewed the state’s and FNS’cost-
Quarterly Calculations   neutral calculations for the first 3 quarters of FIP operation. Both sets of
Differed                 calculations showed the state well below the cost ceilings for the 9-
                         month period. The calculations did differ in nearly every respect, how-
                         ever, as shown in table 3.3, and these differences affected the calcula-
                         tions of the amounts by which the state was under the cost-neutral
                         ceilings. The differences occurred because the state and FNSdid not
                         always use the same data sources, data, or calculation techniques.




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Table 3.3: Comparison of the State’8 and
FNS’ Beneflt CowNeutral Calculations        Quarter ended g/30/88                                            state          FNS    bitt erence’
for the Flrbt 3 Quarters of FIP Operatlon   Federal maximum                                          $44,560,566     $44548,295        $(12,271)
                                            Food Stamps                                               43,105,932      43,342,647        236,715
                                            FIP Food Cash                                                484,243         343,317       (140,926)
                                            Total food costs                                          43,590,175      431685,964         95,789
                                            Amount over (under) ceiling                                  (970,391)     (882,331)      (108,080)
                                            Quarter ended 12/31/88
                                            Federal maximum                                            47.517.140     47504.032          (13.108)
                                            Food Stamps                                                44,410,748    ~44,626,509        215,761
                                            FIP Food Cash                                               2,490,184      2,229,080       (261,104)
                                            Total food costs                                           46,900,932    46,055,589          (45,343)
                                            Amount over (under) ceiling                                  (818,208)     (848,443)        32,235
                                            Quarter ended 3/31/89
                                            Federal maximum                                            497590,361     49.584.284          (6,077)
                                            Food Stamps                                                44,210,182     44,210,182               0
                                            FIP Food Cash                                               4,952,747      4,764,137       (188,610)
                                            Total food costs                                           49,162,929     48,974,319       (188,610)
                                            Amount over (under) ceiling                                  427,432)      (809,985)       182,533
                                            Total over (under) ceilina for 3 auarters                $(2.014.0311 $12.120.7391       $106.708
                                            aAmounf by which FNS’ calculation is over (under) state’s calculation.




State and FNS Used                          First, the cost calculations differed because the state produces several
Different Data Sources                      sets of accounting records from which food stamp and FIP food cash
                                            expenditure data can be drawn. The records differ because adjustments
                                            and corrections of errors are made to some sets of records and not to
                                            others. Because the state and FNSused different sources of state data in
                                            making their cost-neutral calculations, they arrived at different dollar
                                            results when applying the same methodology. For food stamp coupon
                                            issuances, the figures used by the state and FNSdiffered by an average
                                            of $70,000 a month; for FIP food cash expenditures, they differed by an
                                            average of $60,000 a month. Our analysis showed that the figures used
                                            by FNSfor food stamp expenditures have been adjusted for such factors
                                            as lost or stolen coupons and cashier’s issuance errors and differ from
                                            the unadjusted data used by the state. For FIP food cash expenditures,
                                            the figures used by the state differ from those used by FNSbecause they
                                            are generated by a system that takes into account terminations and new
                                            applications which occur throughout the month. To avoid inconsisten-
                                            cies in the cost-neutral determinations, it is important that the state and
                                            FNSuse the same sources of state data for their calculations and that
                                            these sources provide the most accurate data available.



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It is equally important that the data used be internally consistent. For
example, if adjusted figures are used for statewide food stamp and FIP
food cash expenditures, as discussed above, adjusted data should also be
used for food stamp expenditures at the control sites. During our
review, neither the state nor FNSwas using adjusted data for the control
sites because, according to state accounting personnel, it was not being
generated. Because adjusted data tend to be higher than corresponding
unadjusted data, the use of adjusted figures for statewide costs while
using unadjusted figures for the control sites can work to the detriment
of the state because it results in lower cost-neutral ceilings, which in
turn could mean less federal funding.”

Our analysis of available cost data for the first 2 quarters of FIP opera-
tion showed that, if food stamp benefit costs in the control sites had
been adjusted by the same percentage as the state used in adjusting
statewide food stamp benefit costs (a reasonable assumption, according
to state accounting personnel), the statewide benefit ceilings would have
been increased by about $246,000 and $231,000, respectively. Because
the state’s and FNS’ calculations for the first 2 quarters of FIP (see table
3.3) showed that the state’s actual food assistance benefit costs were
below the cost-neutral maximum, the use of unadjusted cost data for the
control sites did not affect the amount of federal funding it was eligible
to receive for those 2 quarters. However, the difference could become
important in future quarters if the state’s reported benefit costs exceed
the amount of the benefit ceiling.

On July 7, 1989, after we brought these calculation inconsistencies and
weaknesses to JTNS  attention, it formally notified the state that the two
parties must use a consistent set of data to ensure consistent evaluations
of cost neutrality. In its letter to the state, FNSprescribed the specific
sets of state records that should be used in the future. Also, effective
August 1, 1989, FNSdirected the state to submit and use adjusted food
stamp cost data for the control sites to avoid inadvertently reducing the
ceiling and therefore the amount of federal funding available to the
state. On August 22 and 29, 1989, the state informed FNSthat although
it was modifying two state financial reports to ensure more consistent
and compatible data, it was unable to adjust food stamp cost data for

“Because control sites’ food stampcosts are divided by .1431 to establish the statewide ceiling, the
use of lower, unadjusted control site cost data results in lower ceilings. For example, if unadjusted
control site costs were $1 million, the statewide ceiling would be $6,988,120 ($1 million divided by
.143 1). If adjusted control site costs were, say, $1.1 million, the statewide ceiling would be $7,686,932
(b 1.1 million divided by .1431), or a ceiling increase of nearly $700,000 due to the $100,000
adjustment.



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                            Enemm Renedlt Cat Nemtdity




                            the control sites. Therefore, according to the state, it intended to use
                            different data for some cost elements than that prescribed by FNS.Our
                            analysis of both FNS’and the state’s proposals showed that, if agreed to
                            and used consistently by both the state and FNS,either set of records
                            should eliminate or minimize the data inconsistency problems we found
                            and help ensure that quarterly cost-neutral calculations are made using
                            the best available, most internally consistent data.


State Sent Some Erroneous   Second, the state’s and FNS’calculation differed because some of the cost
Data to FNS                 data sent to FNSby the state were incorrect. For the third quarter of PIP
                            operation, the state’s social and health services agency erroneously sent
                            FNSinformation on food stamp costs in the control sites that understated
                            actual costs by approximately $103,000. As a result, FNS’cost-neutral
                            calculation for the quarter showed that the state was over the cost-neu-
                            tral ceiling by approximately $113,000. After we brought the error to
                            FNS’attention, it obtained the correct data from the state and revised its
                            calculations. The revision showed the state to be under the ceiling by
                            approximately $610,000.”

                            The large difference in FNS’ two calculations (approximately $723,000)7
                            that resulted from a $103,000 error was due to the multiplier effect dis-
                            cussed earlier. Because control site cost data are divided by ,143l (i.e.,
                            multiplied by a factor of approximately seven) to arrive at an estimate
                            of the state’s total costs, any error in control site cost data is magnified
                            at the statewide level by a factor of nearly seven.

                            Because of the multiplier effect, and the potentially large impact on cost
                            neutrality of even small errors or variances in control site cost data, it is
                            important that control site data be as accurate as possible. We believe
                            that problems such as the error we found could be minimized, and
                            internal control over the gathering and reporting of data could be
                            strengthened, if FIP personnel were required to verify all FIP-related cost



                            “In its technical comments on a draft of this report, FNS indicated that its staff had independently
                            discovered the state’s $103,000 understatement error discussed here. That is not correct. We brought
                            this error to FNS’ attention, and its representative told us that FNS was not aware of it. The error
                            that FNS is referring to is another error in which the state omitted data for one control site from one
                            of its reports. Unlike the $103,000 error, however, the latter error did not affect FNS’ calculation of
                            the state’s cost-neutral status because FNS discovered the error before it made its calculation.

                            7The dollar difference between FNS’ initial calculation showing the state to be $113,000 over the
                            ceiling and its revised calculation showing the state to be $610,000 under the ceiling is $113,000 +
                            $610,000, or $723,000.



                            Page 35                               GAO/RCED-90-84 Washingtan’s Family Independence Program




                                                             .,, ‘.
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                        Alternative Estimating Methods May Better
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                        data before they are released from the state and forwarded to the fed-
                        eral agencies.


State and FNS Used      In addition to these two problems, we found a third discrepancy that
Different Calculation   accounted for a small portion of the differences between the state’s and
                        FNS’cost-neutral calculations for benefits. Although FNS,in calculating
Techniques              the benefit ceiling, was dividing the seven control sites’ costs by exactly
                        14.31 percent, the state was using a computer spreadsheet program that
                        carried the decimal out to several more places, resulting in a benefit
                        ceiling from $6,000 to $12,000 higher per quarter than FNS'. If the state’s
                        reported actual costs come closer to the benefit ceiling in the future than
                        they did for the first 3 quarters of FIP operation, the state and FNSwill
                        need to decide which of the two calculation techniques they find most
                        accurate and/or appropriate to use.


                        Several actions need to be taken to better ensure that food stamp benefit
Conclusions             cost ceilings will more accurately represent what actual food stamp
                        expenditures would have been if FIP had not been implemented.

                        First, because FIP will no longer be implemented statewide, there is no
                        longer a need for the state to project or estimate what food stamp ben-
                        efit costs would have been statewide. Opportunities exist for exploring
                        alternative methods for setting the ceiling that could reduce the risk of
                        estimation errors. Because even small variations in cost data from the
                        control sites can have substantial impacts on the cost ceiling under the
                        current method, other methods need to be examined. This examination
                        should include methods, such as those examples discussed in this
                        chapter, that estimate benefit costs only for those sites at which FIP is
                        implemented.

                        Second, if non-FIP sites continue to be used as a benchmark to estimate
                        costs for other sites, the cost ceiling calculation percentage needs to be
                        adjusted as necessary to reflect significant changes that occur in one or
                        more of the non+m sites but not in the FIP sites, or vice-versa. To do this,
                        the state, FNS,and HHSneed to agree on criteria for making such adjust-
                        ments, aa well as to monitor various economic and other indicators over
                        time. These actions will allow them to be aware of events and/or condi-
                        tions that could have an impact on food stamp expenditures in any of
                        these sites, and thus affect cost-neutral calculations.




                        Page 36                       GAO/RCED-66434 Washington’s Family Independence Program
                      chapter3
                      Alternative Estimating Methods May Better
                      Ensure Benefit Cost Neutrality




                      Regardless of the method used to determine the cost-neutral ceiling,
                      cost-neutral calculations need to be made with the most current, accu-
                      rate, and internally consistent data available. Strengthening the process
                      by requiring FIP office personnel to verify all np-related data before they
                      are released from the state and sent to the federal agencies could also
                      reduce the likelihood of errors that might have significant impact on
                      cost-neutral determinations.


                      We recognize that FIP faces the inherent problems associated with the
Recommendations       demonstration of any new welfare assistance approach. However, to
                      better ensure the program’s cost neutrality, we recommend that the Sec-
                      retaries of Agriculture and Health and Human Services direct their
                      responsible agencies and the state of Washington to consider alternative
                      methods for calculating the food stamp benefit cost ceiling under the FIP
                      demonstration. They should consider approaches such as those that esti-
                      mate benefit costs only for sites at which FIP is implemented and adopt
                      the method that appears to provide the greatest assurance of cost
                      neutrality.

                      In addition, if any number of non-FIP sites continue to be used to esti-
                      mate benefit costs for other sites, we recommend that the Secretaries of
                      Agriculture and Health and Human Services direct their responsible
                      agencies and the state of Washington to

                  . agree on the criteria for adjusting the cost-neutral calculation data for
                    food stamp benefits when conditions affecting food stamp expenditures,
                    and thus cost-neutral calculations, change significantly in one or more of
                    the non-FIP sites but not in the FIP sites, or vice-versa;
                  l monitor economic, demographic, and other indicators at both FIP and
                    non+m sites in order to be aware of major events and/or changes in con-
                    ditions that meet the agreed-upon criteria and warrant adjustments in
                    the data used for calculating the benefit’s cost neutrality; and
                  l adjust the data used to calculate the benefit’s cost neutrality to help
                    assure accurate cost-neutral determinations, whenever conditions
                    affecting food stamp expenditures, and thus cost-neutral calculations,
                    change significantly.

                      We further recommend that the Secretary of Agriculture direct the
                      Administrator, FNS,to work with the state of Washington to

                  l   agree on the best available, most internally consistent data to be used
                      for making quarterly cost-neutral calculations and


                      Page 37                       GAO/RCEJHO-84 Washington’s Family Independence Program
                             chapter a
                             AItemative JietinWing Methods May Better
                             Eusure Benefit Coat Neutrality




                         . require the FIP office to verify all np-related cost data before they are
                           released from the state and sent to the federal agencies.


                             We received written comments on a draft of this report from FNS,HHS,
Agency and State             and Washington State. (See apps. I, II, and III.) They generally agreed
Comments and Our             with our report’s findings and conclusions and indicated that these
Evaluation                   would be helpful to them in exploring and negotiating various options
                             and changes to FIP. Washington noted that because neither federal nor
                             state representatives had significant experience in developing cost-neu-
                             trality provisions, it is not surprising that even after 18 months of FTP
                             operation, issues remain to be resolved. We agree that developing and
                             implementing any innovative welfare assistance approach, especially
                             one such as FIP that includes federal cost-neutrality requirements will
                             undoubtedly raise questions and issues that take time to negotiate and
                             resolve.

                             FNSnoted that food stamp benefits and administrative expenses make
                             up only a small part (less than 13 percent) of the total federal and state
                             expenditures for PIP. Although food assistance is only one portion of FIP,
                             our findings and conclusions should be applicable to the larger AFLE and
                             Medicaid components of FIP because the cost-neutral requirements and
                             calculation procedures for those programs are the same as, or similar to,
                             those for the Food Stamp Program component. Washington State agreed,
                             indicating in its response that many of the issues discussed in the report
                             have relevance beyond the Food Stamp Program. We also believe that
                             the report should be useful in developing and administering any similar
                             welfare reform programs in other states.

                             Comments from all three respondents relating to the clarity and tech-
                             nical accuracy of specific statements in the draft report have been incor-
                             porated in the report where appropriate. In addition, the three
                             organizations provided the following comments and observations on the
                             development and implementation of FIP’S cost-neutrality provisions.


Food and Nutrition Service   FNSagreed with our conclusion that a reasonable approximation of pos-
and Department of Health     sible program costs is probably the best that can be achieved, despite
                             the legislative requirement for an “assurance” of cost neutrality. Both
and Human Services           FNSand HHS pointed out that the benefit cost-neutral methodology was
Comments I                   developed at a time when plans called for FIP eventually to be expanded
                             statewide and that it was reasonable for them and the state to have
                             relied on those plans as an underlying assumption in developing the


                             Page 88                       GAO/RCED-90-84 Wa&ngt.on’s   Family Independence Program
Alternathe EBtLmating Method8 May Better
Eneure Benefit Cmt Neutrality




methodology. FNSalso believes that the use of the seven control offices
for cost-neutral determinations was appropriate at the time because (1)
the offices, chosen for program evaluation purposes, were representa-
tive of the state as a whole, and (2) prior period cost stability could not
be tested beyond 1 year because cost data could not be readily isolated
for the control sites for longer than 1 year, HHS stated that the best
methodology for establishing cost-neutral ceilings would have been
through the use of a representative random sample of AFM: recipients
throughout the state, but because this option was not available, federal
and state officials instead chose a representative sample of local welfare
offices to generate the statewide ceiling.

While we recognize throughout the report that the cost-neutral method-
ology was developed, in part, based on a “statewide implementation”
assumption, we do not agree that the use of the chosen control sites was
necessarily appropriate for cost-neutral determination purposes just
because they had been previously selected for statewide program evalu-
ation purposes. We also do not agree that food stamp costs could only be
isolated for the control offices for 1 year preceding the implementation
of FIP. As stated in chapter 2, an essential condition in using costs at a
small number of control sites to project future costs accurately for the
state as a whole is the existence of demonstrated prior-period cost sta-
bility between the control sites and the state as a whole. We believe that
our analysis, in which we were able to examine cost relationships for a
5-year pre-wp period, raises questions on the reasonableness of the con-
trol offices selected, We found that a variation in the stability of control
site costs as little as plus or minus l-percentage point could result in a
statewide food stamp cost ceiling that could range from as much as $12
million above cost neutrality to $14 million below. In its response, the
state of Washington indicated that in the haste to get FIP underway,
neither federal nor state representatives thoroughly reviewed all of the
implications of the methodology that was established, including exam-
ining the stability of costs in control sites “for even 1 year prior to the
beginning of FIP, let alone for 6 years as presented in the draft report.”
The state therefore concluded that an actual error of more than plus or
minus 1 percent would probably be expected to occur as the result of the
type of sampling methodology used to establish the baseline.

Despite some differences in views from ours on the reasonableness of
the current methodology at the time it was developed, both FM and HHS
agreed that the current methodology should be reevaluated and, if
appropriate, replaced with a method that provides greater assurance of
cost neutrality. However, FNSand HHS questioned whether the examples


Page 39                       GAO/BCED-90-94 Wasldngton’e Family Independence Progran~
                      Chapter 3
                      Alternative Estimating Methods May Better
                      Ensure Benefit Cost Neutrality




                      we cite in the report as calculation alternatives will result in a more
                      accurate ceiling than that based on the current methodology. Although
                      it did not provide any details or support for its contention, FNSsaid that
                      the use of any of our calculation alternatives might introduce new
                      sources of error or bias. We clearly label the examples as merely illustra-
                      tive of a variety of methods that could be used to establish cost ceilings.
                      We believe that FNSand HHS,in conjunction with the state, need to assess
                      the available cost data on FIP based on nearly 2 years of program opera-
                      tion and, by exploring various methodology options, determine whether
                      an alternative can be developed that provides greater assurance than
                      the current method does that food stamp benefit cost ceilings will
                      represent what actual Food Stamp Program expenditures would have
                      been if FIP had not been implemented.

                      FNSagreed that it would be desirable to make adjustments for the effects
                      of changes outside the Food Stamp Program, provided that these
                      changes can be identified as affecting the program and the magnitude of
                      their effects can be estimated. It said that it would entertain any specific
                      suggestions from the state about the types of indicators and the extent
                      of change that should be considered relevant to adjusting the method-
                      ology. Accordingly, we believe that the state, FNS,and HHSshould seek to
                      agree as soon as possible on criteria for monitoring and making such
                      adjustments and that the state should adjust its calculation data when-
                      ever the agreed-upon triggers occur.


State of Washington   The state’s Department of Social and Health Services and the Employ-
Comments              ment Security Department, in a joint response, said that for the most
                      part they agree with the conclusions in the draft report. They believe,
                      however, that the report does not cover broader issues that must be
                      examined and resolved before a final consensus on cost neutrality for
                      either the Food Stamp Program, AFDC,or Medicaid portions of FIP can be
                      reached. These issues, which for the most part arose after we had com-
                      pleted our field work, are summarized below and described in more
                      detail in section A of the state’s response in appendix III.

                      First, the state’s welfare system has experienced a significant growth in
                      caseload. In November 1989, after reviewing the first full year of FIP
                      operations, the state sought approval from USDAand HHSfor several
                      changes in the methodology for determining cost neutrality. The state
                      noted that changes were needed in the wording and interpretation of the
                      special terms and conditions governing FIP to address several new issues
                      that had arisen since the beginning of FIP operations and that would


                      Page 40                        GAO/RCED-90-84 Washington’s Family Independence Program
Chapter I.3
Altmnative Estimating Methods May Better
Ensure Benefit Cost Neutrality




make the cost-neutral methodology better conform to the original intent
of the Congress. The most important of these, according to the state,
was a request for changes in the special terms and conditions that would
require federal participation in a portion of the cost of providing wel-
fare benefits to new FIP participants who, in the absence of FIP, would
have been eligible to participate in the regular Food Stamp, AFDC,and
Medicaid programs. The state points out that since its inception, FIP has
experienced an unanticipated increase in caseload, that the great
majority of these additional participants would have been eligible under
the regular programs, and that both state and federal legislation require
that the state serve them. The state also believes that the Omnibus
Budget and Reconciliation Act of 1987, which authorized FIP and speci-
fies the program’s cost-neutrality requirements, unambiguously requires
federal participation in some portion of the cost of the caseload growth
the state is experiencing.

In January 1990, according to the state, HHSturned down its request
concerning federal participation in the cost of caseload growth. The
state and HHShave had some direct negotiations in an attempt to resolve
the issue, but as of the state’s March 16, 1990, response to us, the issue
remained open. The state noted that if it prevails in its position, either
through negotiation or an appeal to the courts, the required changes to
the project’s special terms and conditions would be so extensive as to
require opening the discussion of cost-neutrality methods considerably
beyond the parameters found in our report. The state also noted that if
it does not prevail in its position, the state’s liability for the additional
cases under the cost neutrality provisions may be so great as to threaten
the continuation of the FIP demonstration.

Second, the state has encountered problems with the accounting method
for the welfare costs of FIP participants who migrate, or move perma-
nently, from F'IPsites to control sites. According to the state, in
December 1989 an HHSrepresentative denied a request by the state that
it be allowed to include the welfare costs of FIP participants who migrate
to control sites as part of the control sites’ costs for purposes of calcu-
lating Food Stamp, AFIX, and Medicaid cost-neutral ceilings, The state
indicates that because, as we point out in the report, the cost of each
case in the control sites is multiplied by a factor of approximately seven
to calculate the statewide ceiling, the exclusion of even a few of these
families from the cost calculation works to the state’s financial disad-
vantage. As of December 1989, according to the state, about 690 FIP
cases had migrated to control sites. The state estimates that HHS' denial
of its request for a change in the accounting method has resulted in


Page 41                       GAO/RCED-90-84 Washington’s Family Independence Program
chapter3
Alternative Eetimaung Methods May Better
Enaum Benefit C&et NeutraU~




accumulated costs not included in the projected cost-neutral ceiling of
more than $2.9 million for the Food Stamp Program component of FTP
and $14.3 million for the AFDCand Medicaid components after the first
6-plus quarters of FIP operation. The state has appealed the HHSrepre-
sentative’s denial to the secretaries of HHSand USDAbut indicated that,
as of March 16, 1990, it had received no formal response to its appeal.

 In addition, the state provided comments on several matters that were
 included in our report. Regarding the current method for estimating ben-
efit cost neutrality, the state indicated that the several assumptions that
 we question in the report, including the stability of both prior and
 future costs in the control offices, were, in fact, assumptions. The state
 indicated that none of the assumptions or other implications of the
methodology was thoroughly reviewed or examined in detail by either
 state or federal representatives involved in developing the cost-neutral
 methodology. The state further indicated that because the current meth-
odology is designed to specifically exclude the federal government from
participating in the costs of caseload growth, as discussed earlier, it
believes that the methodology is more fundamentally flawed than we
describe in our report. Further, the state indicated that each of the three
examples we cite as methodology alternatives would increase the influ-
 ence of a methodological flaw related to how welfare cases migrating
 into FIP sites would be handled and would disadvantage the state even
 more than the current methodology. It did state, however, that if the
problems of federal participation in the cost of caseload growth and
 migration are solved, then the use of some variation of the three exam-
 ples discussed in the report might reduce the potential cost-ceiling pro-
jection error and improve the calculations.

Regarding the differences in state and federal quarterly cost-neutral cal-
culations for food stamp benefits, the state discussed in detail several
technical points about its accounting system and data sources, and to its
ongoing negotiations with the FNSWestern Regional Office on the calcu-
lation of cost neutrality. It also explained why it believes that the FNS
formula for releasing Food Stamp Program funding to the state is
wrong, including its belief that FNS’method improperly mixes both
adjusted and unadjusted data in the same computations. Because much
of the negotiation between the state and FNSover the use of consistent
data sources occurred after we completed our field work, as did several
changes made by the state to accommodate instructions from FNSon
which data sources to use, we did not examine the current status of the
issue in depth. We continue to believe, however, that FNSand the state
need to work together to agree on the best available, most internally


Page 42                       GAO/WED-SO-84   Washingtm’s Family Independence Program
Chapter 8
Abmative   lldlmatlng Methods May   Better
Jbumre Benefit Cat Neutrality




consistent data to be used for making quarterly cost-neutral
calculations.

Finally, the state said that it would be useful for it to sit down with
representatives of USDAand HHSto consider in more detail the questions
that we raise in our report. We agree that such face-to-face discussions
between representatives of the three parties is vital if the issues still
confronting the operation of FIP are to be resolved quickly and amicably.
We also believe that such discussions should occur so that the lessons
learned from this demonstration project can be applied on future
projects and programs.




Page 43                      GAO/RCEDSO-34 Washington’s Family Independence Program
                                                                                                             *
Chapter 4

Cost Neutrality of A dministrative EkpensesIs’
Still Unclear

                   Determining the costs associated with administering a new welfare pro-
                   gram such as FIP is a complex task, and some problems in developing and
                   implementing appropriate methods are to be expected, Our review indi-
                   cated, however, that improvement is needed in both the methodology
                   proposed by the state for determining administrative cost neutrality and
                   in the timeliness of FNS’and HHS'response to the state’s proposal.
                   Because of these problems, the extent to which food stamp administra-
                   tive expenses are being kept within the FIP cost-neutral maximums
                   cannot be determined conclusively.

                   We examined the state’s May 1988 proposed method for determining the
                   administrative cost ceiling and calculating cost neutrality and reviewed
                   the state’s and FNS' calculations of cost neutrality for the first 3 quarters
                   of FTPoperation.’ We found the following:

               l Although the state submitted its first proposed administrative cost
                 methodology to FNSand HHSin early May 1988, it had still not received a
                 formal response as of March 16, 1990.
               . The state’s proposed methodology embodies several questionable
                 assumptions, some of which could disadvantage the state or the federal
                 government if certain situations occur.
               . The state’s calculations of administrative cost neutrality were based in
                 part on incomplete and otherwise preliminary data, and the results
                 should be viewed with caution.
               l FNSwas not making certain required administrative cost-neutral calcula-
                 tions and was therefore unable to determine conclusively whether the
                 state was in compliance with the cost-neutral requirement of the author-
                 izing legislation.

                   On August 11, 1989, after we completed our field work but before FNS
                   and HHShad completed their review of the state’s May 1988 proposal
                   and informed the state of the problems they had identified, the state
                   submitted a revised administrative cost-neutral methodology proposal
                   to HHS.The proposal contains two alternate methodologies, both of
                   which would correct some of the estimating weaknesses identified in
                   FNS’and our reviews and would reduce the amount by which the state
                   was under the administrative cost-neutral ceiling for the first 3 quarters
                   of FIP operation compared with calculations made under the state’s orig-
                   inal proposal.


                   ‘Both the state’s method for determining administrative cost neutrality and the results of the state’s
                   and FNS’ calculations are described in detail in chapter 2.



                   Page 44                            GAO/ItCEMJO-84 Washington’s Family Independence Program
                         chnptm 4
                         Cuet Neutrality of Administrative    &mwea
                         Ia Still Unclear




                         According to the project’s March 1988 special terms and conditions, the
Federal Review of        state had 60 days to prepare and submit proposals for determining food
State Proposal Is Slow   stamp, AFDC,and Medicaid administrative cost neutrality. The state sub-
                         mitted the three proposals to USDAand HHSon May 3 and May 6,1988,
                         respectively. FNSheadquarters and its Western Regional Office com-
                         pleted their food stamp proposal analyses in August and October 1988,
                         respectively, and they internally identified several problems with the
                         methodology and raised several questions about the availability of data
                         to support some of the assumptions the state used. In addition, the FNS
                         region expressed concern to its headquarters in both October 1988 and
                         in January 1989 that a joint response to the state from FNSand HHS,
                         which FNSheadquarters was proposing, could delay establishment of an
                         approved methodology by which to evaluate FIP cost neutrality, and it
                         urged that a joint federal response be issued to the state as quickly as
                         possible. As of March 16,1990, however, the state said that it had still
                         not received a formal response from either FNSor HHSon its proposals
                         (see app. III).

                         In September 1989, FNSand HHSofficials told us that there were several
                         reasons the two agencies had taken over 16 months to review the state’s
                         proposal but had not yet responded to it: (1) the time it took for their
                         program and fiscal staffs to understand and analyze the proposal, (2) a
                         decision to wait for the results from 1 or 2 quarters of FIP operation so
                         that the proposed methodology could be tested using actual data, and
                         (3) the desire to coordinate the response on the food stamp proposal
                         with their response to the state on similar methodology for the AFDCand
                         Medicaid components of FIP.

                         We did not determine whether FNS' and HHS'need for 16 months or
                         longer to review the state’s three May 1988 administrative cost pro-
                         posals was warranted for the reasons agency officials stated. However,
                         because several questions and problems had been raised on the food
                         stamp proposal by FNSheadquarters and its Western Regional Office as
                         early as August and October 1988, we believe that the state should have
                         been notified of these matters at that time. Such notification would have
                         enabled the state and the federal agencies to work together to correct
                         and/or clarify the food stamp proposal without a lengthy delay, and it
                         might have facilitated an earlier completion of the federal agencies’
                         review and approval of all three methodologies.

                         Because the state and FNSdid not have an approved methodology for
                         calculating administrative cost neutrality when we completed our
                         review, they could not formally determine whether overall food stamp


                         Page 46                             GAO/RCEIMtO-84 Washington’s Family Independence Program
                                 Chapter 4
                                 Cast Neutrality of Administrative     Expenses
                                 Is Still Unclear




                                 cost neutrality (benefit and administrative costs combined) was being
                                 achieved as the program’s special terms and conditions require. We
                                 believe that the federal agencies need to complete their reviews and
                                 resolve any differences with the state as expeditiously as possible.


                                 FNS’headquarters and Western Regional Office internal reviews, as well
Proposed Methodology             as our study, identified several problems or potential problems with the
Uses Questionable                state’s proposed administrative cost-neutral methodology, including sev-
Assumptions                      era1 concerns about the portion of administrative costs for the FIP target
                                 population. These issues are discussed in the two following sections.


FNS’ Analyses of the             FNS’headquarters and regional office reviews in August and October
                                 1988, respectively, recommended that the state make the following
State’s Proposal Disclosed       changes or additions to correct for methodology problems or assumption
SomeProblems and                 errors in the state’s proposal as submitted:
Questions
                             l Exclude some cost categories (such as certain administrative require-
                               ments, claims backlog reduction, and employment and training costs)
                               from the cost-ceiling determination because they either were one-time-
                               only costs that occurred during the baseline period or were otherwise
                               inappropriate for inclusion.
                             l Provide documentation, in support of the annualizing of certain costs in
                               the baseline period calculation, to substantiate that 70 percent of the
                               state’s food stamp administrative costs is for salaries and benefits and
                               that 30 percent is for nonsalary expenses, as well as documentation to
                               show that the 70- to 30-percentage split had been constant for a period
                               of years.
                             l Calculate the portion of administrative costs related to the FTP target
                               population by using data for the full 12-month baseline period of April
                               1987 through March 1988, rather than by using only l-month’s data, as
                               the state had done to arrive at the 42.57-percentage.
                             l Treat all federal program changes, other than changes in federal finan-
                               cial participation rates, as adjustments to actual costs rather than
                               amendments to the ceiling.
                             l Treat increased salary costs resulting from reclassification of positions
                               as amendments to the ceiling rather than adjustments to actual costs.
                             9 Develop with FNSa standard methodology for determining when
                               changes in administrative costs are attributable to work load or caseload
                               changes in general, rather than specifically attributable to FIP.




                                 Page 46                             GAO/RCED90-84 Washington’s Family Independence Program
                             Chapter 4
                             Cost Neutrality of Administrative    Expenses
                             Ie StW Unclear




                             In addition to these recommendations, FNSquestioned three of the pro-
                             posal’s underlying assumptions concerning the 42.67-percent calculation
                             of the FIP target population. First, FNSpointed out that identifying the
                             FIP target population as the 42.57 percent of the statewide food stamp
                             recipients served by the AFDCand the state’s General Assistance-Preg-
                             nant Women programs assumes both that FIP will be implemented state-
                             wide and that all those eligible to convert to FIP will do so immediately
                             upon implementation of the program in their local welfare offices. As
                             mentioned earlier, however, the state has limited FIP implementation to
                             only 20 of the 66 welfare offices in the state, and even in those offices
                             conversion of welfare recipients from the AFDC and General Assistance-
                             Pregnant Women programs to FIP is a voluntary process that takes place
                             over a 12-month period. Therefore, FNSpointed out, it is unlikely that
                             the actual FIP food stamp population (and the costs associated with
                             serving it) will ever approximate the 42.57-percent portion of food
                             stamp recipients served by the two programs.

                             Second, FNSindicated that the 42.57 percent used by the state represents
                             the caseload of food stamp recipients on AFDCand General Assistance-
                             Pregnant Women public assistance programs, not the administrative
                             work load applicable to them. According to FNS, any use of public assis-
                             tance caseload data as a factor in estimating food stamp administrative
                             costs, regardless of the percentage, is likely to overstate the cost ceiling
                             because the cost to administer food stamps to public assistance recipi-
                             ents has historically been proportionately less than the cost to admin-
                             ister food stamps to those not on public assistance programs. FNSstated
                             that its acceptance of the 42.57 percent, or any other caseload-based
                             percentage, depended on the state’s submitting data to show that, in
                             estimating food stamp administrative costs, caseload is equivalent to
                             work load.

                             Third, in addition to measuring FIP food cash administrative costs
                             against a FIP ceiling, as the state’s method proposed, FNSrecommended
                             that total food stamp and FIP food cash administrative costs should be
                             measured against the total food stamp ceiling to ensure that non-HP-
                             related food stamp administrative costs do not increase disproportion-
                             ately to FIP food cash administrative costs without being detected.


Our Analysis of SheState’s   We independently analyzed the state’s proposed method for determining
Proposal Disclosed           administrative cost neutrality under the Food Stamp Program. Our anal-
                             ysis indicated that the most straightforward method for determining
Additional Problems          administrative cost neutrality would probably have been for the state to


                             Page 47                             GAO/RCED-90-84 Washington’s Family Independence Program
    Chapter 4
    Cost Neutrality of Admiubtrative    Expeuses
    Ia Still Unclear




    have calculated a per-case cost of administration prior to FIP and then to
    compare that cost with a per-case cost of administration after imple-
    mentation of FIP. The figures could be adjusted, as appropriate, for infla-
    tion, salary increases, and other costs changes in the same manner as
    the state has suggested in its August 1988 proposal. However, state
    agency personnel told us that it would have been too burdensome to
    develop these figures and therefore proposed the alternative method
    described in chapter 2 and analyzed in this chapter. As with FNS' find-
    ings, our review showed the following:

l   The state needs to provide additional documentation to substantiate
    both the annualized costs added to the ceiling and the 42.57-percent por-
    tion of the administrative costs calculated by the state as related to the
    FrPtarget population.
l   Isolating administrative costs by caseload instead of work load may not
    be appropriate.
l   The state needs guidelines to help demonstrate that caseload and work
    load changes are not always attributable to FIP.

    In addition, our analysis revealed two problems not discussed by FNS.
    First, the 42.57 percent includes all cases for which food stamp eligi-
    bility determinations were made. Because some of the cases were ulti-
    mately determined to be ineligible for food stamp assistance and
    because the state has indicated to us that only about 75 percent of its
    food stamp administrative costs are related to the eligibility determina-
    tion process, the remaining 25 percent of administrative costs should be
    applied, in calculating actual administrative costs, only to those cases
    determined to be eligible.

    Second, although not stipulated in the state’s proposal as submitted to
    the federal agencies in May 1988, the state plans each quarter to recom-
    pute the AFDCand General Assistance-Pregnant Women proportion that
    it applies to actual FIP and food stamp administrative costs (calculated
    in the proposal at 42.57 percent), rather than using the percentage cal-
    culated for the baseline period as a constant percentage. In our opinion,
    this procedure should not be undertaken until the state and the over-
    seeing federal agencies (1) agree on whether the AFDCand General Assis-
    tance-pregnant Women caseload percentage should be recomputed each
    quarter and (2) develop and agree on program criteria for determining
    when caseload changes are to be considered FIP- or non-FIP-related.
    During our review, no such agreement or criteria existed. Therefore, we
    concur with the previously mentioned FNSrecommendation that the
    state and FNSneed to agree in advance on methodology and data for


    Page 48                            GAO/RCED-90-84 Washington’s Family Independence Program
                          Chapter 4
                          Cost Neutrality of Administrative     Expenses
                          In Still Unclear




                          determining when administrative cost changes caused by caseload or
                          workload changes will be considered attributable to FIP- or nOrI-FIP-
                          related causes. Also, to the extent that the state does recompute the
                          caseload percentage each quarter, the change should be limited to
                          caseload variations that are FM-elated. Including non-FIP-related vari-
                          ances in the recomputation could disadvantage the state or the federal
                          government, depending on the direction of the changea


The State’s August 1989   On August 11, 1989, after our field work had been completed, the state
Revised Proposal Should   submitted a revised administrative cost-neutral methodology proposal
                          to HHS.According to the state, the proposal was being revised, after
Correct SomeWeaknesses    experience with several quarters of FIPoperation, to better ensure con-
                          sistency and accuracy in the calculation of administrative cost neu-
                          trality. FNSand HHSofficials told us on September 27, 1989, that they
                          planed to complete their evaluation of both the state’s original and
                          revised proposals and provide a response to the state in the next several
                          months. Although we did not review the proposal in depth, we noted
                          that it consisted of two alternate methodologies, either of which the
                          state recommended in lieu of its original methodology.

                          Both alternatives provide that most quarterly revisions are to be made
                          as adjustments to actual administrative expenditures rather than as
                          amendments to the administrative cost ceiling. This change is necessary,
                          according to the state, to avoid overstating some adjustments as its orig-
                          inal methodology did. Also, both alternatives use additional state data to
                          revise the ceiling for the percentage of expenditures related to the AFDC
                          and General Assistance-Pregnant Women programs, but one of the two
                          alternatives calculates the percentage on total AFDC and General Assis-
                          tance-pregnant Women program cases for which food stamp eligibility
                          determinations were made, while the other alternative calculates the
                          percentage only for cases that were determined to be eligible.

                          The effect of these proposed changes, according to the state, is to reduce
                          the amount by which the state was under the food stamp administrative
                          cost-neutral ceiling for the first 3 quarters of FIP operation compared
                          with the amount based on its original proposal. As shown in table 2.3,

                          “If the AFDC and General Assistance-Pregnant Women caseload percentage increases (from, for
                          example, 42.67 percent to 48 percent), the inclusion of non-FIP-related changes would erroneously
                          overstate actual costs and could make it appear that the state had exceeded the cost-neutral ceiling,
                          when in fact it had not. Conversely, if the caseload percentage decreases (from, for example, 42.57
                          percent to 36 percent), the inclusion of non-FIP-related changes would erroneously understate actual
                          costs and could make it appear that the state had not exceeded the cost-neutral ceiling, when in fact it
                          had.



                          Page 49                             GAO/RCED-90-84 Washington’s Family Independence Program
                       Chapter 4
                       Cost Neutrality of Administrative    Expenses
                       Is Still Unclear




                       using its original methodology, the state calculated that its actual
                       administrative expenditures were $536,299 under the ceiling. Using its
                       two proposed alternative methodologies, the state calculates that its
                       expenditures would have been either $473,838 or $439,601 under the
                       ceiling, depending on the alternative used. Although the changes pro-
                       posed by the state correct some weaknesses in the original proposal, our
                       limited review indicates that they do not solve all of the problems raised
                       by FNS’ and our reviews.


                       As mentioned earlier, the state calculated that its administrative costs
State’s Quarterly      for food stamps fell below the cost-neutral ceiling for the first 3 quarters
Calculations Need to   of FIP by a substantial margin of $536,299. We traced the data the state
Be Viewed With         used in its calculations to their source documents (federal financial
                       status reports and state reports created specifically for determining
Caution                amendments to the ceiling) and found that the calculations appeared to
                       be appropriate. The state is uncertain about the reason it shows itself so
                       far under administrative cost neutrality so early in the demonstration
                       and has pointed out that the early results should be viewed with cau-
                       tion. We agree with the state’s position for three specific reasons.

                       First, costs reported for the first 2 quarters of FIP operation may be
                       understated because the state’s automated cost allocation system, which
                       is used to collect and distribute administrative costs to the various state,
                       federal, and other programs the state operates, was not programmed to
                       collect all FIP costs until the beginning of the third quarter. FIP adminis-
                       trative costs for the first 2 quarters (which were used by the state and
                       FNSto calculate cost neutrality) were determined through the use of
                       manually prepared schedules and manual computations. The potential
                       for error using this method of allocation is greater than when using
                       reports generated by an automated system. For example, our detailed
                       analysis showed that the state erroneously underreported FIP adminis-
                       trative costs by $104,233 for the second quarter of the project’s opera-
                       tion because it inadvertently omitted direct overhead charges
                       attributable to the FIP headquarters office.

                       Second, a state official told us that costs reported by any given FIP wel-
                       fare office during its first year in the program may be inaccurate
                       because of the difficulty and complexity of allocating overhead costs
                       correctly on a new program when they must be divided not only among
                       federal and state programs but also among FIP and non-FIP portions of
                       those programs. In addition, he said that time study data, which reflect



                       Page 50                             GAO/RCED-SO-94 Washington’s Family Independence Program
                        Chapter 4
                        Coet Neutrality of Administrative     Expenses
                        Is Still Unclear




                        how much time individual welfare office workers spend on each pro-
                        gram, and which are used to project percentages for the amount of time
                        spent by all workers on all programs, is applied to the cost allocation
                        process on the basis of a 2- to 3-month lag. In a start-up program such as
                        FIP, the caseload can increase significantly each month as new applica-
                        tions come in and as additional AFDCrecipients become eligible for con-
                        version to FIP. Data about the FIP work load from 3 months ago are
                        therefore not likely to be representative of what is occurring in the local
                        welfare offices currently. The state official said that, for this reason,
                        administrative costs reported for any welfare office during its first year
                        under FIP should not be considered definitive, and cost-neutral calcula-
                        tions based upon them should not be viewed as conclusive.

                        Third, the state’s cost-neutral calculations for the first several quarters
                        may not have been consistently applied. For example, in addition to the
                        $104,233 omission of FIP headquarters charges discussed earlier, our
                        analysis disclosed that the state’s food stamp administrative cost-neu-
                        tral calculation for the first quarter of FIP operation (July 1, 1988, to
                        September 30, 1988), which was made by one state office, omitted
                        approximately $170,000 in FIP administrative costs that had been
                        reported to FNSby another state office. In addition, our review showed
                        that the state did not provide adequate back-up documentation to sup-
                        port some of the amendments it made to the ceiling for the first 2
                        quarters’ calculations.


                        Our review of FNS' food stamp administrative cost-neutral calculations
F’NSNot Making          revealed one major and one minor area of concern.
Required Calculations
                        Our primary concern is that FNSwas not making administrative cost-
                        neutral calculations using actual expenditures each quarter, as required
                        by the project’s March 1988 special terms and conditions. While FNSesti-
                        mated administrative costs at the beginning of each quarter and com-
                        pared them with the ceiling to determine the appropriate amount of
                        funds to release to the state, it was not calculating the state’s actual
                        administrative costs at the end of each quarter and adjusting them       .
                        according to the proposed methodology, or comparing actual expenses
                        with the ceiling to determine whether the state was over or under the
                        administrative cost-neutral ceiling for the quarter. In May 1989, an FNS
                        official said his agency was not calculating administrative cost neu-
                        trality on the basis of actual costs because of the need to




                        Page 51                             GAO/RCED-90-84 Washingtxm’s Family Independence Program
                  Chapter 4
                  Cost Neutrality of Administrative    Expenses
                  Is Still Unclear




              . complete final closeout acijustments to the state’s administrative cost
                claims for federal fiscal year 1988 and send the adjusted data to FNS
                headquarters for review;
              . adjust the state’s administrative cost claims for the first 2 quarters of
                federal fiscal year 1989; and
              l assess the effect of the proposed change to the project’s special terms
                and conditions, which would permit the state to achieve food stamp cost
                neutrality over a 36-month rather than a 3-month perioda

                  In addition, FNSdid not believe that such calculations were critical to
                  make at that time because benefit cost-neutral calculations and adminis-
                  trative cost-neutral estimates for the first 3 quarters were coming in far
                  below the overall cost ceiling.

                  According to the FNSofficial, the lack of an approved methodology was
                  not why FNSwas not calculating actual administrative cost neutrality,
                  because FNSstaff had been instructed to operate as if the state’s method-
                  ology had been approved.

                  We did not examine each of the cited reasons to determine whether the
                  needed actions could or should have already been taken, or to what
                  extent, if any, the cited reasons precluded FNS from making the required
                  calculations, Although we did not, perform the calculations, we pointed
                  out earlier and in chapter 2, that the lack of such calculations meant
                  that FNSwas unable to conclusively determine whether the state was in
                  compliance with the cost-neutral requirement of FIP'S authorizing legisla-
                  tion. As we also noted, the state was making such calculations.

                  A second concern is with FNS' calculation of the ceiling for food stamp
                  administrative costs. FNS' calculation of the unadjusted ceiling differed
                  by about $12,000 from the state’s calculation. The difference between
                  the state’s and FNS' computations is due to the use of data from different
                  cost categories on the FNSfinancial status reports submitted by the state.
                  Also, FNSmade a mathematical error in its computation of the ceiling
                  adjustments.


                  The extent to which administrative expenses for food assistance are
Conclusions       being kept within the cost-neutral maximums under FIP is unclear. As of
         Y        March 16, 1990, over 22 months after the state submitted its original
                  administrative cost-neutral methodology proposal, FNSand HHShad not

                  “This proposed change was discussed in ch. 2.



                  Page 52                             GAO/RCED80-84 Washington’s Family Independence Program
                       chapter 4
                       Cost Neutrality of Administrative    Expenses
                       Is Still Unclear




                       yet completed their review of the proposal or notified the state of the
                       methodology questions and other problems they had found. Further-
                       more, although the state’s calculations for the first 3 quarters of FIP
                       operation showed that its administrative costs for food stamps fell
                       below the cost-neutral ceiling by the substantial margin of $536,299, the
                       initial calculations should be viewed with caution for the following
                       reasons:

                     . Some of the assumptions underlying the state’s proposed method for
                       determining the administrative ceiling and making quarterly calcula-
                       tions-especially    those related to the use of data on the AFDCand Gen-
                       eral Assistance-Pregnant Women programs’ caseloads-are
                       questionable.
                     . The state’s automated cost allocation system was not completely
                       programmed to account for FIP administrative costs during the first 2
                       quarters of FIP operation. Although this situation had been partially alle-
                       viated by the third quarter, at which time FIP administrative costs began
                       to be allocated on an automated basis, caution still needs to be taken
                       when viewing FIP administrative costs because of the uncertainty
                       involved in accurately identifying administrative costs during any par-
                       ticular local welfare office’s start-up phase.
                     . No independent verifications of the state’s calculations were routinely
                       occurring because FNSwas not making cost-neutral calculations on the
                       basis of actual expenditures each quarter, as it is required to do.


                       We recommend that the Secretaries of Agriculture and Health and
Recommendations        Human Services direct their agencies to expedite their response to the
                       state of Washington regarding the state’s proposals for determining food
                       stamp administrative cost neutrality and resolve with the state the
                       problems and concerns raised by the agencies’ and our reviews.

                       We also recommend that the Secretary of Agriculture direct the Admin-
                       istrator, FNS,to ensure that food stamp administrative cost neutrality is
                       calculated each quarter on the basis of actual food stamp and FIP food
                       cash administrative expenditures.


                       Neither FNSnor HHScommented on our findings or recommendations
State Comments and     concerning administrative cost neutrality. Washington State indicated
Our Evaluation         that as of March 1990, it had still not received a formal response from
                       the two federal agencies to its May 1988 proposed methodology for



                       Page 53                             GAO/RCED-30-84 Washington’s Family Independence Program
Chapter 4
Cost Neutrality of Administrative    Expenses
Is Still Unclear




establishing administrative cost neutrality for the Food Stamp, Medi-
caid, or AFJX portions of FIP. The state also noted that its next quarterly
submission of FIP cost-neutrality data will contain some additional
adjustments that it will have to negotiate with federal representatives.

As we stated earlier, the lack of an approved administrative cost meth-
odology for the Food Stamp Program portion of FIP prevents the state
and FNSfrom formally determining whether overall food stamp cost neu-
trality has been achieved. It also leaves in question the extent of the
state’s and the federal government’s respective cost responsibilities for
operation of FIP. Accordingly, we continue to believe that FNSand HHS
need to complete their reviews and resolve any differences with the
state on administrative costs as quickly as possible.




Page 54                             GAO~RCEDGO.~~ WaAingtm’r   FamUy Independence Program
Page 55   GAO/RCEJMO-84 Washington’s Family Independence Pmgram
Comments From the U.S. Department of
Agriculture’s Food and Nutrition Service

Note: GAO comments
supplementing those in the
report text appear at the
                                 United States                      Food and                     3101 Park Center Drive
end of this appendix.            Department of                      Nutrition                    Alexandria, VA 22302
                                 Agriculture                        Service




                             Mr. John W. Harman, Director
                             Food and Agriculture    Issues
                             Resources,  Community and
                                Economic Division
                             U.S. General Accounting     Office
                             Washington,  D.C.    20548
                             Dear Mr.    Hax-man:
                             We have received    your draft     report  entitled    "FOOD STAMP PROGRAM:
                             Achieving   Cost Neutrality      in Washington's    Family Independence
                             Procram."     This report was prepared       in response to the statutory
                             requirement    for the Comptroller      General of the United States to
                             conduct periodic     audits  to verify    Washington's    assurance of
                             Federal   cost neutrality    for payments made with Food Stamp Program
                             funds to support     the project.
                             The Omnibus Budget Reconciliation          Act of 1987 which authorized
                             the Family Independence        Program (FIP) holds Washington           to Federal
                             cost neutrality     separately     for the Food Stamp, Aid to Families
                             with Dependent Children        (AFDC) and Medicaid      Programs.       It should
                             be noted that food assistance         costs make up only a small part of
                             Federal  expenditures     under FIP.      State reports      indicate     that less
                             than 13 percent     of total    Federal and State expenditures            for FIP
See comment 1                are used for food stamp benefits          and administrative        expenses.
                             We agree with GAO's conclusion              that "a reasonable         approximation
                             of possible     program costs is probably             the best that can be
                             achieved,"    despite     the legislative        requirement      for "assurance."
                             In developing      and negotiating        the Special      Terms and Conditions
                             under which FIP would operate,              the State and Federal agencies
                             concluded    that a methodology         could be developed          that would
                             provide    a reasonable      estimate     of the aggregate value of coupons
                             and administrative       costs that would have been distributed                  under
                             the Food Stamp Program if the individuals                   in FIP had participated
                             instead    in the traditional        Food Stamp Program.           While the
                             methodology     entails     some potential       risks    for overpayment       to the
                             State,    we believe    these to be minimal under the circumstances.
                             The report   notes that the benefit   cost neutrality     methodology    was
                             developed  based on the assumption    that FIP would be expanded
                             Statewide   (except for the control   offices)    within  three years.
                             With these plans in mind, Federal and State negotiators          reached
                             agreement on a method of estimating       the maximum amount of food
                             assistance    (food stamps and cash payments to FIP participants)
                             the State would be eligible    for if only the traditional       Focd
                             Stamp Program were operating     in Washington.      This method involves




                                      Page 66                        GAO/RCED-90-84 Washington’s Family Independence Frogram
                            Appendix I
                            Comments From the U.S. Department of
                            AgrIcuIture’s Food and Nutrition Service




                    Mr. John W. Harman, Director                                                       2
                    projecting   Statewide   costs based on actual         Food Stamp Program
                    expenditures    in the control      offices.     The report also notes that
                    the control   offices   were selected        to be representative    of the
                    State as a whole.      We believe       this methodology    was reasonable
                    based on the information       available      at the time it was developed.
                    In reaching        the conclusion      that "alternative          estimating      methods
                    may better       assure food stamp benefit            cost neutrality,"          the report
                    identifies       several    assumptions      underlying       the State's       method for
                    estimating       the anticipated       value of coupons that would have been
                    distributed        under the traditional         Food Stamp Program,             One of
                    these assumptions,          that FIP would be implemented               Statewide,     has
                    been addressed above.             GAO challenges        the use of two other
                    assumptions        as potentially      undermining        the accuracy of the
                    current      method of assuring        compliance       with the cost neutrality
                    requirement        for FIP.      With regard to the assumption               that prior
                    period costs for the control              sites would be stable            in relation     to
                    Statewide       costs,   GAO contends that a longer              (than one year)
                    baseline      would have provided         a better      assessment of stability.
                    At the time negotiations             were taking place,          State officials
                    pointed      out that the current         configuration        of Community Services
                    Offices      had been in place for just over one year.                    Actual food
                    stamp cost data could not be readily                  isolated      for the control
                    sites     for longer than a one year period.                 Federal officials
                    accepted that position.
                    The methodology       also assumed that future         costs in the control
                    sites would be stable         in relation     to Statewide     costs.     GAO
                    believes    that significant       economic, demographic,         or other changes
                    affecting     food stamp expenditures         in any of the control         sites
                    that do not occur in the rest of the State,                or vice versa, should
                    trigger    an adjustment      to the proportion       of the State's      total   food
                    stamp costs.        We agree that it would be desirable            to make
                    adjustments      for the effects      of changes outside       the Food Stamp
                    Program, provided        that these changes can be identified             as
                    affecting     the program and the magnitude           of their    effects     can be
                    estimated.       We would entertain       any specific     suggestions      from
                    Washington      State about the types of indicators            and extent of
                    change that should be considered            relevant    to adjusting      the
See comment 2       methodology.
                    Given that there are no plans for Statewide              implementation     of
                    PIP, GAO believes       that alternative      methods for establishing       food
                    stamp cost neutrality        ceilings    need to be considered.         The report
                    expresses     concern that under the current         method, small variations
                    in the proportion       of the State's      costs represented    by the control
                    sites can have a substantial           impact on the cost ceiling
                    estimates.       Three alternatives      were suggested    that would address
                    the "multiplier"      effect . We have reviewed each of the
                    suggestions      and believe     that in correcting    for the multiplier
                    effect    they may introduce        new sources of error or bias,

                Y




                            Page 57                          GAO/RCED-90-84 Washington’e Family Independence Program
                        Appendix I
                        Canmenta From the U.S. Department of
                        Agriculture’e Food and Nutrition Service




                 Mr. John W. Harm-an, Director                                                      3
                 The reduced scope of FIP does merit reconsideration                         of the
                 principles        underlying    the cost neutrality          methodologies.         State
                 and Federal officials           are currently       exploring     alternative       methods
                 of estimating         cost neutrality     ceilings.         GAO's observations        and
                 findings      will   be helpful      to us in considering         various     options     and
See comment 3.   alternatives.
                 Thank you for giving   us the opportunity                to review and comment on
                 this report.   We also greatly  appreciate                your staff's willingness
                 to meet with us to address our questions                  and concerns about the
                 draft  report.
                                                                   Sincerely,




                                                                   Administrator




                         Page 88                         GAO/RCED-90.94 Washiugton’s Family Independence Program
                Appendix1
                Commenta From the U.S. Department of
                Agriculture’s hod and Nutrition Service




                The following are      GAO'S   comments on     USDA'S   letter dated March 13, 1990.


                1. We have modified our report to show the comparative size of the food
GAO Comments:   assistance cost to the other component costs of FIP on page 11 of the
                report.

                2. We have included our response on pages 38 through 40 of the report.

                3. We have included this information on page 40 of the report.




                Page 69                        GAO/RCED4O-B4    Washington’s Family Independence Program
Appendix II

Comments From the Department of Health md
Human Services

Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.           DEPARTMENTOFHEALTHLHUMANSERVICES                                   Oltice   01 Inspector   General


                                                                                                   WSShlngton.      D.C.   20201




                                                                       MAR191990




                             Mr. John W. Hannan
                             Director,     Food and Agriculture         Issues
                             United States     General
                                Accounting    Office
                             Washington,     D.C.    20548
                             Dear Mr. Hannan:
                             Enclosed are the Department's         comments on your draft    report,
                             @'Food Stamp Program:      Achieving     Cost Neutrality   in Washington's
                             Family Independence      Program."     The comments represent     the
                             tentative    position   of the Department and are subject       to
                             reevaluation     when the final    version   of this report   is received.
                             The Department appreciates   the opportunity              to comment on this
                             draft report  before its publication.
                                                                       Sincerely   yours,
                                                                   F---T\    !


                                                                      Richard P. Kusserow
                                                                      Inspector General
                             Enclosure




                 Y




                                  Page60                          GAO/RCED-90-84Washhgton'sFamilyIndependenceFrogram
                        Appendix II
                        Comments From the Department of' Health
                        and Human Services




                 COMMENT6OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES ON THE
                 U.S.   GENERAL ACCOUNTINQ OBFICE'B   REPORT, "FOOD STZ&MP PROam .
                                          itv in ~~41~       8        Zn$hmaden ce


                 We have received      a draft    of the GAO report,      FOOD
                                                                             1~ Indeoendence
                 proaram-   We appreciate        the   opportunity    you have given us to
                 provide  comments.
                 The current     methodology    for determining       cost neutrality      was
                 developed    during    a period when state plans for FIP called               for
                 statewide     implementation.       The best methodology      for establishing
                 a cost baseline       would have been a representative          randomly
                 selected    group of Aid to Families         with Dependent Children           (AFDC)
                 recipients.       This option was not available          to us at the time.
                 Therefore,     we, together    with the state,       chose a representative
                 sample of community service          offices    which contained      a sufficient
See comment 1    number of AFDC recipients         to generate     a statewide     baseline.
                 We recognize,     along with the State,       that since there are
                 currently   no plans to operate Family Independence               Program on a
                 statewide   basis,    a review of the cost neutrality           methodology   is
                 warranted.    The alternative      cost neutrality      proposals     and
                 recommendations      put forth    by GAO will     be taken under considera-
                 tion in such a review.        However, it is not clear at this time that
                 GAO's recommendations        will  provide   a more accurate       baseline than
See comment 2.   the current    methodology.
                 The Department    appreciates the opportunity            to comment on this
                 draft report   before its publication.




                        Page 61                        GAO/RCED-90-84 Washington's Family Independence Program
                Appendix II
                Comments From the Department of Health
                and Human Services




                The following are    GAO'S   comments ori HHS' letter‘dated March 19, 1990.


                1. We have included this information and our response on pages 38 and
GAO Comments:   39 of the report.

                2. We have included this information and our response on page 40 of the
                report.




                Page 62                      GAO/RCED-SO-84 Washington’s Family Independence Program
Appendix     III

CommentsFrom the Stateof Washington


Note: GAO comments
supplementing those in the
report text appear at the                                                        ‘YI
end of this appendix.
                             KKHARD
                                  I TkOMPSON                              g,
                                 SUWWV                                    @ “MB
                                                                    STATEOF WASHINGTON
                                                      DEPARTMENT OF SOCIAL AND HEALTH SERVICES
                                                                 Olympia. Washington 96.504~5


                                                                    March 16, 1990



                                   Mr. John W. Harman
                                   Director,   Food and Agriculture     Issues
                                   United States    General  Accounting    office
                                   Resources,    Community and Economic Development                 Division
                                   Washington,    D.C. 20548
                                   Dear     Mr. Hannan:
                                   This     is in response      to your letters        of January      25, 1990 to
                                   Commissioner Turner and me requesting          a review of your draft report
                                   entitled    Food Stgmp Proaram. . QBservaons           on w             FIP Cost
                                                              r Matter&    (GAO/RCED-90-84).          The comments
                                   provided    here constitute     a joint  response by the Washington State
                                   Employment Security        Department   and the Department       of Social      and
                                   Health Services.        If you have questions       about the details      of our
                                   response,     please   COntaCt Barbara      Flaherty,    Executive     Director,
                                   Washington     State Family Independence       Program, at (206) 753-6050.
                                   For the most part,         we agree with the conclusions        presented  in the
See comment 1 I                    draft    report.      We feel, however, that there are some broad@r issues
                                   not considered         in this  document which must be examined before a
                                   final     consensus on cost neutrality         for either     Food Stamps, AFDC,
                                   or Medicaid        can be reached.    We would first      like to address these
                                   general      issues    in part A below and then comment on some of the
                                   specific       items included    in your draft    report    in part B.

                                   (A) ceneral.auesu           not Addressed           in the   Draft   Rem
                                  Washington         was the      first     state    to receive    specific    federal
                                  legislation         mandating    waivers     necessary   for the operation    of its
                                  welfare     reform program.           The Omnibus Budget Reconciliation       Act of
                                  1987 (OBRA) required          the state to provide assurances          that over the
                                  five-year      life    of the demonstration,        the cost of FIP to the federal
                                  government        would be no greater         than what the cost would have been
                                  under the regular           AFDC, Medicaid,       and Food Stamp programs in the
                                  absence     of FIP.

                         Y




                                          Page   68                 GAO/RC~~O-~~         Washington’s Family Independence Program
        Appendix III
        CommentsF'remtheBtateofW~hingten




Mr.  John W. Harman
March 16, 1990
Page 2

The language  governing cost neutrality    is                   presented   in     sections
9121 and 1509 of OBRA. Section   9121 states                     in part that:
         . . . As a condition         of approval      of the project       under
        this section,     the state must provide assurances satisfac-
        tory to the Secretary         that the total       amount of Federal
        reimbursement       over the period     of this project        will   not
        exceed the anticipated         Federal reimbursements        (over that
        period)   under the AFDC and Medicaid             programs:    but this
        paragraph     shall     not prevent     the state       from claiming
        reimbursement       for additional     persons who would qualify
        for assistance      under the AFDC program, for costs attribu-
        table   to increases       in the state's      payment standard,       or
        any other federally-matched           benefits     or services      . . .
         (Emphasis added.)
Similarly,       section    1509 in part       requires     that:
        . . . the cost of food assistance            provided    under the
       project    will  not be such that the aggregate           amount of
       payments made under this section         by the Secretary     to the
       state over the period of the project          will   exceed the sum
       of...       the anticipated    aggregate    value of the coupons
       that would have been distributed           under the Food Stamp
       program if the individuals      who participate      in the program
       had participated      instead in the Food stamp program . . .
        (Emphasis added.)
The specific        rules      governing       cost     neutrality        for    the Family
Independence       Program are contained             in Section          3 of the Special
Terms and Conditions.             These rules also cover a variety                of aspects
of FIP operation       besides cost neutrality.              When the cost neutrality
provisions      were adopted, neither           federal    nor state representatives
had significant        previous      experience      in this area.            Therefore,    it
      not surprising         that    after      six   quarters         of FIP operation
izestions     continue     to be raised        regarding      whether the methodolog;
contained     in the Special Terms and Conditions                  fully   conforms to the
requirements      of the authorizing         federal     legislation       and whether the
original     methods and data sources selected                     for determining       cost
neutrality       of FIP continue           to be the best and most accurate
indicators      of program operations            and cost.
After    reviewing     the first      full    year of FIP operation,      we sought
federal      approval     for    several      changes   in the methodology        for
determining      cost neutrality.          On November 20, 1989, we wrote to the
Secretaries      of the U.S. Departments           of Agriculture  and Health and
Human Services      requesting     corrections      in wording and interpretation
of the Special Terms and Conditions              which we believed   would address
several    new issues which had arisen since the beginning               of FIP and




        Page64                           GAO/RCED-90-84Washington'sFamily IndependenceProgram
         Appendix III
         Commenta From the State of Washington




Mr. John W. Harman
March 16, 1990
Page 3

which        would make the methodology    better         conform    to   the   original
intent        of congress (copy enclosed).
In those        letters   we requested     that:
1.        [Cost] neutrality    for the Washington State Family Independence
         Program be determined      in the aggregate over the full       five year
         life   of the FIP demonstration.       The state should be able to
         recoup any reductions      in its claim for federal      match resulting
         from expenditures      in excess of [cost]    neutrality      out of any
         future   savings   from expenditures    under budget neutrality.
2.       Except as previously         agreed regarding         the limits     on change
         that may occur in evaluation             control     sites,   Washington      may
         pass on to its public          assistance      recipients     (including      FIP
         enrollees)   all improvements         in services       and benefits     author-
         ized under federal       legislation       since passage of the Omnibus
         Budget Reconciliation          Act of 1987 (OBRA), including               those
         improvements    included     in the Family Support Act.
3.       The U.S.     Departments      of Health     and Human Services      and
         Agriculture    should participate     fully  in the costs of services
         to FIP enrollees,    without    regard to [cost]   neutrality, so long
         as:
         0       Benefits      are provided        to persons who would be eligible
                 for participation           in the AFDC program or any of its suc-
                 cessors,      including       FSA/JOBS, and under these provisions
                 categorically          eligible      for  Medicaid and Food Stamp
                 benefits,
         0       Benefits       and services          that   are provided,       and the
                 administrative          costs that are incurred,       would have been
                 generally      eligible      for reimbursement    under AFDC, Medicaid
                 or Food Stamp programs and their               successor   programs.
4.       The Departments       of Health and Human Services         and Agriculture
         should approve adjustments         to the administrative        cost method-
         ology which will        provide   for full    federal    participation     in
         increases   in administrative          costs related     to expansion      of
         benefits  or services        as described   above.
In a letter       dated January       24, 1990, Arnold        R. Tompkins,     Acting
Assistant     Secretary     for Planning       and Evaluation,      DHHS, responded
to our requests,       generally     approving    changes relating      to items one
and two above.       As of yet, no specific        details    have been negotiated
regarding     how any of these provisions           would be implemented.         Item
four    regarding     administrative        costs   was not addressed         in Mr.
Tompkins'     response.      In your draft report,         you indicate   that after




         Page 65                         GAO/RCED-w-84 Washington’s Family Independence Program
                         Appendix III
                         Commenta From the State of Washingt0n




                 Mr. John W. Harman
                 March 16, 1990
                 Page    4


                 more than a year we had not received      any response to our proposed
                 methodology    for determining  cost neutrality      for administrative
                 costs.    As of March 1990, this is still    the case.
                 The most important          issue raised in our appeal was item number three
                 above, a request          for changes in the Special            Terms and Conditions
                 which would require            federal   participation      in a significant        portion
                 of the cost of providing               Food Stamp, AFDC, and Medicaid             benefits
                 to persons who, in the absence of FIP, would have been eligible                           for
                 participation         in the regular            AFDC, Medicaid,       and Food Stamp
                 programs and their            successor     programs.      Since its inception,           FIP
                 has experienced         an unanticipated          increase   in caseload.       The great
                 majority      of these additional         persons would have been eligible             under
                 the regular         programs        and both       state   and federal       legislation
                 required      that we serve them.
                 We believe         that    Sections      1509 and 9121 of OBRA, cited                  above,
                 unambiguously         require    federal     participation        in some portion      of the
                 cost of caseload growth which we have experienced.                          Members of the
                 Washington          State     Congressional           delegation       and staff,         that
                 participated         in drafting      this portion         of OBRA, indicate        that the
                 exception       language included         in OBRA (e.g. I*. . . but this paragraph
                 shall      not prevent         the state        from claiming          reimbursement        for
                 additional        persons who would qualify             for assistance      under the AFDC
                 program . . .I') was specifically                  included     to cover these kinds of
                 cost.        Unless the federal           government       agrees to paying        its fair
                 share of the costs of serving                 these additional          persons,    our lia-
                 bility      for additional        cases under the cost neutrality                provisions
See comment 2.   may be so great as to threaten                 continuation        of the demonstration.
                 We have also            requested        review     by the Secretaries            of HHS and
                 Agriculture        of a denial          by the FIP federal         project      officer       of a
                 proposal       for changing           how the accounting        for cases that migrate
                 from FIP to AFDC comparison                  sites   is handled.       Currently        we allow
                 FIP enrollees         who move from a FIP Community Service                     Office       (CSO)
                 to a non-FIP CSO to continue                   in the program as long as there is a
                 FIP CSO in the county where they reside.                         FIP enrollees          move for
                 programmatic         reasons        (such as to seek improved work or training
                 opportunities         not available          in the FIP sites)       as well as personal
                 reasons      (to obtain         better     or cheaper housing,         to live        closer    to
                 relatives,        etc).        For purposes        of administrative        efficiency,         we
                 have continued           to manage these cases and account                 for their        costs
                 in the FIP CSO nearest their                  home. In this way, we do not have to
                 provide     special        training       for staff     in those offices            that might
                 handle only a few FIP cases.
                 Because these cases continue    to be managed out of FIP Offices,     they
                 are not included in cost statistics     for the control  sites which are
                 used to project   the baseline      or "would-have-been"     cost against




                         Page 66                           GAO/RCED-90-84 Washington’s Family Independence Program



                                                                                                                      .
                        Appendix III
                        Comment0 From the State of Washington




               Mr. John W. Harman
               March 16, 1990
               Page 5

               which cost neutrality           is measured.      This exclusion         artificially
               reduces    the baseline        against  which our actual            expenditures      are
               measured       for    cost   neutrality    purposes.            The FIP Executive
               Committee,       the governing     body for the program, has voted to dis-
               continue    allowing     FIP enrollees   to participate        if they migrate from
               FIP sites      unless they move to fulfill          their     training      plan or to
               obtain work.        It is expected that enrollees         that have already moved
               would continue        in the program.
               As indicated            in the draft       report,       the cost of each case in the
               control       sites      is multiplied      by a factor          of about seven to produce
               the baseline.              The exclusion      of even a few of these families                     from
               the equation            results     in great disadvantage              to our finances.               In
               December of 1989, there were about 690 cases in this                                     category.
               Even when the                new Executive           Committee        policy      limiting          FIP
               participation            after   out-migration         takes effect,         there will         still
               be a backlog            of accumulated        costs not included             in the projected
               baseline         of more than $2.9 million                    for Food Stamps and $14.3
               million      for AFDC and Medicaid            (total      cost) after the first            six-plus
               quarters       of FIP operation.            (Please see the enclosed copies of the
               original         letter      to our project          officer,       his response,           and our
               appeal      to the Secretaries                of Health           and Human Services                and
               Agriculture           for more details        on these calculations).
               Mr. Tompkins turned down our request                    concerning     participation        in
               the cost of caseload               growth,     and as yet we have had no formal
               response     to our appeal of the migration                 issue.       There have been
               some later,        direct     negotiations         between federal        representatives
               from DHHS and USDA and me, where all parties                     have sought to reach
               some compromise           on this       issue.      If we prevail       in our position
               regarding      federal      participation        in the costs of caseload            growth,
               either    through       negotiation        or an appeal to the courts,             then the
               methodology        included       in Section        3.06 of the Special           Terms and
               Conditions       (which was amended to include               the calculation         of Food
               Stamp benefit        cost neutrality         as well as AFDC and Medicaid benefits
               cost neutrality)           would have to be modified               significantly.           We
               believe    that required          changes would be so extensive              as to require
               opening     the discussion            of cost neutrality         methods considerably
Seecomment3.   beyond the parameters             found in the draft        GAO report.

               IB) Specific         Issues     Addressed       in the GAO Draft           Renort
               cu rren t Me thod       fo r Estimatinq         Cost Neutralit        v for     Benefi t s
               The draft   GAO report directs      much attention   to questions   about the
               technical   appropriateness     of using the ratio     of Food Stamp benefit
               costs in comparison      sites   (which were selected     for use in the FIP
               evaluation)    to total     Food Stamp benefit     costs in the base time




                        Page 67                             GAO/RCED-90-84 Washington’s Family Independence Program
                          Appendix III
                          Comments From the State of Washington




                 Mr.  John W. Harman
                 March 16, 1990
                 Page 6

                 period     (April   1, 1987 through       March 31, 1988),       to estimate        a
                 llwould-have-beenll     cost against    which benefits      cost neutrality       is
                 measured in succeeding       time periods.       Questions    are raised       as to
                 whether     the following     assumptions     implied    or contained        in the
                 existing     cost neutrality    methodology    are correct:
                 1.     Control       sites'     prior      costs     were     stable      in    relation      to
                        statewide       costs,
                 2.     Control      sites'    future      costs    will     be stable      in   relation      to
                        statewide       costs,
                 3.     FIP would      be implemented         statewide.
                 The methodology         which is currently          used to project        cost neutrality
                 was, for the most part,               a creation      of the federal       representatives
See comment 4.   involved     in the negotiations             of the content        of the Special         Terms
                 and Conditions.            All the implied         assumptions      listed     in the draft
                 report    were in fact just that--assumptions.                     The comparison         sites
                 were first       selected     for use in the required            evaluation       of FIP and
                 later    adopted for use in determining                cost neutrality.         In the haste
                 to get FIP underway,              neither      federal      nor state      representatives
                 thoroughly       reviewed     all the implications            of the IUetpJdOlOgy        which
                 was established.           Similarly,      neither      federal   nor state representa-
                 tives     examined       the stability          of either       Food Stamp, AFDC, or
                 Medicaid     base costs in comparison              sites    for even one year prior            to
                 the beginning        of FIP, let alone for five years as presented                      in the
                 draft    report.
                 The draft     report      indicates      that even a one percent            error    in the
                 projected    baseline       against which cost neutrality             is measured could
                 result    in a large actual           swing in dollar       savings or liability         for
                 the state.      In fact,       an actual error in the l1would-have-been'0               cost
                 of more than plus or minus one percent would probably                         be expected
                 as the result        random error         associated     with the type of sampling
                 methodology     used to establish           the baseline.       Since FIP has not been
                 implemented      statewide,         the mathematics        of the methodology          would
                 also seem to dictate           that more of the potential           variance      in actual
                 total   Food Stamp costs,            above or below the baseline,           could be the
                 result    of either     random or systematic          fluctuation       of costs in non-
                 FIP/non-comparison           sites     which are not controllable             by FIP, as
See comment 5.   opposed to the actual            effect    of FIP activities.
                 Certainly,   there    has been some FIP-generated            increase      in costs
                 associated   with the unanticipated         growth in caseload which we have
                 experienced.     Using the current      methodology,     this increase         should
                 show up as a cost neutrality        liability      for the state,        regardless
                 of the problems mentioned above, but it is still               difficult     to sort
                 out the true source of the differences            between projected         baseline




                          Page 68                           GAO/RCED-9044 Washington’s Family Independence Program
             Appendix   III
             Comments From the State of Wahington




    Mr. John W. Harman
    March 16, 1990
    Page 7

    and the actual total       costs which have been reported.            We must again
    stress  here our conviction        that OBRA requires       federal   participation
    in a significant      portion     of the costs related        to caseload growth.
    Since the current      methodology      is designed to specifically            exclude
    these   types    of cost       from federal      participation,         we find       it
    fundamentally     flawed,     much beyond the aspects which you describe
    in your draft     report.                                           \

    The report    recommends that     state     and federal    representatives
    explore the use of other ratios       to determine    FIP cost neutrality
    savings or liabilities,  including      projections   based on using:
    1.       Costs in 7 current            control   sites     to    establish    a ceiling       for
             the 20 FIP.sites           only;
    2.       Costs in the 19 paired non-FIP                  sites    to establish        a ceiling
             for the 20 FIP sites  only; and
    3.       Use of costs in all            45 non-FIP       sites    to establish        a ceiling
             for the 20 FIP sites            only.
    In addition      to the migration          issues discussed     above, each of the
    three    options     increases      the influence      of a methodological            flaw
    related    to how the benefit         costs of AFDC eligibles         or enrollees      who
    migrate    into FIP sites would be handled.              The current        methodology
    compares the total          of actual        FIP and non-FIP      site    costs to the
    projected     baseline.      Each of these three options            compares only FIP
    site costs to the different             bases which are indicated.            This would
    assume that all differential             increases   in costs in FIP sites,          over
    and above the increases           in the projected      baseline,       are the result
    of a FIP effect.          Therefore,      the state would be fully          responsible
    for these increases.
    Recall     again,         Section   1509 of OBRA requires           in part   that:
              . . . the cost of food assistance      provided    under the
             project  will not be such that the aggregate        amount of
             payments made under this section   by the Secretary     to the
             state over the period of the project    will   exceed the sum
             of . . . the anticipated  aggregate value of the coupons
             that would have been distributed     under the Food Stamp
             program . . .
    We interpret   "aggregate value of coupons that   would have been
    distributed  under the Food Stamp Program" to be the total    that
    would have been Spent for all Food Stamp benefits   in the absence
    of FIP.


Y




             Page 69                            GAO/RCED-96-84 Washington’s Family Independence Program
                     Appendix Ill
                     Comments From the State of Washington




             Mr. John W. Harman
             March 16, 1990
             Page 8

             Under each of the three alternative                  projection        methods, when a case
             eligible     for AFDC or already            on AFDC, migrates            into a FIP site in
             order to receive         assistance      there,    its cost shows up as an entirely
             new expense thus becoming the full                      responsibility         of the state.
             In actuality        this type of case constitutes                  no additional         cost to
             the overall      Food Stamp program.            Rather,       such enrollees        are merely
             receiving     their      Food Stamp benefits           in a different         location.       For
             these migrating          cases, there may be some FIP-induced                     increase      in
             Food Stamp, AFDC, or Medicaid                 costs associated            with such factors
             as increased         length     of stay on assistance                or increased        payment
             level due to the cost of incentive                payments over and above the cost
             of "$30 and one-third"             under AFDC. These are marginal                     increases
             as compared with the additional                  cost of the basic benefit                 which
             would be fully        attributable       to PIP. If one of the three projection
             alternatives        is seriously         considered,        we would have to make an
             accurate     estimate        of the rate of migration                  into   FIP sites       and
             propose a suitable           correction.
             Assuming that the problems related                 to fair       federal    participation
              in the cost of caseload           growth and migration            are solved,       then we
             agree it would be advantageous             to both the federal             government and
             ourselves     to place some limit        on the cost savings or liability                 that
             might result       from random or systematic          variation       of costs unrelated
             to a FIP effect.              (This was illustrated             in the report          by the
             relative    effect     of a one percent variation              in cost ceiling,          using
             the current     methodology       and the three scenarios           listed    above.)       Use
             of some variation         of the three alternatives             proposed in your draft
             report    might improve the calculation.                We have not yet determined
             the full    relative      impact of adopting        any of these three options               on
             either    Food Stamp, AFDC, or Medicaid costs.                    We do know that each
             of these options         involves    the use of a new or different                 sample to
             project    a baseline      against which to measure FIP experience                  and that
             the assumptions        of representativeness          of each should be considered
Seecomment   in detail     before selection         or substitution         is made.

             Differences        in    State  and Federal              Cuarterlv        Cost     Neutralitv
             Calculations       for   Food Stamp Benefits
             In developing       our baseline        data for Food Stamp budget neutrality
             calculations     we used Table 2K from the monthly state statistical
             publication       entitled        Income Assistance,     Community Services,       and
             Medical Assistance            (commonly known as the I'Blue Booklq).       Approval
             of the methodology         for the benefits     baseline  calculation   (including
             the Food Stamp calculation)              came from Daniel H. Weinberg,        Acting
             Assistant     Secretary        for Income Policy      of DHHS, in a letter     dated
             April      7, 1989.       Our first      two submissions      of Food Stamp cost
             neutrality     reports       used Table 2K for coupon issuances            data and
             Table 2N for FIP food cash, both from the Blue Book.




                     Page 70                           GAO/RCED-90-84 Wanhington’r Family Independence Frogram
         Appendix III
         Commenta From the State of Washington




Mr. John W. Harman
March 16, 1990
Page     9



In     July   of1989 we received         a letter      from Allen     Ng, Regional
Director,    Food Stamp Program,            USDA, San Francisco,          indicating
"reporting     inconsistencies"         in     the    Washington     State      Family
Independence     Program identified         by GAO auditors.       In particular,
he was concerned      about discrepancies          between Blue Book tables          2N
and 2s which reported         similar    information      on FIP food cash issu-
antes.     He requested      that we report        cost neutrality      information
using data from the adjusted          FNS-388 report       as opposed to the Blue
Book.
In August of 1989, we responded to Mr. Ng via two separate letters,
indicating        the steps that would be taken to meet his concerns.
First,     we stated that we would improve the descriptive                 heading and
footnotes      for Table 2N in the Blue Book and would modify Food Stamp
reconciliation          data in Table 2s to include          daily    FIP cash food
assistance       issuances and cancelled       food assistance      benefits.       These
changes would begin with the August 1989 reporting                 period.      Second,
we said        that      we would    continue      to report       cost     neutrality
information         for food coupons from Table 2K in the Blue Book and
that     we would switch         from Table 2N to 2s for FIP food cash
reporting.         We would revise all previous        Food Stamp cost neutrality
submissions        and base them on Table 2s. Data for reporting                periods
after    August 1989 would reflect           the changes in calculating             Table
2s indicated         above.   However, we would not be able to go back and
correct      Table 2s for the period prior           to August 1989.
Tables 2K and 25 provide           information      identical      to that which is
found in the unadiusted         FNS-388 report.       The final     FNS-388 includes
adjustments      made on at the county level which are not comparable
with data broken down by Community Service Office                    as mandated for
use in the Special          Terms and Conditions.               By using     tables    2K
and 2S, we have both food cash and food coupon data from consistent
sources.      Because cost neutrality         is figured      on a ratio    basis,   the
differences     between using the adjusted          and unadjusted       figures    were
thought     to be insignificant.          FNS has not yet responded               to our
letters     of last August.
There is one additional         issue regarding     how the Food Stamp cost
neutrality     information    is collected      and used that must be dis-
cussed.     The FNS Regional       Office  in San Francisco   is responsible
for releasing      the funds to reimburse Washington State for its Food
Stamp expenditures.        In his letter     of July 1989, Mr. Ng indicated




         Page 71                      GAO/RCED-90-84 Washington’s Family Independence Frogram
        Appendix III
        Commenta From the State of Wasldngton




Mr. John W. Harman
March 16, 1990
Page 10

that the cost neutrality            baseline   would       be used to      release       Food
Stamp funding according           to the following         equation:
      Baseline     - Food Stamp FNS-388 Adjusted              Actual   Issuance      =
                              Funds Available        for   FIP.
The FNS San Francisco          Office    continues     to use this      formula.
There are several         things     wrong with this          equation.       First,     the
formula mixes data from differing               sources,      using FNS-388       adjusted
data in relation        to a baseline         derived     from Table 2K which uses
unadjusted    data.      Second, this formula involves               the use of a data
set for cost neutrality          calculations        other than that which we have
submitted    or have formally           proposed to submit.               FNS has never
responded or made any formal determination                    of the appropriateness
of the data changes we proposed                   last    August.       Third    and most
important,    this    formula     is based on requirements              of Section      3.01
of the Special         Terms and Conditions              which established           a more
restrictive      reimbursement        and payback schedule              for Food Stamp
expenditures      than was set up for AFDC or Medicaid cost neutrality.
We believe    that Section        3.01 is no longer operational.
When Section         3.01     of the Special         Terms and Conditions        was
established,      USDA representatives         in Washington, D.C. believed    that
OBRA Section      21(d)(3),     which covered food cash assistance        to mixed
households,      would open the door to much more extensive            Food Stamp
participation      under FIP.       The state of Washington agreed with this
position      and took immediate steps to have this portion            of the Act
amended or removed.          In a letter     dated March 9, 1980, approving the
Food Stamp portion             of the FIP demonstration,          Richard     Lyng,
Secretary      of Agriculture!       indicated     that should Section    21(d)(3)
be repealed,       he would discuss          changes in the Special     Terms and
Conditions      and that he
       . . . would expect Section           3.01 of the Special  Terms and
       Conditions      would be deleted,         Section  1.02 amended to
       reflect       any   resultant       changes     in  the  Washington
       Administrative      Code and Sections      3.06 and 3.07 [governing
       cost neutrality        computations      and payback for AFDC and
       Medicaid]      amended to incorporate       the Food Stamp Program.
In September     1988, Section       21(d)(3)     was repealed    by the U.S.
Congress.      A study completed        by us that      fall  showed that the
provision   had little     effect  on cost prior     to its cancellation.     In
January or February       1989 we received      a hand annotated    copy of the
Special   Terms and Conditions         from the Office       of the Assistant
Secretary    for Planning       and Evaluation,      DHHS, incorporating    the
changes Secretary      Lyng set out.     On March 16, 1989, we wrote to Mr.




        Page 72                         GAO/RCED-9084 Washington’s Family Independence Prt~gram
       ,
                             Appendix III
                             Comments   From the State of Washington




                     Mr. John W. Harman
                     March 16, 1990
                     Page 11

                     Ng formally        requesting      these     changes     but    did   not    receive     any
                     response.
                     We believe      that we and the Department of Agriculture            should now be
                     at the same place regarding          what are the sources of the numbers we
                     are currently       using to determine     Food Stamp benefit      cost neutrality
                     and what are the sources of the numbers we should be using.                   In the
                     absence of any formal         notification        to the contrary,      we plan to
                     continue      to collect    and submit Food Stamp cost neutrality                 data
                     according      to the formulation        contained    in our letters      of August
                     1989.      In addition,    we consider     Section    3.01 of the Special Terms
                     and Conditions       void and the annotated        Special Terms and Conditions
See comment 7        operative.

                     wstrative            Cost Calculations
                     As indicated         in the report,      separate    cost neutrality          calculations
                     are made for benefits          and administrative         costs.      These are combined
                     for each federal          department's     programs to establish             a net savings
                     or liability.          Our methodology     for establishing          administrative       cost
                     neutrality        for Food Stamps, Medicaid,         and AFDC was submitted             on May
                     3, 1988.        Our submission       of cost neutrality          figures     for the first
                     three      quarters     of FIP contained         calculations         according       to this
                     formula.        Your report'indicates         that we had not received               a formal
                     response       to this     proposed methodology.             As of March 1990, this
See comment 8        continues       to be the case.        We anticipate        that our next submission
                     will    have some additional          adjustments      to administrative            costs not
                     anticipated         or included     in the 1988 methodology.                These changes
                     will    have to be negotiated          with the federal          representatives.

                     (C!) Summarv

                     Thank you for the opportunity                 for commenting   on the GAO draft
                     report,      Food Stamp Proaram:            Observations   on Achievincr  FIP Cost
                     Neutrality      and Other Matters          (GAO/RCED-90-84).   We appreciate     the
                     spirit     of fairness      and impartiality      with which GAO staff   undertook
                     their     review of FIP cost neutrality            issues and complement them on
                     the technical       quality     of the document.
See comment 9.       The draft       report     provides  an excellent    overview     of many of the
                     methodological         and data issues connected with measuring Food Stamp
                     cost    neutrality        for    the Washington   State    Family    Independence
                     Program.         Since we also have cost neutrality             responsibilities
                     related    to changes we have made in the AFDC and Medicaid programs
                     under FIP, many of the.issues          which you discuss in your report have
                     relevance     beyond the Food Stamp program alone.

                 Y




                             Page 73                         GAO/RCED-90-84 Washington’s Family Independence Program
                        Appendix   III
                        CommentaPromtheStrfaofWaAngton




                                                                                               1
                  Mr. John W. Hannan
                  March 16, 1990
                  Page 12

                  We believe      that it would be useful        for us to' sit down with
                  representatives       of the U.S. Departments of Health and Human
                  Services and Agriculture        to consider in more detail the quertions
                  which you raised.       Such discussions should begin with a recognition
See comment 10.   by federal representatives         of their Departments' responsibilities
                  for participation        in the cost of caseload growth which they
                  incurred     under sections       1509 and 9121 of the Omnibus Budget
                  Reconciliation      Act of 1987.




                  Enclosures




                        Page74                  GAO/lUXD-~Was~n*~F8mily        IadepeadenceRogram
                Appendix Ill
                Comments From the State of Wahington




                The following are GAO'S comments on Washington State’s letter dated
                March 16, 1990.


                1. We have included this information on pages 6 and 40 of the report.
GAO Comments:
                2. We have included a summary of this information on pages 40 and 41
                of the report. The state’s enclosure has not been included in the report.

                3. We have included a summary of this information on pages 41 and 42
                of the report.

                4. We have included this information on page 42 of the report.

                6. We have included this information on pages 39 and 40 of the report.

                6. We have included a summary of this information on pages 41 and 42
                of the report.

                7. We have included a summary of this information on pages 41 and 42
                of the report.

                8. We have included this information on pages 22,45 and 52 of the
                report.

                9. We have included this information on pages 6 and 38 of the report.

                10. We have included this information on pages 42 and 43 of the report.




                Page 76                      GAO/RCED4044   Washington’s Family Independence Program
Appendix IV

Major Contributors to This Report


        41111111_______‘----------
Resources,            Peter M. Bramble, Jr., Assignment Manager
Community, and        June M. Foster, Staff Evaluator
                      Michelle A. Gambone, Senior Social Science Analyst
Economic
Development Division,
Washington, D.C.
                              Alvin S. Finegold, Evaluator-in-Charge
Seattle Regional Office       Jane A. Dunkel, Staff Evaluator




(028281)                       Page 76                  GAO/RCED-90-84 Washington’s Family Independence Program
‘I’t~ltq,hont! 202-275-6241

‘I’ht* first. five twpies of each report, art’ free. Aclditioml   copit++ art*
p1;2.00t%ictt.




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out, I.0 t.tte Stiperintettdettt~ of Docurtterrt,s.