oversight

Food Assistance: Reducing Food Stamp Benefit Overpayments and Trafficking

Published by the Government Accountability Office on 1997-10-30.

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

                   United States General Accounting Office

GAO                Testimony
                   Before the Subcommittee on Department Operations,
                   Nutrition, and Foreign Agriculture, Committee on
                   Agriculture, House of Representatives


For Release
on Delivery
Expected at
                   FOOD ASSISTANCE
10:00 a.m. EST
Thursday
October 30, 1997
                   Reducing Food Stamp
                   Benefit Overpayments and
                   Trafficking
                   Statement of Robert A. Robinson, Director
                   Food and Agriculture Issues,
                   Resources, Community, and Economic
                   Development Division




GAO/T-RCED-98-37
    Mr. Chairman and Members of the Subcommittee:

    Thank you for the opportunity to discuss our work on fraud, waste, and
    abuse in the U.S. Department of Agriculture’s (USDA) Food Stamp Program.
    The program is one of the nation’s largest welfare programs and the
    largest single program administered by USDA. In fiscal year 1997, about $21
    billion in food stamps were provided to about 24 million recipients,1 down
    slightly from recent years. Reviews by GAO, USDA’s Office of Inspector
    General (OIG), and others have produced ample evidence that the system
    for delivering food stamps is vulnerable to, and is being victimized by,
    significant fraud, waste, and abuse.

    Today, we will discuss fraud, waste, and abuse in the Food Stamp Program
    from three perspectives: (1) the nature and extent of the problem, (2) the
    roles and responsibilities of the major federal agencies involved in
    minimizing it, and (3) the potential of electronic benefits transfer (EBT)—a
    system of benefit delivery that replaces the traditional food stamp coupons
    with a debit card—to reduce it.

    In summary, we found the following:

•   Fraud, waste, and abuse in the Food Stamp Program takes two primary
    forms: (1) overpayments to food stamp recipients and (2) the use of food
    stamps to obtain cash or other non-food items—a process known as
    trafficking. According to USDA, in fiscal year 1996, the most current year for
    which data are available, about $1.5 billion was paid out to individuals
    who either should not have received any food stamps at all or who
    received more than they were entitled to receive. These overpayments
    represented nearly 7 percent of the approximately $22 billion in food
    stamps provided. Overpayments are caused by both inadvertent and
    intentional errors made by recipients and errors made by state
    caseworkers. In addition, program regulations specify that recipients use
    food stamps only to purchase food from authorized retailers. However,
    USDA has recently estimated that up to $815 million in food stamps,
    approximately 4 percent of the food stamps issued, were traded for cash in
    fiscal year 1993 through retail stores participating in the program.
    Numerous retailers are caught each year paying food stamp recipients a
    discounted value of the stamps (for example, 70 cents on the dollar) and
    then redeeming the stamps at full face value from the government. There



    1
     For this testimony, food stamps refers to the benefits provided in the form of coupons or through
    electronic benefits transfer.



    Page 1                                                                           GAO/T-RCED-98-37
                           are no reliable data on the extent of trafficking that occurs before the food
                           stamps are redeemed by an authorized retailer.
                       •   USDA’s Food and Consumer Service (FCS) administers the Food Stamp
                           Program in partnership with the states. The states are responsible for the
                           day-to-day operation of the program, including meeting with applicants
                           and determining their eligibility and benefit levels. FCS provides nationwide
                           criteria for determining eligibility for assistance and the amount of food
                           stamps recipients are entitled to receive. It monitors the accuracy of state
                           benefit determinations and operates a system of incentives and sanctions
                           to encourage states to reduce the number of errors. FCS also approves
                           retailers to participate in the program and monitors and investigates their
                           activities to identify those potentially violating program regulations. The
                           Department’s OIG devotes a substantial share of its audit and investigative
                           resources to identifying program irregularities, especially trafficking.
                       •   EBT systems have the potential to reduce some aspects of the fraud, waste,
                           and abuse in the Food Stamp Program but not others. By providing a clear
                           “paper trail” of all food stamp transactions, EBT systems help reviewers
                           identify trafficking activities and remove and/or prosecute retailers
                           engaged in such activities. These systems also address problems
                           associated with food stamp theft. Because EBT is a benefit delivery system,
                           however, it cannot address the substantial problems associated with
                           determining eligibility for food stamps or establishing benefit levels.


                           The two main areas of fraud, waste, and abuse involve (1) overpayment of
Nature and Extent of       food stamp benefits and (2) trafficking.
Fraud, Waste, and
Abuse                      Concerning the first area, overpayments occur when ineligible persons are
                           provided food stamps and when eligible persons are provided more than
                           they are entitled to receive. In 1996, for example, the states overpaid
                           recipients an estimated $1.5 billion—or 6.92 percent—of the
                           approximately $22 billion in food stamps issued. Overpayments occur for
                           two reasons. First, recipients make errors, either inadvertent or
                           intentional, in providing information to the state caseworker about the
                           recipient household’s size, income, assets, or other pertinent information
                           needed to determine the household’s eligibility and benefit level. Second,
                           state caseworkers make errors in determining either an applicant’s
                           eligibility for food stamps or the appropriate level of benefits. According
                           to 1996 data, recipient errors accounted for 57 percent of the
                           overpayments—36 percent were unintentional errors and 21 percent were
                           intentional. The remaining 43 percent of the overpayments were caused by
                           caseworkers’ errors. It should be noted that errors by participants and



                           Page 2                                                      GAO/T-RCED-98-37
caseworkers can also result in underpayments. FCS’ data show that food
stamp recipients were underpaid approximately $518 million in fiscal year
1996.

In March 1997, we reported on one specific example of food stamp
overpayments—payments involving violations of the federal regulations
that prohibit inmates of correctional institutions from participating in the
Food Stamp Program.2 By matching automated food stamp and prison
records in four states—California, Florida, New York, and Texas—we
identified over 12,000 inmates who were included in the households
receiving food stamps in fiscal year 1995. These households improperly
collected an estimated $3.5 million in food stamps. Subsequently, in
August 1997, the Balanced Budget Act of 1997 (P. L. 105-33, Aug. 5,
1997) included a provision directing the states to ensure that individuals
who are under federal, state, or local detention for more than 30 days are
not participating in the Food Stamp Program. In response to a request
from the Senate Committee on Agriculture, Nutrition, and Forestry, we are
currently examining the potential for computer matching to identify other
ineligible populations participating in the program.

With respect to trafficking—the second main area of fraud, waste and
abuse—program regulations specify that participants must use food
stamps only to purchase food items from the retailers authorized by FCS to
accept food stamps. Once they receive them, authorized retailers are
required to forward food stamps directly to financial institutions for
redemption. However, numerous federal and state officials told us that
food stamps have essentially become a second currency exchanged by
some recipients for cash or non-food items. Trafficked food stamps may
change hands several times, but all food stamps must eventually flow
through an authorized retailer because only such a retailer can redeem
food stamps for cash from the government. Numerous retailers are caught
each year accepting food stamps from recipients, giving them a discounted
value of the stamps in cash (for example, 70 cents on the dollar), and then
redeeming the stamps at full face value from the government.

Data on the extent of trafficking between parties prior to reaching
authorized retailers are unavailable. However, a 1995 FCS study3 estimated
that up to $815 million, or about 4 percent of the food stamps issued, was

2
 Food Stamps: Substantial Overpayments Result From Prisoners Counted as Household Members
(GAO/RCED-97-54, Mar. 10, 1997).
3
  The Extent of Trafficking in the Food Stamp Program, U.S. Department of Agriculture, Food and
Consumer Service, Aug. 19, 1995.



Page 3                                                                         GAO/T-RCED-98-37
                          exchanged for cash by authorized retailers during fiscal year 1993. The
                          study found that supermarkets, where over three-fourths of all food
                          stamps are redeemed, have low trafficking rates compared with other
                          types of retailers. The trafficking rate reported for publicly owned
                          supermarkets (i.e., a company whose stock trades publicly) was less than
                          0.1 percent of food stamp redemptions, and the rate reported for privately
                          owned supermarkets was 2.6 percent. By comparison, the trafficking rate
                          for small, privately owned food retailers and privately owned retailers that
                          do not stock a full line of food was 15.1 percent of the food stamps they
                          redeemed.


                          The Food Stamp Program is administered by USDA’s FCS in partnership with
Roles and                 the states. FCS provides nationwide criteria for determining who is eligible
Responsibilities of the   for assistance and the amount of benefits recipients are entitled to receive.
Federal Agencies in       The states are responsible for the day-to-day operation of the program,
                          including meeting with applicants and determining their eligibility and
Minimizing Fraud,         benefit levels. In making these decisions, state caseworkers rely on
Waste, and Abuse          documentation provided by households and information obtained in
                          interviews with the applicants. FCS is also responsible for authorizing
                          retailers to redeem food stamps as well as for monitoring program
                          compliance by the approximately 190,000 stores currently authorized to
                          redeem food stamps. FCS and USDA’s OIG are responsible for investigating
                          retailers suspected of violating program regulations. The OIG performs all
                          the criminal investigations of the Food Stamp Program conducted by USDA
                          and coordinates investigative activities with other federal agencies.
                          Others—such as the Federal Bureau of Investigation (FBI), the U.S. Postal
                          Service, and the U.S. Secret Service—as well as the states assist in
                          combatting fraud.

                          The Food Stamp Program’s Quality Control (QC) System is FCS’ primary
                          tool for evaluating the states’ performance in issuing benefits and
                          determining the level of overpayments. Under the QC System, the states
                          must review a sample of their household cases each year to determine the
                          accuracy of the eligibility and benefit determinations made by state
                          caseworkers and the extent of payment errors—both overpayments and
                          underpayments. FCS reviews a subsample of each state’s sample to ensure
                          the accuracy of the states’ efforts. FCS then determines the official error
                          rate for each state and a national error rate. If an individual state’s error
                          rate exceeds the national error rate, FCS can sanction the state by requiring
                          it to reimburse the federal government for a portion of the erroneous
                          payments. On the other hand, states that have low error rates are eligible



                          Page 4                                                       GAO/T-RCED-98-37
for additional reimbursement from the federal government—referred to as
enhanced funding.

According to USDA’s data, overpayments in the Food Stamp Program have
declined since 1993. At the national level, the overpayment error rate has
decreased from 8.27 percent in fiscal year 1993 to 6.92 percent in fiscal
year 1996. The 1996 overpayment error rate is the lowest level ever
achieved in the program. Since 1995, FCS has increased its emphasis on
achieving payment accuracy and has employed various initiatives to assist
the states in reducing the number of errors. The Congress appropriated
over $3 million for these initiatives. Specifically, FCS’ activities include
sponsoring national, regional, and state conferences; providing direct
technical assistance to the states; and facilitating the exchange of state
information on effective strategies for determining accurate payments. As
we reported in 1995,4 while technical assistance and related steps are
undoubtedly useful, the single most critical factor in reducing
overpayments is the commitment of the managers of the states’ Food
Stamp Programs to aggressively address the error rate problem.

Supplementing its efforts to help the states reduce errors, FCS has
implemented a new strategy for conducting its sanction activities.
Historically, for a variety of reasons, the states with high error rates paid
little of the sanction penalties FCS imposed. Beginning in 1996, FCS reached
agreement with some of these states regarding more than $404 million in
penalties owed for unacceptable error rates that occurred in fiscal years
1992 through 1996. FCS agreed to reduce this penalty to $135 million and
entered into settlement agreements with these states that establish
performance goals tied to payment accuracy. Of the $135 million sanction
liability, the states are required to invest almost $35 million in activities
that directly lead to the reduction of their error rates. If a state meets its
performance goals as set out in the agreement, its share of the remaining
$100 million liability will be waived. According to FCS, as a result of these
settlements, the states are more actively engaged in activities to reduce
errors, which should continue to have a positive effect on improving
payment accuracy.

With respect to trafficking, our 1995 report stated that FCS’ controls and
procedures for authorizing and monitoring the retailers that participate in
the Food Stamp Program did not deter or prevent retailers from trafficking
in food stamps. Stores that did not meet eligibility criteria were being

4
 Food Assistance: Reducing Food Stamp Benefit Overpayments and Trafficking (GAO/RCED-95-198,
June 23, 1995).



Page 5                                                                    GAO/T-RCED-98-37
admitted to the program because the process for authorizing them was
flawed. The single most effective deterrent to preventing ineligible
retailers from being authorized is a preauthorization on-site visit.
However, because of insufficient time or resources, FCS made few visits
before authorizing stores to participate in the program. Furthermore, FCS’
monitoring process was inadequate to detect authorized retailers that
were violating program regulations. Reports on retailers’ activities, such as
total food sales and food stamp redemptions, were often untimely or
inaccurate and of limited utility in identifying retailers’ trafficking. In
addition, we reported that FCS had only 46 investigators nationwide to
conduct investigations of retailers suspected of trafficking or violating
other program regulations.

Since our report, FCS has initiated several actions to reduce trafficking in
the program. For example, FCS has contracted with a number of different
companies to make 35,000 to 40,000 store visits by the end of fiscal year
1998. These visits will be made primarily to new stores requesting approval
to participate in the program and to stores requesting reauthorization to
participate in the program. In addition, FCS reports that it has improved its
Store Tracking and Redemption System by, for example, developing a
profile that enables FCS to better identify stores that may be trafficking in
food stamps or selling ineligible items. The system also includes
information on sanctions taken against the stores that violate program
regulations. The system is used to screen all new applications for
participation in the program in order to keep ineligible retailers from
returning to the program during a period in which they are disqualified.
The system is also used to monitor stores’ redemptions and to identify
retailers for investigation or other administrative actions. For the states
using EBT systems, FCS has developed an automated system that identifies
transaction patterns in EBT data that indicate trafficking violations.

In addition to FCS’ oversight activities, USDA’s OIG investigates retailers that
illegally use food stamp benefits and coordinates its investigative activities
with other federal and state agencies. For example, the OIG is currently
looking at food stamp trafficking with state and local agencies in about 30
locations nationwide. The OIG has also taken an active role in monitoring
and reviewing EBT systems and developing the automated system to
analyze EBT data to identify fraud in the Food Stamp Program.

Outside of USDA, a number of federal investigative agencies also play a role
in the process. For example, the FBI investigates criminal violations of
USDA programs if the violation has involved bribery, organized crime, or




Page 6                                                         GAO/T-RCED-98-37
                      major fraud perpetrated by federal employees. The FBI focuses its
                      investigations on links between food stamp trafficking and other criminal
                      activities under the Bureau’s jurisdiction, such as narcotics, terrorism, and
                      white-collar crime. The U.S. Postal Inspection Service has primary
                      responsibility for enforcing laws concerning property in the custody of the
                      U.S. Postal Service. The Postal Inspection Service’s main investigative
                      focus for the Food Stamp Program is the theft of food stamps and EBT
                      cards from the Postal Service’s custody prior to receipt by the food stamp
                      recipient. Finally, the U.S. Secret Service investigates food stamp
                      counterfeiting and makes recommendations on security measures relating
                      to EBT cards.

                      States are responsible for investigating and prosecuting individuals
                      suspected of falsifying information in order to obtain food stamps and
                      misusing their food stamps—such as selling their stamps for cash. States
                      sometimes work with FCS or USDA’s OIG to investigate retailers’ fraud and
                      abuse in the program. In an effort to supplement federal efforts to
                      investigate retailers, FCS has used State Law Enforcement Bureau
                      agreements. Under these agreements, FCS provides the states with food
                      stamp coupons to use in conducting their own trafficking investigations.
                      FCS has established agreements with 32 states, but only 10 states have
                      conducted sustained efforts against food stamp trafficking.


                      Food stamp benefits have historically been distributed in the form of
Observations on the   printed coupons. In Reading, Pennsylvania, in 1984, however, FCS piloted
Use of Electronic     the use of an alternative delivery system—EBT. Since this pilot, there has
Benefits Transfer     been increasing interest in moving to EBT systems. Under such systems,
                      recipients receive plastic debit cards to obtain their food stamps and pay
Systems               for purchases through point-of-sale terminals installed at check-out
                      counters in food stores. At the time of the purchase, recipients enter a
                      personal identification number. The EBT computer then verifies that
                      sufficient funds exist in the recipient’s food stamp account, debits the
                      purchase amount from the recipient’s account, and credits it to the
                      retailer’s account. At the end of each business day, the authorized sales are
                      totaled and funds are transferred electronically to the retailer’s bank
                      account. Currently, 11 states have implemented EBT systems statewide.
                      Eight of these states deliver multiple program benefits with their EBT
                      system, including other federal and state programs. Additionally, 16 states
                      use EBT systems in selected counties. All the remaining states are in the
                      process of implementing EBT systems. Collectively, EBT systems supply
                      almost 20 percent of all food stamps.



                      Page 7                                                       GAO/T-RCED-98-37
By eliminating paper coupons that may be lost, sold without any record of
the sale, or stolen, EBT systems can help cut back on food stamp fraud. EBT
systems reduce the likelihood of benefit theft. Of most importance,
however, EBT systems create an electronic record of each food stamp
transaction, making it easier to identify and document instances where
food stamp benefits are trafficked. EBT data include the following
information on each transaction: the exact time of day, the amount, the
recipient’s identity, the store’s identity, and the specific cash register in the
store. Reviewers can use these data to identify suspicious transactions or
transaction patterns. Since 1991, USDA’s OIG has opened 234 cases involving
food stamp trafficking as a result of analyzing EBT data. The stores
involved in these cases redeemed over $70 million in EBT food stamps, of
which the OIG identified over $27 million as being fraudulent.

The August 1996 Welfare Reform Act explicitly states that EBT data alone
can be used as evidence to take action against retailers violating the Food
Stamp Act. As a result, FCS can now use EBT data to levy administrative
sanctions against retailers caught trafficking, such as permanently barring
them from the program and imposing fiscal penalties, without the expense
of criminal investigation and prosecution. The legislation also mandated
nationwide implementation of EBT systems by October 1, 2002.

While EBT systems make a major contribution to reducing certain aspects
of food stamp fraud, they will not eliminate all fraud. Even in states where
EBT systems have been implemented statewide, trafficking is still
occurring. In such cases, a store owner accepts a card, gives the recipient
a discounted value of the benefits in the recipient’s account in cash, then
claims the full value of the benefits from the government. Furthermore,
because EBT systems are simply another vehicle for distributing benefits,
they cannot correct fraud, waste, and abuse that occurs during the process
of determining eligibility and benefit levels. Unless better ways are found
to verify applicant-supplied information and to avoid errors made by state
caseworkers, individuals will continue to receive benefits to which they
are not entitled, regardless of whether these benefits are distributed by
coupon or EBT systems.

In addition, moving to EBT systems is not without costs. Substantial
investments must be made in computer systems, point-of-sale terminals,
and other hardware. FCS reported that initially EBT systems were more
expensive to operate than conventional coupon systems. More recent
estimates suggest that EBT systems have become more cost competitive.




Page 8                                                         GAO/T-RCED-98-37
           EBT costs are expected to continue to diminish as the technology becomes
           more widely used.

           In any event, however, as we reported in 19945 and continue to believe
           today, EBT systems will likely be most cost effective if they are used to
           deliver food stamps in conjunction with other federal and state assistance
           programs such as Temporary Assistance to Needy Families and the Special
           Supplemental Nutrition Program for Women, Infants and Children. In this
           way, overhead costs can be spread across a larger program volume and
           serve the purposes of multiple programs.


           Thank you again for the opportunity to appear before you today. We would
           be pleased to answer any questions you may have.




           5
           Food Assistance: Potential Impacts of Alternative Systems for Delivering Food Stamp Program
           Benefits (GAO/RCED-95-13, Dec. 16, 1994).



(150279)   Page 9                                                                       GAO/T-RCED-98-37
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 37050
Washington, DC 20013

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested