Food Stamp Program: Payment Errors and Trafficking Have Declined 
despite Increased Program Participation (31-JAN-07, GAO-07-422T).
                                                                 
The U.S. Department of Agriculture's (USDA) Food Stamp Program is
intended to help low-income individuals and families obtain a	 
better diet by supplementing their income with benefits to	 
purchase food. USDA's Food and Nutrition Service (FNS) and the	 
states jointly implement the Food Stamp Program, which is to be  
reauthorized when it expires in fiscal year 2007. This testimony 
discusses our past work on two issues related to ensuring	 
integrity of the program: (1) improper payments to food stamp	 
participants, and (2) trafficking in food stamp benefits. This	 
testimony is based on a May 2005 report on payment errors	 
(GAO-05-245) and an October 2006 report on trafficking		 
(GAO-07-53). For the payment error report, GAO analyzed program  
quality control data and interviewed program stakeholders,	 
including state and local officials. For the trafficking report, 
GAO interviewed agency officials, visited field offices,	 
conducted case file reviews, and analyzed data from the FNS	 
retailer database.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-422T					        
    ACCNO:   A65426						        
  TITLE:     Food Stamp Program: Payment Errors and Trafficking Have  
Declined despite Increased Program Participation		 
     DATE:   01/31/2007 
  SUBJECT:   Accountability					 
	     Criminal investigation				 
	     Erroneous payments 				 
	     Errors						 
	     Food relief programs				 
	     Internal controls					 
	     Monitoring 					 
	     Overpayments					 
	     Program evaluation 				 
	     Program management 				 
	     Quality control					 
	     Risk assessment					 
	     Risk management					 
	     Underpayments					 
	     Food Stamp Program 				 

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GAO-07-422T

   

     * [1]Background

          * [2]Program Participation
          * [3]Determination of Eligibility and Benefits
          * [4]FNS's Quality Control System Measures Improper Payments
          * [5]Trafficking

     * [6]States Have Made Progress Reducing Payment Errors, and Furth

          * [7]The Food Stamp Error Rate, Which Combines Overpayments and U
          * [8]FNS and States Have Taken Steps to Increase Payment Accuracy

     * [9]Estimates Suggest Trafficking Has Declined, but FNS Could Fu

          * [10]FNS Estimates Suggest That the Rate of Food Stamp Traffickin
          * [11]FNS Has Taken Advantage of New EBT Data to Improve Retailer
          * [12]Despite the Progress That Has Been Made against Trafficking,

     * [13]Concluding Observations
     * [14]GAO Contact and Staff Acknowledgments
     * [15]GAO's Mission
     * [16]Obtaining Copies of GAO Reports and Testimony

          * [17]Order by Mail or Phone

     * [18]To Report Fraud, Waste, and Abuse in Federal Programs
     * [19]Congressional Relations
     * [20]Public Affairs

Testimony before the Senate Committee on Agriculture, Nutrition, and
Forestry

United States Government Accountability Office

GAO

For Release on Delivery Expected at 9:45 a.m. EST

Wednesday, January 31, 2007

FOOD STAMP PROGRAM

Payment Errors and Trafficking Have Declined despite Increased Program
Participation

Statement of Sigurd R. Nilsen, Director Education, Workforce, and Income
Security Issues

GAO-07-422T

Mr. Chairman and Members of the Committee:

Thank you for inviting me here today to discuss our observations on the
administration of the Food Stamp Program. As you know, the U.S. Department
of Agriculture's (USDA) Food Stamp Program is intended to help low-income
individuals and families obtain a better diet by supplementing their
income with benefits to purchase food. USDA's Food and Nutrition Service
(FNS) and the states jointly implement the Food Stamp Program, which is to
be reauthorized after it expires in fiscal year 2007. Participation in the
program has been cyclical, with a decrease in the number of recipients for
a few years beginning in 1996. Studies suggest that economic growth in the
late 1990s played a major role in this decrease. However, in recent years,
the Food Stamp Program has grown tremendously. From 2000 to 2005, the
program has grown from $15 billion in benefits provided to 17 million
individuals to $29 billion in benefits to nearly 26 million individuals.
Almost 1 in every 12 Americans participates in the program.

The information I am presenting today is based primarily on findings from
our past work on two issues related to ensuring integrity of the program:
(1) improper payments to food stamp participants, and (2) trafficking in
food stamp benefits.1 Those findings were based on multiple methodologies,
including an analysis of program quality control data for fiscal years
1999 through 2003, case file reviews, data analysis of the FNS retailer
database, and interviews and site visits with program stakeholders,
including federal agency and state and local officials. These efforts were
conducted in accordance with generally accepted government auditing
standards.

In summary, both payment errors and trafficking of benefits have declined
in a time of rising participation, and although progress has been made,
ensuring program integrity remains a fundamental challenge facing the Food
Stamp Program. The national payment error rate for the program combines
states' overpayments and underpayments to program participants and has
declined by about 40 percent between 1999 and 2005, from 9.86 percent to a
record low of 5.84 percent. If the 1999 error rate had been in effect in
2005, the program would have made payment errors totaling over $2.8
billion rather than the $1.7 billion it experienced. FNS and the states we
reviewed have taken many approaches to improving food stamp payment
accuracy, most of which are similar to internal control practices known to
reduce improper payments. In addition to declining payment error, FNS
estimates suggest that the national rate of food stamp trafficking
declined from about 3.8 cents per dollar of benefits redeemed in 1993 to
about 1.0 cent per dollar during the years 2002 to 2005 and that
trafficking occurs more frequently in smaller stores. FNS has taken
advantage of electronic benefit transfer (EBT) and other new technology to
improve its ability to detect trafficking and disqualify retailers who
traffic, while law enforcement agencies have investigated and referred for
prosecution a decreasing number of traffickers, instead focusing their
efforts on fewer high-impact investigations. Despite the progress FNS has
made in combating retailer trafficking, the Food Stamp Program remains
vulnerable because retailers can enter the program intending to traffic
and do so, often without fear of severe criminal penalties, as the
declining number of investigations referred for prosecution suggests. To
reduce program vulnerabilities and ensure limited compliance-monitoring
resources are used efficiently, GAO recommended in its October 2006
trafficking report that FNS take additional steps to target and provide
early oversight of stores most likely to traffic; develop a strategy to
increase penalties for trafficking, working with the Inspector General as
needed; and promote state efforts to pursue recipients suspected of
trafficking. FNS generally agreed with our findings, conclusions, and
recommendations. However, FNS believes it does have a strategy for
targeting resources through their use of food stamp transaction data to
identify suspicious transaction patterns. We believe that FNS has made
good progress in its use of these transaction data; however, it is now at
a point where it can begin to formulate more sophisticated analyses.

1GAO, Food Stamp Program: States Have Made Progress Reducing Payment
Errors, and Further Challenges Remain, [21]GAO-05-245 (Washington, D.C.:
May 5, 2005); Food Stamp Trafficking: FNS Could Enhance Program Integrity
by Better Targeting Stores Likely to Traffic and Increasing Penalties,
[22]GAO-07-53 (Washington, D.C.: Oct. 13, 2006).

Background

The federal Food Stamp Program is intended to help low-income individuals
and families obtain a more nutritious diet by supplementing their income
with benefits to purchase nutritious food such as meat, dairy products,
fruits, and vegetables, but not items such as soap, tobacco, or alcohol.
The Food and Nutrition Service (FNS) pays the full cost of food stamp
benefits and shares the states' administrative costs--with FNS usually
paying approximately 50 percent--and is responsible for promulgating
program regulations and ensuring that state officials administer the
program in compliance with program rules.2 The states administer the
program by determining whether households meet the program's income and
asset requirements, calculating monthly benefits for qualified households,
and issuing benefits to participants on an electronic benefits transfer
card.

Program Participation

In fiscal year 2005, the Food Stamp Program issued almost $28.6 billion in
benefits to about 25.7 million individuals participating in the program,
and the maximum monthly food stamp benefit for a household of four living
in the continental United States was $506. As shown in figure 1, program
participation increased sharply from 2000 to 2005 following a substantial
decline, and the number of food stamp recipients follows the trend in the
number of people living at or below the federal poverty level.

2Reimbursements for food stamp administrative costs in 44 states are
adjusted each year to subtract certain food stamp administrative costs
that have already been factored into these states' Temporary Assistance
for Needy Families (TANF) grants. As a result, these states receive less
than 50 percent of their administrative costs. See GAO, Food Stamp
Program: States Face Reduced Federal Reimbursement for Administrative
Costs, RCED/AIMD-99-231 (Washington D.C.: July 23, 1999).

Figure 1: Food Stamp Participation and Poverty Trends

Note: Poverty data are by calendar year and participation data are by
fiscal year.

In addition to the economic growth in the late 1990s, another factor
contributing to the decrease in number of participants from 1996 to 2001
was the passage of the Personal Responsibility and Work Opportunity Act of
1996 (PRWORA), which toughened eligibility criteria and had the effect of
untethering food stamps from cash assistance. Since 2000, that downward
trend has reversed, and stakeholders believe that the downturn in the U.S.
economy, coupled with changes in the program's rules and administration,
has led to an increase in the number of food stamp participants.

Determination of Eligibility and Benefits

Eligibility for participation in the Food Stamp Program is based on the
Department of Health and Human Services' poverty measures for households.
The caseworker must first determine the household's gross income, which
cannot exceed 130 percent of the poverty level for that year (or about
$1,799 per month for a family of three living in the contiguous United
States in fiscal year 2007). Then the caseworker must determine the
household's net income, which cannot exceed 100 percent of the poverty
level (or about $1,384 per month for a family of three living in the
contiguous United States in fiscal year 2007). Net income is determined by
deducting from gross income expenses such as dependent care costs, medical
expenses, utilities costs, and shelter expenses. In addition, there is a
limit of $2,000 in household assets, and basic program rules limit the
value of vehicles an applicant can own and still be eligible for the
program.3 If the household owns a vehicle worth more than $4,650, the
excess value is included in calculating the household's assets.4

FNS's Quality Control System Measures Improper Payments

FNS and the states share responsibility for implementing an extensive
quality control (QC) system used to measure the accuracy of Food Stamp
payments and from which state and national error rates are determined.
Under FNS's quality control system, the states calculate their payment
errors by drawing a statistical sample to determine whether participating
households received the correct benefit amount.5 The state's error rate is
determined by weighting the dollars paid in error divided by the state's
total issuance of food stamp benefits. Once the error rates are final, FNS
is required to compare each state's performance with the national error
rate and imposes penalties or provides incentives according to
specifications in law. The Farm Security and Rural Investment Act of 2002
(the 2002 Farm Bill) changed the Food Stamp Program's quality control
system by making only those states with persistently high error rates face
liabilities.6 The 2002 Farm Bill also provided for $48 million in bonuses
each year to be awarded to states with high or most improved performance,
including actions taken to correct errors, reduce error rates, improve
eligibility determinations, and other indicators of effective
administration as approved by the Secretary of Agriculture.7

3Households with elderly or disabled members are exempt from the gross
income limit and may have assets valued at $3,000.

4If a household has no other assets, its vehicle can be worth $6,650.
States also have the option to replace the federal food stamp vehicle
asset rule with the vehicle asset rule from their TANF assistance program
or use a categorical eligibility option as a way to exclude all vehicles.

5The food stamp error rate is calculated for the entire program, as well
as every state, by adding overpayments to those who are eligible for
smaller benefits, overpayments to those who are not eligible for any
benefit, and underpayments to those who do not get as much as they should.
The program also calculates a negative error rate, defined as the rate of
improper denials or terminations of benefits.

6Before the 2002 Farm Bill, states were penalized if their combined
payment error rate was higher than the national average. As a result,
about half of states were subject to financial sanctions each year. States
are required to either pay the sanction or provide additional state
funds--beyond their normal share of administrative costs--to be reinvested
in error reduction efforts, such as additional training in calculating
benefits for certain households. Under the 2002 Farm Bill, a state will be
subject to fiscal sanction if there is a 95 percent statistical
probability that the state's payment error rate exceeds 105 percent of the
national average for 2 consecutive years.

Trafficking

Every year, food stamp recipients exchange hundreds of millions of dollars
in benefits for cash instead of food with authorized retailers across the
country, a practice known as trafficking. In a typical trafficking
situation, a retailer gives a food stamp recipient a discounted amount of
cash--commonly 50 cents on the dollar--in exchange for food stamp benefits
and pockets the difference. By trafficking, retailers commit fraud and
undermine the primary purpose of the program, which is to help provide
food to low-income individuals and families. Recipients who traffic
deprive themselves and their families of the intended nutritional
benefits.

FNS has the primary responsibility for authorizing retailers to
participate in the Food Stamp Program, monitoring their compliance with
requirements, and administratively disqualifying those who are found to
have trafficked food stamp benefits. At the end of fiscal year 2005, more
than 160,000 retailers were authorized to accept food stamp benefits.
Supermarkets account for only about 22 percent of the authorized stores
but redeem the lion's share (about 86 percent) of food stamp benefits. To
become an authorized retailer, a store must offer on a continuing basis a
variety of foods in each of the four staple food categories--meats,
poultry or fish; breads or cereals; vegetables or fruits; and dairy
products--or 50 percent of its sales must be in a staple group such as
meat or bakery items. However, the regulations do not specify how many
food items retailers should stock. The store owner submits an application
and includes forms of identification such as copies of the owner's Social
Security card, driver's license, business license, liquor license, and
alien resident card. The FNS field office program specialist then checks
the applicant's Social Security number against FNS's database of
retailers, the Store Tracking and Redemption System, to see if the
applicant has previously been sanctioned in the Food Stamp Program. The
application also collects information on the type of business, store
hours, number of employees, number of cash registers, the types of staple
foods offered, and the estimated annual amount of gross sales and eligible
food stamp sales.

7The 2002 Farm Bill requires the Secretary to issue regulations for fiscal
year 2005 and thereafter that will establish criteria related to these
improved performances and be used to award performance bonus payments.

PRWORA required each state agency to implement an EBT system to
electronically distribute food stamp benefits, and the last state
completed its implementation in fiscal year 2004. Prior to EBT, recipients
used highly negotiable food stamp coupons to pay for allowable foods.
Under the EBT system, food stamp recipients receive an EBT card imprinted
with their name and a personal account number, and food stamp benefits are
automatically credited to the recipients' accounts once a month. In a
legitimate food stamp transaction, recipients run their EBT card, which
works much like a debit card, through an electronic point-of-sale machine
at the grocery checkout counter, and enter their secret personal
identification number to access their food stamp accounts. This authorizes
the transfer of food stamp benefits from a federal account to the
retailer's account to pay for the eligible food items. The legitimate
transaction contrasts with a trafficking transaction in which recipients
swipe their EBT card, but instead of buying groceries, they receive a
discounted amount of cash and the retailer pockets the difference.

In addition to approving retailers to participate in the program, FNS has
the primary responsibility for monitoring their compliance with
requirements and administratively disqualifying those who are found to
have trafficked food stamp benefits. FNS headquarters officials collect
and monitor EBT transaction data to detect suspicious patterns of
transactions by retailers. They then send any leads to FNS program
specialists in the field office who either work the cases themselves or
refer them to undercover investigators in the Retailer Investigations
Branch to pursue by attempting to traffic food stamps for cash.

States Have Made Progress Reducing Payment Errors, and Further Challenges Remain

The national payment error rate for the Food Stamp Program combines
states' overpayments and underpayments to program participants and has
declined by about 40 percent, from 9.86 percent in 1999 to a record low of
5.84 percent in 2005, in a time of increasing participation. FNS and the
states we reviewed have taken many approaches to improving food stamp
payment accuracy, most of which are parallel with internal control
practices known to reduce improper payments. Despite this progress,
improper food stamp payments continue to account for a large amount of
money--about $1.7 billion in 2005-- and similar error rate reductions may
prove challenging given that the program remains complex.

The Food Stamp Error Rate, Which Combines Overpayments and Underpayments, Has
Declined to a Record Low

The national payment error rate for the Food Stamp Program combines
states' overpayments and underpayments to program participants and has
declined by about 40 percent over the last 7 years, from 9.86 percent in
1999 to 5.84 percent in 2005 in a time of increasing participation (see
figure 2 below). If the 1999 error rate had been in effect in 2005, the
program would have made payment errors totaling over $2.8 billion rather
than the $1.7 billion it experienced.

Figure 2: Food Stamp Payment Errors Have Dropped over the Last 7 Years

Improper payments can be in the form of overpayments or underpayments to
food stamp recipients. In fiscal year 2005, food stamp payment errors
totaled about $1.7 billion in benefits. This sum represents about 6
percent of the total $28.6 billion in benefits provided that year to a
monthly average of 25.7 million low-income program participants. Of the
total $1.7 billion in payment error in fiscal year 2005, $1.3 billion, or
about 78 percent, were overpayments. Overpayments occur when eligible
persons are provided more than they are entitled to receive or when
ineligible persons are provided benefits. Underpayments, which occur when
eligible persons are paid less than they are entitled to receive, totaled
$374 million, or about 22 percent of dollars paid in error, in fiscal year
2005.

Error rates fell in 41 states and the District of Columbia, and 18 states
reduced their error rates by one-third or more between fiscal years 1999
and 2003. Further, the 5 states that issue the most food stamp benefits
reduced their error rates by an average of 36 percent during this period.
8 For example, Illinois' error rate dropped from 14.79 in 1999 to 4.87 in
2003, and New York's error rate dropped from 10.47 to 5.88 in those same
years. In addition, 21 states had error rates below 6 percent in 2003;
this is an improvement from 1999, when 7 states had error rates below 6
percent. However, payment error rates vary among states. Despite the
decrease in many states' error rates, some states continue to have high
payment error rates.

We found that almost two-thirds of the payment errors in the Food Stamp
Program are caused by caseworkers, usually when they fail to act on new
information or when they make mistakes when applying program rules, and
one-third are caused by participants, when they unintentionally or
intentionally do not report needed information or provide incomplete or
incorrect information (see fig. 3). As shown below, 5 percent of
participant-caused errors were referred for potential fraud investigations
in fiscal year 2003. Program complexity and other factors, such as the
lack of resources and staff turnover, can contribute to caseworker
mistakes. Despite the decrease in error rate in recent years, these
factors remained the key causes of payment error between 1999 and 2003. We
also found that income-related errors account for more than half of all
payment errors.

8These states are New York, Florida, Illinois, Texas, and California.

Figure 3: Caseworker- and Participant-Caused Errors in Fiscal Year 2003

FNS and States Have Taken Steps to Increase Payment Accuracy

We found that FNS and the states we reviewed have taken many approaches to
increasing food stamp payment accuracy, most of which are parallel with
internal control practices known to reduce improper payments.9 These
include practices to improve accountability, perform risk assessments,
implement changes based on such assessments, and monitor program
performance. Often, several practices are tried simultaneously, making it
difficult to determine which have been the most effective.

9See GAO, Strategies to Manage Improper Payments: Learning From Public and
Private Sector Organizations, GAO-02-69G (Washington, D.C.: October 2001).

States we reviewed adopted a combination of practices to prevent,
minimize, and address payment accuracy problems, such as

           o increasing the awareness of, and the accountability for, payment
           error;
           o analyzing quality control data to identify causes of common
           payment errors and develop corrective actions;
           o making automated system changes to prompt workers to obtain
           complete documentation from clients;
           o developing specialized change units that focus on acting upon
           reported case changes; and
           o verifying the accuracy of benefit payments calculated by state
           food stamp workers through supervisory and other types of case
           file reviews.

For example, in California, state and local officials employed a
combination of practices under each internal control component over the
last several years to bring about their improved error rate. State
officials reported expanding state oversight, hiring a contractor to
perform assessments and provide training to larger counties with higher
error rates, preparing detailed error analyses, and implementation of a
quality assurance case review system in Los Angeles County, which
accounted for 40 percent of the state's caseload. California state
officials credit the adoption of a combination of approaches as the reason
for the state's dramatic error rate reduction from 17.37 percent in fiscal
year 2001 to 6.38 in fiscal year 2005 as the number of cases increased.

In addition, 47 states have adopted some form of simplified reporting, one
of the options FNS and Congress made available to states, which has since
been shown to have contributed to the reduction in the payment error
rate.10 FNS and Congress made several options available to the states to
simplify the application and reporting process. 11 Under the simplified
reporting rule issued in November 2000 and expanded under the 2002 Farm
Bill, most households need only report changes between certification
periods if their new household income exceeds 130 percent of the federal
poverty level. This simplified reporting option can reduce a state's error
rate by minimizing the number of income changes that must be reported
between certifications and thereby reducing errors associated with
caseworker failure to act as well as participant failure to report
changes.

10If simplified reporting had not been implemented, FNS estimates suggest
that the payment error rate would likely be 1.2 to 1.5 points higher.
However, differences in policies and the prevalence of errors considerably
affect the potential gains from simplified reporting. For example, effects
are generally larger in states with policies that cover a large percentage
of the caseload and in those states that do not have the waiver to act on
all reported changes. FNS estimated that if all states adopted policies to
maximize the impact of simplified reporting, the payment error rate
reduction could have been larger, dropping by as much as 2.2 points.

FNS has taken several steps to increase payment accuracy, such as using
its quality control system to provide sanctions and incentives to
encourage states to reduce their payment error rates, tracking the success
of state initiatives, and providing information needed to facilitate
program improvement. FNS has long focused its attention on states'
accountability for error rates through its QC system by assessing
penalties and providing financial incentives. The administration of the QC
process and its system of performance bonuses and sanctions is credited as
being the single largest motivator of program behavior. In fiscal year
2005, 8 states were found to be in jeopardy of being penalized if their
fiscal year 2006 error rates do not improve. Some states have expressed
concern that they may improve their error rates and yet still be penalized
because the national rate continues to drop around them. In addition,
under its new performance bonus system, each fiscal year FNS has awarded a
total of $48 million to states, including $24 million to states with the
lowest and most improved error rates and $6 million to states with the
lowest and most improved negative error rate.12

11The 2002 Farm Bill also gave states the option of adopting provisions
that could simplify program administration and possibly reduce error
rates. These options include simplifying income and resources, housing
costs and deductions, reporting requirements, and utility allowances. See
GAO, Food Stamp Program: Farm Bill Options Ease Administrative Burden, but
Opportunities Exist to Streamline Participant Reporting Rules among
Programs, GAO-04-916 (Washington, D.C.: September 2004).

12The remaining $18 million was awarded for improvements not related to
error rates--the highest and most improved ratio of food stamp
participants compared with the number of persons in poverty and the
highest percentage of timely completed applications. Also, in addition to
monitoring the payment error rate, FNS estimates the rate at which
eligible households are improperly denied benefits, which is called the
negative error rate. According to a FNS QC official, this rate is not
included in the national food stamp payment error rate because it counts
the number of cases affected rather than the number of dollars given in
error.

FNS has also taken many actions to track the success of improvement
initiatives and to provide the information needed to facilitate program
improvement. FNS managers and regional office staff use QC data to monitor
states' performance over time, conduct annual reviews of state operations,
and where applicable, monitor the states' implementation of corrective
action plans. FNS, in turn, requires states to perform management
evaluations to monitor whether adequate corrective action plans are in
place at local offices to address the causes of persistent errors and
deficiencies. In addition, in November of 2003, FNS created a Payment
Accuracy Branch at the national level to work with FNS regions to suggest
policy and program changes and to monitor state performance. The branch
facilitates a National Payment Accuracy Workgroup with representatives
from each FNS regional office and headquarters who use QC data to review
and categorize state performance into one of three tiers.13 FNS has
recommended a specific level of increasing intervention and monitoring
approaches for each tier when error rates increase, and the FNS regional
offices report to headquarters on both state actions and regional
interventions quarterly.

FNS also provides and facilitates the exchange of information gleaned from
monitoring by

           o publishing a periodic guide to highlight the practices states
           are using to address specific problems;14 
           o sponsoring national and regional conferences and best practices
           seminars;
           o training state QC staff;
           o providing state policy training and policy interpretation and
           guidance; and
           o supporting adoption of program simplification options.

Once promising state practices have been identified, FNS also provides
funding to state and local food stamp officials to promote knowledge
sharing of good practices.

13Tier 1 states have an error rate under 6 percent, and tier 2 states have
an error rate of 6 percent or greater but do not fall into tier 3. States
are assigned to tier 3 when the lower limit of their error rate estimate
at the 90 percent confidence level is higher than 105 percent of the
national error rate estimate.

14U.S. Department of Agriculture, Food and Nutrition Service, Payment
Accuracy in the Food Stamp Program (Alexandria, Va.: September 2004).

Despite the progress in reducing payment errors, future similar error rate
reductions may prove challenging. The three major causes of errors have
remained the same over time and are closely linked to the complexity of
program rules and reporting requirements. As long as eligibility
requirements remain so detailed and complex, certain caseworker decisions
will be at risk of error. Moreover, participant-caused errors, which
constitute one-third of the overall national errors, are difficult to
prevent and identify.

Estimates Suggest Trafficking Has Declined, but FNS Could Further Enhance
Program Integrity

Since the early 1990s, trafficking has declined by about 74 percent. FNS
estimates that between 2002 and 2005, about $241 million in food stamp
benefits was trafficked annually, or about 1.0 cent per dollar of benefits
issued. Trafficking occurs more frequently in small convenience stores,
and often, we found, between store owners and food stamp recipients with
whom they were familiar. FNS has taken advantage of EBT and other new
technology to improve its ability to detect trafficking and disqualify
retailers who traffic, while law enforcement agencies have investigated
and referred for prosecution a decreasing number of traffickers, instead
focusing their efforts on fewer high-impact investigations. Despite the
progress FNS has made in combating retailer trafficking, the Food Stamp
Program remains vulnerable because retailers can enter the program
intending to traffic and do so, often without fear of severe criminal
penalties, as the declining number of investigations referred for
prosecution suggests.

FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has Declined and
That It Occurs More Frequently in Smaller Stores

The national rate of food stamp trafficking declined from about 3.8 cents
per dollar of benefits redeemed in 1993 to about 1.0 cent per dollar
during the years 2002 to 2005, as shown in table 1. Overall, the estimated
rate of trafficking at small stores is much higher than the estimated rate
for supermarkets and large groceries, which redeem most food stamp
benefits. The rate of trafficking in small stores is an estimated 7.6
cents per dollar and an estimated 0.2 cents per dollar in large stores.

Table 1: FNS Estimates Suggest That the Trafficking Rate Has Declined

                                       Food stamp                             
                                  benefits issued         Estimated amount of 
                                         annually         benefits trafficked 
                        Estimated                                    annually 
Calendar year trafficking rate    (Millions of                             
period              percentage        dollars)       (Millions of dollars) 
1993                       3.8          21,100                         812 
1996-1998                  3.5         19,627a                         657 
1999-2002                  2.5         16,139a                         393 
2002-2005                  1.0         23,213a                         241 

Source: FNS studies and GAO calculation.

aFNS reported that it annualized redemption data over the period of the
study but did not provide the annualized figures. We calculated the 3- and
4-year average of benefits redeemed for comparative purposes.

FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring, while
Other Federal Entities Have Focused on Fewer High-Impact Investigations

With the implementation of EBT, FNS has supplemented its traditional
undercover investigations by the Retailer Investigations Branch with cases
developed by analyzing EBT transaction data. The nationwide implementation
of EBT has given FNS powerful new tools to supplement its traditional
undercover investigations of retailers suspected of trafficking food stamp
benefits. FNS traditionally sent its investigators into stores numerous
times over a period of months to attempt to traffic benefits. However,
PRWORA gave FNS the authority to charge retailers with trafficking in
cases based solely on EBT transaction evidence, called "paper cases." A
major advantage of paper cases is that they can be prepared relatively
quickly and without multiple store visits.

These EBT cases now account for more than half of the permanent
disqualifications by FNS (see fig. 4). Although the number of trafficking
disqualifications based on undercover investigations has declined, these
investigations continue to play a key role in combating trafficking.
However, as FNS's ability to detect trafficking has improved, the number
of suspected traffickers investigated by other federal entities, such as
the USDA Inspector General and the U.S. Secret Service, has declined.
These entities have focused more on a smaller number of high-impact
investigations. As a result, retailers who traffic are less likely to face
severe criminal penalties or prosecution.15

Figure 4: As Trafficking Disqualifications Based on EBT Data Have
Increased, Those Based on Undercover Investigations Have Decreased

Despite the Progress That Has Been Made against Trafficking, Vulnerabilities
Still Exist in the Program

Despite the progress FNS has made in combating retailer trafficking, the
Food Stamp Program remains vulnerable because retailers can enter the
program intending to traffic and do so, often without fear of severe
criminal penalties, as the declining number of investigations referred for
prosecution suggests. FNS field office officials told us their first
priority is getting stores into the program to ensure needy people have
access to food, and therefore they sometimes authorize stores that stock
limited food supplies but meet the minimum requirements in areas with few
larger grocery stores. However, once authorized, some dishonest retailers
do not maintain adequate food stock and focus more on trafficking food
stamp benefits than on selling groceries, according to FNS officials, and
5 years may pass before FNS checks the stock again unless there is an
indication of a problem with the store.

15When trafficking is proved, FNS penalizes the store owners, usually by
permanent program disqualification. In limited circumstances, traffickers
may receive civil penalties. These penalties may be imposed if the
retailer had taken proper measures and can prove he was not involved in
trafficking. Civil money penalties may also be imposed against
disqualified owners who sell their stores before the expiration of the
disqualification period, because they have not completed their program
suspension penalty.

Oversight of retailers' entry into the program and early operations is
important because newly authorized retailers can quickly ramp up the
amount of food stamps they traffic, and there is no limit on the value of
food stamps a retailer can redeem in 1 month. At one field office location
where retailers are often innovative in their trafficking schemes, FNS
officials noticed that some retailers quickly escalated their trafficking
within 2 to 3 months after their initial authorization. As shown in figure
5, one disqualified retailer's case file we reviewed at that field office
showed the store went from $500 in monthly food stamp redemptions to
almost $200,000 within 6 months. Redemption activity dropped precipitously
after the trafficking charge letter was sent to the retailer in late
October of 2004. In its application for food stamp authorization, this
retailer estimated he would have $180,000 of total annual food sales, yet
the retailer was redeeming more than that each month in food stamp
benefits before being caught in a Retailer Investigations Branch
investigation.

Figure 5: Food Stamp Redemptions of a Newly Authorized Store Disqualified
for Trafficking

FNS has made good use of EBT transaction data. However, FNS has not
conducted the analyses to identify high risk areas and to target their
compliance-monitoring resources to the areas of highest risk. For example,
our analysis of FNS's database of retailers showed that of the 9,808
stores permanently disqualified from the Food Stamp Program, about 35
percent were in just 4 states: New York, Illinois, Texas, and Florida, yet
about 26 percent of food stamp recipients lived in those states. However,
FNS headquarters officials did not know the number of program specialists
in the field offices in these states who devote a portion of their time to
monitoring food stamp transactions and initiating paper cases.

In addition, some retailers and store locations have a history of program
violations that lead up to permanent disqualifications, but FNS did not
have a system in place to ensure these stores were quickly targeted for
heightened attention. Our analysis showed that, of the 9,808 stores that
had been permanently disqualified from the program, about 90 percent were
disqualified for their first detected offense. However, 9.4 percent of the
disqualified retailers had shown early indications of problems before
being disqualified. About 4.3 percent of these retailers had received a
civil money penalty, 4.3 percent had received a warning letter for program
violations, and 0.8 percent had received a temporary disqualification.16
Most of these stores were small and may present a higher risk of future
trafficking than others, yet FNS does not necessarily target them for
speedy attention.

Further, some store locations may be at risk of trafficking because a
series of different owners had trafficked there. After an owner was
disqualified, field office officials told us the store would reopen under
new owners who continued to traffic with the store's clientele. As table 2
shows, our analysis of FNS's database of retailers found that about 174,
or 1.8 percent, of the store addresses had a series of different owners
over time who had been permanently disqualified for trafficking at that
same location, totaling 369 separate disqualifications. In one case, a
store in the District of Columbia had 10 different owners who were each
disqualified for trafficking, consuming FNS's limited
compliance-monitoring resources.

Table 2: Some Store Locations Have Had Multiple Retailers That Engaged in
Trafficking

Number of different owners at same address          Number of disqualified 
disqualified                                                     addresses 
2                                                                      162 
3                                                                       10 
5                                                                        1 
10                                                                       1 
Total                                                                  174 

Source: GAO analysis of FNS data.

Our analysis of the data on these stores with multiple disqualified owners
indicates that FNS officials found this type of trafficking in a handful
of cities and states. Almost 60 percent of repeat store locations were in
6 states, and 44 percent were in 8 cities, often concentrated in small
areas. For example, 14 repeat store locations were clustered in downtown
areas of both Brooklyn and Baltimore. However, it is not clear whether
these data indicate heightened efforts of compliance staff or whether
trafficking is more common in these areas. Regardless, early monitoring of
high-risk locations when stores change hands could be an efficient use of
resources.

16Civil money penalties may be imposed against a store in lieu of
disqualification. FNS collected almost $1.7 million in civil money
penalties in fiscal year 2005. Also, warning letters are sent for lesser
violations of program regulations such as charging food stamp recipients
higher prices than other customers or when the evidence is too limited to
warrant a disqualification. Temporary disqualifications are generally for
selling ineligible goods such as paper plates, tobacco, or alcohol or
providing credit to food stamp recipients.

In addition, states' lack of focus can facilitate vendor trafficking.
Paper cases often identify recipients suspected to have trafficked their
food stamp benefits with a dishonest retailer, and some FNS field offices
send a list of those recipients to the appropriate state. In response,
some states actively pursue and disqualify these recipients. However, FNS
field offices do not always send lists of suspected individual traffickers
to states or counties administering the program, and not all states
investigate the individuals on these lists. Instead of focusing on food
stamp recipients who traffic their benefits, states are using their
resources to focus on recipients who improperly collect benefits,
according to FNS officials. This inaction by some states allows recipients
suspected of trafficking to continue the practice, and such inaction also
leaves a pool of recipients ready and willing to traffic their benefits as
soon as a disqualified store reopens under new management.

Finally, FNS penalties alone may not be sufficient to deter traffickers.
The most severe FNS penalty that most traffickers face is disqualification
from the program, and FNS must rely on other entities to conduct
investigations that could lead to prosecution. For example, in the
food-stamp-trafficking ramp-up case previously cited, this retailer
redeemed almost $650,000 of food stamps over the course of 9 months before
being disqualified from the program in November 2004. As of August 2006,
there was no active investigation of this retailer.

Concluding Observations

Improper food stamp payments and trafficking of benefits have declined in
a time of rising participation, and although progress has been made,
ensuring program integrity will continue to be a fundamental challenge
facing the program. We found that payment error rates have declined
substantially as FNS and states have taken steps to improve payment
accuracy and that future reductions may prove challenging. Attention from
top USDA management as well as continued support and assistance from FNS
will likely continue to be important factors in further reductions. In
addition, if error rates continue to decrease, this trend will continue to
put pressure on states to improve because penalties are assessed using the
state's error rate as compared with the national average. We also found
that FNS, using EBT data, has made significant progress in taking
advantage of new opportunities to monitor and disqualify traffickers.
However, a more focused effort to target and disqualify these stores could
help FNS meet its continuing challenge of ensuring that stores are
available and operating in areas of high need while still maintaining
program integrity. Given the size of the Food Stamp Program, the costs to
administer it, and the current federal budget deficit, achieving program
goals more cost-effectively may become more important. FNS and the states
will continue to face a challenge in balancing the goals of payment
accuracy, increasing program participation rates, and the need to contain
program costs.

To reduce program vulnerabilities and better target its limited
compliance-monitoring resources, we recommended in our October 2006 report
on trafficking that FNS develop additional criteria to identify stores
most likely to traffic; conduct risk assessments, using compliance and
other data, to systematically identify stores and areas that meet these
criteria, and allocate resources accordingly; and provide more targeted
and early oversight of stores determined most likely to engage in
trafficking.

To provide further deterrence for trafficking, we recommended that FNS
work to develop a strategy to increase the penalties for trafficking,
working with the Inspector General as needed, and consider developing
legislative proposals if the penalties entail additional authority.

To promote state efforts to pursue recipients suspected of trafficking and
thereby reduce the pool of recipient traffickers, we recommended that FNS
ensure that FNS field offices report to states those recipients who are
suspected of trafficking, and revisit the incentive structure to encourage
states to investigate and take action against recipients who traffic.

Department of Agriculture officials generally agreed with our findings,
conclusions, and recommendations but raised a concern regarding our
recommendations on more efficient use of their compliance-monitoring
resources. They stated that they believe they do have a strategy for
targeting resources through their use of EBT transaction data to identify
suspicious transaction patterns. We believe that FNS has made good
progress in its use of EBT transaction data. However, it is now at a point
where it can begin to formulate more sophisticated analyses. For example,
these analyses could combine EBT transaction data with other available
data, such as information on stores with minimal inventory, to develop
criteria to better and more quickly identify stores at risk of
trafficking.

Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions that you or other members of the Committee may have.

GAO Contact and Staff Acknowledgments

For future contacts regarding this testimony, I can be contacted at (202)
512-7215. Key contributors to this testimony were Diana Pietrowiak and
Cathy Roark.

Related GAO Products:

Food Stamp Trafficking: FNS Could Enhance Program Integrity by Better
Targeting Stores Likely to Traffic and Increasing Penalties. [23]GAO-07-53
. Washington, D.C.: October 13, 2006.

Improper Payments: Federal and State Coordination Needed to Report
National Improper Payment Estimates on Federal Programs. [24]GAO-06-347 .
Washington, D.C.: April 14, 2006.

Food Stamp Program: States Have Made Progress Reducing Payment Errors, and
Further Challenges Remain. [25]GAO-05-245 . Washington, D.C.: May 5, 2005.

Food Stamp Program: Farm Bill Options Ease Administrative Burden, but
Opportunities Exist to Streamline Participant Reporting Rules among
Programs. [26]GAO-04-916 . Washington, D.C.: September 16, 2004.

Food Stamp Program: Steps Have Been Taken to Increase Participation of
Working Families, but Better Tracking of Efforts Is Needed. [27]GAO-04-346
. Washington, D.C.: March 5, 2004.

Financial Management: Coordinated Approach Needed to Address the
Government's Improper Payments Problems. [28]GAO-02-749 . Washington,
D.C.: August 9, 2002.

Food Stamp Program: States' Use of Options and Waivers to Improve Program
Administration and Promote Access. [29]GAO-02-409 . Washington, D.C.:
February 22, 2002.

Executive Guide: Strategies to Manage Improper Payments: Learning from
Public and Private Sector Organizations. [30]GAO-02-69G . Washington,
D.C.: October 2001.

Food Stamp Program: States Seek to Reduce Payment Errors and Program
Complexity. [31]GAO-01-272 . Washington D.C.: January 19, 2001.

Food Stamp Program: Better Use of Electronic Data Could Result in
Disqualifying More Recipients Who Traffick Benefits. [32]GAO/RCED-00-61 .
Washington D.C.: March 7, 2000.

Food Assistance: Reducing the Trafficking of Food Stamp Benefits.
[33]GAO/T-RCED-00-250 . Washington D.C.: July 19, 2000.

Food Stamp Program: Information on Trafficking Food Stamp Benefits.
[34]GAO/RCED-98-77 . Washington D.C.: March 26, 1998.

(130640)

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Highlights of [42]GAO-07-422T , a testimony before the Senate Committee on
Agriculture, Nutrition, and Forestry

January 31, 2007

FOOD STAMP PROGRAM

Payment Errors and Trafficking Have Declined despite Increased Program
Participation

The U.S. Department of Agriculture's (USDA) Food Stamp Program is intended
to help low-income individuals and families obtain a better diet by
supplementing their income with benefits to purchase food. USDA's Food and
Nutrition Service (FNS) and the states jointly implement the Food Stamp
Program, which is to be reauthorized when it expires in fiscal year 2007.
This testimony discusses our past work on two issues related to ensuring
integrity of the program: (1) improper payments to food stamp
participants, and (2) trafficking in food stamp benefits.

This testimony is based on a May 2005 report on payment errors (
[43]GAO-05-245 ) and an October 2006 report on trafficking ( [44]GAO-07-53
). For the payment error report, GAO analyzed program quality control data
and interviewed program stakeholders, including state and local officials.
For the trafficking report, GAO interviewed agency officials, visited
field offices, conducted case file reviews, and analyzed data from the FNS
retailer database.

The national payment error rate for the Food Stamp Program combines
states' overpayments and underpayments to program participants and has
declined by about 40 percent between 1999 and 2005, from 9.86 percent to a
record low of 5.84 percent, due in part to options made available to
states that simplified program reporting rules. In 2005, the program made
payment errors totaling about $1.7 billion. However, if the 1999 error
rate was in effect in 2005, program payment errors would have been $1.1
billion higher. FNS and the states we reviewed have taken several steps to
improve food stamp payment accuracy, most of which are consistent with
internal control practices known to reduce improper payments. These
include practices to improve accountability, perform risk assessments,
implement changes based on such assessments, and monitor program
performance.

FNS estimates indicate that the national rate of food stamp trafficking
declined from about 3.8 cents per dollar of benefits redeemed in 1993 to
about 1.0 cent per dollar during the years 2002 to 2005 and that
trafficking occurs more frequently in smaller stores. FNS has taken
advantage of electronic benefit transfer and other new technology to
improve its ability to detect trafficking and disqualify retailers who
traffic. Law enforcement agencies have investigated and referred for
prosecution a decreasing number of traffickers; they are instead focusing
their efforts on fewer high-impact investigations. Despite the progress
FNS has made in combating retailer trafficking, the Food Stamp Program
remains vulnerable because retailers can enter the program intending to
traffic and do so, often without fear of severe criminal penalties, as the
declining number of investigations referred for prosecution suggests.

While both payment errors and trafficking of benefits have declined in a
time of rising participation, ensuring program integrity remains a
fundamental challenge facing the Food Stamp Program. To reduce program
vulnerabilities and ensure limited compliance-monitoring resources are
used efficiently, GAO recommended in its October 2006 trafficking report
that FNS take additional steps to target and provide early oversight of
stores most likely to traffic; develop a strategy to increase penalties
for trafficking, working with the Inspector General as needed; and promote
state efforts to pursue recipients suspected of trafficking. FNS generally
agreed with GAO's findings, conclusions, and recommendations. However, FNS
believes it does have a strategy for targeting resources through their use
of food stamp transaction data to identify suspicious transaction
patterns. GAO believes that FNS has made good progress in its use of these
transaction data; however, it is now at a point where it can begin to
formulate more sophisticated analyses.

References

Visible links
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-05-245
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-07-53
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-07-53
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-06-347
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-05-245
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-04-916
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-04-346
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-02-749
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-02-409
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-02-69G
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-01-272
  32. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-00-61
  33. http://www.gao.gov/cgi-bin/getrpt?GAO/T-RCED-00-250
  34. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-98-77
  35. http://www.gao.gov/
  36. http://www.gao.gov/
  37. http://www.gao.gov/fraudnet/fraudnet.htm
  38. file:///home/webmaster/infomgt/d07422t.htm#mailto:[email protected]
  39. file:///home/webmaster/infomgt/d07422t.htm#mailto:[email protected]
  40. file:///home/webmaster/infomgt/d07422t.htm#mailto:[email protected]
  41. http://www.gao.gov/cgi-bin/getrpt?GAO-07-422T
  42. http://www.gao.gov/cgi-bin/getrpt?GAO-07-422T
  43. http://www.gao.gov/cgi-bin/getrpt?GAO-05-245
  44. http://www.gao.gov/cgi-bin/getrpt?GAO-07-53
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