[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
                 WASTE, FRAUD, ABUSE, AND MISMANAGEMENT

=======================================================================

                                HEARINGS

                               before the

                         TASK FORCE ON WELFARE

                                 of the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

              HEARINGS HELD IN WASHINGTON, DC: JULY 19 AND
                           SEPTEMBER 12, 2000

                               __________

                            Serial No. 10-6


           Printed for the use of the Committee on the Budget

                     U.S. GOVERNMENT PRINTING OFFICE
65-618cc                     WASHINGTON : 2000





                        COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California     KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky             JOSEPH M. HOEFFEL III, 
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania
                                 ------                                

                         Task Force on Welfare

                       JIM NUSSLE, Iowa, Chairman
PAUL RYAN, Wisconsin, Vice Chairman  EVA M. CLAYTON, North Carolina,
WALLY HERGER, California               Ranking Minority Member
PETER HOEKSTRA, Michigan             BENNIE G. THOMPSON, Mississippi
MAC COLLINS, Georgia                 JIM DAVIS, Florida
                                     GERALD D. KLECZKA, Wisconsin
                                 ------                                

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel





                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held in Washington, DC, July 19, 2000: Food Stamp Fraud--
  Why Trafficking Persists and What Can Be Done About It.........     1
    Statement of:
        Roger C. Viadero, Inspector General, U.S. Department of 
          Agriculture............................................     5
Lawrence J. Dyckman, Director, Food and Agriculture Issues, 
  Resources, Community, and Economic Development Division, U.S. 
  General Accounting Office......................................    13
        Darrell Hartman, Director of Special Operations, Office 
          of Inspector General, Texas Department of Human 
          Services...............................................    20
        Shirley R. Watkins, Under Secretary, Food, Nutrition, and 
          Consumer Services, U.S. Department of Agriculture......    24
        Sheila R. Zedlewski, Director, the Income and Benefits 
          Policy Center, the Urban Institute.....................    55
        David A. Super, Esquire, General Counsel, Center on 
          Budget and Policy Priorities...........................    59
    Prepared statement of:
        Mr. Viadero..............................................     7
        Mr. Dyckman..............................................    15
        Mr. Hartman..............................................    22
        Food, Nutrition, and Consumer Services: The Extent of 
          Trafficking in the Food Stamp Program--An Update.......    24
        Ms. Watkins..............................................    39
        Ms. Zedlewski............................................    57
        Mr. Super................................................    61
                              ----------                              

Hearing held in Washington, DC, September 12, 2000: Federal 
  Disability Benefits Still Being Paid to Drug Addicts and 
  Alcoholics.....................................................    75
    Statement of:
        James G. Huse, Jr., Inspector General, Social Security 
          Administration.........................................    78
        Steven L. Schaeffer, Assistant Inspector General for 
          Audit, Social Security Administration..................    79
        Kenneth Nibali, Associate Commissioner for Disability, 
          Social Security Administration.........................    82
    Prepared statement of:
        Mr. Huse.................................................    78
        Mr. Schaeffer............................................    81
        Mr. Nibali...............................................    84


 Food Stamp Fraud: Why Trafficking Persists and What Can Be Done About 
                                   It

                              ----------                              


                        WEDNESDAY, JULY 19, 2000

                  House of Representatives,
                           Committee on the Budget,
                                     Task Force on Welfare,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 2:05 p.m., in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the Task Force) presiding.
    Members present: Representatives Nussle, Hoekstra, and 
Clayton.
    Mr. Nussle. The Task Force will come to order. Thank you so 
much for bearing with us on the votes on the floor of the 
House. We apologize for any inconvenience that's given to our 
guests or our witnesses or any colleagues.
    First I'd like to thank the ranking member for joining me 
in this hearing today, this discussion about the Food Stamp 
Program. My ranking member, Eva Clayton, is someone who I have 
had the opportunity to work with on this committee as well as 
on the Agriculture Committee. And she is probably one of the 
Congress' foremost leading advocates and authorities on Food 
and Nutrition Programs. And I am honored to have you sharing 
this discussion today.
    This is not a partisan discussion. The Budget Committee is 
a committee that looks at macro issues, such as the 
expenditures of tax dollars. We have looked through the budget. 
There are a number of issues that we are looking at this year 
that have received reports from different agencies. We're 
looking through those to see what we can do in our effort to 
maintain fiscal discipline and budget oversight.
    Food stamp trafficking is one of the major culprits that 
keep food stamps from providing daily nutrition needed so 
desperately by millions of infants and young children. In our 
hearing today, we'll address the current status of the ongoing 
problem with the Food Stamp Program.
    We will also consider whether the data from the EBT, or 
electronic benefit transfer, system, now in place in most 
States, many States, has enabled USDA better access to the 
level of trafficking information and activity and how EBT data 
can better be used to control trafficking in the future.
    Additionally, we hope to examine the effectiveness of the 
Department's efforts to control trafficking by imposing 
sanctions and prosecuting those who have abused the program 
through trafficking.
    The Food Stamp Program was established to provide low-
income households with coupons or electric benefits, electronic 
benefits, so they can be used to buy food at government-
approved grocery stores and mobile vendors. Unfortunately, 
because food stamps are kind of a parallel currency in many 
parts of our country, they are subject to the kinds of fraud 
and misuse by beneficiaries, vendors, and others who may come 
in contact with them.
    Today we are specifically looking into the fraud and abuse 
of the food stamp trafficking portion. Food stamp trafficking 
generally begins when vendors accept food stamps in exchange 
for cash at discounted rates.
    According to a 1995 study by USDA, one that I remember when 
I was on the Agriculture Committee, USDA's Food and Nutrition 
Service said that about 815 million, or about 4 percent, of the 
food stamps issued were trafficked by about 9 percent of the 
authorized dealers in Fiscal Year 1993.
    The study, which used data from a period when few States 
had begun to use EBTs to deliver food stamps, was until 
recently, really, the only measure that I am aware of about 
trafficking of food stamps.
    More recently, a report by Food and Nutrition Service, 
dated March of this year but just released evidently just this 
past week, as I understand it, contends the trafficking has 
declined by 19 percent, or to about $660 million a year between 
the period of 1996 to 1998.
    It also reported a 24 percent decline in food stamps case 
load from 10.8 million households per month from 1993 to about 
8 million per month in 1998, a 16 percent decline in the number 
of food stamp, retailers authorized to accept food stamps, and 
a 50 percent changeover from paper food stamps to EBT systems.
    To date, the report's conclusions and methodology have not 
really been confirmed independently, but that will be part of 
the discussion I am sure today.
    Joining us we have a number of witnesses. And, instead of 
individually introducing them, what I'd like to do is get to 
their testimony. First I'd like to recognize the ranking member 
for any comments that she would like to make at this time 
before we get to witnesses.
    Mrs. Clayton. Thank you, Chairman Nussle. I want to thank 
you for organizing this hearing. I, too, want to compliment you 
on your sense of fairness and congeniality in making sure we 
have a full discussion of this issue.
    Food stamp trafficking is more than a crime against this 
nation. Food stamp trafficking is a crime against children. 
It's a crime against families. It's a crime against the poor, 
the needy, the hungry. And that is why we must do all that we 
can to decrease and ultimately eliminate food stamp 
trafficking.
    We are making progress. The amount of trafficking is 
declining. During the most recent 2 years, for which data is 
available, food stamp trafficking amounted to about $600 
million a year. That amount is roughly said to be 20 percent 
below the trafficking in 1993, which stood at $815 million a 
year.
    The rate of trafficking is also declining. During the same 
period, the amount of dollars trafficked compared to the 
benefit issued declined by 8 percent from four cents on the 
dollar to three and a half cents on the dollar.
    And, importantly, Mr. Chairman, according to the Department 
of Agriculture, the greatest reduction in the rate of 
trafficking came from those stores that are most likely to 
traffick. We are making progress. Yet, admittedly, we must do 
more.
    Six hundred million dollars in trafficking is unacceptable. 
This amount of money needs to be used and is needed to feed 
families who need food.
    Still, the progress we have experienced has been due, in 
part, to the fact that we have proposed legislation and 
approved in the Agriculture Committee and approved by Congress 
to end waste, fraud, and abuse in the Food Stamp Program.
    We have made an effort to cut down on trafficking. One of 
the greatest strides this Congress has taken in this area is to 
mandate the conversion to electronic benefits transfer, EBT, 
system to end by the Fiscal Year 2002.
    To date, 37 States have converted to EBT systems statewide. 
More than 70 percent of the food stamps issued are through EBT 
systems. Yet, Mr. Chairman, when we consider the cuts in 
funding for enforcement effort against food stamp waste, fraud, 
and abuse, it becomes clear why progress has not been as rapid 
as we would expect.
    Over the past 5 years, the difference between the amount of 
funds requested for food stamp administration and those funds 
enacted has indeed been pronounced. Simply put, it makes little 
sense to challenge a giant with a rock. That fable may have 
worked in Biblical times, but it does not work in these times.
    If we want to eliminate food stamp trafficking, we must put 
the necessary resources behind the effort, but, Mr. Chairman, 
there is another more compelling issue in this area that we 
cannot and we must not ignore.
    Every day in America, despite welfare reform or perhaps, 
some would say, because of it, there are families who need food 
stamps to eat but do not receive that assistance. Every day in 
America, despite welfare reform or perhaps because of it, many 
go hungry.
    There is evidence of hunger in 3.6 percent of all 
households in America. According to the report for Bread for 
the World entitled ``Domestic Hunger and Poverty Facts,'' 31 
million persons live in households that experience hunger or 
risk hunger. That number has represented one in every ten 
households in the United States, despite our great prosperity.
    Many, too many, of the hungry are children. Close to four 
million children are hungry. Fourteen million children, 20 
percent of the population, are said to live in homes that are 
called food-insecure homes. In food-insecure homes, meals are 
skipped. Sizes of meals are reduced.
    Again, according to Bread for the World, some of those 
occupants really do not receive any food for a whole day or 
days. More than 10 percent of all households in America are 
said to be homes of food-insecure.
    Because there is such hunger and such food insecurity, 
there is also infant mortality, growth stunting, iron 
deficiency, anemia, poor learning, and increased chances of 
disease. Because there is this hunger and food insecurity, the 
poor are more likely to remain poor, the hungry more likely to 
remain hungry and the sick less likely to be well.
    The harsh reality of our efforts to root out waste, fraud, 
and abuse--and food stamps is that in all too many instances--
too many citizens who are eligible for food stamps, who need 
food stamps do not get the benefits.
    Indeed, according to the Department of Agriculture, only 
two-thirds of those eligible for food stamps actually receive 
them. And since the rise to welfare reform movement, 
participation in food stamps has decreased by 33 percent. These 
declines may be seen good for waste, fraud, and abuse, but they 
have not been good for eligible children who need the food or 
for the poor families or for those who are hungry. And, most 
disturbing, these declines have included more of the poorest of 
the poor.
    Those least able to feed themselves constitute most of the 
persons who no longer are receiving food stamps. Does it really 
serve our purposes to encourage the space to kick people off 
the food stamp roll by enticing space with a payment of 35 
cents on the dollar for each recipient who no longer receives 
food stamps without regards of those who may be hungry and who 
are not served?
    Should I be concerned that in my State of North Carolina, 
over the last 5-year period from 1993 to 1998, food stamp 
participation declined 103,000, from 630,000 to 520? What has 
happened to those thousands of persons who were then needy, are 
not needy? Should I assume they are no longer hungry? Then why 
are they no longer participating? Should we applaud the 
citizens of North Carolina or try to find out the extent of 
hunger?
    Is it proper to praise the State of Texas, where the number 
of food stamp recipients was cut from $2.7 million to $1.4 
million over a recent 5-year period? Two million Texans 
according to the Department of Agriculture have trouble 
consistently affording food and 950,000 of those suffer from 
outright hunger.
    Should we applaud the State of Maryland that among the 50 
States is responsible for closing food stamp operations at 
almost half of the nation's stores that have been closed? 
What's happening to the people who need to use their food 
stamps when, indeed, their neighborhood food store operation is 
no longer authorized and none to replace it? Worse, what 
happens in rural communities when the only store within miles 
of the distance are no longer authorized and none to replace 
it?
    Over the recent 5-year period for which we have data, there 
has been a decline of 16 percent, from 210,000 stores 
nationwide to 117,000. Mr. Chairman, is our zeal to eliminate 
food stamp trafficking--and I count myself in that zeal--a tool 
to help or is it really an instrument that hurts? I repeat: 
Food stamp trafficking is unacceptable. And we must do 
everything to eliminate it. But we must be careful to keep the 
consequences of our efforts in mind.
    There was a 24 percent decline in food stamp caseload over 
a recent 5-year period. How are those persons eating now, Mr. 
Chairman? Hunger is indeed a condition of poverty.
    For more than three decades, the Food Stamp Program has 
been a cornerstone of America's fight against hunger and the 
first line of defense. And as we seek to eliminate food stamp 
trafficking, let us be careful not to eliminate our fight 
against hunger. We must not produce unintended results denying 
hungry families and children food they so desperately need.
    Again, I thank you. And I applaud the success we have thus 
far. I look forward to the testimony.
    Mr. Nussle. I thank the gentle lady. We're just trying to 
organize now that we have yet more votes. Our job is 
interrupting our job. See how that works?
    First of all, I ask unanimous consent that all members be 
given five legislative days to submit statements for the 
record. Without objection, so ordered. And the witnesses are 
allowed to--we'll submit your entire testimony for the record. 
And we would ask you to summarize.
    What we would first like to do is to ask Mr. Viadero. He is 
the Inspector General for the Department of Agriculture. My 
understanding is you have a time constraint. Why don't we ask 
you to provide your testimony? We'll ask you some questions. 
And then we'll go to the rest of the panel.
    So I'll turn it over to you. We'd ask if you can try and 
keep it within about 5 minutes. That would be great. Thank you.
    Mr. Viadero. Thank you, Mr. Chairman and Ms. Clayton. I 
appreciate the consideration given to me in time for this.

    STATEMENT OF ROGER C. VIADERO, INSPECTOR GENERAL, U.S. 
DEPARTMENT OF AGRICULTURE; ACCOMPANIED BY LAWRENCE J. DYCKMAN, 
 DIRECTOR, FOOD AND AGRICULTURE ISSUES, RESOURCES, COMMUNITY, 
  AND ECONOMIC DEVELOPMENT DIVISION, U.S. GENERAL ACCOUNTING 
OFFICE; DARRELL HARTMAN, DIRECTOR OF SPECIAL OPERATIONS, OFFICE 
 OF INSPECTOR GENERAL, TEXAS DEPARTMENT OF HUMAN SERVICES; AND 
   SHIRLEY R. WATKINS, UNDER SECRETARY, FOOD, NUTRITION, AND 
       CONSUMER SERVICES, U.S. DEPARTMENT OF AGRICULTURE

                   STATEMENT OF ROGER VIADERO

    Mr. Viadero. Good afternoon, Mr. Chairman and members of 
the Committee. We are pleased to be here today to testify on 
trafficking in the Food Stamp Program, a topic of considerable 
concern within my agency.
    Before we begin, I would like to introduce members of my 
staff who are with me today: Mr. Gregory Seybold, Assistant 
Inspector General for Investigations; and Mr. James Ebbitt, 
Assistant Inspector General for Audit.
    The Food Stamp Program continues to be our nation's primary 
nutritional safety net, with an excess of $15.8 billion in 
benefits issued to an average of 18,200,000 people in Fiscal 
Year 1999. The huge size of this program and its vulnerability 
to fraud and abuse has caused the Office of Inspector General 
to continue to devote a significant portion of its total 
resources to the Food Stamp Program.
    During 1999, we devoted approximately 80 investigative 
staff years to the food stamp trafficking and theft 
investigations, which is a drop of 70 staff years from 150 
staff years in Fiscal 1996.
    Also, in Fiscal 1999, we conducted 242 investigations and 
obtained 391 criminal convictions; whereas, in Fiscal 1996, we 
conducted 691 investigations, resulting in 593 convictions.
    Although our resources have been limited, we continue to 
investigate a wide variety of food stamp trafficking 
activities. These investigations have targeted those who 
defrauded the program of benefits distributed through the 
electronic benefits transfer, EBT, system as well as those 
distributed as food stamp coupons.
    These investigations also often uncovered complex criminal 
conspiracies involving individuals who use numerous legitimate 
and phony businesses to gather and redeem benefits. Those 
involved moved their trafficking operations from one authorized 
store to another, used the names of bogus owners for their 
stores, established counter-surveillance, and took other 
measures to avoid detection.
    These individuals were also often found to be involved in 
other criminal activities, such as drug trafficking, thefts, 
burglary, armed robbery, illegal firearms trafficking, money-
laundering, immigration fraud, and other violent crimes. I'll 
cover all of these topics of criminal investigations we have 
been conducting and update you on our Operation Talon 
initiative.
    We categorize food stamp trafficking activities primarily 
in two categories: street trafficking and retail store 
trafficking. While much of the country has moved to EBT, many 
States are still using food coupons. This distribution system 
has been shown to be highly vulnerable to trafficking, and we 
continue to uncover immense frauds.
    An example of such a case was recently completed in New 
York City. In this investigation, we uncovered a food stamp 
conspiracy involving 44 defendants in 3 boroughs of the city 
who fraudulently redeemed food stamps in excess of $63 million 
at 40 authorized stores.
    Much of the money used in food stamp trafficking was 
derived from drug trafficking. To promote the scheme and 
conceal the illegal source of funds, defendants moved money in 
bank accounts between stores and laundered large amounts of 
currency to accounts in such areas as Florida and Puerto Rico 
held in the name of the account holders who are truly and 
rightfully citizens of the Dominican Republic. This case has 
already resulted in 35 convictions, including 4 bank officials, 
and more are expected.
    A recent example of another OIG investigation conducted 
with members of a Detroit, MI, task force led to the arrest and 
conviction of 18 members of a major narcotics and food stamp 
trafficking organization.
    The head of the organization trafficked narcotics for more 
than 20 years in the area. He was seemingly untouchable until 
he mentioned that he was interested in buying food stamps, 
which brought my organization into the investigation.
    During the course of the investigation, he purchased 
$23,000 in food stamps directly from an undercover officer. He 
then sold narcotics to the officer and was arrested. However, 
after being arrested and released on bond, he was murdered 
gangland style along with his girlfriend. The rest of his 
organization was arrested and convicted for drug and food stamp 
trafficking.
    My office has also continued to lead a special enforcement 
initiative known as Operation Talon, which targets individuals 
who are involved in food stamp fraud and wanted for other 
crimes.
    Under this initiative, social service agencies match their 
food stamp recipient records with law enforcement agencies' 
fugitive felon warrants. The Office of Inspector General and 
other law enforcement officials then use the information to 
locate and apprehend the fugitives. As of July 12, 2000, 
Operation Talon has resulted in 6,360 arrests of fugitive 
felons in more than 70 metropolitan areas, including numerous 
violent and dangerous felons who were wanted for murder, child 
molestation, rape, and kidnapping.
    I want to address the EBT system for distributing food 
stamp benefits and our efforts to combat trafficking in this 
area. We have observed a significant positive impact on 
trafficking in the Food Stamp Program as a result of EBT.
    While paper coupons are generally not traceable to 
individual recipients, the EBT system records the date, time, 
amount, recipient, and store involved in each transaction. Our 
investigators can then analyze this information to document 
criminal violations and support criminal prosecutions.
    As expected, EBT has dramatically reduced street 
trafficking in the Food Stamp Program. EBT benefits are less 
negotiable on the street and, thus, less likely to be used as a 
second currency. Such trafficking, however, does continue to a 
lesser degree and still requires my office's attention.
    While EBT has eliminated many street traffickers, large-
scale trafficking by retailers continues to be widespread. In a 
recent investigation in Houston, Texas, six family members were 
convicted of food stamp fraud, money-laundering, and 
conspiracy. Our investigation disclosed that these individuals 
illegally purchased and redeemed in excess of two million 
dollars in food stamp benefits via EBT.
    In this scheme, recipients sold food stamp benefits for 
cash at two unauthorized storefronts, whose employees 
telephoned one of the authorized stores and gave the 
recipient's EBT card number, the recipient's confidential 
identification number, and the transaction amount to move funds 
to the individual retailer account.
    Mr. Chairman, this concludes my statement. I thank you 
again for the opportunity to address this Committee. And I 
would be pleased to answer any questions you or other members 
of the Committee might have.
    Mr. Nussle. I thank you for your testimony.
    [The prepared statement of Roger Viadero follows:]

    Prepared Statement of Roger C. Viadero, Inspector General, U.S. 
                       Department of Agriculture

    Good afternoon, Mr. Chairman, and members of the committee. We are 
pleased to be here today to testify on trafficking in the Food Stamp 
Program (FSP), a topic of considerable concern within my agency. Before 
we begin, I would like to introduce members of my staff who are here 
with me today: Gregory S. Seybold, Assistant Inspector General for 
Investigations; and James R. Ebbitt, Assistant Inspector General for 
Audit.
    The FSP continues to be our nation's primary nutritional ``safety 
net,'' with $15.8 billion in benefits issued to an average 18.2 million 
people in fiscal year (FY) 1999. The huge size of this program and its 
vulnerability to fraud and abuse has caused the Office of Inspector 
General (OIG) to continue to devote a significant portion of its total 
resources to work in FSP. In FY 1999, we committed roughly 39 percent 
of our investigative resources to combat fraud in the program and 9 
percent of our audit resources to protect program integrity.

                           Limited Resources

    While we have committed a significant percentage of our special 
agents to combating trafficking in the program, the number of agents 
available for such assignments has declined significantly and steadily. 
During FY 1999, we devoted approximately 80 investigative staff years 
to food stamp trafficking and theft investigations. This was down from 
about 150 staff years in FY 1996, or a drop of nearly 50 percent. This 
decline was primarily a result of our shrinking staff--agents and 
auditors reduced by approximately 25 percent since 1993--and 
secondarily due to our shifting agents to investigations of criminal 
activities that threaten the safety and health of the public, the 
agricultural sector, and U.S. Department of Agriculture (USDA) 
employees. Such matters included investigations of meat packers who 
knowingly sold contaminated or unwholesome meat products to an 
unsuspecting public and smugglers who brought in tens of thousands of 
pounds of agricultural products that were infested with agricultural 
pests, as well as an increasing number of threats, assaults, and 
homicides involving USDA employees.
    The substantial drop in resources that we have been able to devote 
to combating trafficking in FSP has led to corresponding drops in our 
numbers of investigations conducted and convictions obtained. In FY 
1996, we conducted 691 food stamp trafficking and theft investigations, 
which resulted in 593 criminal convictions of individuals and 
businesses. In FY 1999, we conducted only 242 investigations and 
obtained 391 criminal convictions.

                 Food Stamp Trafficking Investigations

    With our limited resources we have continued to investigate a wide 
variety of food stamp trafficking activities. These investigations have 
targeted those who defrauded the program of benefits distributed 
through the Electronics Benefits Transfer (EBT) system, as well as 
those distributed as food stamp coupons, both of which are highly 
vulnerable to criminal activity. These investigations, as in past 
years, often uncovered complex, criminal conspiracies, involving dozens 
of individuals who used numerous legitimate and phony businesses to 
gather and redeem benefits. Those involved moved their trafficking 
operations from one authorized store to another, used the names of 
bogus owners for their stores, established counter surveillance and 
took other measures to avoid detection by law enforcement authorities. 
These individuals were also often found to be involved in other 
criminal activity, such as drug trafficking, thefts, and violent 
crimes. I will cover the types of criminal investigations we have been 
conducting, update you on our ``Operation Talon'' initiative, and 
briefly mention our audit work in this area.

                    Street and Retailer Trafficking

    We categorize food stamp trafficking activities primarily into two 
categories: street trafficking and retail store trafficking. Street 
trafficking involves individuals who buy or barter food stamp benefits 
for cash or other nonfood items away from Food and Nutrition Service 
(FNS) authorized stores. These traffickers generally obtain benefits 
from recipients at a substantial discount of their face value, in 
exchange for cash, drugs, or other nonfood items, and then sell them to 
FNS-authorized store retailers who redeem the benefits at full value, 
or sell them to another retailer. As of September 30, 1999, 161,000 
stores were authorized to receive and redeem food stamp benefits 
whether in the form of paper coupons or EBT cards. Both the street 
trafficker and retailer profit when they sell or redeem the benefits.
    We further categorize trafficking activities into those that 
involve food coupons and EBT. While much of the country has moved to 
EBT, which I will discuss later, many States are still using food stamp 
coupons. This distribution system has been shown to be highly 
vulnerable to large-scale street-type and retailer trafficking, and we 
continue to uncover immense frauds.
    An example of such a case was recently completed in New York City. 
In this investigation our investigators uncovered a food stamp 
conspiracy involving 44 defendants in 3 boroughs who fraudulently 
redeemed food stamps worth $63 million at 40 authorized stores. Money 
used in the food stamp trafficking was derived from drug trafficking. 
In order to promote the scheme and conceal the illegal source of funds, 
defendants moved money in bank accounts between stores and laundered 
large amounts of currency to accounts in Puerto Rico and Florida, held 
in the name of account holders in the Dominican Republic. This case has 
already resulted in 35 convictions, including four bank officials. More 
are expected.
    Two other examples of cases are those recently completed in 
Illinois and Mississippi. An investigation in Chicago resulted in the 
indictment of a food storeowner and his brother for conspiring to 
fraudulently redeem more than $1.2 million in food stamps over 10 
months. The brothers opened eight bank accounts around Chicago and 
deposited the proceeds from illegally obtained food stamps that were 
received from other merchants and food storeowners in exchange for 
cash. A record analysis revealed that only approximately $295,000 of 
the over $1.2 million redeemed through the store resulted from 
legitimate sales. The owner, who fled the country prior to sentencing, 
is a fugitive. His brother was convicted and sentenced to serve 37 
months in prison and ordered to pay restitution of $1 million.
    An investigation in Mississippi resulted in the sentencing of a 
storeowner to 4 years and 3 months in prison after his conviction for 
food stamp fraud, conspiracy, and witness tampering. He was also 
ordered to pay $1.2 million in restitution. The individual had obtained 
several authorizations to accept and redeem food stamps in different 
names and at different locations, and with an accomplice, had illegally 
redeemed food stamps worth about $1.3 million over a 21-month period. 
The investigation also disclosed that this individual offered a gang 
member $10,000 cash to kill his accomplice who had become a Government 
witness against him. The accomplice pled guilty to food stamp 
trafficking and was sentenced to 6 months in prison.

                        Other Criminal Activity

    As is indicated by the investigations mentioned earlier, our 
special agents often establish that individuals involved in food stamp 
trafficking are also involved in a variety of other criminal 
activities. Such activities include drug trafficking, burglary, armed 
robbery, fencing of stolen property, illegal firearms trafficking, 
money laundering, and immigration fraud. Through these investigations, 
which are often worked with other law enforcement organizations, we are 
able to remove from society those who defraud its programs and endanger 
its citizens.
    A recent example of such an OIG investigation, conducted with 
members of a Detroit, Michigan, task force, is that which led to the 
arrest and conviction of 18 members of an organization of a major 
narcotics and food stamp trafficker. The head of the organization had 
trafficked narcotics for over 20 years in the area and was seemingly 
``untouchable'' until he mentioned that he was interested in buying 
food stamps, which brought OIG into the investigation. Prior to this 
time he had insulated himself from law enforcement by never conducting 
any drug deals himself, only through his lieutenants. During the course 
of the investigation he bought $23,000 in food stamps directly from an 
undercover officer. He then sold narcotics to the officer, after which 
he was arrested. However, after being released on bond, he was 
murdered, gangland style, along with his girlfriend. The rest of his 
organization was arrested in a citywide sweep. Their convictions for 
drug and/or food stamp trafficking led to sentences that ranged from a 
maximum of life in prison without parole to a minimum of 5 months in 
prison. The owner of the authorized store who was involved pled guilty 
to food stamp and drug trafficking. He is currently a fugitive. The 
neutralization of this major drug trafficking enterprise significantly 
stemmed the flow of narcotics in the Detroit area.
    Another OIG investigation, which we conducted with a task force in 
Indiana, resulted in the arrest and conviction of 14 individuals for 
their involvement in the theft and trafficking of $728,000 in food 
stamps from 4 county welfare offices. Sentences ranged up to 20 years 
in prison, with $1.1 million in restitution ordered. The investigation 
showed that street gang members stole the food stamps from county 
welfare offices and traded them for cocaine, marijuana, firearms, 
explosives, and cash.
    Through another ongoing case we are currently working jointly with 
Immigration and Naturalization Service (INS) and Internal Revenue 
Service, we found that food stamps were trafficked in Rochester, New 
York, and then laundered through approximately 20 authorized grocery 
stores. This food stamp conspiracy was conducted to facilitate the 
smuggling and illegal entry of approximately 50 foreign nationals from 
Pakistan. The group was also involved in a marriage fraud scam and visa 
fraud. Thirty-six of 38 indicted individuals have, thus far, been 
arrested and another unindicted individual arrested. Ten other 
individuals have also been detained for INS violations.
    My office has also continued to lead a special law enforcement 
initiative known as ``Operation Talon,'' which targets individuals who 
are involved in food stamp fraud and wanted for other crimes. Under 
this initiative, OIG has been the intermediary between social service 
agencies across the country and State and local law enforcement 
agencies. The social service agencies match their food stamp recipient 
records with law enforcement agencies' fugitive records. Information on 
fugitives is then shared with OIG and other law enforcement officials, 
who use it to locate and apprehend the fugitives. As of July 12, 2000, 
Operation Talon has resulted in 6,360 arrests of fugitive felons in 
more than 70 metropolitan areas nationwide. These fugitives included 
numerous violent and dangerous felons who were wanted for murder, child 
molestation, rape, and kidnapping.

                           EBT Implementation

    I have briefly addressed food coupons trafficking and some of the 
other types of criminal activity associated with food stamp 
trafficking, now I want to address the EBT system for distributing food 
stamp benefits, and our efforts to combat trafficking in food stamp 
benefits distributed through EBT.
    As you know, the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, also known as Welfare Reform, mandated that 
all Food Stamp Program benefits be issued using an EBT system by 2002. 
States have rapidly moved in that direction. Whereas about 75 percent 
of the benefits were issued using paper food coupons in FY 1997, now 
about 74 percent of FSP benefits are issued using EBT. Almost three out 
of every four recipients receive their food stamp benefits via an EBT 
system. Per FNS, as of April 2000, 41 States and the District of 
Columbia use EBT systems. Thirty-seven of the systems have been 
implemented statewide, including the District of Columbia. The 
remaining States are in various stages of implementation, from 
planning, to putting out requests for proposals, to contract approval. 
Some of the States in this category, with average participation 
exceeding 250,000 people, are Indiana, Michigan, Mississippi, and 
Virginia. The two largest Food Stamp Program States are California and 
New York. California currently has two counties operating a pilot 
system and expects to award a statewide contract during 2000. The five 
boroughs of New York City are issuing benefits via EBT with the 
remainder of the State expected to be operational by 2001.

                        Positive Aspects of EBT

    As EBT has been brought on-line across the country, we have 
observed a significant, positive impact on trafficking in the FSP. 
While paper food coupons are generally not traceable to individual 
recipients, the EBT system records the date, time, amount, recipient, 
and store involved in all benefit transactions. Our investigators 
manipulate this information to identify likely trafficking by 
authorized retailers and food stamp recipients. We also use the data to 
document criminal violations and then use the data in criminal 
prosecutions. In fact, we have been manipulating and using EBT data in 
our criminal investigations since our first EBT investigation in 
Reading, Pennsylvania, in 1991.
    FNS has also developed its own EBT data analysis computer program 
for detecting potential fraudulent EBT activity, based on our original 
EBT trafficking identification computer program. The FNS system, known 
as the Anti-Fraud Locator Using EBT Retailer Transactions, or ALERT, is 
now on-line and available in all FNS and OIG regions. We use both ALERT 
and our own computer program in our investigations.
    FNS is also using EBT data to disqualify violating retailers and 
State authorities are using information obtained from EBT records to 
disqualify large numbers of recipients who have sold their benefits. 
The number of individuals disqualified as a result of OIG investigative 
work has risen from fewer than 10 in FY 1994 to more than 10,000 since 
FY 1997, almost entirely as a result of EBT investigations.

                    Investigation of EBT Traffickers

    I am also pleased to report that implementation of EBT, as 
expected, has dramatically reduced street trafficking in FSP benefits. 
This has occurred because EBT benefits are less negotiable ''on the 
street'' and, thus, less likely to be used as a ''second currency.'' 
Such trafficking, however, does continue to a lesser degree and still 
requires OIG attention. For example, investigations in Cleveland, 
Texas, resulted in the convictions of two individuals who exchanged 
``crack'' cocaine for EBT food stamp benefits. The food stamp 
recipients who purchased ``crack'' cocaine from these individuals gave 
them their EBT cards and personal identification numbers, which allowed 
the traffickers to use the cards and their benefits. One subject was 
sentenced to 46 months in jail and the other to 18 months.
    While EBT has eliminated many street traffickers, large-scale 
trafficking by retailers continues to be widespread. Again, those 
involved often traffic in immense quantities of benefits, have large 
organizations, and often use sophisticated schemes to carry out the 
crimes and to conceal their illegal activities.
    A recent investigation in Houston, Texas, is a good example of 
retailer trafficking in EBT benefits. The investigation resulted in the 
conviction of six family members for food stamp fraud, money 
laundering, and conspiracy. The 2-year long investigation disclosed 
that these individuals illegally purchased and redeemed in excess of $2 
million in food stamp benefits via EBT. In this scheme, recipients sold 
food stamp benefits for cash at two unauthorized storefronts, whose 
employees telephoned one of two authorized stores and gave the 
recipient's EBT card number, the recipient confidential identification 
number, and the transaction amount to employees at the authorized 
store. The employee at the authorized store then manually entered the 
information into the EBT access device to make it appear that the 
recipient had actually purchased groceries at that location. The six 
subjects were sentenced to prison terms ranging from 3\1/4\ years to 
more than 8 years, and ordered to pay restitution of $2 million.
    In another case, the owners of a store pled guilty in Federal Court 
in Baltimore, MD, to fraud in EBT. The EBT records showed that during a 
3-year period $975,000 worth of benefits was redeemed through this 
store. However, bank records showed that nearly all of the funds 
deposited into the account were removed through checks written to cash 
or the owner, while only $103,000 in checks was written to wholesale 
vendors. The total loss to the Government from 1995 to 1999 may have 
been over a million dollars. Both co-owners confessed to the crimes. 
One individual was sentenced to 21 months prison, the second to 5 
months home detention. Both were ordered to pay $500,000 each in 
restitution.

                         Audits of EBT Systems

    In addition to conducting investigations of trafficking, we have 
also taken a proactive role in attempting to limit fraudulent 
activities in these programs. My office has taken an active role in 
monitoring and reviewing EBT systems beginning in 1986 when we reviewed 
the Reading, Pennsylvania, EBT pilot project. We view our role as 
providing assurances to program managers that the systems are operating 
as intended, or reporting the problems that need to be addressed so 
that the systems operate properly. Reviewing EBT systems as they are 
implemented has been a high priority for us and remains so.
    Of the 41 States currently operating systems, OIG has conducted 
reviews at 19, with reviews at 4 additional States and the District of 
Columbia in process. We have concentrated our limited resources on 
reviewing systems being implemented that will be issuing a larger 
volume of program benefits.
    This concludes my statement, Mr. Chairman. I thank you again for 
the opportunity to address the Committee, and I would be pleased to 
answer any questions you or other members of the committee might have.

    Mr. Nussle. Is it possible to totally eliminate trafficking 
within the Food Stamp Program? In your opinion, based on your 
experience, do you believe that it's possible to have a more 
dramatic decrease in this trafficking than what we have seen in 
the reports that have been provided to Congress?
    Mr. Viadero. In answer to the first part of the question, I 
don't think we can realistically eliminate it. But can we have 
a greater impact, a more significant impact? Can we get it down 
to less than half of what it is? I say definitely yes.
    The issue here is the amount of resources we have and we're 
willing to put into this. My staff has been reduced by 24 
percent in the last 5 years. I've had zero budget growth in the 
last 5 years. These are very intensive investigations. And as 
it stands right now on the EBT side, we very rarely open a case 
where the amount of food stamp benefit to the authorized store 
is not less than five times the amount of food sales.
    So if an individual sells $100 worth of food, we see $500 
worth of food stamp benefits being transacted there. Therefore, 
that's the only way we can investigate. We're only doing high-
priority cases.
    I'd like to do the simple, if you will, 50 to 100 thousand 
dollar cases. Those are just too many to handle. For that, we 
count on our friends at the State level to pick up the void and 
at FNS to help us disqualify some of the stores.
    We will say--and I think it should be understood from our 
point--this is a very valuable and very successful program. I 
have immediate family that have been on food stamps. It's a 
good program. We just have to get the rascals out of it.
    Mr. Nussle. I think your sentiments are joined by this 
Committee that it is a valuable program providing food and 
nutrition.
    One of the issues, one of the questions that I am curious 
about is in the area of enforcement. Do you find it at all 
difficult to convince people within the U.S. Attorney's Office 
to prosecute these kinds of cases?
    I used to be a prosecutor. I did this at the State level. 
There are obviously State welfare types of cases involving the 
welfare system. They're not as interesting sometimes, as 
glamorous as some of the other cases that are obviously very 
pressing involving violence, involving drugs, involving some of 
the mandatory cases that come through.
    Is that an issue, having a difficult time just convincing 
U.S. Attorneys and other prosecutors to prosecute these cases?
    Mr. Viadero. Mr. Chairman, what we see is a difference, 
district by district, in our ability to get these cases done. 
For instance, when we go into the Southern District of Florida, 
we don't have a great deal of success because of the 
prosecutive minimum. OK?
    If we go to the Southern District of New York, we don't 
have any issues at all. The bulk of our cases in the New York 
metro area are prosecuted at the United States Attorney's 
Office.
    The issue in Florida--and, again, it's a resource problem 
on the part of the United States Attorney--is that they're 
handling major drug trafficking cases and other interdiction 
issues with Customs. However, the Dade County District Attorney 
does prosecute all of our cases for us. Again, most of the 
people will end up on probation because the Dade County Jail is 
literally at 100 percent of capital offenders.
    Mr. Nussle. Then my final question--and I have to run and 
vote, and I am going to turn this over to Mr. Hoekstra from 
Michigan--is on the issue of the EBT. Should we be doing more 
to push toward that system?
    You seem to very directly intimate that one of the aspects 
of this is prosecution, which, of course, you're doing the best 
you can to do, but the other side of this is to move to a 
system that is a little bit more fraud-proof, such as EBT. 
Would that be your recommendation to this Committee?
    Mr. Viadero. Unequivocally so. EBT is the only way to go. 
It's the smart way. Actually, we're entering the Twenty-First 
Century. And we're slowly catching up to Twentieth Century 
technology.
    Mr. Hoekstra [presiding]. Excuse me for just a minute----
    Mr. Viadero. Yes, sir.
    Mr. Hoekstra [continuing]. I don't think either he or I 
expected this kind of a break at this point in time.
    One of the comments that Jim wanted for the record were 
whether you were noting any trends in the kinds of trafficking 
cases that you were uncovering. Has the value of the stamps 
being trafficked increased in the kinds of cases you are seeing 
relative to those in the past?
    Mr. Viadero. Based upon what we see, EBT gives us a finite 
amount because the computer records everything, as opposed to 
having to go out and do the old, if you will, gumshoe-type 
surveillance on traffickers in the street. What we see here, 
though, is the fraud is removed from the street, taken off the 
street, and put in a store, where it belongs. So, in essence, 
the crooks have taken care of the Paperwork Reduction Act for 
us.
    The split on the street used to be the person trafficking 
benefits would historically get 50 cents on a dollar. Since the 
retailers now don't have to fill out any paperwork in an EBT 
system, the person trafficking their benefits in EBT gets up to 
70 cents on a dollar.
    Mr. Hoekstra. OK. And I think that is all that we need from 
you. We appreciate you being here. And my understanding is that 
you've got another commitment and you will be excused from the 
panel.
    Mr. Viadero. Thank you very much, Mr. Chairman.
    Mr. Hoekstra. Good. Thank you for being here.
    Mr. Viadero. Yes, sir.
    Mr. Hoekstra. Let me introduce the rest of the panel and 
welcome you here. Our next witness will be Lawrence Dyckman, 
who is Director, Food and Agricultural Issues, the General 
Accounting Office.
    He will be followed by Darrell Hartman, who is the Director 
of Special Operations, Office of the Inspector General, Texas 
Department of Human Services. Welcome. Thank you for being 
here.
    And our final witness will be Shirley Watkins, who is the 
Under Secretary, Food and Nutrition and Consumer Services of 
the U.S. Department of Agriculture.
    Mr. Dyckman, we will begin with you. Thank you for being 
here.
    Mr. Dyckman. It is a pleasure to be here, sir. Would you 
mind if I asked one of my colleagues, Ron Wood, to join me at 
the table?
    Mr. Hoekstra. That would be fine.
    Mr. Dyckman. Thank you. Mr. Wood is an Assistant Director. 
He has done much of the work we have done on food stamp 
trafficking.

                 STATEMENT OF LAWRENCE DYCKMAN

    Mr. Dyckman. It really is a pleasure to be here today to 
present our observations on how to reduce trafficking of food 
stamp benefits. As you know, the Food Stamp Program, one of the 
nation's largest assistance programs for low-income Americans, 
provided $16 billion in benefits to about 18 million recipients 
in 1999. Unfortunately, though, like many programs, it is 
susceptible to fraud, waste, and abuse.
    Our testimony today will focus on three reports we have 
issued over the last several years. Two of them deal with store 
owners, and one of them deals with recipient trafficking.
    In summary, we found that while USDA and its OIG have 
identified thousands of store owners of trafficked benefits, 
there are opportunities to identify additional store owners who 
are likely to be engaged in trafficking by more effectively 
using EBT data.
    In this regard, under 1996 legislation, Federal agencies 
may use EBT data alone without the expense of conducting an 
undercover investigation to take action against store owners 
violating the requirements of the Food Stamp Program.
    However, we also found that even when store owners were 
assessed financial penalties for trafficking, they generally 
didn't pay. For example, from 1993 through 1998, USDA and the 
courts assessed or levied about $78 million in financial 
penalties and interest against store owners for violating food 
stamp regulations, primarily for trafficking. However, they 
collected only $11.5 million, or about 13 percent.
    USDA wrote off as uncollectible another $49 million, or 55 
percent, of the total amount. According to agency officials, 
this small percentage of fines collected reflects the 
difficulties involved in collecting this type of debt. And this 
is true.
    However, weaknesses in the agency's debt collection 
procedures and practices also contributed to low collections. 
We found that USDA had not consistently and aggressively 
collected debt, assessed interest on unpaid debt, written off 
uncollectible debt in a timely manner, or established 
procedures to identify the causes of delinquencies and develop 
countermeasures.
    Now I would like to talk a little bit about recipient 
trafficking. Although EBT data has been available in varying 
degrees since 1993 to analyze food stamp transactions for 
trafficking, USDA has only recently taken steps to encourage 
States to target recipients engaged in this activity. As a 
result, we found that most States with EBT systems were not 
analyzing EBT data to identify potential traffickers.
    Of the 29 States with statewide EBT systems as of April 
1999, the last time we looked at this, only 4, Florida, 
Missouri, South Carolina, and Texas, independently analyzed 
their electronic databases to identify suspect recipients.
    Additionally, since 1994, USDA's OIG has identified about 
34,000 suspect traffickers in Maryland and provided this 
information to State officials. All five of these States have 
invested the resources to investigate suspect recipients and 
disqualified those that engaged in trafficking.
    The proof is very simple. During 1998 and 1999, these five 
States were responsible for disqualifying about 99 percent of 
the 7,000 or so individuals nationwide who were removed from 
the Food Stamp Program for trafficking. Although not as 
aggressive, nine other States have investigated suspect 
recipients who were identified by other sources, such as USDA, 
through its efforts to disqualify store owners. And these 
States have disqualified some recipients engaged in 
trafficking. The remaining 15 States did not disqualify any 
recipients for trafficking during the 2-year period.
    We have made a series of recommendations in these two 
reports to improve debt collection activities; to increase EBT 
analysis; and to help USDA and the States use EBT to identify 
traffickers, both recipients and store owners.
    Basically, USDA agrees with the recommendations and has 
begun to take actions. We have not, unfortunately, had the time 
to evaluate how well these actions have played out.
    We would be happy to answer any questions. That concludes 
my statement.
    [The prepared statement of Lawrence Dyckman follows:]

  Prepared Statement of Larry Dyckman, Director, Food and Agriculture 
                 Issues, U.S. General Accounting Office

    Mr. Chairman and members of the Task Force, thank you for the 
opportunity to present our observations on how to reduce the improper 
trafficking of food stamp benefits--exchanging food stamps for cash or 
certain nonfood items. As you know, the Food Stamp Program, one of the 
nation's largest assistance programs for low-income Americans, provided 
$16 billion in benefits to about 18 million recipients in 1999. And, 
like many programs, the Food Stamp Program is susceptible to fraud, 
waste, and abuse. When benefits are improperly exchanged for cash, the 
storeowner gives a recipient a discounted cash payment (often 50 cents 
on the dollar) for food stamp benefits. The storeowner then redeems the 
benefits at full face value from the government. Until the mid-1990's, 
most recipients were provided coupons to purchase food, but currently 
about 70 percent of all benefits are provided electronically through a 
card that works much like a debit card at the grocery checkout counter. 
All the transactions are recorded in databases that can be analyzed to 
identify trafficking. The U.S. Department of Agriculture's (USDA) Food 
and Nutrition Service (FNS), in partnership with the States, 
administers the Food Stamp Program.
    Our testimony today focuses on various aspects of the trafficking 
problem that we have addressed over the past 3 years.\1\ In particular, 
we have reported on first, Federal efforts to identify storeowners who 
engage in trafficking, second, the amount of penalties assessed and 
collected against these storeowners, and third, the extent to which 
States with statewide electronic benefit transfer (EBT) systems are 
identifying and disqualifying recipients who engage in trafficking.
---------------------------------------------------------------------------
    \1\ Food Stamp Program: Information on Trafficking Food Stamp 
Benefits (GAO/RCED-98-77, Mar. 26, 1998); Food Stamp Program: 
Storeowners Seldom Pay Financial Penalties Owed for Program Violations 
(GAO/RCED-99-91, May 11, 1999); and Food Stamp Program: Better Use of 
Electronic Data Could Result in Disqualifying More Recipients Who 
Traffic Benefits (GAO/RCED-00-61, Mar. 7, 2000).
---------------------------------------------------------------------------
    In summary, we found the following:
     FNS and USDA's Office of Inspector General (OIG) use a 
variety of databases to analyze transaction patterns to identify 
suspect traffickers. They then conduct costly and time-consuming 
investigations to confirm actual trafficking. While FNS and the OIG 
have identified thousands of storeowners who have trafficked benefits, 
there are opportunities to identify additional trafficking storeowners 
who are likely to be engaged in trafficking by more effectively using 
EBT data. Under the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, Federal agencies may use EBT data alone, 
without the expense of conducting an uncover investigation, to take 
action against storeowners violating the requirements of the Food Stamp 
Program.
     Storeowners generally did not pay the financial penalties 
they were assessed for trafficking. For example, from 1993 through 
1998, FNS and the courts assessed or levied about $78 million in 
financial penalties and interest against storeowners for violating Food 
Stamp Program regulations, primarily for trafficking. However, they 
collected only $11.5 million, or about 13 percent of the total 
penalties. FNS wrote off as uncollectible another $49 million, or 55 
percent of the total assessed or levied. The remaining debt was pending 
collection at the time of our review.
     Most States with statewide EBT systems were not analyzing 
EBT data to identify recipients who may have been trafficking food 
stamp benefits. Of the 29 States with statewide electronic benefit 
systems, as of April 1, 1999, only 4--Florida, Missouri, South 
Carolina, and Texas--independently analyzed their electronic databases 
to identify suspect recipients. Additionally, since 1994, USDA's OIG 
has identified about 34,000 suspected traffickers in Maryland and 
provided this information to that state. All five of these States 
invested the resources to investigate suspect recipients and disqualify 
those engaged in trafficking. During 1998 and 1999, these five States 
were responsible for disqualifying about 99 percent of the 6,873 
individuals nationwide who were removed from the Food Stamp Program for 
trafficking.
    In recent reports, we have recommended various ways that FNS can 
improve its debt collection activities and better use electronic data 
to identify suspected storeowner and recipient traffickers. We have 
also recommended that FNS use electronic data to routinely develop 
reliable estimates of the extent of trafficking and establish goals and 
strategies for reducing recipient trafficking on the basis of these 
estimates. Appendix I lists our recommendations and describes the 
actions FNS has taken to address them.

                               Background

    FNS administers the Food Stamp Program in partnership with the 
states. It funds all of the program's food stamp benefits and about 50 
percent of the states' administrative costs. FNS is primarily 
responsible for developing the program's policies and guidelines, 
authorizing retail food stores to participate in the program, and 
monitoring storeowners' compliance with the program's requirements. Its 
58 field offices assess financial penalties against storeowners who 
violate program regulations.\2\ Storeowners violate the program's 
requirements when they accept food stamps for nonfood items such as 
paper towels, accept food stamp benefits when they are not authorized 
to participate in the program, or traffick in food stamp benefits. The 
States are specifically responsible for investigating recipients 
alleged to be engaged in trafficking and for disqualifying those found 
trafficking.
---------------------------------------------------------------------------
    \2\ Food stamp State agencies establish debts against program 
recipients to recover benefits they receive in excess of the level that 
was appropriate. According to FNS officials, debt owed by recipients is 
approximately 95 percent of the agency's accounts receivable.
---------------------------------------------------------------------------
    According to a 1995 FNS study, about $815 million, or about 4 
percent of the food stamps issued, was trafficked at 9 percent of 
authorized retail stores during fiscal year 1993.\3\ The study found 
that most trafficking occurred in small grocery stores. Last week, FNS 
released an updated study.\4\ This study estimated that stores 
trafficked about $660 million a year, or about 3\1/2\ cents of every 
dollar of food stamp benefits issued, and that most trafficking 
occurred in small stores. Our 1998 analysis of 432 trafficking cases 
found comparable results--most trafficking occurred in small stores. 
Data on the extent of trafficking between parties prior to reaching 
authorized retailers are unavailable.
---------------------------------------------------------------------------
    \3\ The Extent of Trafficking in the Food Stamp Program, FNS, Aug. 
1995. This study analyzed data from the Store Investigation and 
Monitoring System database, which contains information on the stores 
suspected of trafficking.
    \4\ The Extent of Trafficking in the Food Stamp Program: An Update, 
FNS, Mar. 2000.
---------------------------------------------------------------------------
    In addition to determining the eligibility of individuals applying 
for food stamps, the States are responsible for investigating 
recipients alleged to be engaged in trafficking and for disqualifying 
those found trafficking. Typically, a recipient found guilty of 
trafficking is disqualified from the program for 1 year for the first 
offense, 2 years for the second offense, and permanently for the third 
offense or for trafficking an amount that exceeds $500.\5\ To 
disqualify an individual from the program, the States often conduct 
costly, time-consuming investigations--interviews with the suspect, 
undercover observations of transactions, and a more detailed analysis 
of the recipient's shopping habits.
---------------------------------------------------------------------------
    \5\ In some States, trafficking can also be prosecuted in State 
courts.
---------------------------------------------------------------------------
    Recipients use food stamp coupons or an electronic benefit transfer 
card to pay for allowable foods. Food stamp electronic systems use the 
same electronic fund transfer technology that many grocery stores use 
for their debit card payment systems. After a food stamp recipient 
receives a card and a personal identification number, the recipient 
purchases food by authorizing the transfer of the food stamp benefits 
from a Federal account to a retailer's account. At the grocery checkout 
counter, the recipient's card is run through an electronic reader, and 
the recipient enters a personal identification number to access the 
food stamp account.
    Under the Personal Responsibility and Work Opportunity 
Reconciliation Act of 1996, all States must implement EBT systems by 
October 1, 2002, unless USDA waives the requirement. Currently, 37 
States and the District of Columbia have statewide EBT systems.

   Federal Efforts to Identify Storeowners Who Engage in Trafficking

    FNS and USDA's OIG use a variety of sources, including EBT 
databases and USDA's fraud hotline, to analyze transaction patterns to 
identify suspect traffickers. This initial effort is generally followed 
up with costly and time-consuming investigations, including undercover 
investigations, to confirm actual trafficking. Through these efforts, 
FNS and the OIG have identified thousands of storeowners who have 
trafficked benefits. The OIG has reported that it spends about 50 
percent of its investigative resources on addressing trafficking and 
oversight of the Food Stamp Program--the single largest program 
administered by USDA.
    We found that FNS could have identified additional storeowners who 
violated program regulations if it more effectively used EBT data. For 
example, each month FNS prepares a list of hundreds of stores in each 
region that appear to be highly likely to be violating program 
regulations, such as trafficking. Two of the six FNS field offices we 
visited further analyzed the data and took administrative action to 
penalize offending storeowners. However, the four other FNS field 
offices were not sure what to do with the data. Moreover, the head of 
one of the field offices told us that 1 monthly report indicated that 
over 100 of the stores in her area were probably engaged in 
trafficking, but she lacked the resources to further analyze the data 
on any of these stores and take action against them. Further, FNS had 
no feedback system to inform headquarters of how many of the stores on 
the list of likely traffickers were actually reviewed in detail. Such 
information would enable headquarters officials to know the extent to 
which the listings were examined. At the time of our review, FNS had no 
assurance that the stores on the monthly lists were consistently 
reviewed.
    FNS had made limited use of this information because it had not 
developed an effective plan for reviewing and acting upon the data, 
including designating responsible staff. FNS officials told us that 
they need more personnel to analyze the data on stores that are likely 
to be trafficking food stamp benefits. Greater use of EBT data would 
enable FNS to better leverage its enforcement resources. Moreover, the 
Personal Responsibility and Work Opportunity Reconciliation Act of 1996 
permits FNS to use EBT data alone, without the expense of conducting an 
undercover investigation, to take action against storeowners violating 
the requirements of the Food Stamp Program.
    To improve FNS field offices' use of EBT data, we recommended that 
FNS develop guidance for its field offices for use in reviewing EBT 
data to identify and assess penalties against storeowners who violate 
Food Stamp Program regulations. FNS agreed and has initiated corrective 
actions to implement the recommendation.

    Amount of Storeowner Financial Penalties Assessed and Collected

    We found that FNS almost always assessed penalties against 
storeowners when its investigations showed that storeowners had 
violated requirements of the Food Stamp Program. However, storeowners 
generally did not pay the financial penalties they were assessed for 
trafficking. For example, from 1993 through 1998, FNS and the courts 
assessed or levied about $78 million in financial penalties and 
interest against storeowners for violating Food Stamp Program 
regulations, primarily for trafficking. However, they collected only 
$11.5 million, or about 13 percent of the total penalties. FNS wrote 
off as uncollectible another $49 million, or 55 percent of the total 
assessed or levied. The remaining debt was pending collection at the 
time of our review.
    According to agency officials, this small percentage of fines 
collected (13 percent) reflects the difficulties involved in collecting 
this type of debt, such as problems in locating debtors as well as 
their refusal to pay.\6\ However, weaknesses in the agency's debt 
collection procedures and practices also contributed to low 
collections. For example, FNS has not consistently implemented Federal 
policies, practices, and procedures that are designed to ensure the 
effective management and collection of debt. FNS has not consistently 
and aggressively collected debt, assessed interest on unpaid debt, 
written off uncollectible debt in a timely manner, or established 
procedures to identify the causes of delinquencies and develop the 
correction actions needed.
---------------------------------------------------------------------------
    \6\ These problems are particularly acute for collecting debt from 
storeowners who were penalized for unauthorized participation in the 
Food Stamp Program. In these cases, FNS may not have information that 
would facilitate debt collection, such as Social Security numbers, 
because the storeowners never applied to FNS to become authorized 
retailers. Furthermore, FNS cannot use one of its tools for encouraging 
debt payment--threatening to remove the storeowner from the program--in 
these types of cases.
---------------------------------------------------------------------------
    To improve FNS' debt collection activities, we recommended that FNS 
develop the corrective actions needed to make its debt collection more 
effective. FNS agreed and has initiated corrective actions to implement 
the recommendation.

   Extent to Which States Use EBT Systems to Identify and Disqualify 
                        Recipients Who Traffick

    Of the 29 States with statewide electronic benefit systems, as of 
April 1, 1999, only 4--Florida, Missouri, South Carolina, and Texas--
independently analyzed their electronic databases to identify suspect 
recipients. These States viewed this activity as essential to their 
efforts to improve the integrity of the Food Stamp Program. 
Additionally, since 1994, USDA's Office of Inspector General has 
identified about 34,000 suspected traffickers in Maryland and provided 
this information to that State.\7\ All five of these States relied upon 
the results of detailed analysis of EBT databases to identify suspect 
recipients and invested the resources necessary to investigate these 
recipients and disqualify those engaged in trafficking. For example, 
for fiscal years 1998 and 1999, these five States were responsible for 
disqualifying about 99 percent of the 6,873 individuals nationwide who 
were removed from the Food Stamp Program for trafficking benefits. 
Although not as aggressive, nine other States investigated suspect 
recipients--identified by other sources, such as FNS through its 
efforts in disqualifying storeowners--and disqualified those who 
engaged in trafficking. The remaining 15 States did not disqualify any 
recipient for trafficking during the 2-year period.
---------------------------------------------------------------------------
    \7\ The Office of Inspector General analyzes EBT data to generate a 
list of all suspect recipients associated with storeowners who have 
been convicted of trafficking. This list is more complete than the 
information FNS would provide to States in connection with its 
investigation of trafficking storeowners.
---------------------------------------------------------------------------
    Florida and Texas analyze their EBT data to identify stores likely 
to be engaged in trafficking and then identify likely trafficking 
recipients using those stores. As a result, Texas identified hundreds 
of recipients suspected of trafficking at stores identified as likely 
to be engaged in trafficking. On the other hand, FNS generally limits 
its identification of food stamp recipients to the few cases that it 
needs to support its actions against a storeowner. After recipients are 
identified as suspected traffickers, the States investigate to confirm 
whether trafficking actually occurred before disqualifying those found 
to be trafficking.
    Other States take a different approach. For example, Missouri 
identifies suspect recipient traffickers by profiling all recipients in 
the EBT database without regard to specific stores. From January 
through August 1999, Missouri identified about 500 recipients suspected 
of trafficking food stamp benefits. Since 1994, Maryland has 
disqualified about 7,700 recipients out of about 34,000 referred by OIG 
as possible traffickers, including 3,000 during fiscal years 1998 and 
1999. These referrals were associated with eight storeowners who were 
convicted for trafficking.
    Of the 15 States that had not taken any action against trafficking 
recipients, 5 had received referrals of suspected recipients from FNS. 
According to officials in these States, they did not investigate 
suspect recipients because the investigations were time--e consuming 
and costly and it was not cost-effective to do so. The officials in the 
five States that disqualified about 99 percent of all those removed 
from the program nationwide for trafficking agreed that acting against 
suspect traffickers was not cost-effective. However, these officials 
and FNS officials agree that identifying suspect recipients and 
disqualifying those who traffic is an essential activity for 
maintaining the integrity of the Food Stamp Program. They maintain that 
their efforts act as a deterrent by discouraging other recipients from 
engaging in trafficking. In this regard, FNS has established improving 
the integrity of the program as a major goal in complying with the 
principles of the Government Performance and Results Act of 1993 
(Results Act).
    Although EBT data have been available in varying degrees since 1993 
to analyze food stamp transactions for trafficking, FNS has only 
recently taken steps to encourage the States to target recipients 
engaged in trafficking. In July 1999, FNS instructed its seven regional 
offices to prepare plans on how to work with States to best use the EBT 
data now available to identify, investigate, and disqualify trafficking 
recipients. We reviewed the seven draft plans that were developed and 
found that they were all different, but they generally included such 
activities as defining the Federal and State roles for identifying 
recipients suspected of trafficking and developing processes for 
routinely sharing information. All these plans provide that FNS would 
submit to the States the names of suspect recipients associated with 
storeowners disqualified from the program. However, States could target 
a more extensive list of suspect recipients for investigation. FNS' 
plans do not set goals for the number of recipients to be investigated 
and/or disqualified. Furthermore, none of the draft plans described how 
they contributed to FNS' overall effort to reduce trafficking. The FNS 
regions are just beginning to implement the plans.
    In our March 2000 report, we reported that FNS was not able to 
measure the effectiveness of its or the states' efforts in reducing the 
overall level of trafficking because it lacked current, reliable 
information on the extent of trafficking. FNS' estimate, developed in 
1995, used 1993 data and did not rely on EBT data. With the 
introduction of EBT systems in 1993, FNS has an important tool for 
developing current estimates of the extent of trafficking at the local, 
State, and national levels. Using these estimates, FNS could establish 
goals for reducing trafficking on the basis, for example, of the value 
of benefits trafficked each year. FNS could then develop strategies to 
efficiently and effectively reduce trafficking and use EBT data to 
measure the extent to which it was achieving its goals. On July 13, 
2000, FNS released an update to its 1995 study. The new study estimated 
stores to be trafficking at $660 million, about 3\1/2\ cents on every 
dollar of food stamp benefits provided.
    FNS' actions to help the States reduce recipient trafficking was 
not being guided by the best available estimate of the extent of 
trafficking, which would enable it to better set appropriate goals and 
strategies, as prescribed by the Results Act. Instead, as proposed in 
the draft regional plans, FNS would work with the States only to 
investigate the number of suspect recipients identified as being 
involved with specific trafficking storeowners. In its fiscal year 2000 
performance plan, FNS' goal is to disqualify 1,201 stores annually. FNS 
could realize this goal but not substantially reduce the overall level 
of trafficking because the stores disqualified might be those stores 
with relatively low levels of trafficking. FNS has not set priorities 
for targeting the trafficking stores--for example, based on the volume 
of transactions and/or the value of the benefits trafficked. If FNS set 
such priorities and identified these storeowners, additional States 
might have an incentive to examine more suspect recipients purchasing 
at these stores because the likelihood of recipient trafficking would 
be greater.
    To help States improve their review of EBT data and to obtain a 
reliable estimate of the extent of trafficking, we recommended that FNS 
(1) determine the best techniques for using EBT data to identify 
suspected recipient traffickers and work with States to implement these 
techniques and (2) use EBT data to periodically develop reliable 
estimates of the extent of trafficking and use these estimates to 
develop goals and appropriate strategies for reducing trafficking. FNS 
agreed and has initiated corrective actions to implement both of these 
recommendations.
    This concludes my statement. I would be pleased to answer any 
questions that you may have.

 Recommendations Contained in GAO Reports and Subsequent Agency Actions

    Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed 
for Program Violations, (GAO/RCED-99-91, May 11, 1999).

    GAO Recommendations: To improve the integrity of the Food Stamp 
Program, we recommended that the Secretary of Agriculture direct the 
Administrator, Food and Nutrition Service (FNS), to:
     Develop guidance that specifies its field staff's 
responsibilities, duties, and guidelines in reviewing data on 
electronic benefit transfers to identify and assess penalties against 
storeowners who violate Food Stamp Program regulations;
     Develop the corrective actions necessary, as required by 
the Federal Claims Collection Standards, to help prevent delinquencies 
and defaults, and determine the priority and resources it needs to 
assign to make debt collection more effective; and
     Complete the actions needed to refer delinquent debts with 
storeowner taxpayer identification numbers to Treasury electronically 
in a timely manner.
    Agency Action: FNS agreed with each of the GAO recommendations and 
has initiated actions to implement them. Regarding the first 
recommendation, FNS has issued several policy memorandums to the field 
and plans to issue a set of national guidelines for field staff use 
when reviewing and analyzing EBT data. Regarding the second 
recommendation, FNS has developed and implemented a strategy to refer 
all appropriate delinquent retailer debt, including retailer Taxpayer 
Identification Numbers, to the Treasury Department for collection. 
Regarding the third recommendation, FNS is developing the computer 
software necessary for the electronic transmission of retailer debt to 
the Treasury Department.

    Food Stamp Program: Better Use of Electronic Data Could Result in 
Disqualifying More Recipients Who Traffic Benefits (GAO/RCED-00-61, 
March 7, 2000).

    GAO Recommendations: To improve the integrity of the Food Stamp 
Program, we recommended that the Secretary of Agriculture direct the 
Administrator of the Food and Nutrition Service to:
     Work with the five States currently using EBT data to 
determine the best techniques for using these data to identify 
suspected recipient traffickers and work with the other States with 
statewide EBT systems to implement the best techniques, as appropriate, 
and
     Use EBT data to periodically develop reliable estimates of 
the extent of trafficking and use these estimates to develop goals and 
appropriate strategies for reducing trafficking.
    Agency Action: FNS agreed with both of the GAO recommendations and 
has initiated actions to implement them. FNS stated that it fully 
agrees with GAO's recommendation to work with the five States which 
have been identified as currently using EBT data to identify suspected 
recipient traffickers and with the other States with statewide EBT 
systems to implement the best techniques, as appropriate. In the near 
future, FNS expects to publish a final regulation on recipient claims, 
which will provide an increased financial incentive for States to be 
more aggressive in the pursuit of recipients who traffic in EBT 
benefits. Under this new regulation, States will be able to retain 35 
percent of each collection.
    With regard to the second recommendation, FNS agreed and, in July 
2000, has issued an update to its 1995 report on the extent of food 
stamp trafficking. FNS also reported that it would use these estimates 
to develop goals and appropriate strategies for reducing trafficking. 
However, according to FNS, current law explicitly prohibits FNS from 
using Food Stamp Program funds to conduct studies and evaluations. FNS 
stated that restoration of funding to conduct this work is critical to 
effective implementation of this recommendation.

    Mr. Hoekstra. Good. Thank you very much.
    Mr. Hartman.
    Mr. Hartman. Thank you for the opportunity to speak before 
you today about the Texas Electronic Benefit Transfer Program.

                  STATEMENT OF DARRELL HARTMAN

    Mr. Hartman. We call it the Lone Star System. As indicated 
by the name we gave it, we take a great deal of pride in the 
Lone Star System. I'd like to give you a little history about 
the program. Texas believed there was a better way to provide 
food stamps to people in need and started looking into the 
provision of such benefits through an electronic benefit 
transfer system in the early 1990's.
    As we looked at the program, it was easy to see that EBT 
offered a win-win situation to all of those involved. Clients, 
retailers, financial institutions, State agencies, Federal 
partners, and the general public all benefitted through an 
electronic delivery system.
    A simpler, safer way for clients to receive and use their 
food stamp benefits with increased dignity and reduced stigma, 
an improved way to process transactions for the retailers, like 
the way they do business for other transactions.
    For financial institutions, it eliminated the paper system 
and replaced it with an electronic one. And the general public 
benefitted by government doing business in a cost-effective, 
efficient manner that reduces fraud and abuse in a system.
    So, as you can see, there are many reasons to do EBT. One 
of them was related to program integrity. That's the one that 
you have invited me here today to discuss. EBT, the Lone Star 
card, provided us an opportunity to assure that taxpayers, 
including the people who are receiving the benefits, could feel 
comfortable that the program was running as it was intended, 
providing supplemental nutrition to families and individuals in 
need. So the State developed an innovative program to identify 
retailers trafficking in food stamp benefits through the 
electronic trail provided by the Lone Star card transactions.
    Using existing personnel and off-the-shelf computer 
technology, we began analyzing the EBT data to identify 
patterns of suspicious transactions, such as retailers with 
unusually high transaction amounts, retailers whose customers 
often spend every penny in their account, retailers with 
customers who make rapid, repeated transactions in a short time 
frame, retailers with a lot of even dollar transactions, and 
retailers with a high percentage of manual entry transactions, 
where they don't swipe the card.
    EBT provides the clues. It gives us the electronic audit 
trail to go forward with investigations we would never have 
known were needed. In Fiscal Year 1998, we conducted 
approximately 100 retailer trafficking investigations. In 
Fiscal Year 1999, we conducted approximately 125 trafficking 
investigations. We identified several who were trafficking more 
than a million dollars worth of benefits per year. We shut 
those operations down and referred the traffickers for 
prosecution and the stores to the Food and Nutrition Service 
for administrative action.
    There are still some schemes out there to defraud the 
program, but it is tougher than it used to be. Perhaps more 
importantly, the Food Stamp Program in Texas has the support of 
the general public because they know people in need are 
receiving the benefits they need and that traffickers are being 
prosecuted.
    Trafficking exists because there are retailers willing to 
buy and clients willing to sell food stamp benefits at a 
discount. We have found that the best way to identify 
suspicious clients is to first identify retailers who are 
trafficking. And through the process I've described, we have 
closed the circle that is required for the program to be 
defrauded, the circle which includes a retailer and a client 
working together.
    In Fiscal Year 1998, the Department completed almost 3,000 
client trafficking investigations, in which 1.44 million 
changed hands. Ninety-five percent of those clients signed a 
waiver or were found to have committed an intentional program 
violation through a hearing.
    In Fiscal Year 1999, the Department completed close to 
2,700 cases, of which 1.24 million changed hands. Almost all of 
the cases the Department develops against clients are handled 
through an administrative disqualification hearing. It is only 
the most blatant cases involving large amounts of benefits that 
the Department refers clients to a D.A. for felony prosecution.
    As I mentioned earlier, we have partners in this effort to 
assure integrity in the Food Stamp Program: FNS, the Office of 
Inspector General at the USDA, and local law enforcement 
agencies. We consider other States our partners as well and 
have shared our innovative cost-effective initiative with them.
    We travel to other States by invitation and host other 
States in Texas who are interested in our program. Two key 
elements are necessary for a strong anti-trafficking program. 
First, good, supportive relationships with your regional FNS 
office and the regional OIG are essential.
    Texas appreciates the outstanding technical assistance and 
support we receive from both of these offices. Second, it is 
critical to have a deep commitment to program integrity, which 
allows a State to devote staff and automation resources to 
anti-trafficking effort.
    In Texas, Commissioner Bost has made our efforts a top 
priority. And the support provided by the management and 
leadership of our State has been an important component of our 
success.
    In conclusion, we want to thank FNS for their recent rule 
change, which allows States to establish claims on trafficking 
cases. While Texas took the initiative to begin this program 
because we believed it was the right thing to do, we are 
encouraged that this initiative for States to participate in 
developing comprehensive trafficking programs will reinforce 
the importance and commitment to preserving the integrity of 
the Food Stamp Program.
    You can probably tell by now that in Texas, we believe in 
the Food Stamp Program. We believe in the Lone Star System. And 
we believe that through the use of a strong, smart anti-
trafficking program, which can be developed without expending a 
lot of scarce tax dollars, Americans will support a program 
which has integrity and cares for the nutritional needs of 
those who deserve support.
    Thank you again for inviting me to testify.
    [The prepared statement of Darrell Hartman follows:]

Prepared Statement of Darrell Hartman, Office of the Inspector General, 
                   Texas Department of Human Services

                               Background
    Texas believed there was a better way to provide food stamps to 
people in need, and started looking into the provision of such benefits 
through an electronic benefit transfer system in the early 1990's.
    As we looked at the program, it was easy to see that EBT offered a 
win-win situation to all those involved. Clients, retailers, financial 
institutions, State agencies, Federal partners, and the general public 
all benefited through an electronic delivery system.
    Key benefits included:
     A simpler, safer way for clients to receive and use their 
food stamp benefits with increased dignity and reduced stigma;
     An improved way to process transactions for the 
retailers--like the way they do business for other transactions;
     For financial institutions, it eliminated the paper system 
and replaced it with an electronic one; and
     The general public benefited by government doing business 
in a cost-effective, efficient manner that reduces fraud and abuse of 
the system.
    So, as you can see, there were many reasons to do EBT--one of them 
was related to program integrity.
    That is the one you have invited me to discuss today.

                            Getting Started
    The Lone Star program was statewide by the fall of 1995. At that 
time, over 2.5 million people were receiving over $2 billion in food 
stamp benefits using the Lone Star card.
    In Texas, we are committed to helping our neighbors in need. We are 
also committed to providing that help with integrity. At the time, 
there was a great deal of concern about fraud and abuse in the food 
stamp program.
    EBT--the Lone Star card--provided us an opportunity to assure that 
taxpayers, including the people who were receiving the benefits, could 
feel comfortable that the program was running as it was intended--
providing supplemental nutrition to families and individuals in need.
    So the State developed an innovative program to identify retailers 
trafficking in food stamp benefits through the electronic trail 
provided by the Lone Star card transactions.
    In the southwest region, the Food and Nutrition Service relies on 
our system to identify clients that may be utilizing their benefits 
inappropriately. Using existing personnel and off the shelf computer 
technology, we began analyzing the EBT data to identify patterns of 
suspicious transactions, such as:
     Retailers with unusually high transaction amounts;
     Retailers whose customers often spend every penny in their 
account;
     Retailers with customers who make rapid, repeated 
transactions in a short time frame;
     Retailers with a lot of even-dollar transactions (how 
often does your grocery tab come out to an even $20 * * *, $50 * * *, 
or $100?); and
     Retailers with a high percentage of manual entry 
transactions--where they don't swipe the card.

                         So, What Does It Mean?
    EBT provides the clues. It gives us the electronic audit trail to 
go forward with investigations we would never have known were needed.
    In FY 1998, we conducted approximately 100 retailer trafficking 
investigations. In FY 1999, we conducted approximately 125 retailer 
trafficking investigations.
    We identified several retailers who were trafficking more than a 
million dollars worth of benefits per year. We shut those operations 
down and referred the traffickers for prosecution and the stores to the 
Food and Nutrition Service for administrative action.
    But that is only a part of the picture. The big picture includes:
     Savings associated with shutting down the trafficking 
retailer. Not surprisingly, word travels fast when the State starts 
identifying suspicious operations;
     Savings associated with those who were trafficking out of 
their apartments--they didn't even have retail outlets--but now we knew 
because we had to install equipment to process the electronic 
transactions; and
     Savings associated with the significant reduction in 
trafficking throughout the state.
    There are still some schemes out there to defraud the program, but 
it is tougher than it used to be to work the system.
    Perhaps most importantly, the food stamp program in Texas has the 
support of the general public because they know people in need are 
receiving the benefits they need--and that traffickers are being 
prosecuted.

                         What About the Client?
    Trafficking exists because there are retailers willing to buy--and 
clients willing to sell--Food Stamp benefits at a discount.
    We have found that the best way to identify suspicious clients is 
to first identify retailers who are trafficking.
    And through the process I have described, we have closed the circle 
that is required for the program to be defrauded--the circle which 
includes a retailer and a client, working together.
    In FY 1998, the Department completed almost 3000 client trafficking 
investigations in which $1.44 million changed hands.
    95 percent of those clients signed a waiver or were found to have 
committed an intentional program violation through a hearing.
    In FY 1999, the Department completed close to 2,700 cases in which 
$1.24 million changed hands.
    Almost all of the cases the Department develops against clients are 
handled through an administrative disqualification hearing. It is only 
in the most blatant cases, involving large amounts of benefits, that 
the Department refers clients to a DA for a felony prosecution.

                              Our Partners
    As I mentioned earlier, we have partners in this effort to assure 
integrity in the Food Stamp program--FNS, the Office of Inspector 
General at the USDA, and local law enforcement agencies.
    We consider other States our partners as well and have shared our 
innovative, cost-effective initiative with them. We travel to other 
States by invitation, and host other States in Texas who are interested 
in our program.
    Two key elements are necessary for a strong anti-trafficking 
program:
     First--good, supportive relationships with your regional 
FNS office and Regional OIG are essential. Texas appreciates the 
outstanding technical assistance and support we have received from both 
these offices; and
     Second--it is critical to have a deep commitment to 
program integrity which allows the State to devote staff and automation 
resources to the anti-trafficking effort. In Texas, Commissioner Bost 
has made our efforts a top priority and the support provided by the 
management and leadership of our State has been an important component 
of our success.

                               Conclusion
    In conclusion, we want to thank the FNS for their recent rule 
change which allows States to establish claims on trafficking cases. 
While Texas took the initiative to begin this program because we 
believed it was the right thing to do, we are encouraged that this 
incentive for States to participate in developing comprehensive 
trafficking programs will reinforce the importance and commitment to 
preserving the integrity of the Food Stamp program.
    You can probably tell by now that in Texas, we believe in the FS 
program, we believe in the Lone Star system, and we believe that 
through the use of a strong, smart anti-trafficking program (which can 
be developed without expending a lot of scarce tax dollars) Americans 
will support a program which has integrity and cares for the 
nutritional needs of those who deserve support.
    Once again, thank you for inviting me to speak to you today.

    Mr. Nussle [presiding]. Thank you.
    Ms. Watkins.

                  STATEMENT OF SHIRLEY WATKINS

    Ms. Watkins. Mr. Chairman and members of this Committee, I 
am Shirley Watkins, Under Secretary for Food, Nutrition, and 
Consumer Services. I am honored to join you this afternoon as 
your Task Force looks at USDA's premier program that has the 
responsibility of providing the safety net for and the fight 
against hunger: our Food Stamp Program.
    This is a very crucial element of President Clinton's and 
Secretary Glickman's commitment to delivering nutrition 
assistance to needy Americans. And that is to protect the 
integrity of the Food Stamp Program from those who would misuse 
or abuse the program. We worked tirelessly to identify ways to 
strengthen the program management and to keep public confidence 
in this vital program very high.
    Our mission at FNCS, Food, Nutrition, and Consumer 
Services, is to reduce hunger and food insecurity in 
partnership with cooperating organizations by providing 
children and needy families access to food, a healthful diet, 
and nutrition education in a manner that supports American 
agriculture and inspires public confidence. And I think that is 
the same thing that you have heard from Mr. Hartman, who has 
indicated that Texas supports the Food Stamp Program and the 
public confidence is a critical element of that.
    The purpose for today's hearing is to discuss to what 
extent trafficking exists. Last week we released a study 
entitled ``Extent of Trafficking in the Food Stamp Program: An 
Update.'' The study shows that the level of food stamp benefits 
trafficked for cash dropped by 19 percent between 1993 and 
1998. We estimate that stores trafficked about $660 million per 
year, roughly 3.5 cents of every dollar of benefits issued.
    Mr. Chairman, I would like to ask that the study be 
included in the official record of today's testimony.
    Mr. Nussle. It will be.
    Ms. Watkins. Thank you.
    [The FNCS study follows:]

     The Extent of Trafficking in the Food Stamp Program: An Update

                           Executive Summary
    Food stamps are intended for food. When individuals sell their 
benefits for cash it violates the spirit and intent of the Food Stamp 
Program as well as the law. This practice, known as trafficking, 
diverts food stamps away from their purpose. It reduces intended 
nutritional benefits and undermines public perceptions of the integrity 
and utility of the program. A crucial question, therefore, is the 
extent to which trafficking exists.
    Several years ago, a method to calculate data-based estimates of 
the prevalence of trafficking was developed by USDA. The Extent of 
Trafficking in the Food Stamp Program\1\ used this method to analyze 
over 11,000 completed undercover investigations of trafficking and 
generate an estimate for calendar year 1993. This report duplicates the 
precise methodology of the earlier analysis with more than 10,000 new 
investigations to generate an estimate for the 1996-1998 calendar year 
period. We find that:
---------------------------------------------------------------------------
    \1\ Theodore F. Macaluso, The Extent of Trafficking in the Food 
Stamp Program (Alexandria, VA: Food and Nutrition Service, USDA; 1995).
---------------------------------------------------------------------------
    The amount of trafficking has decreased. Stores trafficked about 
$660 million per year for cash from the government in the 1996-1998 
period, a 19 percent decline from the $815 million trafficked in 1993.
    The rate of trafficking has also decreased. The trafficking rate--
which compares dollars trafficked to benefits issued--declined 8 
percent: from almost four cents of every dollar of food stamp benefits 
issued to three-and-one-half cents of every dollar issued.
    FNS concentrates its enforcement efforts on stores most likely to 
traffic. In addition, the expansion of Electronic Benefit Transfer 
(EBT)--which had grown to half of all issuance during this period--
makes certain forms of trafficking harder to conduct and large-scale 
trafficking easier to detect. For these reasons, we find the largest 
reduction in the trafficking rate among the store categories most 
likely to traffic--privately owned stores, especially small ones that 
do not stock a full line of food.
    When we repeat our analysis of where store violations occur the 
overall pattern remains unchanged:
     Dramatic differences exist among store types: the percent 
of redemptions that are trafficked ranged from nearly zero to over 
fifteen percent across store categories.
     The stores which redeem the overwhelming majority of food 
stamp benefits continue to have very low trafficking rates.

                            Acknowledgments

    The author wishes to express his appreciation to the many 
individuals who contributed to this report. Richard Mantovani, Ph.D, 
Hoke Wilson and Tigran Markaryan at Macro International successfully 
compiled and merged the data summarized here, faithfully reproduced the 
original methodology, made thoughtful suggestions, and responded 
promptly to the author's numerous requests for additional information 
and analyses.
    Steven Carlson, Director of the Family Programs Staff in the Office 
of Analysis, Nutrition and Evaluation (OANE), Food and Nutrition 
Service, provided guidance and commented thoughtfully on drafts of the 
text. Ken Offerman, also of OANE, managed the contractual support for 
the project, performed considerable legwork in tracking down data, and 
also commented thoughtfully on drafts. Finally, the staff of the 
Benefit Redemption Division of the Food Stamp Program provided many 
comments and corrections and helped to make this a comprehensive--and 
better--report.

                              Introduction
    Food stamps are intended for food. When individuals sell their 
benefits for cash it violates the spirit and intent of the Food Stamp 
Program as well as the law. This practice, known as trafficking, 
diverts food stamps away from their purpose. It reduces intended 
nutritional benefits and undermines public perceptions of the integrity 
and utility of the program. A crucial question, therefore, is the 
extent to which trafficking exists.
    Several years ago, a method to calculate data-based estimates of 
the prevalence of trafficking was developed by USDA. The Extent of 
Trafficking in the Food Stamp Program\2\ used this method to analyze 
over 11,000 completed undercover investigations of trafficking and 
generate an estimate for calendar year 1993.\3\ The report found that:
---------------------------------------------------------------------------
    \2\ Theodore F. Macaluso, The Extent of Trafficking in the Food 
Stamp Program (Alexandria, VA: Food and Nutrition Service, USDA; 1995).
    \3\ Both the earlier report and this one intentionally use 
calendar, rather than fiscal, years for the analysis. There are two 
reasons for this. First, it is necessary to combine investigations from 
several years to achieve a sufficient number of cases for analysis, so 
the choice of a fiscal or calendar metric is arbitrary. Second, the use 
of calendar year reinforces the fact that we are providing estimates, 
rather than administrative data (which typically is presented on a 
fiscal year basis).
---------------------------------------------------------------------------
     About $815 million was trafficked for cash from the 
government by food stores during 1993. This amounted to just under four 
cents of every dollar of food stamp benefits issued.
     Significant differences across types of food retailers 
existed: supermarkets had very low trafficking rates, non-supermarkets 
had substantially higher trafficking rates.
     The food stores which redeemed the overwhelming majority 
of food stamp benefits had very low trafficking rates.
    This report updates the earlier analysis with more than 10,000 new 
investigations to generate an estimate for the 1996-1998 calendar year 
period. We continue to estimate three basic measures of trafficking:
    1. the amount of trafficking (i.e., the total sum of dollars 
trafficked, which depends partly upon the total sum of benefits issued 
and partly upon the next measure, the rate of trafficking);
    2. the rate of trafficking (the proportion of total benefits issued 
which were trafficked), and
    3. the store violation rate (the proportion of all authorized 
stores that engage in trafficking).
    While all three measures are important for different purposes, the 
second measure--the rate of trafficking--is the one that provides an 
approximation of FNS' relative success in controlling trafficking. The 
trafficking rate is independent of the size of the program (i.e., the 
total sum of benefits issued) or the relative market share of different 
types of retailers (which is not reflected in the store violation 
rate).
    We undertook an update because there have been several significant 
developments which may affect each of these measures of trafficking. 
These developments include the following:
     A 24 percent decline in food stamp caseload: from 10.8 
million households per month in 1993 to 8.2 million in 1998. The 
caseload decline resulted in an 11.3 percent decline in total benefits 
issued. This is likely to reduce the total dollar amount of trafficking 
(since total benefits issued decreased), but is unlikely--by itself--to 
change the trafficking rate (i.e., the proportion of benefits issued 
that are trafficked).\4\
---------------------------------------------------------------------------
    \4\ There has been speculation that able-bodied adults without 
dependents (ABAWDS) are more likely to traffic than other program 
participants. If this were true, then welfare reform time limits on the 
duration of participation by ABAWDS might be expected to reduce the 
rate of trafficking. However, the evidence available to USDA indicates 
that no one category of participant is either more or less prone to 
traffic than any other category.
---------------------------------------------------------------------------
     A 16 percent decline in the number of food retailers 
authorized to accept food stamps: from about 210,000 in 1993 to 177,000 
in 1998. The decline in participating retailers may change the store 
violation rate depending upon whether stores willing to traffic left 
the program at a faster (or slower) rate than non-trafficking stores. 
However the influence of this factor on changes in the rate of 
trafficking will depend upon two things: (i) whether trafficking-prone 
stores that remain on the program changed their trafficking activity; 
and (ii) whether food stamp participants choose to shop at trafficking-
prone stores or not.
     A 50 percent change-over from paper food coupons to 
electronic benefit transfer (EBT). The Personal Responsibility and Work 
Opportunities Reconciliation Act of 1996 mandates that all States 
convert from paper food stamp coupons to electronic benefit issuance by 
2002. By September 1998 slightly more than half of all food stamp 
benefits were issued and redeemed electronically. Under EBT certain 
forms of trafficking are harder to conduct and large-scale trafficking 
is easier to detect. Therefore, we would expect its expansion to reduce 
the rate of trafficking (i.e., the proportion of benefits issued that 
are trafficked).\5\
---------------------------------------------------------------------------
    \5\ EBT also provides new ways to catch any trafficking that does 
occur. A new system, labeled ALERT, analyzes EBT transaction data to 
catch some trafficking stores without the need for in-person 
investigations. These cases are still relatively new and are not 
incorporated here. FNS is working on developing a new trafficking 
measure to better reflect the impact of Electronic Benefit Transfer. 
ALERT data will be included in the new measure.
---------------------------------------------------------------------------
    The combined effect of these developments is hard to predict. 
Fortunately, one additional factor that could affect results--the 
quality of FNS undercover investigations--appears to have remained 
stable: there has been no meaningful change in the quantity or quality 
of FNS investigations. The total number of investigations, the number 
in which any food stamp violation is disclosed (``positives'') and the 
raw number in which trafficking is found have each remained relatively 
constant from 1993 through 1998 (Chart 1).



                                Approach
    This update uses the same methodology as the earlier report to 
ensure consistent comparisons. The method focuses on authorized food 
retailers because all trafficking must eventually flow through a food 
retailer authorized to participate in the Food Stamp Program. The 
reason is obvious, but worth pointing out explicitly: authorized food 
retailers are the only ones who can redeem food benefits for cash from 
the government.\6\
---------------------------------------------------------------------------
    \6\ While food retailers constitute the overwhelming majority of 
authorized redeemers of food stamp benefits, the Food Stamp Program has 
also authorized a few food wholesalers to accept food stamp benefits. 
For simplicity, we refer to all authorized entities as retailers.
---------------------------------------------------------------------------
    Because authorized food retailers are the only ones who can redeem 
food benefits for cash from the government, knowing the prevalence of 
trafficking among retailers tells us the maximum amount of dollars 
diverted from food benefits by trafficking for cash.\7\
---------------------------------------------------------------------------
    \7\ Trafficked coupons are not always redeemed for cash from the 
government. Owners of small authorized or unauthorized stores, 
restaurants, and the like can pretend to be recipients and illegally 
use food stamps to buy food at supermarkets for resale in their stores. 
We label this ``evasion trafficking'' (since it is a form of tax 
evasion) and discuss its impact on our estimate at the end of this 
paper.
---------------------------------------------------------------------------
    The Food and Nutrition Service (FNS) maintains a staff of 
investigators who work undercover to determine whether authorized food 
stores sell ineligible items or engage in trafficking. Stores caught 
violating are fined or removed from the program and in some instances 
prosecuted.
    For the update, we followed the same approach used in the earlier 
report:\8\
---------------------------------------------------------------------------
    \8\ There is one trivial difference: the earlier report involved 
data on investigations started by January 1, 1991 and completed by 
March 1994 which were combined with redemption data from 1993 and 
presented as a single result for calendar 1993; this update involves 
data on investigations completed between January 1996 through December 
1998 combined with redemptions from 1996-1998, which we annualize and 
present as a single result for the 1996-1998 period. Because 
trafficking was less of a focus of investigators in the 1980's than it 
is now, the earlier report involved a cut-off on the start of 
investigations to ensure that the investigators' focus was on 
trafficking (rather than sale of ineligible items). Such a restriction 
is no longer needed.
---------------------------------------------------------------------------
     First, we sorted a database of 10,354 completed 
investigations across five specific dimensions that categorize store 
types and store locations.\9\
---------------------------------------------------------------------------
    \9\ We obtained all investigations included in the FNS Store 
Investigation and Monitoring System (SIMS) database for calendar years 
1996 through 1998. A small fraction of these investigations were of 
stores that could not be matched to zip codes in the redemption file 
and therefore were not used in the analysis. Inspection of these 
dropped investigations indicated (1) that the proportion of trafficking 
to non-trafficking outcomes in these investigations was similar to the 
data used for the analysis and (2) the cases were distributed across 
the data in such a way that it is implausible that they would change 
any substantive findings. The total number of SIMS investigations and 
the number used in the analysis were as follows:
    1996: SIMS--3,709; Analysis file--3,690.
    1997: SIMS--3,624; Analysis file--3,601.
    1998: SIMS--3,095; Analysis file--3,063.
    Total: SIMS--10,428; Analysis file--10,354.
    The five dimensions we employ consist of three that categorize 
stores (type of store, ownership, and amount of food stamp business) 
and two that categorize the zip code in which each store was located 
(degree of urbanization, percent of households in poverty). Specific 
definitions employed are as follows:
    Type of Store. Store types on the FNS application form were 
collapsed to the following seven categories (to ensure an adequate 
number of cases of each type):
    Supermarket--any store identifying itself to FNS as a supermarket 
or grocery with gross sales over $2,000,000.
    Large grocery--any store identifying itself to FNS as a supermarket 
or grocery with gross sales between $500,000 and $2,000,000.
    Small grocery--any store identifying itself to FNS as a supermarket 
or grocery with gross sales under $500,000.
    Convenience--any store identifying itself to FNS by this title, 
regardless of gross sales.
    Specialty--any store identifying itself to FNS by this title, 
regardless of gross sales. They are almost always single product line 
stores such as meat markets, fish markets, dairy stores, etc.
    Gas/Grocery--any store identifying itself to FNS by this title, 
regardless of gross sales.
    Other Types--any store identifying itself to FNS by a title 
different than any of the preceding, regardless of gross sales. 
Examples include produce stands, general stores, combination grocery/
bars, health/natural food stores, milk and/or bread routes.
    Ownership. Ownership types on the FNS application form were 
collapsed to the following two categories (to ensure an adequate number 
of cases of each type).
    Public--any store identifying itself to FNS as a public corporation 
(i.e., a retailer whose stock trades publicly).
    Private--any store identifying itself to FNS as other than publicly 
owned. This includes private (i.e., closely held) corporations as well 
as partnerships, sole proprietorships, co-ops, etc.
    (``Franchise'' is a separate category on the FNS application, not 
an ownership type: both public and private ownership categories include 
stores that report themselves as franchises.)
    Amount of Food Stamp Business. Stores were categorized into deciles 
on the basis of food stamp redemptions. The purpose was statistical, 
rather than analytical, to ensure that large disparities in redemptions 
by stores do not distort results.
    Urbanization. Based on census data for the zip code in which the 
store is located. Four categories were employed: 0 to 10 percent urban 
population, 11 to 50 percent, 51 to 90 percent, and over 90 percent.
    Poverty. Based on census data for the zip code in which the store 
is located. Four categories were employed: 0 to 10 percent of 
residential population below poverty, 11 to 20 percent, 21 to 30 
percent, and over 30 percent.
---------------------------------------------------------------------------
     Second, for each specific category of store and location 
we compiled national data from calendar years 1996 through 1998 on the 
total number of stores and the total food stamp redemptions in that 
category.
     Third, we analyzed the investigation outcomes and 
calculated the weighted trafficking and store violation rates within 
each category.\10\ We weighted the investigation data to accurately 
represent the national figures.\11\ We calculated two of our three 
measures: the trafficking rate, a redemption-based rate to reflect 
dollar diversions, and the store violation rate, a store-based rate to 
identify the kinds of stores that contain the most violators.
---------------------------------------------------------------------------
    \10\ For calculating trafficking rates, the number of 
investigations in each store category are large enough to give high 
confidence in the estimates (ranging from a low of 369 to a high of 
3,665 by store type).
    \11\ Statistically, the FNS investigation data base encompasses a 
sufficient number of cases to be used as a post-stratified sample of 
the national ``population'' of retailers. By categorizing the 
investigated stores on the five dimensions described in note 8 and 
weighting the stores, by category, to reflect the national population 
of retailers, by category, we are able to draw valid conclusions about 
the national situation.
---------------------------------------------------------------------------
     Finally, we multiplied the redemption-based trafficking 
rate against the total food stamp redemptions in each category and 
summed across all categories to obtain the first of our three measures: 
the amount of trafficking, which provides an estimate of dollars 
diverted from food benefits by trafficking in the Food Stamp 
Program.\12\
---------------------------------------------------------------------------
    \12\ The specific calculation was a two-stage one. The first stage 
combines the data on the trafficking rates by type of store and store 
location with national redemption data to yield an estimate of the 
gross redemptions by authorized food stores found trafficking. The 
second stage accounts for the fact that some of the gross redemptions 
are legitimate food sales. To ensure consistency with the earlier 
estimate, we continue to use the assumption that legitimate food sales 
account for 60 percent of the gross redemptions among supermarkets and 
large grocery stores caught trafficking and treat 40 percent of their 
gross redemptions as trafficked. Among all other types of food stores, 
we assume that only 10 percent of the gross redemptions are legitimate 
food sales among stores that do not stock a full line of food (i.e., 
small grocery, convenience, specialty food, gas/grocery, and ``other'' 
stores) and treat 90 percent of their gross redemptions as trafficked.
---------------------------------------------------------------------------

                                Findings
    About $660 million per year was diverted from food benefits by 
trafficking between 1996 and 1998. This amounts to three-and-one-half 
cents of every benefit dollar issued (Table 1).
    Our methodology yields a cautious estimate that is likely to best 
represent the maximum dollars diverted from food benefits per year by 
direct trafficking in 1996-1998.

 TABLE 1.--TRAFFICKING CONTINUES TO BE LOW AMONG SUPERMARKETS AND LARGE GROCERY STORES BUT SUBSTANTIALLY HIGHER
                       AMONG SMALL STORES AND STORES THAT DO NOT STOCK A FULL LINE OF FOOD
----------------------------------------------------------------------------------------------------------------
                                                1993                                    1996-1998
                             -----------------------------------------------------------------------------------
        Type of store            Store                     Estimated       Store                     Estimated
                               violation   Trafficking    trafficking    violation   Trafficking    trafficking
                                  rate         rate      amount ($000)      rate         rate      amount ($000)
----------------------------------------------------------------------------------------------------------------
Supermarkets................          4.2          1.7        $282,058          5.3          1.9        $279,163
Large Groceries.............          6.7          3.7          46,632          9.8          3.2          35,255
    Subtotal................          5.0          1.9        $328,690          6.7          2.0        $314,418
Small Groceries.............         12.8         15.7         177,809         14.4         15.8         154,109
Convenience.................          8.1          9.6          78,090         11.7         10.8          66,809
Specialty...................         17.6         14.2         117,004         10.7          8.1          55,782
Gas/Grocery.................          8.7         10.4          27,528         12.8          9.7          21,784
Other Types.................         10.2         12.4          82,605         16.2          9.4          43,892
    Subtotal................         10.7         13.0        $483,036         13.0         11.5        $342,376
All Stores..................          9.4          3.8        $811,726         11.7          3.5        $656,794
----------------------------------------------------------------------------------------------------------------
Notes: The 1996-1998 data have been annualized--see footnote 8.

Trafficking violation rates are calculated separately for stores and redemptions. The store violation rate is
  the percent of investigated stores caught trafficking weighted by the national distribution of stores. The
  trafficking rate is the percent of trafficked redemptions in investigated stores, weighted by the national
  distribution of redemptions. The apparent anomaly between the two rates--i.e., the store-based rate was higher
  in 6 of 7 store types while the redemption-based rate is lower both overall and in 4 of 7 store types--
  reflects the fact that the two rates measure different aspects of trafficking.

               Trafficking and Change in Benefits Issued
    Compared to 1993, the 1998 figure represents a 19 percent decline 
in the dollar amount of benefits trafficked. As expected, we find a 
similarity among the changes in caseload, total redemptions, and the 
amount of trafficking (Chart 2):
    However, the decline in caseload and total redemptions is far from 
a complete explanation of changes over this period of time: we also 
find an 8 percent decline in the rate of trafficking, which is 
independent of benefits issued. The trafficking rate decreased from 3.8 
percent of benefits issued in 1993 to 3.5 percent of benefits issued in 
1998 (Table 1).



      trafficking and change in the authorized retailer population
    The 16 percent decline in number of authorized retailers also does 
not appear to explain the improvement in the trafficking rate: we 
actually find an increase in the store violation rate between 1993 and 
1998 (Table 1 and Chart 3).


                 Trafficking and Type of Food Retailer
    Part of the explanation for the improvement in the trafficking rate 
is to be found in two critical facts:
    (1) trafficking continues to vary by type of store;
    (2) stores that redeem the most, traffic the least.
    Tables 1 and 2 show that:
     Supermarkets and large grocery stores redeemed 84 percent 
of all benefit dollars but few of those dollars are trafficked.
     In comparison to supermarkets and large grocery stores, 
trafficking rates among small stores and stores that do not stock a 
full line of food are 4 to 8 times higher.

                   TABLE 2.--DISTRIBUTION AND MARKET SHARES OF AUTHORIZED FOOD STAMP RETAILERS
----------------------------------------------------------------------------------------------------------------
                                                                 1993 Percent of all    1996-1998 Percent of all
                        Type of store                        ---------------------------------------------------
                                                                 Stores    Redemptions     Stores    Redemptions
----------------------------------------------------------------------------------------------------------------
Supermarkets................................................         15.3         76.5         14.9         78.3
Large Groceries.............................................          6.9          6.0          7.0          5.8
    Subtotal................................................         22.2         82.5         21.9         84.1
Small Groceries.............................................         18.8          5.4         20.0          5.2
Convenience.................................................         27.7          3.8         26.8          3.3
Specialty...................................................          8.7          3.9          9.0          3.7
Gas/Grocery.................................................         10.3          1.2         11.9          1.2
Other Types.................................................         12.3          3.2         10.4          2.5
    Subtotal................................................         77.8         17.5         78.1         15.9
All Stores..................................................  (\1\) 100.0  (\2\) 100.0  (\3\) 100.0  (\4\) 100.0
----------------------------------------------------------------------------------------------------------------

    Table notes:
    1. Based on a total of 200,568 authorized food retailers redeeming 
at any point during 1993.
    2. Based on a total of $21.1 billion.
    3. Based on 237,824 unique food retailers redeeming at any point 
during the 1996-1998 period.\13\
---------------------------------------------------------------------------
    \13\ We processed all stores received from FNS redemption files but 
used only the ones with a match to zip code data in the analysis. 
Stores that had no redemptions were dropped from the analysis (unless 
they had been investigated, in which case they were retained). For each 
specific year the total number of authorized retailers received and 
total number in our analysis file are as follows:
    1996: Received--205,318; Analysis file--202,850
    1997: Received--196,408; Analysis file--193,510
    1998: Received--184,055; Analysis file--180,857
---------------------------------------------------------------------------
    4. Based on total of $56.16 billion over the 3 years.\14\
---------------------------------------------------------------------------
    \14\ For each specific year the sum of redemptions (total dollars) 
was:
    1996: Received--$21,713,774,005; Analysis file--$21,580,132,008
    1997: Received--$18,463,396,131; Analysis file--$18,322,710,580
    1998: Received--$16,433,240,311; Analysis file--$16,260,221,191
---------------------------------------------------------------------------
    Between 1993 and 1998 there was a modest increase in the relative 
market share of supermarkets and large grocery stores--the stores least 
likely to traffic (Chart 4).



    Notes: Unlike earlier charts, in which each column was a different 
year (1993 or 1998), in this chart each column is the difference 
between the two periods. The ``large store'' category includes both 
supermarkets and large grocery stores; ``small stores'' are everything 
else. Market share is defined as the percentage of redemptions 
accounted for by the given category of store.
    Food retailers owned by public corporations (i.e., owned by a 
company whose stock trades publicly) continue to have lower trafficking 
rates than privately owned stores (Table 3). The public corporation 
category includes many of the major national supermarket chains, many 
convenience store chains, and many grocery marts associated with 
national gasoline retailers.\15\
---------------------------------------------------------------------------
    \15\ We categorize stores according to how they categorized 
themselves in FNS authorization data. Examples of public corporations 
are major supermarket chains, like Albertson's and Safeway and gas-and-
go mini-marts operated by companies like Texaco or Mobil. Many major 
supermarket chains, such as the Publix chain in Florida, are private 
corporations. IGA stores which have the appearance of a chain but are 
not public also fall under non-public ownership. Stores that most 
readers consider ``franchises'' may fall under either the public or 
non-public heading, depending on how they categorized themselves to 
FNS. Southland's 7-Eleven chain are classified under public 
corporations.
---------------------------------------------------------------------------
     In 375 investigations of public corporations, FNS 
undercover investigators found trafficking involved about 4 percent of 
publicly owned stores.
     Among privately owned food retailers, FNS undercover 
investigators found trafficking in almost thirteen percent of stores.

TABLE 3.--PUBLICLY OWNED FOOD RETAILERS DISPLAY LOW TRAFFICKING RATES; PRIVATELY OWNED RETAILERS, ESPECIALLY NON-
                      SUPERMARKETS, ARE SUBSTANTIALLY MORE LIKELY TO ENGAGE IN TRAFFICKING
----------------------------------------------------------------------------------------------------------------
                                          Trafficking when store is publicly       Trafficking when store is
                                                         owned                          privately owned
                                         -----------------------------------------------------------------------
              Type of store                Store violation  Trafficking rate   Store violation  Trafficking rate
                                                rate       ------------------       rate       -----------------
                                         ------------------                  ------------------
                                            1993     1998     1993     1998     1993     1998     1993     1998
----------------------------------------------------------------------------------------------------------------
Supermarkets............................      0.0  (\1\) 4      0.0  (\1\) 3      5.4      5.7      2.6      1.3
                                                        .7                .0
Large Groceries.........................      0.0      0.0      0.0      0.0      6.8      9.9      3.8      3.3
Other Types (small groceries,                 1.7      4.3      1.8      4.6     12.0     14.0     15.1     12.3
 convenience stores, gas/grocery,
 specialty foods, etc...................
All Stores..............................      1.2      4.4      0.2      3.0     10.7     12.7      5.3      3.7
----------------------------------------------------------------------------------------------------------------
\1\ See footnote 20.
Trafficking violation rates are calculated separately for stores and redemptions. The store violation rate is
  the percent of investigated stores caught trafficking weighted by the national distribution of stores. The
  trafficking rate is the percent of trafficked redemptions in investigated stores, weighted by the national
  distribution of redemptions.

    The store categories most likely to traffic continue to be small 
privately owned stores and privately owned stores that do not stock a 
full-line of food (Table 4):
     Among these stores more than 1 of every 8 benefit dollars 
redeemed was trafficked.
     While these categories account for about 71 percent of all 
stores they account for only 14 percent of all redemptions.

   TABLE 4.--SMALL PRIVATELY OWNED STORES HAVE THE HIGHEST TRAFFICKING RATES BUT REDEEM ONLY 14 PERCENT OF ALL
                                                 BENEFITS ISSUED
----------------------------------------------------------------------------------------------------------------
                                            Trafficking rates        Percent of all          Percent of all
                                              (redemptions)              stores                redemptions
           Category of store           -------------------------------------------------------------------------
                                            1993         1998        1993       1998        1993         1998
----------------------------------------------------------------------------------------------------------------
Publicly Owned Stores.................          0.2        (\1\)       12.8       12.8         28.0         30.0
Large Private Stores..................          2.7          1.5       17.2       16.5         56.2         55.8
Private--other stores.................         15.1         12.3       70.0       70.7         15.8         14.2
All stores............................          3.8          3.5      100.0      100.0        100.0        100.0
----------------------------------------------------------------------------------------------------------------
\1\ See footnote to Table 3.

                  Trafficking, FNS Enforcement and EBT
    FNS concentrates its enforcement efforts on stores most likely to 
traffic. In addition, the expansion of Electronic Benefit Transfer 
(EBT) makes certain forms of trafficking harder to conduct and large-
scale trafficking easier to detect. For these reasons, it should not be 
surprising that we find the largest reduction in the trafficking rate 
among the store categories most likely to traffic--privately owned 
stores, especially small ones that do not stock a full line of food 
(Chart 5).



                     Trafficking and Store Location
    The 1993 report examined the prevalence of trafficking by 
neighborhood and found that trafficking is more frequent among stores 
located in the poorest of poor neighborhoods. The 1993 report also 
found only a mild relationship between trafficking rates and a store's 
location in an urban neighborhood. These two findings continued to be 
true in the 1996-1998 period.
    Stores in the poorest of poor neighborhoods continue to be more 
likely to engage in trafficking than stores located elsewhere, although 
the difference between rich and poor neighborhoods has decreased 
somewhat (Table 5). Few recipients are likely to sell food stamp 
benefits for less than they can buy in food, unless the need for cash 
is overwhelming. It is no surprise, therefore, to find that the rate of 
trafficking (i.e., proportion of benefits trafficked) continues to vary 
widely by the economic status of neighborhoods.

                   TABLE 5.--TRAFFICKING IS MORE FREQUENT IN THE POOREST OF POOR NEIGHBORHOODS
----------------------------------------------------------------------------------------------------------------
                                                       Trafficking rates                  Percent of all
                                             -------------------------------------------------------------------
Percent of households in poverty in Zip Code    Store violation     Trafficking       Stores        Redemptions
           where store is located                    rate              rate      -------------------------------
                                             ------------------------------------
                                                1993      1998     1993    1998    1993    1998    1993    1998
----------------------------------------------------------------------------------------------------------------
0 to 10 percent.............................       4.6       9.5     1.7     2.0    30.3    26.5    27.2    23.2
11 to 20 percent............................       8.7      10.7     4.1     3.1    38.9    40.5    38.9    40.1
21 to 30 percent............................      13.0      13.2     3.8     3.3    20.1    20.5    20.1    21.6
Over 30 percent.............................      19.2      16.8     7.6     7.1    13.8    12.4    13.8    15.1
All Stores..................................       9.4      11.7     3.8     3.5   100.0   100.0   100.0   100.0
----------------------------------------------------------------------------------------------------------------

    Although some urban areas are widely perceived as having more crime 
than rural areas, we found only a mild relationship between the 
trafficking rate and urbanicity. The Bureau of the Census classifies 
zip codes by the urban/rural percentage of residents in the zip code. 
The trafficking rates by urban/rural percentage in the zip code in 
which a store is located show a modest increase in highly urban areas 
(Table 6).

 TABLE 6.--THE TRAFFICKING RATE IS SLIGHTLY HIGHER IN HIGHLY URBAN AREAS
------------------------------------------------------------------------
                                             Trafficking rates
                                 ---------------------------------------
   Stores located in Zip Codes      Store violation    Trafficking rate
     where percent urban is              rate        -------------------
                                 --------------------
                                    1993      1998      1993      1998
------------------------------------------------------------------------
0 to 10 percent.................       6.1      12.9       3.5       2.4
11 to 50 percent................       8.6      11.6       3.1       2.5
51 to 90 percent................       7.1      10.9       2.8       3.0
90 to 100 percent...............      12.1      11.6       4.4       3.9
------------------------------------------------------------------------

    While trafficking rates remain low and do not vary sharply by 
urbanicity, between 1993 and 1998 we find a large increase in the store 
violation rate in rural and lower-urban areas (Chart 6). Table 5 
indicates a similar increase in the store violation rate outside of the 
poorest areas. The reason for these changes in store behavior is 
unknown.\16\
---------------------------------------------------------------------------
    \16\ The increase in store violation rates outside of high poverty 
and highly urban areas may have occurred for several reasons. For 
example, the results are possible if the decline in authorized 
retailers differed by area. Alternatively, the results may reflect the 
expansion of EBT, either if the EBT switch-over forces violators into 
nearby non-EBT areas (and those areas are less than 90 percent urban 
and/or the population in poverty is under 21 percent) or if rural or 
higher-income States are implementing EBT at a slower rate. It is also 
unclear at this stage whether the increase is occurring among all non-
urban stores or only those located along highways through rural areas. 
FNS is developing a new trafficking measure to better reflect the 
impact of Electronic Benefit Transfer. These--and other--potential 
explanations will be analyzed as part of that effort.



    Stores in low trafficking areas continue to redeem the majority of 
food stamp benefits.
     Twelve percent of the nation's authorized food retailers 
are located in high poverty/high trafficking areas, 88 percent are 
located in lower poverty/low trafficking areas.
     Eighty-five percent of redemptions flow through stores 
located in neighborhoods where less than 30 percent of the population 
is below poverty.

           Conclusion and Implications for Program Integrity
    The rate of trafficking has decreased over this period. Although 
the data available are not sufficient to determine causality, the 
direction and nature of the decrease are consistent with two facts:
     The stores which redeem the majority of food stamp 
benefits continue to be stores with the lowest trafficking rates. 
Overall, 84 percent of food stamp benefits are redeemed in store 
categories with the lowest rates of trafficking.
     Electronic Benefit Transfer accounted for over half of all 
issuance during the measured period.
    EBT has expanded even more since these data were collected and it 
now represents over seventy percent of all food stamp issuance.
    Finally, during this period the store violation rate increased in 
rural and lower-poverty areas. While this change should be monitored, 
its significance is muted by the fact that the proportion of benefits 
trafficked in such areas (the rate of trafficking) is low.

                          Technical Discussion
    When we look at additional considerations that bear on trafficking, 
we find two factors which would tend to increase our estimate and two 
others that would tend to decrease it. It is important to discuss each 
of these additional considerations explicitly.

                       Sources of Underestimation
    1. Our procedure underestimates two aspects of the trafficking 
problem. The first aspect leading to underestimation is evasion 
trafficking:
     Among small retailers that are family-owned or where 
ownership is closely held, some violators do not redeem coupons for 
cash from the government (direct trafficking) but buy food stock for 
resale from large stores with trafficked coupons (a form of tax evasion 
we label ``evasion trafficking''). Evasion trafficking is a gray area, 
since the practice does not necessarily involve discounting: a small 
firm makes an illicit profit at the least risk of detection if it 
accepts food stamps at full value for food from legitimate recipients, 
but uses them (illegally) to buy food at supermarkets for resale.
     In our estimate we are most concerned about evasion 
trafficking when it is linked to discounting (i.e., the firm buys food 
stamp benefits at a discount). We have no data to estimate the extent 
of evasion trafficking by unauthorized food stores or restaurants. 
However, evasion trafficking by authorized retailers is partially 
captured by our estimating procedure, when the trafficking involves 
discounting. The data we use to estimate direct trafficking adequately 
capture the rate at which all authorized stores engage in discounting. 
What the data fail to do is account for redemptions that are unreported 
by authorized discounting firms that buy food for resale with the 
coupons. If unreported redemptions could be measured, then the evasion 
trafficking factor would increase the national estimate of dollars 
diverted from food benefits by trafficking but would not change the 
store-based violation rates useful for targeting future action.
     Engaging in evasion trafficking was relatively easy with 
food coupons but is substantially more difficult under EBT.\17\ Because 
the only ones to find evasion trafficking cost-effective are small 
privately owned stores who have not yet switched to EBT, the potential 
impact of this factor is limited to a shrinking subset of the privately 
owned small-store component of our estimate.
---------------------------------------------------------------------------
    \17\ The store owner would need to have possession of multiple EBT 
cards and make multiple trips to supermarkets (a small-store owner 
using more than one card to pay for a large purchase transaction would 
involve the supermarket in a violation that is readily detectable 
through the ALERT system; supermarkets are unlikely to accept that 
risk). Not only would the store owner need to have several cards and 
use them at several places (or on different days), for the practice to 
be worth the risk of getting caught the balances left on the cards 
would need to be large (which is not usually the case).
---------------------------------------------------------------------------
    2. The second potential cause of underestimation is network 
trafficking:
     Some violating stores will traffic with strangers while 
others restrict their illegal activities to people they know (which we 
label ``network trafficking''). Investigators can and do catch this 
type of trafficking, but it requires a harder investigation.
     As a result, some network trafficking is included in our 
estimate (because our investigations include some cases where the 
network was penetrated and trafficking was caught). But other instances 
of network trafficking are not included in our estimate (because 
investigators were unable to penetrate the network and make the case). 
This source of underestimation applies to all components of our model. 
If investigators could catch all instances of network trafficking, the 
national estimate of trafficking diversions would increase.\18\
---------------------------------------------------------------------------
    \18\ An additional potential consideration is the quality of the 
investigation. Even when retailers are willing to traffic with 
strangers, investigators with greater experience and adequate time and 
resources to establish a case are likely to catch more trafficking than 
investigators with less experience, time and resources. We believe the 
overall quality of investigations in our sample is high for two 
reasons. First, FNS investigative procedures provide adequate time and 
resources to establish a case. Second, in the earlier report we only 
used cases from 1991 and later, to ensure that investigators had at 
least 2 years of experience in establishing trafficking cases (or were 
hired with the understanding that trafficking cases were highest 
priority). In this report, most investigators have at least 6 years of 
experience in establishing trafficking cases, which strengthens our 
confidence in these estimates.
---------------------------------------------------------------------------
                       Sources of Overestimation
    1. However, our procedure also overestimates other aspects of the 
trafficking problem. A first source of overestimation is the procedure 
used to determine legitimate food sales.
     With extremely rare exceptions, stores that engage in 
trafficking also sell food and we must allocate some proportion of 
their total redemptions to legitimate food sales and the balance to 
trafficking.\19\ We purposefully used very low figures to estimate the 
percentage of legitimate food sales by violating stores--this procedure 
serves our goal of assuring an estimate of the maximum benefits 
diverted by trafficking. The estimate of trafficking diversion would be 
lower to the extent that our method to estimate legitimate food sales 
was more precise.
---------------------------------------------------------------------------
    \19\ On rare occasions phantom stores--i.e., fronts that take 
coupons but do not have a food business--are found. This phenomenon is 
likely to decrease in the future for two reasons: (1) FNS has expanded 
its staff resources to visit more stores in person; (2) EBT requires a 
visit from the EBT vendor to install terminals and the vendor will not 
install a terminal if they have questions about the legitimacy of the 
business.
---------------------------------------------------------------------------
     This consideration is especially relevant to the large-
store components of our model (where most redemptions occur). We 
reviewed investigator reports in connection with cases of supermarket 
trafficking.\20\ In supermarkets the percentage of total redemptions 
our methodology attributes to trafficking (40 percent) is about four 
times higher than experienced FNS field investigators attribute to 
trafficking (10 percent or less) when recommending sanctions or 
participating in other legal proceedings.
---------------------------------------------------------------------------
    \20\ In 1993 USDA investigators found no instances of trafficking 
at publicly owned supermarkets. Between 1995 and 1998, however, four 
cases of trafficking occurred in publicly owned supermarkets. Because 
there are relatively few investigations of supermarkets and because the 
redemptions flowing through supermarkets are so large, these four cases 
have a large apparent impact on trafficking rates. To be consistent, we 
report the trafficking rates exactly as computed in the first 
trafficking report. However, an examination of the four cases indicates 
that the procedures used in the earlier report significantly overstate 
the amount of redemptions trafficked in supermarkets. Relevant 
considerations include the following:
     Only a very small number of supermarket cases detect 
trafficking in any 1 year. Combining the data from the earlier report 
with this update, we found the following cases of trafficking in 
publicly owned supermarkets: 0 in 1993, 0 in 1994, 1 in 1995, 2 in 
1996, 0 in 1997, 1 in 1998.
     Two of the four cases appear to involve the actions of a 
single clerk. In one of those cases, the clerk was not even at the cash 
register when the transaction took place. Two of the four cases, 
however, involved a lower-level manager at the store.
     In three of the four cases, redemptions at the supermarket 
were in a pattern of significant decline; two of the three were being 
closed. It is possible that upper management gave decreased attention 
to employee actions in such an atypical environment. (This speculation 
will be evaluated as additional supermarket trafficking cases emerge 
over the next several years.)
     The percentage of redemptions attributed to trafficking in 
these four stores by the investigators was substantially lower than the 
percentage we use in our calculations. In the first report when 
trafficking was found at a supermarket or large grocery we attributed 
40 percent of the total redemptions in the store to trafficking. In 
these four instances of trafficking, investigators estimated that 10 
percent or less of total redemptions were trafficked.
     In light of the above, the true rate of redemptions 
trafficked in supermarkets is likely to be substantially below the 3 
percent figure in Table 3.
---------------------------------------------------------------------------
     To be consistent with the 1993 figures, we keep our method 
the same in this update report--but it is likely that the percentage of 
a store's redemptions we attribute to trafficking substantially 
overestimate trafficking, especially in supermarkets. Additional work 
is being conducted to determine whether better estimates can be 
created.
    2. Another major source of overestimation is that investigations 
are a non-random sample of stores.
     Our estimating procedure relies on investigations targeted 
to find fraud: our estimate would decrease substantially if 
investigators had randomly selected average stores, rather than 
selected suspicious stores on purpose.
     Of our four technical considerations, this is arguably the 
one with the largest impact on our estimate and applies to all 
components of our model.

    Ms. Watkins. We can credit much of the decline to a strong 
economy and the enactment of welfare reform which resulted in a 
drop in the food stamp rolls. However, we can also credit our 
expansion, which you heard today, of EBT, electronic benefits 
transfer, and the continued aggressive enforcement efforts.
    In addition, in spite of our limited resources, USDA has 
instituted several initiatives to combat trafficking and other 
violations. And I would like to cite six of those for you.
    Number one, the Personal Responsibility and Work 
Opportunity Act of 1996 provided the Department with much 
needed authority to strengthen enforcement of program integrity 
and eliminate fraud by strengthening those penalties, not only 
against the recipients but against retailers as well. And, as a 
result, the Department now has and is using this authority to 
suspend retailers immediately for the most egregious program 
offenses: trafficking in food stamps and in EBT benefits.
    The second one is that retailer oversight is a Federal 
responsibility. And it begins with the screening of retailers, 
seeking approval to accept food stamps or EBT cards at their 
stores by the Food and Nutrition Service.
    All of our retailers are essential partners in the Food 
Stamp Program. Store authorization to participate is a 
privilege and not a right. And to participate, a store owner 
applies directly to one of our field offices, providing that 
office with detailed information on the store's sales, the food 
stock, and general business operations.
    And, to the extent possible, when we have the resources 
available, the FNS field staff conducts site visits prior to 
authorizing a store to ensure that that establishment is, in 
fact, a food store and not a liquor store, not a dry cleaner's, 
and not an empty store front, or someone acting as a front for 
illegal activities.
    Currently there are 170,000 authorized retailers 
participating in the Food Stamp Program nationwide. We recently 
began using contracted staff in cooperation with our own staff 
to start performing some of those pre and post-authorization 
visits to gather information on the nature of the business that 
is actually being conducted by the stores. But still, in spite 
of our rigorous screening procedures, some authorized stores 
have owners or employees willing to sell ineligible items or 
engage in trafficking.
    Nationwide, FNS has a staff of only 46 Compliance Branch 
investigators that are dedicated to uncovering abuse by 
authorized retailers. Nevertheless, in the last 5 years, FNS 
has investigated over 24,000 stores suspected of violations 
across the country. And we do this by targeting our efforts on 
stores that are suspected of conducting illegal activities.
    We found violations in 44 percent of the investigations. 
Agency investigators discovered trafficking, as opposed to the 
sale of ineligible items, in over 3,500 stores.
    The third area: We are actively pursuing civil prosecution 
through the U.S. Department of Justice under the Civil False 
Claims Act against stores that are found trafficking in food 
stamps.
    The fourth area that we're working on is issuing food 
assistance through electronic benefits. And that is also 
changing and improving the way we protect benefits from fraud 
and abuse by reducing street trafficking and by creating an 
electronic paper trail, linking those who cheat the program 
with crime.
    Maryland, New Jersey, New Mexico, South Carolina, and Texas 
have all used the EBT data to identify recipient trafficking. 
You have heard from Texas. And you would hear similar kinds of 
evidence from the other States that I just mentioned.
    To date, we estimate that 75 percent of all households are 
using an EBT card to access their benefits. Forty States plus 
the District of Columbia have now implemented food stamp EBT 
systems in either all or part of their states.
    And all States should have EBT up and running 
electronically by 2002. We have already sent letters to the 12 
States that are still waiting to implement EBT and encouraging 
those governors and those commissioners to work with us so that 
we can implement and have all States operating effectively by 
2002.
    Number five: Several years ago FNS successfully implemented 
an automated EBT anti-fraud system called ALERT. And that ALERT 
system records the EBT transactions electronically. It 
provides: a record of the store; the date; the time; the 
purchase amount; the recipient's card number; and the point-of-
sale terminal, the POS.
    The ALERT's computerized system examines and analyzes this 
data very quickly, identifies suspicious patterns, and it 
expedites our ability to investigate, process, and remove those 
stores who do violate the regulations for the program.
    And, finally, the Department is conducting a series of 
national food stamp conversations around the country. The third 
one will be held tomorrow in New York. And we're soliciting 
input and ideas so that we can build on the successes in the 
program to reach all eligible individuals and families. We also 
want to simplify the program while at the same time maintaining 
the stewardship and effective measures of program performances.
    I will be chairing these conversations. I chaired the one 
here in Washington. We had one last week in Atlanta, and then 
we will have three more, one in Kansas City, one in Los 
Angeles, and one in Dallas.
    In closing, I want to thank you, Mr. Chairman and members 
of this Committee for your interest and your commitment and 
cooperation in working with the Department of Agriculture to 
protect the integrity of this program. We are very proud of the 
Food Stamp Program, and we want to assure you that we will do 
everything that's possible to protect the integrity of this 
program.
    That concludes my prepared remarks, and I would be happy to 
answer any questions that you may have.
    [The prepared statement of Shirley Watkins follows:]

   Prepared Statement of Shirley R. Watkins, Under Secretary, Food, 
    Nutrition, and Consumer Services, U.S. Department of Agriculture

    Good morning, Mr. Chairman and members of the committee. I am 
Shirley Watkins, Under Secretary for Food, Nutrition and Consumer 
Services at the U.S. Department of Agriculture (USDA). I am pleased to 
join you this afternoon as your Task Force looks at the Food Stamp 
Program.
    A crucial part of the President's and Secretary Glickman's 
commitment to delivering nutrition assistance to needy Americans is 
ensuring the integrity of the Food Stamp Program by protecting it from 
those who would misuse or abuse it. The Food Stamp Program is our 
nation's most important nutrition program, and protecting its integrity 
is one of our highest priorities. Food stamps are intended for food, 
and we do not and we will not tolerate fraud and abuse in the Food 
Stamp Program. We work tirelessly to identify ways to strengthen 
program management and keep public confidence high in this vital 
program.
    When individuals or retailers sell benefits for cash, it violates 
the intent and the spirit of the Food Stamp Program as well as the law. 
This practice, known as trafficking, reduces intended nutritional 
benefits and undermines the public's perceptions of the integrity and 
utility of the program.
    The crucial question, I believe, for today's hearing, is to what 
extent does trafficking exist. Last week, we released a study, entitled 
``Extent of Trafficking in the Food Stamp Program: An Update,'' which 
shows that the level of food stamp benefits trafficked for cash dropped 
by 19 percent from 1993 to the period from 1996 to 1998. We estimate 
that stores trafficked about $660 million per year. Furthermore, the 
trafficking rate--which compares dollars trafficked to benefits 
issued--declined 8 percent: from almost four cents of every dollar of 
food stamp benefits issued to three-and-one-half cents of every dollar 
issued. (Mr. Chairman, I ask that the study be included for the 
record.) While we can credit much of the decline on a strong economy 
and the enactment of welfare reform resulting in a drop of the food 
stamp rolls, certainly our expansion of Electronic Benefit Transfer, or 
EBT, and continued enforcement efforts have contributed as well.
    In addition, USDA, in spite of scarce resources, has instituted 
several initiatives to combat trafficking and other offenses:
    1. The Personal Responsibility and Work Opportunity Act of 1996 
provided the Department with much needed authority to strengthen 
enforcement of program integrity and eliminate fraud by strengthening 
penalties not only against recipients, but against retailers as well. 
As a result, the Department now has and is using this authority to 
suspend retailers immediately for the most egregious program offenses--
trafficking in food stamp and EBT benefits.
    2. Retailer oversight is a Federal responsibility, and begins with 
the Food and Nutrition Service (FNS) screening retailers seeking 
approval to accept food stamps or EBT cards at their stores. Although 
retailers are essential partners in the Food Stamp Program, store's 
must meet all legal requirements in order to participate in the 
program. In order to participate, a store owner applies directly to one 
of our field offices, providing that office with information on the 
store's sales and food stock, and other business information.
    To the extent possible and where resources are available, FNS field 
staff conduct store visits prior to authorizing a store in order to 
make sure the store is, in fact, a real food store and not a liquor 
store, a dry cleaners, or an empty storefront devoted to illegal 
activities. Currently, there are 170,000 authorized retailers 
participating in the food stamp program nationwide. We recently began 
using contract staff in coordination with our own staff to perform pre- 
and post-authorization visits to stores to gather information for us on 
the nature of the business actually being conducted by a store. Still, 
in spite of our rigorous screening efforts, some authorized stores have 
owners or employees willing to sell ineligible items or engage in 
trafficking.
    FNS has a staff of 46 compliance branch investigators nationwide 
dedicated to uncovering abuse by authorized retailers; and, during the 
last 5 years, FNS has investigated over 24,000 stores nationwide 
suspected of violations. By targeting our efforts on stores suspected 
of illegal activities, we found evidence of violations in 44 percent of 
the investigations. Agency investigators uncovered trafficking--as 
opposed to sales of ineligible items--in over 3500 of these stores.
    3. FNS' is actively pursuing civil prosecution through the U.S. 
Department of Justice under the Civil False Claims Act against stores 
found trafficking in food stamps.
    4. Issuing food assistance benefits electronically is also changing 
and improving the way we protect benefits from fraud and abuse by 
reducing street trafficking and by creating an electronic paper-trail 
linking those who cheat the program with the crime. Maryland, New 
Jersey, New Mexico, South Carolina and Texas have all used EBT data to 
identify recipient trafficking. EBT is key to delivering food stamp 
benefits efficiently, affordably and securely to recipients. In 1992, 
barely 1 percent of all food stamp households nationwide were receiving 
their food stamp benefits electronically. Today, we estimate 75 percent 
of all households are using an EBT card to access their benefits. Forty 
States plus the District of Columbia have now implemented food stamp 
EBT systems, in all or parts of their States, and all States will be 
issuing food stamp benefits electronically by the year 2002.
    5. Several years ago, FNS successfully deployed an automated EBT 
anti-fraud system called ``ALERT.'' The ALERT system records EBT 
transactions electronically so that we have a record of the store, the 
date, the time, the purchase amount, the recipient's card number and 
the point of sale terminal. ALERT's computerized system examines and 
analyzes this data, quickly identifying suspicious patterns and 
speeding our ability to investigate, process and remove cheating stores 
from the program.
    6. Finally, the Department is conducting a series of national food 
stamp conversations around the country this summer to solicit input and 
ideas so that we can build upon the successes in the program to reach 
all eligible individuals and families; simplify the program while 
maintaining prudent stewardship; and effectively measure program 
performance. As a matter of fact, I will be chairing the next 
conversation tomorrow in New York City.
    In closing, I want to thank you, Chairman Nussle, and members of 
this committee, for your interest, commitment and cooperation in 
working with the Department to protect the integrity of the Food Stamp 
Program.
    Mr. Chairman, this concludes my prepared remarks. I would be happy 
to answer any questions you may have.

    Mr. Nussle. Thank you very much. And, as I stated, all of 
the witnesses' testimony and any statements by members will be 
put in the record at their appropriate point. We appreciate all 
of your testimony.
    I would like to first turn to the ranking member, Ms. 
Clayton, for any questions she has for this panel.
    Mrs. Clayton. Thank you.
    I would like to ask the Inspector General if--you commented 
on the result of----
    Mr. Nussle. He actually left.
    Mrs. Clayton. I am sorry.
    Mr. Nussle. He had to leave. I don't mean to interrupt.
    Mr. Dyckman. Mr. Wood is with me. I am with the General 
Accounting Office. My apology.
    Mrs. Clayton. I apologize. I just looked at the chair, not 
that you aren't better looking. But, anyhow, forgive me for 
that.
    [Laughter.]
    Mr. Dyckman. Well, we auditors look the same, I know.
    Mrs. Clayton. Well, I wasn't going to say that. But, at any 
rate, is there anyone who can answer if there's any data to 
substantiate what all of you now have claimed, that having the 
EBTs you are able to actually identify quicker because you have 
that system?
    And I guess the testimony from the gentleman from Texas was 
that they investigated I guess quicker and had some prosecution 
as a result of that. But is that across the board or is that 
spotty?
    Mr. Dyckman. Let me just make a comment that there is no 
question that EBT is an extremely valuable tool for 
investigators. What is somewhat disconcerting, though, is that 
you would have expected that the rate of trafficking would have 
decreased substantially----
    Mrs. Clayton. I would have, too.
    Mr. Dyckman [continuing]. But that has not occurred. I 
mean, there has been about an 8-percent decrease in the rate of 
trafficking between 1993 and 1998. A part of that might be 
because that data is not exclusively based on EBT 
investigations, but from an investigative standpoint, it is a 
lot easier to identify potential recipient traffickers and 
store owners. Unfortunately, there is still a significant 
amount of trafficking.
    Ms. Watkins. There is a 19 percent decline in trafficking 
between 1996 and 1998. I think we are seeing some decline in 
trafficking and the rate of trafficking.
    Obviously when you start looking at all of the States that 
have EBT and putting those measures in place, I am sure we're 
going to see an even greater decline in trafficking.
    Mrs. Clayton. No. I had said in my testimony there were 37. 
You said there were 40. So I think Mr. Dyckman's comment is 
even more revealing having 40 States with statewide systems and 
not to see any more decline.
    Do you see the vulnerability of the EBT system that is 
still lousy as the intent to commit crime is so pervasive that 
they will indeed continue?
    Mr. Dyckman. It's a quick payoff. But in order for EBT to 
be effective, it has to be used more. We have recommended that 
and I think the Department is moving in that direction.
    Mrs. Clayton. When you say ``to be used,'' what does that 
mean? I thought they were using it.
    Mr. Dyckman. EBT data has to be analyzed at the State level 
much more on a broad scale than it has. As of a year ago, only 
four or five States were actively using EBT to aggressively 
identify traffickers.
    Mrs. Clayton. I see.
    Mr. Dyckman. As more and more States use this and Ms. 
Watkins has indicated a couple of more States, I believe, I 
would hope to see, we would hope to see, a decline in 
trafficking. Clearly it's more difficult not to be caught if 
you have an electronic trail, but you have to have some degree 
of resources spent at the State and at the Federal level to 
pursue that.
    Mrs. Clayton. My concern in my written statement was that I 
want to make sure we reduce and eliminate trafficking because I 
think any dollar misspent is a dollar taken away from the poor.
    Mr. Dyckman. There is no question about it.
    Mrs. Clayton. At the same time, I wanted to make sure as we 
move in that direction, that there is a balance. It's like you 
have a flood. And there are some people who are illegal 
standing in line but a lot of people who desperately need help 
from the Red Cross. And I just want to make sure that in our 
zeal to make sure that the trafficking is not occurring, that 
we are not eliminating people who are eligible.
    Mr. Hartman, can you assure us that you have that kind of 
balance in Texas or other States? Since you are the only State 
here, what would you say to us to make sure that it ought to be 
there for that sensitivity indeed to catch the people who are 
taking the monies but not at the expense that everybody 
suspects or people who are hungry actually go unassisted and we 
feel good because our rolls are down but, yet, there are hungry 
people?
    Mr. Hartman. When we first began our project to try to 
identify clients involved in trafficking, we were very careful 
to make sure that we went after clients where we had very 
substantial evidence against them for trafficking.
    In fact, when we set our parameters, we doubled the 
suspicious transactions that we needed. And, instead of going 
with one, we went with three. We wanted to make sure that we 
gave every benefit of a doubt to a client who may have had one 
suspicious transaction. We wanted to make sure they had several 
before we looked at them.
    When we first began our program, we started mailing out 
waivers to the clients, saying that we believed on this day, at 
this time, you trafficked in this amount of benefits at this 
store. And we were very specific with the information we 
provided to them.
    And, as our statistics indicate, about 70 percent of the 
clients that we mailed the waivers to signed the waiver and 
acknowledged that they were involved in trafficking, and 
voluntarily allowed us to disqualify them from program 
participation.
    Now, we only disqualified the adult member who was 
trafficking, not the remainder of the household. So it's only 
that adult that is disqualified. The remainder of the cases 
were sent for an administrative hearing.
    In total, about 95 percent of all of the client cases that 
we have identified either signed the waiver or were found 
guilty in a hearing. We think that's a very good indication 
that we are targeting the right folks and that we're not 
including recipients who are not involved in trafficking.
    Mrs. Clayton. Is your trafficking program separate from 
your whole food stamp administration or is there a dedication 
of resources? You have a very effective program in trafficking. 
Do you have a dedicated staff for that investigator to work 
which is different from eligibility and assistance?
    Mr. Hartman. Yes, ma'am. Our Office of Inspector General in 
Texas handles all of the fraud investigations of program abuse 
in the Department of Human Services. This includes food stamps. 
In OIG, we have certain investigators that are dedicated to 
working the majority of their time in food stamp trafficking.
    One of the reasons is that it takes an expertise to be able 
to do that. We need investigators who are able to go in and 
work undercover, and not everyone can do that. So we have a 
limited number. We have less than 10 statewide who are devoted 
to actually conducting retailer trafficking investigations.
    Now, once we identify the retailer, we shut them down. We 
send the case to FNS and FNS takes them administratively off 
the program and we prosecute the retailer. It's at that point 
that we go back and identify the clients who trafficked at that 
store. We then handle the clients administratively.
    We prepare cases administratively. We mail the waivers to 
the clients. We give them the chance if they want to 
voluntarily withdraw themselves or voluntarily give their 
consent for disqualification. Those are handled by 
administrative investigators, but our actual on-the-street food 
stamp trafficking is done by a very limited number of Office of 
Inspector General staff.
    Mrs. Clayton. If your retailer is investigated and found 
trafficking, he is disqualified, but is he also prosecuted?
    Mr. Hartman. Yes, ma'am. In Texas, we have a State law that 
allows us to prosecute food stamp trafficking. In fact, the 
State law was implemented back in the 1970's, shortly after the 
Food Stamp Program began. In 1995-1996, our State legislature 
amended it to include electronic benefits transfer.
    The majority of retail investigations we work in Texas are 
worked in cooperation with USDA-OIG staff and with local law 
enforcement. We file those cases with our State district 
attorneys. We file criminal charges, and we prosecute felony 
charges on them.
    We then refer the retailer to FNS for them to handle 
administratively. FNS authorizes the retailer, and only they 
can remove them from authorization.
    Mrs. Clayton. Thank you, Mr. Inspector General.
    Mr. Nussle. Mr. Hoekstra.
    Mr. Hoekstra. I thank the Chair for yielding.
    Ms. Watkins, is the estimated rate of food stamp 
trafficking around three and a half percent? Is that the number 
that you're using?
    Ms. Watkins. The estimated rate of trafficking that we have 
seen between the period of 1996 and 1998 is stores traffick 
about $660 million. That's the estimated amount. And the 
trafficking rate?
    Mr. Hoekstra. Yes. Of the dollars that are being put into 
food stamps, how much of that is being trafficked?
    Ms. Watkins. That's three and a half cents on the dollar.
    Mr. Hoekstra. OK. Three and a half percent. Is the rate the 
same for a State like Texas as what it might be as the national 
average? Are you seeing a better rate in Texas because of the 
EBT and because of your enforcement mechanisms or don't you 
have a way of measuring that? Do either one of you have a 
response to that?
    Mr. Hartman. I can tell you that since we started this in 
1995, we have definitely seen a drop in the flagrant offenders 
for EBT trafficking. I am talking about retailers who were 
doing just huge amounts. They would buy from anyone. They were 
doing 80 to 100 thousand dollars a month in business that was 
straight trafficking.
    Those have really disappeared. It took us about 3 years to 
weed them all out. Trafficking continues to exist, but it's 
much more subtle. The retailers that are involved in 
trafficking are much more careful because of our enforcement 
actions.
    Mr. Hoekstra. So you would expect that you're less than 
three and a half cents on a dollar, but you're not sure?
    Mr. Hartman. I can tell you that it's better than it was in 
1995. I really couldn't tell you how many cents on the dollar. 
I have no information to support that one way or the other. But 
I can assure you that in Texas, due to our enforcement efforts, 
we have made a definite impact. We have made a very positive 
impact against food stamp trafficking.
    Mr. Hoekstra. Mr. Dyckman, does GAO have any way of 
comparing the States that are vigorously enforcing through the 
use of EBT as to whether there is a better rate there versus 
those States that do not?
    Mr. Dyckman. Unfortunately, we don't. Let me just say 
something about the rate. It is based on a study that, quite 
frankly, has some assumptions that may or may not be true.
    I take umbrage with that rate of 3 or 3.5 percent. It is 
based on a set of assumptions that the study and the authors by 
their own admission point out might be higher or lower. I 
personally do not have 100 percent confidence that that is an 
accurate reflection. There is an assumption that trafficking 
occurs at the same ratio in stores that are investigated and in 
those that are not investigated. And that just seems 
counterintuitive.
    So while we will use this rate as a yardstick, it is a very 
rough yardstick in my opinion.
    Mr. Hoekstra. OK. Thank you.
    Mr. Dyckman, under the Government Performance and Results 
Act, I mean--maybe, Ms. Watkins, you would want to address this 
as well. Have you established a plan to--recognizing that the 
3.5 percent may or may not be a valid number, have you, though, 
based on that methodology established a target of reducing that 
3\1/2\ percent to 1 percent or 2 percent and the steps that 
would be implemented to get us there or what are the targets 
and the goals that the Department has established for the Food 
Stamp Program and the fraud within the Food Stamp Program?
    Ms. Watkins. I would have to go back and look at our 
strategic plan. And I am not certain that I could provide you 
that information and let you know if we established a target 
for trafficking, but I am not certain of that. And I would want 
to be sure that I could give you the correct information. I'll 
be glad to provide that answer to you, and we can go back and 
look at our strategic plan.
    We do have targets for everything. And I can't believe that 
we don't have targets for that. I just don't know what they 
are, but I'd be glad to provide that for you.
    Mr. Hoekstra. OK. Mr. Dyckman.
    Mr. Dyckman. Mr. Wood.
    Mr. Hoekstra. OK.
    Mr. Wood. I would like to respond briefly to that. In our 
March report, we did address the goals that had been 
established in FNS's performance plan for 2000. And one of the 
things we observed is that the goal of increasing the integrity 
in the Food Stamp Program was based upon sanctioning, meaning 
going after and investigating 1,201 stores.
    What we observed and believe is a better goal or strategy 
would have been to reduce trafficking, have a better estimate 
of total trafficking, and target your resources to reducing 
trafficking by going after the priority stores.
    While you could investigate 1,201 stores and meet your goal 
100 percent, but they may be the low-priority stores as far as 
trafficking. So it would be much better to use EBT data more 
effectively and target the stores that are more extensively 
involved in trafficking and try to reduce trafficking at these 
stores. Set your goal that you are trying to reduce trafficking 
to and the strategies needed to achieve the goal.
    Mr. Hoekstra. What I think you just said is that this was a 
measurement of activity perhaps and not a measurement of 
results.
    Mr. Dyckman. That is correct, sir.
    Mr. Hoekstra. OK.
    Mr. Dyckman. And clearly going after the store owners is 
the least costly and most leveraged way of using your resources 
because if you do not have a store that cooperates, recipients 
cannot traffick.
    Mr. Hoekstra. Good. Thank you.
    I yield back.
    Mr. Nussle. Thank you, Mr. Hoekstra.
    Let me play a little different role here, and my statement 
still stands. This is a very important program. I don't want 
anything I am about to say to pollute that particular fact. 
Let's just take a look at this from a little different angle.
    We've got a $19 billion company. We're the board of 
directors here. And we discovered in 1993--actually, in 1995 
that in 1993, we were losing $815 million. All right? In the 
year 2000, we decided to do a study and look at the period of 
time from 1996 to 1998, a 2-year period, and 2 years after the 
information was stale found out that we had some improvement, 
now down to $660 million we were losing as a company. That's 
the concern I've got. I can't imagine why anyone would have to 
check the records about what is an acceptable level of 
trafficking.
    Now, I understand it is impossible--I prosecuted. And trust 
me. I prosecuted in Manchester, Iowa. And most people have a 
fairly Norman Rockwellian view of the Midwest and think there 
isn't much that goes on out there, but there is.
    So I understand it's going to go on. We're going to have 
trafficking. But I cannot imagine how in the world we are as a 
country allowing an acceptable level to be 3.5 percent or 
almost close to a billion dollars worth of trafficking to go on 
in this country and to not have a fairly clearly defined action 
plan in order to get that done. That concerns me. But, more 
importantly than that, it concerns me that there is debate over 
the information that's used. That concerns me.
    You know, should we use the EBT data? Should we use some 
other data? We're looking 2 years prior. We don't know what the 
trafficking is today. We know based on the report that was 
written and done in March but not released until last week. We 
know what the previous 2 years trafficking was all about, but 
we don't know what it is today. That concerns me a lot.
    Now, I'd be happy to let you comment on that. And please do 
not misunderstand what I am saying, Madam Secretary. I am not 
suggesting that you're not concerned about that. I am not 
suggesting that at all. I am not suggesting you have any lack 
of concern for the people that are trafficking or for the 
clients that you are serving, for the beneficiaries that we are 
all serving.
    I am not suggesting that at all, but what I am just curious 
about is that there isn't more of an urgency over this. I mean, 
in 1993, when Ms. Clayton and I sat on that committee and heard 
about this and asked for--the first one was a congressionally 
mandated study, if I am not mistaken, the one in 1993, due in 
1995. That's not. I see some people shaking their heads.
    We asked for it. I am sure it was a combined effort, if 
nothing else. But this last one, it just doesn't seem like 
there's much urgency. Am I wrong about that?
    Ms. Watkins. I share your concern. I think it's a valid 
concern, and we have requested funding in the budget years 
since I've been there so that we would have additional staff 
because you do need resources in order to identify and to work 
on these issues.
    Just as Mr. Viadero said earlier, as did Mr. Hartman, these 
are very, very valid concerns for all of us, and we are not 
taking it lightly. But when you have limited resources, we 
don't have the availability of funds to do research to 
determine whether or not there are problems.
    And I would agree with you we need some way of determining 
more quickly what is going on now. You have a $19 billion 
business. You need to know what is going on today, and you 
don't need to be working off of 1998 figures.
    Mr. Nussle. Right.
    Ms. Watkins. We don't have the capabilities to pull 
information. We are working to see how we can get data more 
quickly. Obviously with the new technology that's available, we 
should be able to respond more quickly to problems of 
trafficking and to some other issues.
    It is a concern of mine. It's a concern of the Secretary's. 
And we have requested funding to look at these issues so that 
we can get something done about it. So you have a valid 
concern. And as this Committee looks at it, I think it's 
something that you can help us work on.
    Mr. Nussle. All right. What is your request for next year? 
What do we need to do? Let's lay out a plan.
    Ms. Watkins. Let's lay out a plan. For the 2001 budget 
year, in the FPA account, we asked for an additional five 
million dollars.
    Mr. Nussle. Five million. And what will that get us?
    Ms. Watkins. That would give us 69 staff-years to support 
our integrity activities.
    Mr. Nussle. And what will we get as a result of that as far 
as a reduction in the amount of trafficking or an increase in 
investigations or implementation of EBT? What will be the year-
end goal based on that increase?
    Ms. Watkins. The year-end goal would help us provide more 
staffing for our investigative team that does all of the small 
trafficking. The IG's office does the large, the really large, 
trafficking areas, and we handle all of the smaller ones. 
Obviously that adds up. So we would be able to reduce that 
trafficking amount. So we could reduce the trafficking.
    Now, for EBT implementation, that is another part of our 
budget process. And that's working with the States so they can 
get EBT up and running by 2002.
    Mr. Nussle. Yes. But the concern I have is, even if we 
increase it, let's double that. Let's give you ten million. All 
right? let's double that. What is the manageable expectation 
that we are shooting for? I mean, does your staff have with you 
the goal for our trafficking level that is part of your 
strategic plan?
    Ms. Watkins. I didn't know----
    Mr. Nussle. I can't believe you do not have that with you.
    Ms. Watkins. Well, I did not bring it. If I had known you 
wanted, that I would have had the strategic plan with me. I did 
not bring the strategic plan. If I could provide----
    Mr. Nussle. I am not suggesting you don't have one. Lay out 
in here----
    Ms. Watkins. Oh, yes, we do.
    Mr. Nussle. I am sure you do. You lay out in here five 
different steps. And I assume these are the steps that you are 
hoping to take in order to reduce trafficking.
    Ms. Watkins. The steps that we have identified today in the 
testimony are things that we are already doing. Obviously there 
are additional things that we can do.
    Mr. Nussle. OK.
    Ms. Watkins. Yes.
    Mr. Nussle. And that's what I am searching for. Such as? 
What are we going to do?
    Ms. Watkins. That's the reason why I said I will provide 
you the data--I don't want to give you the information that I 
would pull out of the air without actually getting that off of 
the strategic plan. And I will provide that for you, the actual 
steps that they take.
    Mr. Nussle. You didn't bring that along today?
    Ms. Watkins. No, I did not. And, Mr. Chairman, if I had 
known----
    Mr. Nussle. You started by saying you worked tirelessly.
    Ms. Watkins. That's exactly right. And if I had known, if 
your staff had told me, that you wanted the strategic plan, I 
would have provided that and I would have come in here with a 
strategic plan and all the steps. And you would have had that. 
And I will provide that for you.
    Mr. Nussle. And you have one written?
    Ms. Watkins. Pardon me?
    Mr. Nussle. There is one already completed?
    Ms. Watkins. Oh, yes. We----
    Mr. Nussle. Is there somebody who can at least give me a 
ballpark of what we're talking about? This is the only hearing 
we're going to have on this for a little while. And I am 
interested in at least a couple of things that we can report to 
our colleagues that we're going to be working on because just 
to say that there was a problem 2 years ago and just to say 
that that's the first time we've known about that since 5 years 
ago concerns me.
    And I can tell just by the conversation we're having here 
that you're a sincere, thoughtful person who is very interested 
in solving this. I can tell that. So based on what you already 
know, I know you can pull a few of these off the cuff. I just 
know that.
    Ms. Watkins. I have learned from my years in working at 
USDA and the many times that I have testified before 
congressional committees it's best to provide you the accurate 
information. I am not going to sit here and give you any false 
information or guess. I want to give you accurate information, 
and I will provide that for you. I hope you understand. I just 
don't want to give you any false information and give you false 
expectations.
    Mr. Nussle. Well, no. And I am not interested in false 
information. I just am very surprised that--and I am not 
suggesting this in any kind of way to be concerned about you 
personally or your agency, but I am very surprised that on a 
hearing involving trafficking to discuss a report that has just 
been released that is now almost 4 months old that also as part 
of that, you aren't prepared to discuss what you and the United 
States Department of Agriculture are prepared to do about that 
and any recommendations that you have because I will just tell 
you--and this is the concern that we have almost constantly.
    I cannot go forward to the Agriculture Committee or to the 
Appropriations Committee on Agriculture and suggest that five 
million dollars is going to solve anything unless I know the 
rest of it. And so that part does concern me.
    I have some other questions, but I would be happy to turn 
it over to Ms. Clayton or Mr. Hoekstra if they have any follow-
up as well. Ms. Clayton.
    Mrs. Clayton. I do. Thank you.
    It's not necessary to try to resurrect you, Ms. Watkins, 
because I think you can do that yourself, but let's act off of 
what you did present us. You gave the things you are now doing. 
And one of them was that the retail oversight is a Federal 
responsibility.
    Can you tell us--and maybe you don't have the information. 
Perhaps others on the panel may have. To what extent can you 
tell us the percentage of stores that are investigated prior to 
authorization?
    You said you now have this authority. You can investigate 
stores prior to authorizing them if there are fronts or liquor 
stores, dry cleaners. To what extent have you investigated 
them? And is there any data there?
    Ms. Watkins. Let me just ask the staff on the number, 
actual number, that we go in on----
    Mrs. Clayton. Actually, you have a number as a percent. You 
had 24,000 stores nationwide. I am sorry. I am misreading it.
    Ms. Watkins. We have investigated the 24,000 stores.
    Mrs. Clayton. Yes, who are suspected of violation.
    Ms. Watkins. Right.
    Mrs. Clayton. The question is----
    Ms. Watkins. You want to know the----
    Mrs. Clayton. What's the result of that? You investigate 
them, and what happened?
    Ms. Watkins. Once those stores are investigated, if we have 
or if they are suspected of trafficking, in all of those, we 
have found evidence of about 44 percent of those investigations 
where they were actually trafficking.
    Mrs. Clayton. OK. Now, what kind of resources do you have 
now that result in those kind of results? The question the 
Chairman asked--now, again, I am not asking you for any 
numbers, but it would seem to me if you have been asking for 
resources and you have had limited and here is what your 
results are, now you are asking for additional resources.
    So there is an expectation I think from increased results 
or as a result of having new staff to go along with that. At 
least these activities will be enhanced, even if you didn't do 
other activities.
    Ms. Watkins. The activities would be enhanced, Mrs. 
Clayton. What we are hopeful is that if we get additional 
staff, we'll be able to provide more people, who will be able 
to not only help the contracted services, but our field offices 
would be expanded to go out and do the investigations and to 
review those stores before they are actually authorized.
    The States are working with our regional staff. The 
regional staff is providing some training. And for many of 
them, that is an ongoing activity. But when you go in with the 
small regional field office staffs that we have, they go in to 
actually do some of the pre and post-reviews before stores are 
authorized.
    Mrs. Clayton. Right.
    Ms. Watkins. And that's a pretty awesome number with the 
small staff that we have in our field office. So that was why 
the request was made to get additional staff, so we would be 
able to review those stores before they were actually 
authorized.
    Mrs. Clayton. Well, there is valid reason for wanting to 
prevent crime, rather than just prosecute crime. Even a 
prosecutor knows there is value in prevention. But, again, if 
you know what the result of that prevention has been, then 
obviously you can make a better case for getting more resources 
to prevent it.
    I just think there is some value in having some numerical 
expectation of the activities you now have with scarce 
resources. As I said in my opening remarks, I think if we 
really want to, you know, slew this lion, this giant of 
trafficking, we have to have enough resources to do that. But 
in having resources, we want the resources with an expectation 
of achieving and eventually eliminating, achieving in a certain 
period of time.
    And I think what Mr. Hartman demonstrated, although he 
couldn't tell specifically how many in Texas, what he knew is 
that his effort had been successful in getting the big 
offenders or those who indeed were so flagrant and arrogant and 
persistent they have ceased.
    I mean, I know the percentage. So you know with more 
effort, you eliminate more. So I think there is some value in 
approaching this in a numerical way, rather than just a general 
way. I think the persistence for wanting numbers has some 
validity for it and just makes the case better.
    I think all of us want to achieve eliminating traffick 
because I've stated what my preference is, to make sure we have 
balance in that because I get, you know, mighty nervous, Mr. 
Hartman, when I see you reduce your level so low.
    I get very nervous in my own State when they reduce their 
level because I know that 3.6 million people out there whom we 
can document that are hungry. So I want to make sure as we 
reduce the traffick, I want the resources to go to those who 
are hungry. But I don't want us in our zeal to ignore that 
there are people who really need to have food and assistance in 
that area.
    Mr. Chairman, those are the end of my questions.
    Mr. Nussle. Mr. Hoekstra.
    Mr. Hoekstra. I thank the Chair.
    I just want to bring out one point. And, Mr. Dyckman, maybe 
you can correct me if I am wrong.
    When we're talking about the Department of Agriculture, one 
of the things that we do have to keep in mind is that they 
received a disclaimer of opinion on their financial audits, 
which means, at least as we have taken a look at the Department 
of Education and as we have taken--my experience out of the 
private sector is that almost any of the numbers that you look 
at as you go through the Department and the agency, you need to 
be a little bit suspicious of because the auditors have said 
that the internal financial controls, the reporting systems 
lack the integrity and the security that they demand as they go 
through the audit to tell you that those numbers are actually 
an accurate reflection of the current conditions or the 
performance during the previous year of that department or 
agency. Is that not correct?
    Mr. Dyckman. That is correct, sir.
    Mr. Hoekstra. Yes. And I think other than not even turning 
in a report, which would be the worst situation which we have a 
few departments and agencies that miss that criteria, the 
Agriculture Department would fall into the next level of 
concern, which is a disclaimer of opinion, which is I think a 
very negative, a very bad position to be in, which says that 
the books are in such a condition, in such a state that the 
auditors even feel uncomfortable rendering an opinion.
    And I know that from our work at the Department of 
Education, which is actually one level above that, they 
received a qualified opinion. And that's pretty ugly, the 
performance over there.
    So I just want to get that in the record that as we talk 
about the performance, we have to recognize that we're not 
necessarily even working off of a clean set of books with 
people telling you that these numbers accurately reflect what's 
going on. So it's even one more caveat as we move forward.
    I hope that the Department has an aggressive plan in place 
to get a clean audit one of these days so that we can have a 
high degree of confidence that the numbers that we're talking 
about actually reflect what's going on.
    Ms. Watkins. I am smiling because I can sit here and tell 
you that since I've been the Under Secretary in Food and 
Nutrition and Consumer Services, we're one of the agencies at 
USDA that has received a clean opinion.
    Mr. Hoekstra. Well, I am glad you have because, as a whole, 
the Department has not. Congratulations to you in that work. 
And I hope that the rest of the agency----
    Ms. Watkins. And we have done so for the last two and a 
half years. So I am real proud of that.
    Mr. Hoekstra. And I hope that the rest of the agency or the 
rest of the Department of Agriculture learns from what you're 
doing in your niche of that agency because the bottom line is 
still for the entire Department the auditors are saying, you 
know: We're concerned, and we're not ready to even render an 
opinion.
    I yield back. Thanks.
    Mr. Nussle. Thank you, Mr. Hoekstra.
    I, too, want to compliment you on that, on the fact that if 
you're receiving clean audits, that's certainly what we're 
hoping to achieve because we want to be able to measure that.
    I think there's some encouragement, though, in one of the 
areas. And part of the reason I asked you the questions about 
the action plan is that--and maybe this is just me being 
suspicious. But somebody who can pull out of their hat, so to 
speak, next year's budget request, my guess is you could also 
probably come up with a strategic plan for me today, too. But 
I'll get off of----
    Ms. Watkins. I will. And I'll have it here this afternoon.
    Mr. Nussle. All right. Well, I will get off of that for 
just a moment, but I am interested in seeing that.
    One of the things I would like to ask Mr. Dyckman and his 
folks is the whole issue of just data and oversight and how 
often should we be looking at the information. How often would 
you recommend to the Secretary to be doing that or to us in 
Congress?
    How often should we be doing these kinds of reports that 
seem to me at least--and it does seem also to the Secretary--I 
don't want to put words in your mouth, but seem to be too few 
and too far between.
    Mr. Dyckman. I think the issue of food stamp trafficking 
and the financial consequences of that and the social 
consequences of that, which are even more important, are 
critical for our periodic oversight.
    And I would suggest that on an annual basis, the Department 
reports to the Congress what progress it has made in getting 
rid of the unscrupulous storeowners and reducing trafficking. 
And to do that, you have to have reliable figures.
    Now, I am not saying it is easy. It is a difficult task to 
estimate nationwide trafficking. I mean, the data does not 
exist in EBT. You have to come up with projections. But if you 
could routinize that at the Department and if the Department 
could make that a high priority and have an outcome-oriented 
approach to that and if Congress could have annual oversight 
hearings on that subject, I think everyone will be better 
served.
    Mr. Nussle. Another issue that comes up--and this will 
maybe end up being in the form of a recommendation. It starts 
with a curiosity. As I read the report, my understanding is 
that 14 percent of all of the food stamp benefits--and hear me 
out here because if these aren't right, I want to make sure I 
get this right--14 percent of all of the food stamp benefits go 
through stores that have been profiled by your report to be the 
kinds of stores that are likely to engage in trafficking. And I 
want to make sure I am using that correctly.
    Obviously 14 percent are the ones that you would suggest 
are ones that are probably in a category that are typically 
engaging in this kind of activity. All right? But of the stores 
most likely to traffick, they include 71 percent of all of the 
stores that are certified. And I see your staff is shaking 
their heads. So I think I am saying that right.
    Now, let me make sure I am getting that right. Fourteen 
percent of all of the benefits go through 71 percent of stores. 
And those 71 percent of the stores are likely to be 
trafficking.
    Now, one of my immediate questions that come to mind is: 
Shouldn't we be changing the criteria of the kind of stores 
that we're authorizing and in order to try and eliminate from 
the certification process, stores that you perceive to be 
likely kinds of operations to be trafficking?
    And you mentioned a few storefront kinds of operations that 
are mobile or that are involved in liquor or other kinds of 
activities. I mean, one of the criteria I would hope is part of 
the strategic plan is just a consideration for a change in what 
seems to be a pretty target-rich environment. And those are the 
71 percent of the stores that are certified that seem to be 
likely for one reason or another.
    Is that a fair place to begin at least part of our search?
    Ms. Watkins. That is a fair place to begin in looking at 
the kinds of stores that are there and looking at the 
assessment that we use. So yes, that is fair.
    Mr. Nussle. And then the other question or point I'd like 
to just ask or have you comment on is this issue of the annual 
review. I mean, I am very troubled, and I can tell by the way 
you presented it you seem to be troubled by the fact that we're 
getting a report from 2 years ago.
    Mrs. Clayton. Mr. Chairman.
    Mr. Nussle. Yes. I am sorry.
    Mrs. Clayton. Can I ask----
    Mr. Nussle. I would yield, yes.
    Mrs. Clayton. On your first question----
    Mr. Nussle. Yes.
    Mrs. Clayton [continuing]. About the typical profile store, 
I guess I would just want to enter into the record there are 
some stores who are in poor areas. And then you have a question 
here: Is more crime more likely to happen in rural areas or in 
urban areas? I didn't want his response to assume that these 
stores either had one flavor or another or a poor area.
    Then another question says ``trafficking more frequently in 
the poorest of poor neighborhoods.'' Table 16 says, ``The 
trafficking rate is slightly higher in urban areas.''
    Now, is there a disaggregation of the--the stores that have 
that profile, are they more likely to be in any one of those 
areas? Are they in all three of those areas?
    If you look at the poorest of the poor areas, some shoddy 
things go on in some poor areas. But also occasionally some 
shoddy things go on in non-poor areas. But it is understood 
where you have operations with chain stores in more affluent 
areas, you may have less trafficking in that area.
    I just want to make sure we understand that there are some 
culture issues around those, too.
    Mr. Nussle. No question. And that's why I was very careful 
when I asked the question. I mean, I do not want to--because 
you and I both represent similar kinds of areas in that you 
don't necessarily have a Safeway or a Giant or whatever out in 
the middle of--you know, it may be a Mom and Pop kind of an 
operation.
    But if Mom and Pop have got--what was that figure?--
$295,000 running out the back door, I mean, Mom and Pop need to 
have--I mean, that sounds quaint and Norman Rockwellian, but we 
have got to figure out a way to deal with it.
    So my only point was: Is the criteria on the front end for 
certification one of the areas within the strategic plan that 
you're considering some type of changes and improvement? And 
you indicated that that was one of the areas that you were 
looking at.
    The last issues--I am sorry--that I wanted to just touch 
base on was the whole issue of the reporting and oversight, 
both on your part and our part. It was suggested by the folks 
at the General Accounting Office that we should do this on an 
annual basis. Is that possible? Can we begin that kind of a 
process?
    You came in in 1997. It seems to me that you have tried to 
enforce that. It sounds like it's one of the first things that 
you did. My understanding is the report that was released here 
this last week is a report that you requested. This isn't 
Congress. This isn't Eva Clayton and Jim Nussle and Peter 
Hoekstra asking for it. You did this, and I commend you for it.
    Is there a way that we can help you other than you 
mentioned a little bit of money. We'll talk about that. Is 
there anything else that we need to do in order to get these 
kinds of annual reports with better information and better data 
so that we can look into this more deeply next time?
    Ms. Watkins. Currently we don't have the authority to 
continue to do the kind of report that I requested. Of course, 
when I started and requested this kind of information, we had 
the legislative authority to use some of our funding to do 
studies like this.
    This would have to be requested that ERS would do this kind 
of study for us on an annual basis as a part of the research 
and the data collection and analysis. So I think it's feasible, 
but that request would need to be made from Congress to ERS to 
get accomplished for us.
    Mr. Nussle. Is that GAO's understanding as well?
    Mr. Dyckman. It is a little murky here, Mr. Chairman. The 
Department claims that they do not have authority to spend 
research on food and nutrition issues, but they do spend. They 
do perform research on food and nutrition issues.
    And, quite frankly, I do not have a definitive opinion on 
that. It is a murky area. I suspect that they can do this, but 
I am reluctant to give you a final answer today.
    Mr. Nussle. But you're saying you don't.
    Ms. Watkins. I can read the language, Public Law 106-78, 
October 22, 1999, prevents us from funding any of the 
developmental work needed to use EBT data to develop any 
reliable measures on trafficking. And it states, ``Food Stamp 
Program for necessary expenses to carry out the Food Stamp Act, 
7 U.S.C. 2011, provided that none of the funds made available 
under the head shall be used for studies and evaluation.''
    Mr. Nussle. Well, now, how does that square, then, with the 
new ALERT Program?
    Ms. Watkins. We have----
    Mr. Nussle. My understanding is that that is in an attempt 
to use exactly the EBT data in order to provide that kind of 
information so that you can process and investigate and 
research what is happening.
    Ms. Watkins. Well, we can't do any research. We can't do 
any studies and evaluations. And according to Congress, that's 
a part of research and studies and evaluations. We can't use 
our funds in FNS for any studies and evaluations. It would have 
to be done through ERS. And that's why I am saying request for 
ERS to do it.
    It can be done. ERS would have to be directed to use some 
of the funding to do that.
    Mr. Nussle. OK. Are there any other questions or anything 
else that members would like to--I really appreciate you 
allowing us to ask a couple of rounds of questions, be a little 
bit less formal today and do that. I know all of the members, 
including myself, would be very interested in any 
recommendations you would make.
    And I am very serious about what I stated. We feel that 
this is a responsibility that we all share. We want to make 
sure that the young people, in particular, but everybody who is 
in need of food and nutrition services get those services that 
they deserve. That's the reason we have the program, but we 
want to stop the nonsense that's out there, too, and the crime.
    And so anything we can do to work together on that to help 
implement your strategic plan, we'll look forward to working 
with you. And we thank all of the witnesses for their 
information and their testimony today. And we'll dismiss you at 
this point.
    Thank you.
    Ms. Watkins. Thank you.
    Mr. Dyckman. Thank you.
    Mr. Nussle. And now we'd like the second panel to come 
forward. The two witnesses that we have on the second private 
sector panel--we had a governmental panel. Now we have a 
private sector panel. We have invited a couple of people, and I 
see that we have one that may have changed.
    So I'll introduce that Ms. Sheila Zedlewski, who is the 
Director of the Income and Benefits Policy Center of The Urban 
Institute, is with us; and from the Center on Budget and Policy 
Priorities, Mr. David Super. Is that correct?
    Mr. Super. Yes. Thank you.
    Mr. Nussle. OK. And so why don't we ask Ms. Zedlewski to 
present her testimony at this time. Your entire testimony will 
be entered into the record. We would like you to summarize, if 
you can, and do it within about a 5-minute period.
    Ms. Zedlewski. Thank you. Thank you for the opportunity to 
address the Committee.

  STATEMENT OF SHEILA R. ZEDLEWSKI, DIRECTOR, THE INCOME AND 
  BENEFITS POLICY CENTER, THE URBAN INSTITUTE; ACCOMPANIED BY 
DAVID A. SUPER, ESQUIRE, GENERAL COUNSEL, CENTER ON BUDGET AND 
                       POLICY PRIORITIES

                 STATEMENT OF SHEILA ZEDLEWSKI

    Ms. Zedlewski. The Food Stamp Program, a cornerstone of the 
income security policy in the United States since 1961, was 
designed to ensure that all Americans have enough to eat. Yet, 
the program is falling farther and farther short of this 
mission. Many families are leaving the Food Stamp Program, even 
though many report difficulties paying for food and are 
eligible to receive benefits.
    States face a delicate balance between implementing 
initiatives to reduce trafficking and errors in the program and 
encouraging more low-income families who qualify for benefits 
to participate.
    I'd like to draw your attention to six important issues. 
First, recent declines in program participation have exceeded 
what we could expect from a strong economy or changes in 
program rules.
    Many witnesses this afternoon have highlighted the recent 
steep declines in food stamp participation. Indeed, the strong 
economy can take credit for an important share of this decline. 
However, a considerable body of research now shows the declines 
have far exceeded what can be explained by economic factors or 
program changes enacted as part of welfare reform in 1996.
    Second, the need for food assistance persists among 
American families, as has also been stated earlier. For 
example, last year, three out of ten children in the United 
States lived in families that reported they either worried 
about or experienced difficulty in affording food, according to 
The Urban Institute's 1999 national survey of America's 
families. The percent reporting difficulties affording food was 
down only slightly, by 3 percentage points, from levels 
reported in the same survey 2 years earlier. Half of children 
with families below 200 percent of poverty lived in families 
with some food insecurity.
    Third, food stamps offer an effective income supplement for 
working poor families. Many parents, especially single mothers 
who recently left welfare, work full-time and still earn less 
than the poverty line for their families. Food stamps can 
provide an important supplement to their incomes until they 
move up in the labor market.
    For example, a single parent with two children working 
full-time at a minimum wage job for a year would earn an income 
of around 75 percent of poverty. She could also receive about 
$3,000 in food stamps for her family, increasing her family's 
income to about 94 percent for that year.
    Despite the potential value of food stamps, many families 
do not enroll. We at The Urban Institute have recently 
estimated that program participation nationally for all 
households was about 50 to 55 percent in 1997, down 
considerably from earlier years.
    Participation rates are especially low for working poor 
families. The evidence is strong. For example, my own research 
has shown that most families who left welfare also left the 
Food Stamp Program, even though they were still income-eligible 
for benefits. A particularly troubling finding was that only 
one-half of families who left welfare with incomes below 50 
percent of poverty received food stamps.
    State studies that used matched administrative data to 
investigate food stamp participation of welfare leavers 
confirmed this finding. Most find that only about half 
participate in food stamps in the first quarter after leaving 
welfare and participation drops off further with time.
    Fifth, program complexity discourages families' 
participation. Recent focus group discussions among working 
poor and poor elderly households confirmed earlier studies 
about what we know about reasons for low participation.
    Families often lack information about the program. They 
perceive they don't need these benefits. They think the costs 
of participating is too high or they have negative feelings 
about the program.
    In short, the program is so complex that many families do 
not know they are eligible. They report confusion about 
eligibility rules, resource and income limits, and deductions. 
Some families are deterred from applying for benefits because 
the process is time-consuming and complicated. It's often 
difficult to get to the welfare office. The process id 
demeaning. And many offices are unsafe.
    Finally, program improvements must include more effective 
outreach. Reaching out to individuals who may be eligible for 
food stamps must become a priority for the Federal, State, and 
local government agencies.
    States can receive a 50 percent Federal match for funding 
outreach activities, but only 9 States applied for these funds 
in 1999. Most of these States contract with nonprofit 
community-based organizations to provide outreach to help 
families with the application process, their document 
preparation, and translation services.
    States can also extend office hours in the morning, 
evening, or weekends to lessen the burden on working families. 
They can collaborate with other programs serving low-income 
families, such as job training centers, HeadStart programs, and 
WIC offices, to inform families about the full set of work 
supports available to them.
    Many State agencies also need to make administrative 
changes to ensure that families who leave welfare or get 
diverted continue to receive benefits as long as they are 
eligible.
    These program innovations will take time, investment by the 
States, and commitment by caseworkers. Federal administrative 
funds and encouragement will be essential to ensure that the 
Food Stamp Program works for working poor families.
    I thank you again for the opportunity to address this 
Committee.
    [The prepared statement of Sheila Zedlewski follows:]

Prepared Statement of Sheila R. Zedlewski,\1\ Director, the Income and 
              Benefits Policy Center, the Urban Institute

    Thank you for the opportunity to address the Committee about 
current trends in the Food Stamp Program (FSP). The Food Stamp Program, 
a cornerstone of income security policy in the US since 1961, was 
designed to ensure that all Americans have enough to eat. Yet the 
program is falling farther and farther short of this mission. Many 
families are leaving the food stamp program even though many report 
difficulties paying for food and are eligible to receive benefits.
---------------------------------------------------------------------------
    \1\ This statement reflects the views of the author and does not 
necessarily represent the views of the Urban Institute, its sponsors, 
or its Board of Trustees.
---------------------------------------------------------------------------
    I'd like to draw your attention to six important issues:
    1. Recent declines in program participation have exceeded what we 
could expect from a strong economy or changes in program rules.
    As you are well aware, total food stamp program participation has 
declined from 28 million persons in 1994 (the program's peak) to 17 
million persons in March 2000 (38 percent).\2\ Indeed the strong 
economy can take credit for an important share of this decline. 
However, a considerable body of research shows that declines in 
participation have far exceeded what can be explained by economic 
factors or program changes enacted as part of Federal welfare reform in 
1996.
---------------------------------------------------------------------------
    \2\ Monthly caseload data, the Food and Nutrition Service, 2000.
---------------------------------------------------------------------------
    2. The need for food assistance persists among American families.
    For example, last year 3 out of 10 children in the US lived in 
families that reported they either worried about or experienced 
difficulty affording food according to the Urban Institute's 1999 
National Survey of America's Families.\3\ The percent reporting 
difficulties affording food was down only slightly (by 3 percentage 
points) from levels reported in the same survey 2 years earlier. Half 
of children in families with incomes below 200 percent of poverty lived 
in families with some food insecurity.
---------------------------------------------------------------------------
    \3\ The National Survey of America's Families (NSAF) is a 
nationally representative survey of over 44,000 non-aged families. The 
survey was conducted in 1997 and 1999 at the Urban Institute as part of 
a large, multi-year study called Assessing the New Federalism.
---------------------------------------------------------------------------
    3. Food Stamps offer an effective income supplement for working 
poor families.
    Many parents, especially single mothers who recently left welfare, 
work full time and still earn less than the poverty line for their 
family. Food stamps can provide an important supplement to their 
incomes until they can move up in the labor market. For example, a 
single parent with two children working full time at a minimum wage job 
for the year would earn an income around 75 percent of poverty. She 
could also receive about $3,000 in food stamps for her family, 
increasing her family's income to about 94 percent of poverty.\4\
---------------------------------------------------------------------------
    \4\ Calculation assumes no income beyond earnings, a maximum child 
care cost deduction for children older than two, and no excess shelter 
cost.
---------------------------------------------------------------------------
    4. Many low-income families who qualify for food stamps do not 
receive benefits.
    Despite the potential value of food stamp benefits, many families 
do not enroll in the program. Historically, program participation rates 
have been around 70 percent, but the rate has fallen in recent years. 
We recently estimated that program participation for all households was 
just above 50 percent in 1997.\5\ Participation rates are especially 
low for working poor families. As families have left welfare to join 
the ranks of the working poor, they are leaving behind food stamp 
benefits.
---------------------------------------------------------------------------
    \5\ The Urban Institute's Transfer Income Model, version III, based 
on the March 1998 Current Population Survey.
---------------------------------------------------------------------------
    The evidence is strong. For example, my own research has shown that 
most families who left welfare also left the food stamp program even 
though most were still eligible for benefits.\6\ A particularly 
troubling finding was that only one-half of families who left welfare 
with incomes below 50 percent of poverty continued to receive help from 
food stamps.
---------------------------------------------------------------------------
    \6\ Zedlewski, Sheila and Sarah Brauner, 1999. ``Declines in Food 
Stamp and Welfare Participation: Is There a Connection?'' Washington 
DC. The Urban Institute.
---------------------------------------------------------------------------
    States studies that use matched administrative data to investigate 
food stamp participation of welfare leavers confirm this finding. Most 
find that only about half participate in food stamps in the first 
quarter after leaving welfare and participation drops off further with 
time.\7\
---------------------------------------------------------------------------
    \7\ Acs, Gregory and Pamela Loprest. 2000. ``Studies of Welfare 
Leavers: methods, Findings, and Contributions to the Policy Process,'' 
Paper prepared for the National Research Council's Panel on Data and 
Methods for Measuring the Effects of Changes in Social Welfare 
Programs, Washington, DC. The Urban Institute.
---------------------------------------------------------------------------
    More recently, an econometric study completed by the Economic 
Research Service estimated that 55 percent of the total decline in 
participation from 1994 to 1998 was due to a decline in the proportion 
of low-income people (income below 130 percent of poverty) who 
participate in the FSP. They conclude that ``this pattern corroborates 
other evidence that a large number of low-income families are 
disappearing from the food stamp rolls.'' \8\
---------------------------------------------------------------------------
    \8\ Wilde, Parke et al. 2000. ``The Decline in Food Stamp Program 
Participation in the 1990s.'' U.S. Department of Agriculture, Economic 
Research Service, Food Assistance and Nutrition Research Report Number 
7, Washington, DC. USDA.
---------------------------------------------------------------------------
    5. Program complexity discourages participation.
    Recent focus group discussions among working poor and poor elderly 
households confirmed earlier research about reasons for low 
participation: families often lack information about the program; they 
perceive that they do not need benefits; they don't think applying for 
a small amount of benefits is worth it; they think the cost of 
participating is too high; and they have negative feelings about 
participating in the program.\9\
---------------------------------------------------------------------------
    \9\ McConnell, Sheena and Michael Ponza. 1999. ``The Reaching the 
Working Poor and Poor Elderly Study: What We Learned and 
Recommendations for Future Research,'' Mathematica Policy Institute 
8305-013 for the USDA.
---------------------------------------------------------------------------
    In short, the program is so complex that many families do not know 
that they are eligible. They report confusion about eligibility rules, 
resource and income limits, and deductions. Some families report that 
they are deterred from applying for benefits because the process is 
time consuming and complicated, it is difficult to get to the welfare 
office, the process is demeaning, and the office is unsafe.\10\
---------------------------------------------------------------------------
    \10\ See ``Food Stamp Program Client Enrollment Assistance 
Demonstration Projects: Final Evaluation Report,'' 1999, Food and 
Nutrition Service, USDA (July) for a discussion of these issues.
---------------------------------------------------------------------------
    6. Program improvements must include more effective outreach.
    Reaching out to individuals who may be eligible for food stamps 
must become a priority for federal, states, and local community 
agencies. States can receive a 50 percent Federal match for funding 
outreach activities, but only nine states applied for these funds in 
1999.\11\ Most of these states contract with non-profit community-based 
organizations to provide outreach services. They assist families with 
the application process, documentation preparation, and provide 
translation services. States also can extend office hours in the 
morning, evening or weekends to lessen the burden on working families. 
They can collaborate with other programs serving low-income families 
such as one stop job training centers, Head Start programs, and WIC 
offices to inform families about the entire set of work supports 
available to them. Many state agencies also need to make administrative 
changes to ensure that families who leave welfare or get diverted from 
welfare continue to receive food stamps as long as they are eligible.
---------------------------------------------------------------------------
    \11\ These states are Arizona, Connecticut, Kentucky, 
Massachusetts, New Hampshire, New York, Tennessee, Vermont, and 
Washington.
---------------------------------------------------------------------------
    Program innovations will take time, investment by the state, and 
commitment by caseworkers. Federal administrative funds and 
encouragement will be essential to ensure that the Food Stamp Program 
works for working poor families.

    Mr. Nussle. Thank you.
    Mr. Super.
    Mr. Super. Thank you very much, Mr. Chairman, 
Representative Clayton, Representative Hoekstra. I appreciate 
the opportunity to address these important issues involving the 
Food Stamp Program before you today.

                    STATEMENT OF DAVID SUPER

    Mr. Super. My name is David Super. I am General Counsel of 
the Center on Budget and Policy Priorities. The center is a 
nonprofit organization that conducts research and analysis on 
an array of policy issues at both the Federal and State levels. 
We receive no government funding.
    As an organization concerned about low-income people 
struggling to feed their families, we feel very strongly that 
no food stamps ought to be issued to ineligible people. We are 
equally concerned that when food stamps are issued correctly, 
that they not be misused through trafficking.
    Although trafficking in properly issued food stamps does 
not constitute a monetary loss to the Federal Government and 
eliminating all trafficking would not produce any budgetary 
savings, trafficking does undermine public trust and should be 
vigorously pursued. And we appreciated hearing about the 
efforts earlier that a number of the other witnesses and 
agencies were engaging to that effect.
    Just as we're concerned about improper issuances and 
improper use of benefits, we are also concerned that when 
eligible families are in need of food stamps, that they have a 
fair option to obtain those benefits. We applaud the Committee 
for its interest in all of these challenges facing the Food 
Stamp Program today.
    With regard to trafficking, we were pleased to read in 
USDA's report that the overwhelming majority of food stamp 
benefits continue to be used for their intended purposes and 
that the incidence of food stamp trafficking appears to be 
declining.
    Any trafficking is too much, but it's heartening to see 
progress being made. This may well be a result of the 
bipartisan anti-fraud provisions of the 1996 welfare law as 
well as greater movement toward EBT and some of FNS' efforts 
that were described earlier to partner with States and others 
to bring more resources to bear against the traffickers.
    We hope the Congress and the administration will work 
together to make further progress in this area, in particular, 
by providing FNS with the resources it needs, both for 
additional compliance and enforcement staff and also for a 
research budget that could, among other things, help the agency 
understand better how traffickers operate.
    We also hope that Congress and the administration will work 
together to ensure that food stamps are available to eligible 
low-income families that need them. In their May 1999 report 
entitled ``Welfare Reform Has Already Achieved Major Successes: 
A House Republican Assessment of the Effects of Welfare 
Reform,'' Speaker Hastert, Representatives Nancy Johnson, Bill 
Archer, and Clay Shaw make the point that food stamp benefits 
play an important part of the Federal Government's commitment 
to making work pay. Food stamps can supplement the low wages 
that many families moving from welfare to work are earning.
    Leaders of both political parties and officials of 
conservative and liberal think tanks alike have urged that a 
family working full-time throughout the year should not have to 
live in poverty. This goal largely shaped the bipartisan 
expansions of the Earned Income Tax Credit through the late 
1980's and early 1990's so that the EITC is now designed so the 
full-time year-round minimum wage work plus food stamps plus 
the EITC bring a family of four to or very close to the poverty 
line. If you take food stamps out of that equation, the family 
falls at least one-fifth short of the poverty line.
    In the report on welfare reform last year, Speaker Hastert, 
Representatives Johnson, Archer, and Shaw noted that, quote, 
``Caseload data from the Food Stamp Program and the Medicaid 
Program seem to indicate that many adults and children who meet 
the demographic income and resource standards for these 
benefits are not receiving them. There is concern among program 
administrators and other experts that there are probably many 
children eligible for Medicaid and food stamps who are not 
receiving them,'' unquote.
    The evidence suggests that the decline in food stamp 
participation is significantly larger than can be explained by 
the economy and food stamp changes in the welfare law. The 
reduction in food stamp spending in recent years--and we have 
provided a chart to the Committee to demonstrate this--has been 
far greater than Congress sought or anticipated when it enacted 
the 1996 law, even after adjusting for the improved economy.
    In a report last year, GAO reported, quote, ``There's a 
growing gap between the number of children living in poverty, 
an important indicator of children's need for food assistance, 
and the number of children receiving food stamp assistance,'' 
unquote. We have conducted a similar analysis going from the 
peak in food stamp participation in 1994 and reached results 
very similar to those of GAO.
    Overall the number of people living below the poverty line 
fell 9.4 percent, or 3.6 million people, between 1994 and 1998, 
while the number of people receiving food stamps in an average 
month fell nearly 30 percent, or over 8 million people, during 
that same period.
    This difference is far greater than the 1.5 million illegal 
immigrants and childless adults whom CBO estimated became 
ineligible for food stamps at the end of 1997 as a result of 
the 1996 law.
    We found a similar decline in the percentage of poor 
children receiving food stamp assistance. Using census data, 
the number of children receiving food stamps as a percentage of 
those children living in poverty was 88 percent in 1994 and 
1995. By 1998, it was down to just 72 percent, a significant 
drop. It's important to search for the causes of this 
unprecedented decline in food stamp participation.
    Overall, it shows that nonimmigrant families, families not 
affected by the changes in immigrant eligibility account for 
almost three-fifths of the decline in food stamp participation 
from 1994 to 1998.
    It appears that families that are either being diverted 
from cash assistance or leaving welfare are losing food stamps 
at the same time or shortly thereafter. For these families, the 
transition from welfare to work is going to be more difficult, 
and that could undermine the success of welfare reform efforts 
around the country.
    We're also troubled to see that a three-quarters decline in 
the number of low-income U.S. citizen children participating in 
food stamp programs that live in immigrant households. These 
children because they're U.S. citizens did not lose 
eligibility, although household members may have as a result of 
the 1996 legislation. And, yet, the number of them 
participating has dropped by three-quarters. We believe this 
requires further investigation.
    Finally, it appears that some efforts that States are 
engaging in with the very best of intentions to reduce their 
error rates may inadvertently be making food stamps less 
accessible to the working poor.
    Some States now require these families to take time off 
from work and reapply for food stamps and provide extensive 
documentation of their eligibility once every 3 months. 
Naturally, missing this amount of time for work is burdensome 
and costly to the working families and can undermine their 
relationships with their employers and jeopardize their 
opportunities to advance in the workplace. Families subject to 
these short certification periods may soon decide that the cost 
of participating in food stamps is too great.
    As a final one of our chart shows, States that have 
substantially increased the proportion of families, working 
families with kids that have to reapply every 3 months or less 
have had a 24 percent decline in participation among working 
families with kids compared to a national average of about 5 
percent. We need to find ways to better serve these families.
    In conclusion, the Food Stamp Program plays a vital role in 
providing a nutritional floor under the nation's poor. Former 
Senate Minority Leader Robert Dole once called the program the 
most important social program since Social Security to continue 
to fulfill its mission, we need to strengthen the program's 
integrity to improve its service to working poor families, to 
gain a deeper understanding of the causes of the larger than 
anticipated declines in food stamp participation, and to 
respond accordingly to these challenges.
    Thank you very much again for the opportunity to testify 
today. I'd be pleased to answer any questions you might have.
    [The prepared statement of David Super follows:]

Prepared Statement of David A. Super, General Counsel, Center on Budget 
                         and Policy Priorities

    Mr. Chairman, Representative Clayton, members of the committee, 
thank you very much for inviting me to testify before you today on the 
important issues confronting the Food Stamp Program. I am David Super, 
General Counsel of the Center for Budget and Policy Priorities. The 
Center is a non-profit organization that conducts research and analysis 
on an array of policy issues at both the Federal and state levels. We 
receive no government funding.
    As an organization concerned about low-income people who are 
struggling to feed their families, we feel strongly that no food stamps 
ought to be issued to ineligible persons.
    We are equally concerned when food stamps that are issued correctly 
are misused through trafficking. Although trafficking in properly 
issued benefits does not constitute a monetary loss to the Federal 
Government, and eliminating all trafficking would not produce any 
budgetary savings, trafficking does undermine the public trust and 
should be vigorously pursued.
    And just as we are concerned about improper issuances and improper 
use of benefits, we are also concerned that eligible families in need 
of food stamps have a fair opportunity to obtain those benefits. We 
applaud the Committee for its interest in all of these challenges 
facing the Food Stamp Program today.
    With regards to trafficking, we were pleased to read in USDA's 
recent study that the overwhelming majority of food stamp benefits 
continue to be used for their intended purposes and that the incidence 
of food stamp trafficking appears to be declining. Any trafficking is 
too much, but it is heartening to see progress is being made. This may 
well be in part the result of the bipartisan anti-fraud provisions of 
the 1996 welfare law, the greater movement toward electronic benefit 
transfer (EBT), and FNS's greater efforts to partner with states and 
others to attack trafficking.
    We hope that Congress and the Administration will work together to 
make further progress in this area, in particular by providing FNS with 
the resources it needs both for additional compliance and enforcement 
staff and for a research budget that could, among other things, help 
the agency understand more about how food stamp traffickers operate.
    We also hope that Congress and the Administration will work 
together to ensure that food stamps are available to eligible low-
income families that need them. In their May 1999 report entitled, 
``Welfare Reform Has Already Achieved Major Successes: A House 
Republican Assessment of the Effects of Welfare Reform,'' Speaker 
Hastert and Reps. Nancy Johnson, Bill Archer and Clay Shaw make the 
point that food stamp benefits are an important part of the Federal 
Government's ``commitment to making work pay.'' \1\ Food stamps can 
supplement the low wages that many families moving from welfare to work 
are earning.
---------------------------------------------------------------------------
    \1\ Representatives Nancy L. Johnson, Bill Archer, E. Clay Shaw, 
Jr., and J. Dennis Hastert, ``Welfare Reform Has Already Achieved Major 
Successes: A House Republican Assessment of the Effects of Welfare 
Reform,'' May 27, 1999, p. 29.
---------------------------------------------------------------------------
    Leaders of both political parties and officials of conservative and 
liberal think tanks alike have urged that if a family works full time 
throughout the year, the family should not have to live in poverty. 
This goal shaped the largely bipartisan expansions of the earned income 
tax credit (EITC) throughout the late 1980's and early 1990's. The EITC 
is now designed so that full-time year-round minimum-wage earnings plus 
the EITC and food stamps bring a family of four to the poverty line.
    In the report on welfare reform they released last year, Speaker 
Hastert and Reps. Johnson, Archer and Shaw note that ``caseload data 
from the food stamp program and the Medicaid program seem to indicate 
that many adults and children who meet the demographic, income, and 
resource standards for these benefits are not receiving them. * * * 
[T]here is concern among program administrators and other experts that 
there probably are many children eligible for Medicaid and food stamps 
who are not receiving them.'' \2\
---------------------------------------------------------------------------
    \21\ Op cit., p. 31.
---------------------------------------------------------------------------
    The evidence suggests that the decline in food stamp participation 
is significantly larger than can be explained by the economy and the 
food stamp changes in the welfare law. The reduction in food stamp 
spending in recent years has been far greater than Congress sought or 
anticipated when it enacted the 1996 welfare law, even after adjusting 
for the improved economy.
    In a report issued last year, the GAO reported: ``there is a 
growing gap between the number of children living in poverty--an 
important indicator of children's need for food assistance--and the 
number of children receiving food stamp assistance.''
    We have conducted a similar analysis going back to the peak in food 
stamp participation in 1994 and reached results very similar to GAO's. 
Overall, the number of people living below the poverty line fell 9.4 
percent, or 3.6 million people, between 1994 and 1998 while the number 
of people receiving food stamps in the average month fell nearly 30 
percent, over eight million people, during the same period. The 
difference was far greater than the 1.5 million legal immigrants and 
childless adults whom CBO estimated became ineligible for food stamps 
by the end of 1997 as a result of the 1996 welfare law.
    We also found a substantial decline in the percentage of poor 
children receiving food stamp assistance. Using Census data on the 
number of poor children and USDA data on food stamp participation, we 
found that in 1994 and 1995, there were 88 children receiving food 
stamps for every 100 children below the poverty line. By 1998, we 
estimate there were just 72 children receiving food stamps for every 
100 poor children.
    It is important to search for the causes of this unprecedented 
decline in program participation among eligible low-income households. 
Overall, the data show that non-immigrant families with children have 
accounted for almost three-fifths of the decline in food stamp 
participation from 1994 to 1998. As research by the Urban Institute and 
others has shown, a great many of the families that have left welfare 
for low-paying jobs remain eligible for food stamps but no longer 
receive benefits. It appears that low-income families that are being 
diverted from cash assistance programs are also failing to apply for 
food stamps, and that families leaving welfare are losing food stamps 
at the same time or shortly thereafter. Without food stamps, the 
transition from welfare to work for these families will be 
substantially more difficult, and the success of welfare reform efforts 
may be imperiled.
    Also troubling is the three-quarters decline in the number of low-
income U.S. citizen children receiving food stamps in households 
containing immigrant members. Citizen children remain eligible for food 
stamps, and many need this assistance to ensure that they go to school 
alert and ready to learn. We need to understand better why they are no 
longer receiving food stamps and work together to ensure they receive 
this assistance if they need it.
    Finally, it appears that some state practices designed to reduce 
error rates may be inadvertently making food stamps much less 
accessible to the working poor. Some states now require these families 
to take time off from work once every 3 months to reapply for food 
stamps and to provide extensive documentation of their eligibility. 
Naturally, missing this amount of time from work is burdensome to these 
working families and can undermine their relationships with their 
employers. Families subject to these short certification periods may 
soon decide that the cost of continuing to receive food stamps is too 
great. In states that have required a substantially higher proportion 
of working families with children to reapply every 3 months, the 
decline in participation among these families has been 24 percent, 
compared with a national average decline among these families of just 5 
percent. We need to find better ways to serve these families.
    In conclusion, the food stamp program plays a vital role in 
providing a nutritional floor under the nation's poor. Former Senate 
Majority Leader Bob Dole once called it the most important social 
program since Social Security. To continue to fulfill its mission, we 
need to strengthen the program's integrity, to improve its service to 
working poor families, to gain a deeper understanding of the causes of 
the larger-than-anticipated declines in food stamp participation, and 
to respond appropriately to these challenges. Thank you very much again 
for the opportunity to testify before you today. I would be pleased to 
answer any questions that I can.







  DECLINE IN PROPORTION OF POOR CHILDREN RECEIVING ASSISTANCE 1994-1998
                              [Percentage]
------------------------------------------------------------------------
                                                               Cash
                                            Food stamps     assistance
------------------------------------------------------------------------
Percentage of Poor Children Receiving                 88              58
 Benefits, 1994.........................
Percentage of Poor Children Receiving                 72              41
 Beneifts, 1998.........................
------------------------------------------------------------------------

                                                          
                                                          
                                                          
                                                          
                                                          
                                                          
    Mr. Nussle. Thank you both.
    Ms. Clayton, do you have questions for this panel?
    Mrs. Clayton. Well, I want to thank you first for allowing 
both of these witnesses to testify. I think they bring a 
different dimension to our whole issue of making sure that we 
use the resources well.
    The reason I wanted, Mr. Chairman, to have their statement 
on the record is that as we try, indeed, to make sure that the 
monies that are allocated, approved, and authorized by Congress 
be spent correctly and not in trafficking or misused, 
mismanaged, we also want to make sure that we have a 
compelling, urgent need to make sure we reach out and serve the 
people the bill was originally designed.
    I think in both of their testimony, they will show that, 
indeed, the program has been the cornerstone of responding to 
the nutritional needs of America, but there has been a drastic 
decline in some ways which is unexplainable, though there have 
been efforts.
    In Ms. Zedlewski's testimony, she gave five different 
reasons of what she thought what was happening in those areas. 
But, again, in the spirit of the Chairman's request to the last 
panel, if we want this program to be responsive to those 
citizens who are eligible and for which it was originally 
authorized, what would you recommend to us that we should do?
    And I'll get, Mr. Super, in a few minutes to you, but I 
would be interested in your particular analysis, where you say 
the working families indeed were having far more difficulty in 
getting resources.
    Ms. Zedlewski. Right. This has been true throughout, as 
long as we know, in the program that eligible families who work 
are much less likely to participate in the Food Stamp Program 
than others.
    And there have been a lot of anecdotal stories about why 
that is true. Food stamp offices are typically open between 9 
and 5, when people are working. The process takes place in a 
welfare office. I would contrast this with the Women, Infants 
and Children [WIC] nutrition program, where participation has 
actually been increasing. Families can go into a community 
health office and get WIC benefits. The process is easier.
    When you talk to States about trying to increase 
participation among working poor families, they turn to the 
cost of doing this. It costs extra money to have caseworkers 
available outside of regular hours, to outstation workers, to 
issue contracts to community service agencies to help families 
stay in the system.
    I think that States need to be encouraged to do this, and 
need to be encouraged to take advantage of the Federal monies 
that are put out there for outreach. There is a 50 percent 
Federal match. But, as I said, only nine States right now are 
really engaged in these kinds of new outreach services.
    It's a tough issue. It's a tough administrative problem. 
And the States, as you know, are also dealing with some very 
new procedures around their TANF programs. But I think this has 
to be part of the package of services that's offered to working 
poor families, as an important supplement to their incomes. And 
it needs to be made easier for families who are qualified to 
get the benefits. It's going to cost a little more 
administrative money.
    Mrs. Clayton. Did I understand you to say that there's a 
match to be offered from the Federal Government to States if 
States wanted to take this initiative?
    Ms. Zedlewski. That's right. States need to submit a 
special plan on new outreach efforts. And there's a 50/50 match 
with Federal/State moneys sharing the extra administrative cost 
equally.
    Mrs. Clayton. Mr. Super? You gave some startling traffick 
scenarios, where, actually, the poorest of the poor were 
receiving less and children were receiving less. Can you give 
us any reason why you think that is happening? Children of 
immigrant families, you said, the poorest of the poor and 
children in general are receiving less in 1996 than they are 
now.
    Mr. Super. Yes.
    Mrs. Clayton. I am sorry. They're receiving less now than 
they were in 1996.
    Mr. Super. Yes. I think that there are a number of factors 
that are probably fitting into this. Certainly with regard to 
those immigrant children, I think that there has been a lot of 
misunderstanding about the eligibility rules that were put in 
in 1996.
    I think that there may be a perception the families have 
where there is an immigrant present, that they may be 
undermining their immigration status, even though they're 
legally here if they get assistance for the children and the 
family. There may be a number of other concerns along those 
lines with regards to them.
    With regards to the group that constitutes the great bulk 
of the participation decline, the families with kids where 
there are no immigrants present, I think that's a combination 
of people not understanding that they are eligible, that some 
of the changes that have been made on the cash assistance side, 
which were designed to get people to work, were never intended 
to take food stamps away from people who are, in fact, working 
but still making very low wages.
    I think it's also that there are people who are leaving 
cash assistance programs who are not understanding that they 
can retain their food stamps and, indeed, their Medicaid and 
child care benefits when they leave if they've still got a very 
low income. And I think it is some of the practices that have 
been pursued to reduce the error rates, such as these very 
short certification periods, such as asking people to bring in 
extensive documentation from their employers, where people may 
not want to let their employer know that they're receiving food 
stamps and those sorts of things that are now causing problems.
    Mrs. Clayton. Have you done any documentation to make a 
comparison between the utilization of Medicaid by persons 
leaving welfare and persons leaving welfare or using food 
stamps? Are people accessing the health care services for their 
children when they begin work but are no longer eligible for 
cash assistance more than they are doing for food stamps or 
less or about the same?
    Mr. Super. It's very difficult to compare. There are a 
number of State studies of people leaving cash assistance that 
have been done. Some of them are pretty good. Some of them the 
data is not so good, and they show differing rates.
    The best study or the most comprehensive one that I am 
aware of that might answer that question was actually done by 
The Urban Institute. So if I could?
    Mrs. Clayton. Yes. Ms. Zedlewski.
    Ms. Zedlewski. Thank you. Yes, we have looked at that 
issue. And there was a decline in Medicaid coverage as families 
left welfare. It wasn't as steep as the decline in food stamp 
benefits.
    More recently, the Federal Government in partnerships with 
private foundations and community agencies has really been 
working hard at outreach to low-income families about continued 
eligibility for Medicaid and SCHIP for their children.
    My understanding is the latest data show that this trend 
has turned around. So it gives me some encouragement and 
optimism that, in fact, we can decouple these work support 
programs, such as health insurance and food assistance from 
welfare. As families move into work, there are ways to keep 
them attached to these other important supports.
    Mrs. Clayton. Mr. Chairman, I thank you for your 
forbearance, but let me just make this statement. I think one 
of the things we wanted to add into the record is that food 
stamps as well as Medicaid are there to assist people to make 
that transition from welfare to work because what you will find 
is that the cost of food and the cost of health for their 
families will drive them back to that.
    So if we're not working in an effective way to make these 
programs effective for them, we are not even serving welfare 
reform well because we're making such an expensive issue to be 
able to have independents say, ``I can't afford to take my kid 
to the doctor. I can't afford food. So why shouldn't I just 
stay on--because the job I have, it doesn't provide for all of 
those goods.''
    So I think it's a compelling case for us to make sure that 
there's outreach and the people who are eligible for that and 
who are working indeed are getting those resources. So I think 
that's a mismanagement of funds when we don't do this.
    Mr. Nussle. Clearly. And that's why I knew that when we set 
up this hearing today that having you on the panel with me 
would provide that focus and that interest. We are talking 
about people here.
    I know you were in the audience when we had the green 
eyeshades on. And we do that very often. We're very good at it. 
When we're in Congress, we talk about the bottom line a lot, 
what is the budget, what is this, what is that.
    And what we're talking about here is people. I mean, are 
the kids getting the necessary nutrition that they need? Are 
the parents able to provide that assistance? Are they able to 
provide and make the transition from welfare to work? Because 
while we are certainly hopeful that we have a program in place 
that can provide the assistance to kids and to families when 
they need it, we also hope they get off it, not just for the 
sake of getting off it but because we understand that that 
independence that a family has of being able to find a job, of 
being able to provide for their family, being able to pass on 
those kinds of self-reliance attitudes to their children is a 
pretty important value I think that is shared by all of us that 
helped to write the welfare law.
    The question I have--and I don't mean to zero in quite so 
focused on one thing, but today's hearing is about trafficking, 
waste, fraud, and abuse. And so please for a moment just 
provide it as a given that it is our hope that every single 
person who is eligible is able to reach the benefits that we 
are providing. Otherwise why are we providing them? Of course, 
we want them to get to them.
    The question I have is: Do you--and I heard a little bit of 
it today, and I am just interested in any expansion you'd 
provide on this. Do you perceive that if we begin fighting 
waste and fraud and abuse of this system and trafficking of 
food stamps, in particular, that there will be those who 
decide, for one reason or another, to just say, ``Hey, get me 
out of this program. I am not going to do it'' other than the 
ones who are doing it already illegally?
    I mean, I have a little bit of sympathy. I have sympathy 
for the kids that they're victimizing. I don't have a lot of 
sympathy for the adults that are going out and trafficking. I 
have sympathy for their kids. And so I am not talking about 
participation rates among those who are thrown out of the 
system because they violated it, appropriately thrown out 
because they violated it.
    What I am talking about is what you're hinting at, I think. 
And that is: Do participation rates come down because we start 
getting tougher because the Department gets tougher on 
trafficking? Is that what you're telling us today? Either one 
can----
    Ms. Zedlewski. I think this is a really complex topic, 
obviously. As it was said earlier today--and I truly believe 
this--as you reduce trafficking, you can increase the American 
confidence in this program. You can increase its acceptance as 
a work support for low-income families as you reduce the 
negativity that seems to surround the program.
    However, when we're talking about implementing procedures 
that investigate a lot of innocent clients in the Food Stamp 
Program, that, in fact, can have the opposite effects. I think 
there's a delicate balance between how zealous you get in terms 
of looking at trafficking when you're going after the clients 
who are in the system and not discouraging participation among 
eligible families.
    I think the bigger issue perhaps in terms of program 
participation is something that David alluded to earlier. One 
of the reasons why working families are thought to participate 
at much lower rates is that when you work, your income 
fluctuates over time. Your earnings can fluctuate from day to 
day, from week to week.
    And States have had to be very careful to get frequent 
reports from recipients who have earnings, sometimes requiring 
certified statements from their employer and having them come 
in every 3 months face to face to make sure that they're still 
eligible.
    So when we're talking about keeping the error rate down, 
sometimes we can implement systems that make it much more 
difficult for working poor families to maintain these benefits. 
Perhaps there can be a balance between that and making the 
offices more accessible, like expanding the time that they're 
open, increasing the number of places you can go to update 
certification, allowing clients to update information via the 
phone and so on.
    Maybe we can keep it all in balance. But, as I said, I 
think reducing the trafficking and any illegal activities 
surrounding the program could, in fact, increase the public's 
confidence in this program and would not deter participation. 
It's the negativity that you want to reduce in the program.
    Mr. Nussle. Do you have any--and, again, part of what I see 
here--and we just heard a number today that it's potentially 
3.5 percent or somewhere in the neighborhood of $660 million a 
year. You know, I'd love to take that $660 million and make 
sure that all the kids you're talking about are getting a 
nutritious set of meals during the day.
    And so immediately what we think of sometimes--and that's 
why I am asking the question--is let's just crack down on this 
side, take the 660 million, put it over on this side, and make 
sure more kids get food.
    And what you're telling me and what I am looking for is: Do 
you have any evidence to suggest that on the trafficking side, 
not so much the eligibility side because certainly there are 
people--and we're not talking about eligibility fraud because 
there are people who go out and hide income and do that. We're 
not talking about that because that does happen. That's kind of 
a separate subject to some extent. I am talking about somebody 
who is already eligible but is doing something wrong or a store 
that is either allowing it to happen or perpetrating it on 
their own.
    At that level of trafficking, at that criminal activity 
level, do you anticipate that if, in fact, the Department 
cracks down, as they are telling us today that they're going 
to--they're working on a strategic plan to do that--and if we 
continue to persuade our colleagues to work at efforts to crack 
down, do you see that or do you have evidence to suggest that 
that will further have a chilling effort on the participation 
rates in food stamps overall?
    Do you have evidence to that effect or is that just a 
general concern you have? I share your concern is the reason I 
ask it, but is it evidentiary or is it just supposition to some 
extent?
    Ms. Zedlewski. Well, the evidence that we have is through a 
lot of focus groups with low-income families who are not 
participating in the program and talking to them across the 
country about why it is they don't participate in the country.
    Mr. Nussle. OK.
    Ms. Zedlewski. So I am associating those kinds of 
comments----
    Mr. Nussle. Sure.
    Ms. Zedlewski [continuing]. With what might happen if there 
were further crackdowns.
    Mr. Nussle. Do you see a difference between EBT situations 
versus paper transaction coupon situations?
    Ms. Zedlewski. Well, I think EBT, in fact, should have had 
a positive effect on participation. It was hypothesized that it 
would. In other words, families would be going into a grocery 
store with a plastic card, instead of obvious food stamps.
    My understanding is that there isn't any real evidence that 
EBT has increased program participation, but EBT cards I think 
in general are good for clients, are good for the program. It's 
much more a modern way of issuing these kinds of benefits.
    Mr. Nussle. Do you find it's a less onerous way of 
gathering information, too? For instance, if we started to 
relax some of the informational barriers that appear to be 
there the Department is suggesting are there between the EBT 
and some mandate by Congress that they can't use that for 
research, if we would relax that, for some reason, would that 
in your opinion be a less onerous way to collect that data than 
individual interviews and paperwork transactions?
    Ms. Zedlewski. I think there's a lot of important 
information that you could gain from analysis of the EBT data 
in terms of the kinds of nutrition families are getting, as 
well as some of the other things that were mentioned earlier 
today.
    Mr. Nussle. OK. Mr. Super, do you have anything you would 
like to add to this conversation? I don't mean to exclude you 
from this.
    Mr. Super. Mr. Chairman, I think I would agree with 
everything that Ms. Zedlewski said about this. I think a sound, 
a sensible anti-fraud or anti-trafficking effort should not 
have an adverse effect on participation.
    And just to give you an example of what I mean by that, a 
story that was told to me by a State anti-fraud investigator, 
one of the things that they looked for in finding suspicious 
evidence of possible trafficking is someone who has many, many 
transactions in the same day. That's not seen as normal 
activity, and that raises red flags.
    They called someone in. And it turned out it was someone, a 
senior citizen, who was utterly incapable of understanding the 
balance information that EBT gave them. So they got all their 
groceries up to the front. And they'd run each one of them 
through until they ran out of funds. Once they found that out, 
they, of course, didn't proceed further.
    As long as you have people using common sense and 
distinguishing between that sort of a situation and the 
situation where there is actual abuse going on, then I don't 
see a problem.
    Indeed, I think, for just the reason Ms. Zedlewski said, it 
would be helpful if we could give the public confidence that 
when they see food stamps being used, that they know that they 
are being used appropriately.
    Mr. Nussle. Actually, your example sounds like maybe the 
poster child for EBT and the use of that information because 
that probably could not have been discovered as fast if it was 
done with a coupon transfer.
    Mr. Super. Yes. I mean, the potential for using EBT 
information to zero in on the problematic retailers and get 
them out of the program is fabulous and used sensibly, as in 
the example I gave, where you don't bother with people who just 
can't quite handle the technology but you use that--and 
probably the next person who had that same flag they called in 
may well have been a trafficker and they got rid of them--that 
I think is a very exciting possibility.
    Mr. Nussle. Do you have anything else you would like to 
add, Ms. Clayton, before we wrap up the hearing?
    Mrs. Clayton. I would just like to ask the issue about 
reports and doing research and analysis that the Secretary said 
she is prohibited from. And she read from the 1999 bill.
    Do either of you have comments about that or is there a way 
we can get around that, why that is--if there is such valuable 
information to come from analyzing use of the electronic card, 
it seems to me that prohibition is denying us some critical 
information, a tool, not only for getting at the trafficking 
but also for utilization, other reasons.
    Mr. Super. Yes. Congresswoman Clayton, if I may borrow the 
Chairman's analogy of a corporation that is having financial 
difficulties, when the appropriations language was put in 
prohibiting FNS from spending its money on research, in some 
sense, we took away their research and development arm. And if 
a corporation is having trouble, that's the very time when you 
want them doing research.
    Now, they're allowed to operationalize things that they 
already know how to do. And that ALERT system is one example. 
But in times past, FNS' Office of Analysis and Evaluation was 
ahead of the game. They understood problems before other people 
did. They were years ahead of the program in finding these 
problems and identifying solutions and helping the operational 
people go after them before they got out of hand.
    And for the past several years, the agriculture 
appropriations law has not allowed them to do that sort of 
work. And I think the more years that goes on, the farther 
behind we become.
    Mr. Nussle. Yes. It's interesting. I was just checking with 
the staff about how that little rider got in there. I found 
out. It wasn't me, but I probably supported it. You may have 
even supported it, too, but it was in an effort to stop some--
it sounded like maybe some political activity that was going on 
down at the Department or some focus groups. And so you put a 
provision in there. And now the Department is not doing any 
research. So we've got to figure out a way to put the governor 
on a little bit but loosen it a little bit.
    So we will work on that, but suffice it to say I appreciate 
the testimony that this panel has given us. It's been very 
enlightening. We appreciate your interest and work in this area 
and concern. And I appreciate the participation of members.
    We will call this hearing to a close. And hopefully we will 
have another opportunity to discuss this in a little bit more 
detail in a little while. There's some discussion about maybe 
one more hearing on this subject. And so we will look forward 
to that opportunity in the future.
    The Task Force will stand adjourned. Thank you.
    [Whereupon, the foregoing matter was concluded at 4:25 
p.m.]


   Federal Disability Benefits Still Being Paid to Drug Addicts and 
                               Alcoholics

                              ----------                              


                      TUESDAY, SEPTEMBER 12, 2000

                  House of Representatives,
                           Committee on the Budget,
                                     Task Force on Welfare,
                                                    Washington, DC.
    The Task Force met, pursuant to call, at 1:20 p.m., in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the Task Force) presiding.
    Chairman Nussle. Good morning--or good afternoon. It is 
still good morning for some of us. I apologize for running a 
little bit behind. We have had some weather problems in the 
country, as some of you know, and I spent the night at O'Hare 
last night and so my clock has been turned back just slightly. 
So I apologize for the delay.
    Mrs. Clayton will be here in a moment, and we will also be 
recognizing her. I appreciate Mr. Collins of Georgia being here 
as well today.
    I would like to begin this today by talking a little bit 
about the fact that in 1996 the Congress passed and the 
President signed into law comprehensive reform of our Nation's 
welfare system. And while the intentions were good when it was 
created in 1965 after 30 years of the old welfare system, we 
had basically more poverty, more despair and hopelessness 
within our country from those who seem to be locked within that 
system. The failed, old system placed a real disincentive on 
working and keeping the family together.
    In 1996, reforms transformed welfare from a failed, very 
impersonal Washington-dictated system to a much more 
personalized, more effective and hopefully more compassionate 
system based on individual States and their communities. We 
have witnessed the most dramatic decline in welfare caseloads 
in the history of the Federal welfare programs, cutting the 
number of recipients in half.
    Since 1996, more than 6 million Americans are off welfare 
and enjoying the rewards of hard work and a well-deserved 
paycheck. In fact, the number of Americans on welfare is now at 
the lowest levels since 1965. This remarkable turnaround has 
created some unique problems of its own, but they are problems 
we are all happier in addressing, I believe, than the original 
problems themselves. For example, the city of Milwaukee, 
Wisconsin, has had to revamp its public bus routes, as we 
understand--and schedules--because so many more people are 
going to work than there were 4 years ago.
    With all of that being said, however, we are here today to 
look at a concern about a provision that I believe was really a 
component of welfare reform, but which was approved and signed 
into law separately from the actual 1996 welfare reform bill 
and has not been adequately enforced or certainly not in a 
timely manner and it is costing American taxpayers millions of 
dollars each year.
    Public Law 104-121 eliminated drug addiction and alcoholism 
as conditions for which individuals could legally qualify for 
SSI, Supplemental Security Income, and Social Security 
disability insurance benefits. Substance abusers who have other 
medical conditions that would qualify them for benefits remain 
eligible, but eligibility was terminated for those who would 
not be disabled if they stopped abusing drugs and alcohol.
    The history of whether substance abuse in and of itself 
should qualify as a disabling condition goes back to the 
creation of the SSI program. The compromise struck in the 1972 
legislation requires persons whose sole qualification for SSI 
was addiction to have benefits paid through representative 
payees. But there was no restriction on who that payee might be 
and it was often a relative or friend of the recipient. There 
were even horror stories about benefits being paid directly 
to--in some instances, even bars and taverns.
    Congress attempted--and Congress', I should say, first 
attempt to make some changes--came in 1994. Legislation was 
enacted to limit the period of time persons could remain 
eligible for SSI and DI benefits based solely on substance 
abuse. The 1994 bill also finally strengthened the 
representative payee requirements and required recipients to 
participate in drug or alcohol abuse treatment, but those 
changes did not go far enough.
    There were many in Congress who always believed that it was 
inappropriate to be providing SSI or DI benefits to a person 
based solely on their drug or alcohol addiction. Obviously it 
wasn't fair to the taxpayer, but even more importantly it was 
not fair to those beneficiaries.
    There is no shortage of examples of drug addicts and 
alcoholics receiving their checks and using those funds 
specifically to satisfy and further their addiction. In many 
cases, it was as if the Federal Government was contributing to 
their addiction and in some cases it has ended in tragedy and 
death.
    I remember reading an article that quoted an assistant 
director of the drug treatment facility who saw a number of SSI 
and DI recipients repeatedly in his treatment facility with 
little or no hope of conquering their addictions. According to 
that person on the front lines of the drug battle, he never saw 
a disability recipient successfully complete the drug treatment 
program and he placed some of the blame on the monthly check 
that the drug addict basically could count on receiving from 
the Federal Government to help fund their addiction.
    In 1996, changes ended this vicious cycle and it directed 
the Social Security Administration to terminate SSI and DI 
benefits for any beneficiary for whom drug addiction or 
alcoholism was material to the funding of their disability. As 
of May, 1997, SSA had notified more than 200,000 individuals 
that their benefits would terminate under the new welfare law.
    In May of this year, the SSA Inspector General issued an 
audit detailing the implementation of this provision of the 
1996 law. The report estimated that thousands of SSI and DI 
beneficiaries whose sole disabling condition was drug addiction 
and alcoholism remained on the benefit rolls despite having 
their eligibility terminated by the new welfare law. Based on a 
sample of cases reviewed, the IG audit estimated that between 
1997 and the completion of the audit, more than 3,000 
individuals had received more than $40 million in SSI or DI 
benefits to which they were not entitled. And under current 
procedures, SSI will not seek to recover any of those overpaid 
benefits.
    I believe treatment must be available to the recovering 
alcoholic and drug addict. If they need and want help, that 
assistance should be available to them. But a monthly cash 
payment from the Federal Government is not the way to help an 
alcoholic or drug addict battle his or her disease.
    This is not just me saying this. These are the people that 
are on the front lines who make that point. This point is made 
by the fact that after 4 years of payments, these same 
individuals still have the same problem.
    Each dollar used inappropriately in payments to these 
people could have been better used in their treatment or to 
provide assistance to other people with disabilities.
    We are here today to review the audit report, to learn why 
these thousands of drug addicts and alcoholics continued to 
receive disability benefits for more than 4 years after the law 
was changed terminating their benefits. We also will seek to 
determine what steps SSA is taking to address the findings of 
the audit report and to assure that provisions of the 1996 
welfare law are fully implemented.
    Joining us today at the hearing is James Huse, Jr.--, am I 
pronouncing that right?
    Mr. Huse. Yes, sir.
    Chairman Nussle [continuing]. Who is the Inspector General 
of the Social Security Administration; Steven Schaeffer, who is 
the Assistant Inspector General for audit of the Social 
Security Administration; Kenneth--and you're going to have to 
help me with this----
    Mr. Nibali. Nibali.
    Chairman Nussle [continuing]. Kenneth Nibali, Associate 
Commissioner for Disability for the Social Security 
Administration. I appreciate all three of you coming here 
today.
    Before we begin with the testimony, Mr. Collins, do you 
have any opening statement that you would like to make at this 
time?
    Mr. Collins. I don't believe so, sir.
    Chairman Nussle. Thank you.
    Without objection, all Members will be given 5 legislative 
days to revise and extend their remarks and submit extraneous 
written material. Is there any objection to that?
    Also, the witnesses themselves, I would ask you to 
recognize that your written statement will be placed into the 
record, and you may summarize if you care to and pull out the 
points that you believe are most important.
    Hearing no objections to that, I will call on Mr. Huse, 
Jr., the Inspector General, and ask you for your testimony. 
Welcome and thank you.

  STATEMENT OF JAMES G. HUSE, JR., INSPECTOR GENERAL, SOCIAL 
                    SECURITY ADMINISTRATION

    Mr. Huse. Thank you, Mr. Chairman, and Mr. Collins.
    Mr. Collins. Nice to see you again, sir.
    Mr. Huse. Good to see you again, sir.
    Thank you for this opportunity for us to discuss the 
Federal disability benefits being paid to drug addicts and 
alcoholics.
    As you are aware, our office is responsible for preventing 
fraud, waste and abuse in the Social Security Administration's 
programs and operations. An important part of our efforts 
involves performing independent and objective audits aimed at 
effecting positive change and improvement. In May, 2000, we 
released our audit report entitled implementation of drug 
addiction and alcoholism provisions of Public Law 104-121. Our 
objective in this audit was to determined whether SSA 
identified and terminated benefits to all beneficiaries for 
whom drug addiction or alcoholism was a contributing factor 
material to the finding of disability.
    We conducted this audit to ascertain the agency's 
compliance with the Contract With America Advancement Act of 
1996 which prohibits the payment of disability insurance 
benefits and Supplemental Security Income benefits if drug 
addiction or alcoholism is the primary reason the individual is 
disabled. To establish materiality, SSA needed to evaluate 
medical evidence to determine if the individual would not be 
disabled if he or she stopped using drugs or alcohol.
    After this evaluation, the law requires SSA to terminate 
payments to individuals whose disabilities were based on drug 
addiction and alcoholism alone. In addition, if individuals 
appealed their terminations timely, this law required SSA to 
conduct medical redeterminations by January 1, 1997.
    Our audit concluded that SSA did not identify and terminate 
benefits to all beneficiaries for whom drug addiction and 
alcoholism was a contributing factor, material to the finding 
of disability.
    Assistant Inspector General for Audit, Steven Schaeffer, 
will provide you with a more comprehensive explanation of our 
findings. At this point, I would like to allow Mr. Schaeffer to 
present his statement.
    [The prepared statement of James G. Huse, Jr., follows:]

  Prepared Statement of James G. Huse, Jr., Inspector General, Social 
                        Security Administration

    Chairman Kasich and members of the Task Force, thank you for 
inviting me to discuss the issue of Federal Disability Benefit payments 
for drug addicts and alcoholics. As you are well aware, our office is 
responsible for preventing and detecting fraud, waste, and abuse in the 
Social Security Administration's programs and operations. An important 
part of our efforts involves performing independent and objective 
audits aimed at affecting positive change and improvement.
    In May 2000, we released our audit report entitled ``Implementation 
of Drug Addiction and Alcoholism Provisions of Public Law 104-121''. 
Public Law 104-121, also known as the Contract with America Advancement 
Act of 1996, prohibits the payment of Social Security Disability 
Insurance benefits and Supplemental Security Income benefits if drug 
addiction or alcoholism is a contributing factor material to finding a 
claimant disabled. The objective of our audit was to determine whether 
SSA identified and terminated benefits to all beneficiaries for whom 
these prohibitions applied.
    Our audit concluded that SSA did not identify and terminate 
benefits to all beneficiaries for whom drug addiction and alcoholism 
was a contributing factor material to the finding of disability. 
Assistant Inspector General for Audit Steven Schaeffer will provide you 
with a more comprehensive explanation of our findings. At this point I 
would like to allow Mr. Schaeffer to present his statement. I would 
also like to thank the Subcommittee for its interest in our work and 
efforts to prevent and detect fraud, waste and abuse in SSA's programs 
and operations.

    Chairman Nussle. Mr. Schaeffer.

 STATEMENT OF STEVEN L. SCHAEFFER, ASSISTANT INSPECTOR GENERAL 
           FOR AUDIT, SOCIAL SECURITY ADMINISTRATION

    Mr. Schaeffer. Mr. Chairman, Mr. Collins, it is a pleasure 
to be here to discuss this important topic with you.
    By May 30, 1997, SSA had notified approximately 209,000 
individuals that their benefits would be terminated due to drug 
addiction or alcoholism. Of these 209,000 identified 
individuals, 67 percent actually had their benefits terminated 
by SSA, 31 percent appealed the DAA termination and continued 
to receive benefits based on a disability other than drug and 
alcohol abuse, and 2 percent continued in benefit status 
because they were incorrectly identified as DAA cases.
    In September 1998, we began an audit to determine if the 
Social Security Administration had identified and terminated 
benefit payments to all individuals where DAA was a 
contributing material factor to that individual's disability. 
We learned that SSA only used one criteria for identifying DAA 
cases for review. However, using an additional code, we focused 
on approximately 20,000 individuals whose cases we believed 
might be indicative of drug addiction or alcoholism. After 
reviewing a sample of these cases, we found that DAA was in 
fact the primary reason for disability in many cases.
    In December, 1998, SSA disagreed and asserted that based 
upon data contained in their information systems, disability 
determinations for 16,677 of these individuals did not consider 
DAA. For the remaining 3,269 individuals, SSA informed us that 
it did not have sufficient information to determine whether or 
not DAA was the reason that they were determined to be 
disabled.
    In March 1999, we expressed our concerns to SSA regarding 
its assertions and we expressed our intent to proceed with a 
review of a sample of the approximately 20,000 beneficiaries 
who appeared to be receiving benefits based on DAA even though 
the law prohibited such payments. Following our review, we 
concluded that SSA did not identify and terminate benefits to 
all individuals where DAA was material to their disability 
determination. We then estimated that approximately 3,200 
individuals were paid around $39 million in DI and SSI 
benefits.
    In one example, an individual in our sample was selected 
for review because he was receiving benefits and had a 
diagnosis code for alcohol substance addiction. Our review of 
information provided by SSA indicated that DAA was in fact the 
contributing factor for the disability finding. Specifically, 
the case folder contained a document that stated, ``Substance 
abuse is a substantial reason for the finding of disability and 
the conferring of benefits in this case.'' Additionally, a 
report from SSA's Disability Review Section stated that DAA was 
a contributing factor and the claimant was determined to be an 
alcoholic.
    For this particular case, there was no documentation to 
indicate that SSA reviewed this individual's medical condition 
after the passage of Public Law 104-121. Further, SSA's records 
showed that SSA did not review this case between SSA's DAA 
determination in 1993 and our audit work in 1998. SSA did not 
identify this case when the new law was passed in 1996 because 
the agency only looked at certain indicators and not the entire 
record. Therefore, benefits were not terminated and this 
individual received a total of $11,736 in SSI payments between 
the effective date of Public Law 104-121, January 1997, and 
December, 1998.
    Additionally, we found that cases were miscoded in SSA's 
information systems showing DAA, even though DAA was not 
material to the disability determination. Based on our review, 
we estimate that 14,420 SSA beneficiaries do not have the 
correct diagnosis codes, DAA indicators, or both, on their 
records to show that DAA was not material to their disability 
determination. Incorrect coding such as this could impact the 
agency's ability to identify cases affected by new legislation, 
as was the case with Public Law 104-121. Additionally, 
incorrect coding could also impact on SSA's ability to profile 
cases for continuing disability reviews which determine whether 
beneficiaries continue to be disabled.
    We provided SSA with four recommendations to improve its 
implementation of the DAA provisions of Public Law 104-121 and 
to help reduce SSA's incidence of paying benefits to ineligible 
individuals. We specifically recommended that SSA review the 
10,611 SSI cases that SSA asserted were either properly handled 
or miscoded and apply the provisions of Public Law 104-121 
where appropriate.
    Two, when conducting the next scheduled CDRs for the 6,066 
DI cases in our extract, ensure that the benefits are 
terminated if DAA is material to the finding of disability.
    Three, ensure that the 3,269 cases SSA agreed to review are 
completed, the coding corrected and the benefits terminated 
where appropriate.
    Four, modify its systems so that the primary diagnosis 
codes for alcohol or drug addiction will no longer be accepted.
    In response to our draft report, SSA agreed with our 
recommendations and stated that corrective actions were 
initiated and in some cases completed. Specifically, SSA stated 
that all the reviews specified in our first three 
recommendations were completed or initiated. Regarding our 
fourth recommendation, SSA stated that in August 1999 systems 
modifications were completed to eliminate erroneous entries in 
its systems. SSA stated that when a case is denied because DAA 
was the reason for the disability, the use of alcohol or drug 
addiction codes is appropriate.
    I would like to thank the subcommittee for its interest in 
improving SSA's implementation of the DAA provisions. This 
issue represents a successful illustration of the role of the 
OIG at SSA and the importance of cooperation between the OIG 
and the agency, resulting with SSA immediately implementing 
some of the corrective actions. The agency's aggressive action 
limited further incorrect payments from being made.
    Thank you for your time and interest in this subject. I 
would be glad to respond to any questions you may have.
    Chairman Nussle. Thank you very much.
    [The prepared statement of Steven L. Schaeffer follows:]

Prepared Statement of Steven L. Schaeffer, Assistant Inspector General 
               for Audit, Social Security Administration

    It is a pleasure to be here to discuss this important topic with 
you. By May 30, 1997, SSA had notified 209,374 individuals that their 
benefits would be terminated due to drug addiction or alcoholism (DAA). 
Of these 209,374 identified individuals:
     67 percent actually had their benefits terminated by SSA;
     31 percent appealed the DAA termination and continued to 
receive benefits based on a disability other than DAA; and
     2 percent continued in benefit status because they were 
incorrectly identified as DAA cases.
    In September 1998, we began an audit to determine if the Social 
Security Administration (SSA) had identified and terminated benefit 
payments to all individuals where DAA was a contributing material 
factor to that individual's disability. We learned that SSA only used 
one criteria for identifying DAA cases for review. However, using an 
additional code, we focused on 19,946 individuals whose cases we 
believed might be indicative of drug addiction or alcoholism. After 
reviewing a sample of these claims, we found that DAA was in fact the 
primary reason disability in many cases. In December 1998, SSA 
disagreed and asserted that, based upon data contained in their 
information system, disability determinations for 16,677 of the 
individuals did not consider DAA. For the remaining 3,269 individuals, 
SSA informed us that it did not have sufficient information to 
determine whether or not DAA was the reason they were determined to be 
disabled.
    In March 1999, we expressed our concerns to SSA regarding its 
assertions, and we expressed our intent to proceed with a review of a 
sample of the 19,946 beneficiaries who appeared to be receiving 
benefits based on DAA even though the law prohibited such payments. 
Following our review, we concluded that SSA did not identify and 
terminate benefits to all individuals where DAA was material to their 
disability determination. We then estimated that 3,190 individuals were 
incorrectly paid $38.7 million in DI and SSI benefits.
    In one example, an individual in our sample was selected for review 
because he was receiving benefits and had a diagnosis code for Alcohol 
Substance Addiction. Our review of information provided by SSA 
indicated that DAA was in fact, the contributing factor for the 
disability finding. Specifically, the case folder contained a document 
that stated, ``Substance abuse is a substantial reason for the finding 
of disability and the conferring of benefits in this case.'' 
Additionally, a report from SSA's Disability Review Section stated that 
DAA was a contributing factor and the claimant was determined to be an 
alcoholic.
    For this particular case, there was no documentation to indicate 
that SSA reviewed this individual's medical condition after the passage 
of Pub. L. No. 104-121. Further, SSA's records showed that SSA did not 
review this case between SSA's DAA determination in 1993 and our audit 
work in 1998. SSA did not identify this case when the new law was 
passed in 1996 because the Agency only looked at certain indicators and 
not the entire record. Therefore, benefits were not terminated and this 
individual received a total of $11,736 in SSI payments between the 
effective date of Pub. L. No. 104-121 (January 1997) and December 1998 
(the date the case was selected for review).
    Additionally, we found that cases were miscoded in SSA's 
information systems showing DAA, even though DAA was not material to 
the disability determination. Based on our review, we estimate that 
14,420 SSA beneficiaries do not have the correct diagnosis codes, DAA 
indicators, or both, on their records to show that DAA was material to 
their disability determination. Incorrect coding such as this could 
impact SSA's ability to identify cases affected by new legislation, as 
was the case with Pub. L. No. 104-121. Additionally, incorect coding 
could also impact on SSA's abiltiy to profile cases for continuing 
disability reviews (CDRs), which determine whether beneficiaries 
continue to be disabled.
    We provided SSA with four recommendations to improve its 
implementation of the DAA provisions of P.L. 104-121, and to help 
reduce SSA's incidence of paying benefits to ineligible individuals. We 
recommended that SSA:
    1. Review the 10,611 SSI cases that SSA asserted were either 
properly handled or miscoded and apply the provisions of Pub. L. No. 
104-121 where appropriate.
    2. When conducting the next scheduled CDRs for the 6,066 DI cases 
in our extract, ensure that benefits are terminated if DAA is material 
to the finding of disability.
    3. Ensure that the 3,269 cases SSA agreed to review are completed, 
the coding corrected, and the benefits terminated where appropriate.
    4. Modify its systems so that primary diagnosis codes for Alcohol 
or Drug Addiction will no longer be accepted.
    In response to our draft report, SSA agreed with our 
recommendations and stated that corrective actions were initiated, and 
in some cases, completed. Specifically, SSA stated that all the reviews 
specified in our first three recommendations were completed or 
initiated. Regarding our fourth recommendation, SSA stated that in 
August 1999, systems modifications were completed to eliminate 
erroneous entries in its systems. SSA stated that when a case is denied 
because DAA was the reason for the disability, the use of alcohol or 
drug addiction codes is appropriate.
    I would like to thank the Subcommittee for its interest in 
improving SSA's implementation of the DAA provisions. This issue 
represents a successful illustration of the role of the OIG at SSA, and 
the importance of cooperation between the OIG and the Agency, resulting 
with SSA immediately implementing some of the corrective actions. The 
Agency's aggressive action limited further incorrect payments from 
being made. Thank you for your time and interest in this subject matter 
and I would be glad to respond to any questions that you may have.

    Chairman Nussle. Commissioner Nibali.

    STATEMENT OF KENNETH NIBALI, ASSOCIATE COMMISSIONER FOR 
           DISABILITY, SOCIAL SECURITY ADMINISTRATION

    Mr. Nibali. Thank you, Mr. Chairman, Mrs. Clayton is here 
now, and Mr. Collins. I am pleased to be here today to discuss 
issues relating to the Social Security Administration's 
implementation of the drug addiction and/or alcoholism 
provisions of Public Law 104-121. I am a careerist with SSA for 
29, years and I am most currently the Associate Administrator 
for Disability.
    While SSA worked aggressively to successfully implement 
this legislation, we are appreciative of the work by the 
Inspector General to identify potential concerns with our 
implementation and give us the opportunity to address those 
concerns.
    I will briefly discuss the history of these conditions, the 
steps we took to implementation the legislation, the recent 
review and report by the IG and our actions and results. Again, 
I would like to thank the Inspector General for their help in 
implementing this legislation.
    As you noted, Mr. Chairman, the original legislation passed 
by Congress in 1972 to create the SSI program required that 
disabled individuals whose DAA condition was material to their 
disability accept treatment, if available, and have their 
benefits paid to a representative payee.
    The provisions did not apply to the Social Security 
disability insurance beneficiaries at that time. All SSI cases 
in which alcohol and/or drug addiction was material to the 
finding of disability were flagged with special DAA codes. Then 
the Social Security Independence and Program Improvement Act of 
1994 placed additional requirements on individuals disabled due 
to DAA. Among other things, it extended the treatment 
participation requirements to the Social Security disability 
beneficiaries whose substance abuse was material to their 
disability, and therefore, special DAA codes were also applied 
to those cases to indicate DAA materiality.
    Then, 2 years later, all benefits to individuals disabled 
solely due to DAA were eliminated in Public Law 104-121, which 
became law on March 29, 1996. Among other things, for 
individuals whose DAA is a contributing factor material to the 
finding of disability, this law prevented DI and SSI 
eligibility effective with all claims adjudicated on or after 
March 29, 1996, and for individuals already receiving benefits 
based on DAA, SSA was required to notify beneficiaries of the 
new provisions and to complete new medical determinations by 
January 1, 1997. Additionally, beneficiaries who have a DAA 
condition and are incapable of managing their benefits are 
required to have a representative payee and to be referred to 
the appropriate State agency for treatment.
    As has been noted, SSA took immediate steps to implement 
the legislation. We immediately instructed our disability 
adjudicators on how to process DAA cases under the new law, 
including the prohibition against allowing benefits in any case 
where DAA was material to the finding of disability. In June 
1996, over 209,000 beneficiaries with special DAA codes were 
notified that their disability benefits would terminate 
effective January 1, 1997, due to the change in the law, and 
they could request a new medical determination.
    We received about 141,000 responses to the over 209,000 
initial notices. What that meant is for the 68,000 individuals 
who did not respond to the initial notice, eligibility for 
disability benefits was terminated effective January 1, 1997. 
Then SSA made medical decisions in about 131,000 cases.
    After all appeals, benefits had been ceased to an 
additional 50,000 of those individuals and continued on the 
basis of another disability for 81,000. So the bottom line is 
that out of all 209,000 identified DAA beneficiaries, SSA has 
ceased benefits for about 123,000 beneficiaries and continued 
benefits based on another disability for about 86,000 
beneficiaries.
    As has been noted, in November, 1998 the Inspector General 
questioned whether some individuals were being paid benefits on 
the basis of DAA. OIG projected that almost 20,000 
beneficiaries with a diagnosis of DAA or a DAA code were still 
receiving benefits and asked us to respond. After some 
discussions with OIG, SSA immediately started a review process 
through a combination of expedited, continuing disability 
reviews and other expedited folder reviews. And then, as has 
been said, on May 12, the Inspector General issued the report; 
and it identified the 20,000 cases that OIG had questioned and 
projected the numbers that Mr. Schaeffer just gave you, that 
3,190 individuals may be being paid benefits that should have 
been terminated for DAA materiality.
    OIG made a number of recommendations again, as Mr. 
Schaeffer pointed out, involving reviewing these cases and 
modifying our systems so that the diagnosis codes would no 
longer be accepted. We did agree with all those 
recommendations. We released cases for priority review, we 
accelerated continuing disability reviews for others. The 
results are these: That out of the almost 20,000 individuals 
identified by the Inspector General, we found a total of 339 to 
be still improperly receiving benefits because of DAA 
materiality, and those benefits should have been ceased and 
have been ceased now.
    Additionally, in August 1999, we completed modifying our 
systems to preclude a DAA diagnosis in all cases except 
denials. The Inspector General did SSA a good service by 
identifying this group of cases involving DAA that were not 
reviewed and suggested that we implement system audits to be 
assured that no DAA cases can be paid benefits. We took action 
as soon as the IG brought this to our attention. Again, the 
bottom line is that benefits have been terminated for 123,000 
individuals out of those 209,000 originally coded as DAA.
    Again, we would like to thank the Inspector General and his 
office for their help in the implementation of this.
    That concludes my statement. I would be happy to answer any 
questions you might have.
    [The prepared statement of Kenneth Nibali follows:]

   Prepared Statement of Kenneth Nibali, Associate Commissioner for 
               Disability, Social Security Administration

    Mr. Chairman and members of the Task Force, I am pleased to be here 
today to discuss issues relating to the Social Security 
Administration's (SSA's) implementation of the drug addiction and/or 
alcoholism (DAA) provisions of Public Law 104-121. While SSA worked 
aggressively to successfully implement this legislation, we are 
appreciative of the work by the Inspector General to identify potential 
concerns with our implementation and give us the opportunity to address 
those concerns. I will discuss the history of these provisions, the 
steps we took to implement the legislation, the recent review and 
report by the Inspector General of implementation, and our actions and 
results pursuant to his recommendations. Again, I want to thank the 
Inspector General and his office for helping us implement this 
legislation.

                               Background
    The original legislation passed by Congress in 1972 to create the 
Supplemental Security Income (SSI) program required that disabled 
individuals whose DAA condition was material to their disability accept 
treatment if available and have their benefits paid to a representative 
payee. These two special requirements did not apply to SSI recipients 
who were determined to be disabled independently of their substance 
addictions (e.g., recipients who were disabled due to heart disease). 
Nor did they apply to Social Security Disability Insurance (SSDI) 
beneficiaries. All SSI cases in which alcohol and/or drug addiction was 
material to the finding of disability were flagged with special DAA 
codes.
                              P.L. 103-296
    The Social Security Independence and Program Improvements Act of 
1994, P.L. 103-296 enacted August 15, 1994, placed additional stringent 
requirements on individuals disabled due to DAA. Among other things, it 
extended the treatment participation requirements to SSDI beneficiaries 
whose substance abuse was material to their disability, required 
suspension of benefits for noncompliance with treatment, and limited 
payment of benefits to SSI recipients disabled due to DAA to 36 months. 
For DI beneficiaries disabled due to DAA benefits were limited to 36 
months during which treatment was available. Our efforts to identify 
and code all DAA cases intensified. Special DAA codes were also applied 
to SSDI cases to indicate DAA materiality.

                              P.L. 104-121
    All benefits for individuals disabled solely due to DAA were 
eliminated in Public Law 104-121, the Contract with America Advancement 
Act of 1996 which became law on March 29, 1996. Among other things, for 
individuals whose DAA is a contributing factor material to the finding 
of disability, this law prohibited DI and SSI eligibility effective 
with all claims filed or finally adjudicated on or after March 29, 
1996. This prohibition was effective January 1, 1997, for individuals 
already receiving benefits based on DAA. SSA was required to notify 
current beneficiaries of the new provisions by June 27, 1996, and 
complete new medical determinations by January 1, 1997 for affected 
current beneficiaries who requested such a determination by July 29, 
1996. Benefits (including Medicare and Medicaid) would stop unless the 
new determination showed that DAA was not material to the finding of 
disability (i.e., beneficiaries had to be disabled regardless of any 
DAA condition). Additionally, beneficiaries who have a DAA condition 
and are incapable of managing their benefits are required to have a 
representative payee and to be referred to the appropriate State agency 
for treatment.
    SSA took immediate steps to implement the legislation. We 
immediately instructed our disability adjudicators on how to process 
DAA cases under the new law, including the prohibition against allowing 
benefits in any case where DAA was material to the finding of 
disability. We were able within days of enactment to mail information 
across the country to several hundred organizations within the 
disability community--including legal aid and advocacy groups, payees, 
and county and state welfare agencies--informing them of the new law 
and what they could do to help their clients navigate the appeals 
process.
    In June 1996, over 209,000 beneficiaries with special DAA codes 
were notified that their disability benefits would terminate effective 
January 1, 1997, due to the change in the law and that they could 
request a new medical determination.
     We received about 141,000 responses to the over 209,000 
initial notices. Of these, about 131,000 cases required a medical 
decision. Of the remaining 10,000 cases: about half had benefits 
terminated for some non-DAA reason before a DAA medical decision was 
made; about 4,000 had been incorrectly coded as DAA on SSA's systems; 
and almost 900 were found eligible for other benefits based on age. For 
the 68,000 individuals who did not respond to the initial notice, 
eligibility to disability benefits was terminated effective January 1, 
1997.
     SSA made medical decisions in about 131,000 cases. After 
appeals, benefits were continued based on another disability in about 
81,000 cases and 50,000 were ceased.
     Out of all the 209,000 identified DAA beneficiaries, SSA 
ceased benefits for about 123,000 beneficiaries and continued benefits 
based on another disability (or based on age) for about 86,000 
beneficiaries.
    Benefit payments continued past January 1997 for beneficiaries 
whose timely filed appeals were still pending, but the vast majority of 
terminations were effectuated by January 1, 1997.
    By the end of 1998, with the exception of a few appeals, the 
209,000 identified DAA beneficiaries had either established that DAA 
was not material to their disability or had their benefits stopped.

                OIG Review and Report and SSA's Actions
    In November 1998, SSA's Office of the Inspector General (OIG) 
questioned whether some individuals were being paid disability benefits 
on the basis of DAA. OIG found that almost 20,000 beneficiaries with a 
diagnosis of DAA or a DAA code were still receiving benefits and asked 
SSA to respond.
    In response to the OIG inquiry, SSA immediately started a review 
process through a combination of expedited continuing disability 
reviews (CDRs) and other expedited folder reviews.
    Subsequent to the OIG review, on May 12, 2000, the Inspector 
General issued the report Implementation of Drug Addiction and 
Alcoholism Provisions of Public Law 104-121. The report noted that SSA 
had not identified every beneficiary for whom DAA was a contributing 
factor material to the finding of disability, identified the almost 
20,000 cases OIG had questioned, and projected that an estimated 3,190 
individuals may be being paid benefits who should have been terminated 
for DAA materiality.
    OIG made a number of recommendations to SSA involving reviewing 
cases and modifying our systems so that DAA diagnosis codes would not 
be accepted. We agreed with all of the recommendations. Because we had 
begun action as soon as OIG had questioned us about beneficiaries with 
DAA coding, I am happy to report that we had already corrected many of 
the problems by the time the report was issued, and since then have 
corrected the rest. We released cases for priority review and 
accelerated continuing disability reviews for others. The results are 
that a total of 339 of the almost 20,000 individuals identified by the 
Inspector General were found to be improperly receiving benefits 
because of DAA materiality and thus benefits have been ceased. 
Additionally, in August 1999, we completed modifying our systems to 
preclude a DAA diagnosis in all cases except denials.
    The Inspector General did SSA a good service by identifying this 
group of cases involving DAA that were not reviewed and suggesting that 
we implement system edits to ensure that no DAA cases can be paid 
benefits. In retrospect we can see that we should have initially 
reviewed even those cases where our systems coding showed that a 
determination had already been made that DAA was not material. We took 
action as soon as the Inspector General brought this to our attention. 
The bottom line is that SSA implemented the DAA legislation timely and 
terminated benefits to more than 123,000 out of the over 209,000 
individuals originally coded as DAA.

                               Conclusion
    We at SSA are proud of the actions we have taken to implement the 
DAA legislation. While regretting that we did not locate the final few 
hundred individuals until the Inspector General brought this to our 
attention, I cannot say enough about the dedicated employees in SSA and 
the State DDSs who handle our disability program.
    Again, I would like to thank the Inspector General and his office 
for their help in our implementation of this legislation. By 
identifying cases that were incorrectly coded and needed review, they 
provided us a valuable service. That concludes my statement. I would be 
happy to answer any questions you might have.

    Chairman Nussle. Thank you very much.
    Before I do my questions, Mrs. Clayton has joined us. As I 
said at the last hearing, there is nobody in the Congress who 
on an individual basis is more aggressive in championing the 
individual rights of people who are disabled and in need of 
government assistance.
    I appreciate your involvement in the hearing today. If you 
have any opening statement or anything that you would like, or 
if you have questions, I will refer to you at this time.
    Mrs. Clayton. I will wait for my turn.
    Chairman Nussle. Thank you.
    Mr. Collins, do you have any questions for these witnesses?
    Mr. Collins. Not at this time.
    Chairman Nussle. First of all, let me just walk through a 
couple of things here real quick that I want to make sure I am 
following.
    First of all, I appreciate the testimony of the witnesses. 
It does appear, as you referred to, Commissioner Nibali, that 
this is a very good example of where the OIG has provided 
oversight within an agency, made recommendations and corrective 
matters have been taken and have been followed through on. I 
congratulate you on that teamwork. Certainly whenever you talk 
about a law that was passed in 1996 and an end result that was 
taken all the way to the year 2000, you can imagine that there 
would probably be frustration; but I am sure you share in that 
frustration.
    Part of my question is a general, possibly procedural 
question: Why would it take so long? Can you walk us through--
can you walk the committee through why something like that--it 
would seem to me, if it is coded, if there is a coding issue 
where you have 209,000 people where if you pull up their files 
that say DA or A, or both, that it would be fairly easy to make 
a determination and make the kind of corrective matters back in 
1996 or 1997.
    Could you walk us through a little bit about why it took 
all the way to now to successfully complete this?
    Mr. Nibali. Yes, sir.
    I think your summation is essentially the story. We did 
identify the individuals who we had coded on our system that we 
believed were subject to the legislative changes that Congress 
passed. We did it very quickly. The law gave us approximately 9 
months to identify, to give legal notice to these individuals, 
and then to get a substantial number of them in and have their 
cases decided. And we did that.
    The majority of these cases were in fact decided by January 
1, 1997, as the legislation called for, the clear majority. 
Particularly in the disability arena, additional cases can take 
some amount of time just because of the need to be fair and 
humane to people, get the information that is required, and 
this group in particular is a group that is not always easy to 
get the right information out to make all the decisions that 
should be made.
    Chairman Nussle. Just so we are clear on the numbers, just 
so I am understanding what you are saying, that is that part of 
your testimony where you say 68,000 people did not respond and 
were immediately taken off at that point in time, and there 
were 131,000 that required an appeals process and that is what 
you are referring to?
    Mr. Nibali. Yes, and most of that 131,000 were adjudicated 
in that same time period. So in addition to the 68,000, another 
a 50,000 were taken off the rolls, roughly, in that time period 
through that process, again a challenging piece of legislation 
to implement in a relatively short period of time. We were very 
interested some doing it correctly and within the time frames 
allocated, and we substantially did that.
    Again, I would just point out that we did remove 123,000 
individuals from the rolls. As you just pointed out, 68,000 of 
those were because, in fact, they did not appeal; that could be 
for a variety of reasons, but still that was the sum total.
    What we are talking about in the substantial remaining 
period of that time is, yes, we did think we had it right. We 
looked at our codes, et cetera. This is where the partnership 
you just spoke of was a real benefit to us.
    The Inspector General's staff looked at cases. We had some 
questions, as Mr. Schaeffer acknowledged, about some of their 
early reactions to the 20,000 some cases that they identified. 
There are other codes, diagnosis codes we call them, on our 
records. It indicates that a drug abuse and alcohol situation 
is present, but it did not indicate that that was the basis 
that we were paying that case on.
    The Inspector General did some of the reviews they talked 
about. It raised some further issues. That is when we agreed 
with them that to be sure because we did not want to spend any 
money of the American taxpayers' dollars that are paid in, that 
we should not under the legislation, we thought we ought to go 
back and review those cases. That is what we did in that 
remaining period of time.
    Chairman Nussle. Thank you.
    Mrs. Clayton.
    Mrs. Clayton. Commissioner, admittedly the 19,000 was 
raised, but also admittedly apparently by your figures out of 
that now, you know there are 339 that probably would be denied; 
is that what you are saying?
    Mr. Nibali. They have been denied.
    Mrs. Clayton. They have been denied?
    Mr. Nibali. Yes, terminated.
    Mrs. Clayton. Is that to suggest that of the other 19,946, 
that the others were just miscoded and therefore there isn't a 
reason to be concerned?
    Mr. Nibali. Well, there are a variety of things there. The 
bulk of those individuals, whether ``miscoding'' is exactly the 
term or not, we have straightened out our coding and we have 
determined that they properly belong on the rolls, again under 
the definition of that 1996 law that DAA is not material to 
their disability, meaning they would be disabled under another 
disability.
    Now, it is not all of those people, because a number of 
folks we in fact terminated because as we did those continuing 
disability reviews, we accelerated them at the suggestion of 
the Inspector General. We always find some number of people who 
in fact medically improve, we find some people who die, we find 
some people who are no longer eligible for other reasons, 
whether it is income and resources or issues like that.
    There are other folks that were removed from the rolls, but 
the bulk of those people were determined to be disabled under 
another disability.
    Mrs. Clayton. You feel the recommendations that the audit 
reports made, that you are able to meet those recommendations 
and there is a time frame for it?
    Mr. Nibali. Yes, I believe we certainly met the 
recommendations and I believe we did it in a very timely 
fashion, because once having been advised by the Inspector 
General that they had these concerns, as again Mr. Schaeffer 
noted, we had some back-and-forth about exactly which cases 
needed to be looked at and whether they needed to be looked at.
    But in fact even in that interim period of time we started 
identifying cases and started putting things in process, so we 
could do, for example, continuing disability reviews on cases. 
So, therefore, I believe we acted in about as quick a manner as 
possible once those cases were identified and we agreed to 
relook at them.
    Mrs. Clayton. So would you conclude, although there was a 
problem, there is no problem now?
    Mr. Nibali. Yes. What we conclude is that, as I was 
discussing with Mr. Nussle, the clear majority of these cases 
were properly identified and were from the original legislation 
back in 1996 and 1997--209,000 people looked at, 123,000 
terminated. Based on the additional questions raised by the 
Inspector General, we have now looked at that remaining batch 
of cases, and we are very confident that we have a good 
resolution of all the cases for DAA.
    Mrs. Clayton. In fact you have a system that at least can 
monitor with certainty that you are reviewing it, right?
    Mr. Nibali. Yes. In fact, our continuing disability review 
process is calling cases up pretty much on a routine basis 
every 3 years unless there is some reason to do it longer than 
that. That always gives us an opportunity to in fact identify 
if there are any other issues that need to be addressed. But in 
this way, working with the Inspector General, we actually 
accelerated some of that so we took care of those very quickly.
    Mrs. Clayton. Part of the ability to do that is, obviously, 
having the resources that are needed to do that. I know it is 
not uncommon to have the Social Security Administration to take 
a long time to determine someone is disabled. I'm not sure why 
we should expect that it would be easier and quicker to go 
through the same process. It took a long time to determine the 
eligibility now to go through, if you are fair in that process 
to determine that they are not eligible at the time.
    So we have some cases--I almost know every Congressperson, 
we are not unique to this, we have cases that are 2 and 3 years 
old, and in fact they come to us as a last resort in that area. 
So I am not terribly disturbed if indeed there is some small 
percentage of individuals who may be on the rolls who almost 
may have an alcohol or drug abuse problem, and there is a code 
that says they may not be eligible. Would I rather them not get 
it, the law says.
    Of course we want to follow the law, but I would rather 
there is due process in making sure that they are not eligible; 
I would err on the side of due process.
    I would just raise for balance that you certainly do due 
diligence in determining whether people are eligible in the 
first instance; and I would say to the Inspector General, you 
are right to investigate and make sure we are following the 
law, but I would also call into question if we are indeed doing 
due diligence and persistence in making sure that people who 
are trying to get assistance, who need it desperately in that 
area.
    Let me just ask a question of Mr. Schaeffer.
    Mr. Schaeffer, the Commissioner feels that the 
recommendations you have made have all been followed. Do you 
share his evaluation that they have all been followed and 
timely?
    Mr. Schaeffer. We certainly think that some of the 
recommendations have been followed and implemented timely. 
Whether they have all been actually implemented successfully, 
we haven't done any follow-up work to verify that and we have 
planned audit work that we will start next calendar year. We 
will take a look at the work that was actually done in this 
area and make an independent evaluation of whether or not 
everything that needed to be done was in fact done.
    Mrs. Clayton. How do you see the missing DI codes affecting 
SSA's ability to profile beneficiaries in the disability 
review?
    Mr. Schaeffer. We did a companion report to this. In that 
companion report we identified, based on SSA's records, over a 
million codes of the 11 million people that were on the SSR, 
Supplemental Security Record, or the Master Beneficiary Record 
having a disability as having incorrect diagnostic codes or 
missing the codes.
    What that impacts is that when you pass a piece of 
legislation like this legislation here, if you go to implement 
that legislation, in this case remove people from the rolls, if 
that code isn't correct you may expend resources examining 
somebody that you shouldn't be examining because they don't 
have a drug and alcohol problem. If they are identified that 
way, then you looked at a case that you didn't need to look at 
and that uses administrative resources. On the other hand, if 
it is not coded correctly and they do have a problem, then you 
are not even looking at that one to begin with.
    That is what we see as the problem. That if you are going 
to expend the resources to code the records with the diagnostic 
code, then you want to make sure that those diagnostic codes 
are correct. Because at some point later on you are going to 
use that information to profile the type of continuing 
disability review that you are going to do. Obviously, 
depending upon the type of disability a person has, the person 
may get a mailer--they are just sent a mailer if there is 
little likelihood that they are going to improve--or you may 
ask them to come in and present additional evidence on their 
continuing disability review.
    There could be errors on both sides. You could require 
somebody to come in who is hopelessly disabled, and that is not 
a good use of administrative resources. On the other hand, if 
you have a person that is receiving a mailer but their 
disability is of the type that you should be conducting a full 
CDR, then you are missing an opportunity to perhaps remove 
somebody from the rolls who has improved.
    In our opinion, it is critical for the agency to do what is 
necessary to ensure that its diagnostic codes are encoded 
correctly at the time they are entered into the system.
    Mrs. Clayton. Does that require additional resources for 
capacity and design for the coding? I am assuming that 209,374 
cases had to have some coding program, some program with a 
coding assistance to identify them; and I am assuming the new 
law requires a distinction of being able to distinguish between 
those who would have this problem; and that wouldn't be readily 
available if the law wasn't there before.
    Mr. Schaeffer. In this particular case, I would say it was 
a matter of a compliance for certain types of the cases. When 
the cases were originally established, they didn't have an 
indicator for DAA. They used a different code. But when they 
made their selection of which ones they were going to look at, 
they did not use the only code that was available. So that the 
20,000 cases that we selected to look at, we selected those 
cases that we thought were most problematic, which included not 
only the criteria that the agency used but some additional 
information that was already in their database that they could 
have used and if they would have used would have caused those 
cases to be looked at, too.
    The 20,000, it was really only 10 percent of the 200,000 
cases that they did, in fact, look at. In that instance, that 
information was available to them at the time that they made 
their selection criteria.
    Chairman Nussle. Mr. Collins, do you have any questions?
    Mr. Collins. In the overall number of people that you 
examined the disability, how did you determine the 209,000 
people? What was in their record that would make you look at 
those specific people? How would you pull 209,000 out of how 
many million you have that are drawing?
    Mr. Nibali. We pulled them based on the indicator on the 
system that said DAA was material to their finding of 
disability. That was what the law asked for us to review, and 
that's what we reviewed.
    I think what Mr. Schaeffer was just explaining is that the 
vast majority of cases that needed to be reviewed were 
correctly identified on the system. We pulled them. We worked 
them. I told you what the results were, that a significant 
number of people came off the rolls.
    What the issue that the Inspector General raised is about 
this potential additional 10 percent of cases that did not have 
that code in this computer system but had some other indicators 
that DAA was present in that case, and their suggestion was 
that we should look at those cases as well.
    I would just explain, kind of in relation to what Mrs. 
Clayton was saying, and I appreciate your acknowledgment of 
what it takes to work these cases, is that it's a fairly 
devastating thing--I would say a very devastating thing--for 
people to get these notices that your benefits are being 
terminated, you have to come in and file. We try to be as 
judicious as possible about what cases we select to subject to 
that kind of review, and we selected the cases that our system 
told us with 90 plus percent, even accepting these 20,000 as 
potentials, 90 plus percent identified very well on our system. 
The question was, should we have done these additional cases 
from the beginning as well? We have done them now.
    Mr. Collins. How did you get into this report, Mr. Huse?
    Mr. Huse. We plan our audit work through several channels. 
Anytime the Congress passes new legislation that requires 
compliance by the agency, it is appropriate for us as the 
oversight entity in the Social Security Administration to take 
a look at implementation, and that was one driver here.
    The other was we get a lot of anecdotal and allegation 
information that comes to us that indicated that perhaps the 
universe was not as wide as it could have been in the 
implementation of this law, which also gets into the decision 
to put this into our audit work plan. When we do that, though, 
we communicate the audit work plan to the agency so there is no 
surprise about what we're going to take a look at. But that is 
how it is done.
    Mr. Collins. Very good. Thank you, Mr. Chairman.
    Chairman Nussle. Thank you.
    I would like to go one step further now, if I may. As I 
understand it, in the 1972 law, in order for a person who has 
the substance abuse issue to receive a benefit, they are also 
supposed to have a representative payee. What has continued----
    Mr. Nibali. If I may.
    Chairman Nussle. Yes.
    Mr. Nibali. Under the law, they have to have a rep payee if 
they are determined to be incapable of handling their own 
affairs, not just that they are DAA.
    Chairman Nussle. I guess what I'm getting at here is what 
is the current status of that law with regard to people who are 
partially--because, of course, now no one is supposed to be on 
the benefit that is DA or A. So someone who has partial 
substance abuse issues, what is the obligation for SSA 
currently to have rep payees for these beneficiaries?
    Mr. Nibali. SSA field office personnel follow the current 
law and some rather extensive guidelines that we have been 
issuing over the years. That requirement is that when DAA--you 
are absolutely correct. Obviously, we do not pay people on the 
basis of DAA, but DAA can still be present in other cases for 
other disabilities. When that is the case, we ask the field 
office to make a determination as to the capability of that 
person to handle their own financial affairs to receive those 
benefits. That determination is made based on interviews with 
the individuals involved and often involves a referral for a 
doctor to make an assessment of the capability of that 
individual to handle their own benefits. Having made that 
capability determination, if the determination is that the 
person should not and is not able to handle their own affairs, 
then a representative payee is selected.
    Actually, the 1994 legislation set up a specific set of 
criteria right in the legislation for the preferred order of 
rep payees for individuals with DAA conditions. Those start off 
generally with organizations as rep payees. And organizations 
particularly that are used to dealing with individuals like 
that, they can be private, they can be Federal or State or 
local kinds of organizations. But actually, in terms of the DAA 
rep payees, the family members actually come far down on that 
list versus where they come for the normal rep payee positions. 
That is generally because these are extremely stressful 
situations for individual family members to try to handle the 
financial affairs of individuals with drug and alcohol abuse, 
and I think everyone pretty much agrees that there are better 
results when you have an organization that is capable of 
handling that.
    Chairman Nussle. Do you happen to know how many current 
beneficiaries are in a situation like that where they have a 
rep payee that have some type of substance abuse?
    Mr. Nibali. Yes, I do.
    Chairman Nussle. That is fine. While they are looking at 
that, let me ask you another question.
    Mr. Nibali. I don't have the exact number. Would you please 
less us provide that for the record?
    Chairman Nussle. Do you have a percent? I am just 
interested in a ballpark.
    Mr. Nibali. What we know is it is the minority of 
individuals that have a rep payee.
    Chairman Nussle. What is the obligation on the part of SSA 
to encourage, demand, instruct treatment with regard to the 
moneys that have been provided through SSA for people who are 
having a substance abuse issue?
    Mr. Nibali. We very much understand that obligation. That 
is required again by the legislation. When we do find 
individuals incapable of handling their own affairs, we make 
referral of those individuals for services. So that is a 
routine part of what is done when we are in that process of 
dealing with DAA people.
    Chairman Nussle. But it is primarily those who are also 
determined to require a rep payee. In other words, it is rare 
for there to be a situation where someone is requiring--where 
you have directed treatment at the same point that they don't 
have a rep payee? In other words, they go hand in hand. In 
order for you to get treatment, you also have a rep payee. Is 
that basically what you are telling us?
    Mr. Nibali. I have been corrected. We refer everyone.
    Chairman Nussle. For treatment?
    Mr. Nibali. Yes, for treatment.
    Chairman Nussle. But not all of them will have a rep payee?
    Mr. Nibali. No, only those who will then be determined to 
be incapable of handling their own affairs.
    Chairman Nussle. I realize you've got many issues here, but 
are you also able to determine, when you say all of them are 
directed, all of them are instructed, is there a follow-up 
process to determine whether or not anything has occurred with 
regard to treatment?
    Mr. Nibali. Under the 1994 legislation, you may recall 
there was a fairly extensive referral and monitoring activity 
set up. That is no longer in existence under the 1996 
legislation. We have annual accounting from rep payees for that 
portion of the individuals we are talking about. They have to 
do annual reporting to us so that we have some idea of what is 
going on with that piece of it. But generally when the 
referrals are made for treatment for these individuals, we do 
not have the mandate or provided the resources to do the kind 
of follow-up that was under the 1994 legislation.
    Chairman Nussle. Mr. Huse, the two questions I have for you 
is, first of all, and I believe you touched on it briefly with 
Mr. Collins, but you are planning a follow-up audit with regard 
to or follow-up with regard to the recommendations that have 
been made? And I assume that requires or suggests another 
report that you are going to come out with, is that correct?
    Mr. Huse. Yes, Mr. Chairman, that is in our audit plan for 
next year.
    Chairman Nussle. What will that focus on? Do you have a 
determination yet of what that will primarily focus on?
    Mr. Huse. It will go to the actual discharge of these 
recommendations and whether we saw what we suggested was done. 
Basically, that is how we do it.
    Chairman Nussle. I guess part of what I am getting at is I 
am wondering if some type of oversight with regard to rep 
payees is necessary. Has that been something that the IG's 
office has looked into at all?
    Mr. Huse. In other hearings this year, we have testified on 
our rep payee system and rep payee issues. This is a piece of a 
much greater issue, but the answer is yes, and we continue to 
do that. We have quite a bit of work ongoing with the agency to 
address that, too. That I'm sure Mr. Nibali could speak to.
    Chairman Nussle. Then the only other question I had is in 
regard to back benefits and prosecution or some type of attempt 
to reimburse the government and the SSA for benefits that have 
been paid erroneously. I preface this, as I did the last time 
at our food stamp hearing by suggesting--I prosecuted for a few 
years and have some brief understanding of the difficulty in 
this area with regard to benefits, particularly welfare 
benefits and trying to recoup them. But I am just wondering 
what system, if any, is in place for that purpose, in trying to 
get back any benefits that were paid erroneously.
    Mr. Nibali. Obviously, we have no desire to pay any 
benefits that should not have been paid and, where possible, 
would have liked to have recovered them. What we are dealing 
with here are very specific legal protections for individuals, 
and it is basically a matter of due process. Because they were 
receiving benefits, because we had not given them a timely 
notice as we did with the original individuals, et cetera, we 
were not able to go back and eliminate those benefits until 
they had had their chance for a review and a hearing and 
therefore could only terminate the benefits from the time we 
made the decision. And that was discussed at great lengths with 
our general counsel. That was the result of his research, that 
we were precluded from going back and recapturing any of those 
benefits.
    Chairman Nussle. I realize that is in the initial phase, 
when you made the 68,000 no response, that is obvious, as well 
as the due process of those 131,000. But what about the--and I 
am going to get the number wrong, I am sure--but 13,000 that 
were identified through--or was it 1,300? But it was that last 
category----
    Mr. Nibali. The 339.
    Chairman Nussle. Is that what it was?
    Mr. Nibali. Yes.
    Chairman Nussle. What about in those particular cases, is 
there a follow-up that can be done there in regard to back 
benefits?
    Mr. Nibali. No, we would be precluded the same way from 
recapturing those back benefits.
    Chairman Nussle. Mrs. Clayton, do you have any follow-up 
questions?
    Mrs. Clayton. I guess once a prosecutor, always a 
prosecutor.
    Chairman Nussle. Well, I had to ask the question.
    Mrs. Clayton. Following that line of questioning, is this a 
different procedure than it is for others? Again, our 
congressional experience in our constituent work wherein 
inadvertently or by some error if people have been overpaid 
based on a rate they shouldn't have been paid, they have had to 
pay it back, is there a general rule about who is responsible 
as to whether you have to pay it back?
    I know in this case--I have been reading the background--
that unless there was notice--in fact, one of the questions I 
guess I was prepared to ask you if you hadn't offered the 
information, given the numbers, if you hadn't given them due 
notice, you couldn't get the moneys back. But you gave them 
notice. In fact, you have terminated them. Is there a general 
principle in the Social Security Administration about 
reimbursement when you find that there has been an omission or 
inadvertence of paying too much on a rate, perhaps in other 
programs that are different from this? Is this a unique piece 
here that you have to give notice?
    Mr. Nibali. It is a little unique. What we are dealing with 
are specific protections that have come out from court 
decisions, particularly related to individuals already 
receiving benefits. And this is particularly in the SSI part of 
the program where this stems from--they are called Goldberg-
Kelly rights. We need to give people their opportunity to a 
hearing before those benefits can be stopped.
    I believe--one answer to the general question is certainly 
if individuals have been overpaid in any way under Social 
Security, there are many times where we can and do not only 
attempt but do in fact collect benefits overpaid. But there are 
general----
    Mrs. Clayton. Even if it is the administration's 
responsibility?
    Mr. Nibali. Yes. Generally, the rule is if the person was 
not at fault and they are unable to repay us, then it is 
generally excluded from trying to collect it. But if those 
conditions don't exist, then we do make an effort to recapture 
the benefits.
    Chairman Nussle. Certainly that is part of what I was--I 
would certainly understand that part of the issue here is 
ability to repay. I am not discounting that at all. But when 
there was--my question went more to, and I think Mrs. Clayton 
zeroed in on it much better than I was able to, and that is, if 
general notice is given to those 209,000 people, then even 
after adjudication and receiving those monthly checks--let's 
say notice was given in, you said January 1996, I believe you 
said?
    Mr. Nibali. I think around June or so.
    Chairman Nussle. OK, June 1996, if determination, final 
adjudication is made in December that they were ineligible, 
then what happens to the June, the July, the August, September, 
October and November payments?
    Mr. Nibali. In that case, sir, actually by the law itself, 
their benefits continued until January 1, 1997. That was the 
earliest we cut anybody's benefits off.
    Chairman Nussle. So that was part of the issue there. So 
none of those would have gone beyond that January, 1997, date?
    Mr. Nibali. They could not have been terminated sooner than 
that.
    Chairman Nussle. I appreciate you making that clear.
    Any other questions from members of the committee?
    Again, I want to thank you and compliment you on the 
teamwork that it appears that you have put together in order to 
accomplish this. As I said when I opened, I am sure that there 
will be frustration in just the amount of time it takes, but I 
think you have made it clear some of the issues and why that 
occurred.
    I appreciate your testimony today. If there is no other 
business, then we will adjourn. Thank you.
    [Whereupon, at 2:15 p.m., the Task Force was adjourned.]

                                
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