Food Assistance: Potential Impacts of Alternative Systems for Delivering
Food Stamp Program Benefits (Chapter Report, 12/16/94, GAO/RCED-95-13).

Both electronic benefits transfer and cash-out alternatives can reduce
fraud, waste, and abuse associated with food stamp coupons, but the
reductions possible under the two alternatives have not been quantified
by the Agriculture Department's Food and Consumer Service. Neither
alternative will reduce the overpayment of benefits--which totaled $1.8
billion in 1993--that occurs from fraud, waste, and abuse in the process
for determining eligibility and benefits. Administratively, cash-out is
the least expensive of the three systems for delivering benefits.
Whether electronic benefits transfer will be less costly to run than the
coupon system is unclear. Also, the popularly held assumption that
electronic benefits transfer and cash-out will boost program
participation has not been proven. With regard to ensuring that benefits
are actually used to buy food, the electronic benefits transfer system
appears superior to both the coupon and cash-out-systems. Currently,
momentum is building to implement a new federal electronic benefits
delivery system that would provide government payments and benefits for
a host of federal and state programs. In GAO's opinion, the future value
and utility of electronic benefits transfer are in the larger arena of a
multi-program benefit delivery mechanism instead of in a system for
delivery food assistance benefits alone.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-95-13
     TITLE:  Food Assistance: Potential Impacts of Alternative Systems 
             for Delivering Food Stamp Program Benefits
      DATE:  12/16/94
   SUBJECT:  Food stamp programs
             State-administered programs
             Overpayments
             Food relief programs
             Administrative costs
             Program abuses
             Electronic funds transfer
             Cost control
             Erroneous payments
             Welfare recipients
IDENTIFIER:  Food Stamp Fraud Reduction Act of 1993
             USDA Food Stamp Quality Control System
             National Performance Review
             AFDC
             Reading (PA)
             New Mexico
             Ramsey County (MN)
             Dayton (OH)
             Maryland
             Alabama Avenues to Self-Sufficiency through Employment and 
             Training Services Project
             Alabama Pure Cash-Out Demonstration Project
             San Diego Food Stamp Cash-Out Demonstration Project
             Washington State Family Independence Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

December 1994

FOOD ASSISTANCE - POTENTIAL
IMPACTS OF ALTERNATIVE SYSTEMS FOR
DELIVERING FOOD STAMP PROGRAM
BENEFITS

GAO/RCED-95-13

Alternative Systems for Food Stamps


Abbreviations
=============================================================== ABBREV

  AFDC - Aid to Families with Dependent Children
  ASSETS - Alabama Avenues to Self-Sufficiency through Employment and
  Training Services
  EBT - electronic benefits transfer
  FCS - Food and Consumer Service
  FIP - Family Independence Program
  GAO - General Accounting Office
  OIG - Office of Inspector General
  OTA - Office of Technology Assessment
  PIN - personal identification number
  POS - point-of-sale
  SSI - Supplemental Security Income
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER


B-256367

December 16, 1994

Congressional Committees

This report responds to your request for information on fraud, waste,
and abuse in the Food Stamp Program and the potential of two
alternative benefit delivery systems--electronic benefits transfer
and cash-out--to reduce fraud, waste, and abuse in the current
coupon-based Program.  This report also examines the impact that
these alternatives would have on (1) the costs of administering the
Program, (2) the number of participants in the Program, and (3) the
assurance that benefits are used to purchase food.  A separate, more
detailed report on the fraud, waste, and abuse that occurs during the
process for determining applicants' eligibility and benefits,
together with a more detailed examination of the processes used to
approve and monitor retail stores allowed to redeem food stamps, will
be provided early next year. 

As arranged with your offices, unless you announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter.  At that time, we will send copies to
the appropriate House and Senate committees and subcommittees;
interested Members of Congress; the Secretaries of Agriculture and
the Treasury; the Director of the U.S.  Secret Service; the
Postmaster General; the Director, Office of Management and Budget;
and other interested parties.  We will make copies available to
others upon request. 

This work was performed under the direction of John W.  Harman,
Director, Food and Agriculture Issues, who can be reached at (202)
512-5138 if you or your staff have any questions.  Major contributors
to this report are listed in appendix VII. 

Sincerely yours,

Keith O.  Fultz

List of Committees

The Honorable Patrick J.  Leahy
Chairman
The Honorable Richard G.  Lugar
Ranking Minority Member
Committee on Agriculture, Nutrition
 and Forestry
United States Senate

The Honorable E (Kika) de la Garza
Chairman
The Honorable Pat Roberts
Ranking Minority Member
Committee on Agriculture
House of Representatives


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Food Stamp Program is one of the nation's largest welfare
programs, currently providing benefits to about 1 out of every 10
Americans.  In fiscal year 1993, federal costs for the Program were
almost $24.8 billion.  Because of the Program's rising cost and
vulnerability to fraud, waste, and abuse, the House Committee on
Agriculture and the Senate Committee on Agriculture, Nutrition and
Forestry asked GAO to examine two alternatives to the current
coupon-based system for delivering benefits--(1) the use of
electronic fund transfer technologies, referred to as electronic
benefits transfer, and (2) the distribution of benefits by check,
referred to as cash-out.  GAO was also asked to examine the effects
that these alternatives might have on the Program's administrative
costs, the number of participants in the Program, and the assurance
that benefits are actually used for food. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

The Program is administered by the U.S.  Department of Agriculture's
(USDA) Food and Consumer Service (FCS) in partnership with the
states.  FCS provides nationwide criteria for determining who is
eligible for assistance and how much in benefits each participant is
entitled to receive.  The states are responsible for the day-to-day
administration of the Program at the local levels.  The federal
government pays all of the costs of providing benefits and shares
with the states in the costs of administering the Program. 

GAO's review focused on FCS-sponsored electronic benefits transfer
and cash-out demonstration projects.  In analyzing fraud, waste, and
abuse, GAO focused on the (1) overpayments that occur during the
eligibility and benefit determination process, (2) illegal use of
benefits after they are issued, (3) counterfeiting of food stamps,
and (4) theft of coupons from the mail. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Both the electronic benefits transfer and cash-out alternatives can
reduce certain types of fraud, waste, and abuse that occur in the
currently used coupon system for delivering benefits, but the
reductions possible under the two alternatives have not been
quantified under FCS' demonstration projects.  Neither alternative
will reduce the overpayment of benefits--which was about $1.8 billion
in 1993--that occurs from fraud, waste, and abuse in the process for
determining eligibility and benefits.  Administratively, cash-out is
the least expensive of the three systems for delivering benefits. 
Whether electronic benefits transfer will be less expensive to
administer than the coupon system is unclear on the basis of
demonstrations to date.  Also, the popularly held assumption that
electronic benefits transfer and cash-out will increase participation
in the Program has not been substantiated in the demonstrations. 
With regard to the Program's objective of ensuring that benefits are
actually used to purchase food, the electronic benefits transfer
system appears superior to both the coupon and cash-out systems. 

Currently, momentum is building to implement a new federal electronic
benefits delivery system that would provide government benefits and
payments for a host of federal and state programs.  In GAO's opinion,
the future value and utility of electronic benefits transfer are in
the larger arena of a multi-program benefit delivery mechanism
instead of in a system for delivering food assistance benefits alone. 


   GAO ANALYSIS
---------------------------------------------------------- Chapter 0:4


      ELECTRONIC BENEFITS TRANSFER
      AND CASH-OUT CAN REDUCE BUT
      NOT ELIMINATE FRAUD, WASTE,
      AND ABUSE
-------------------------------------------------------- Chapter 0:4.1

There is ample evidence that the current coupon-based Program is
vulnerable to fraud, waste, and abuse; however, it is not possible to
determine precisely how much is lost each year as a result.  FCS'
estimates show that for the 6-year period covering fiscal years
1988-93, $7.44 billion in benefits was issued to ineligible
households and to households who received more benefits than they
should have.  About $1.78 billion, or 24 percent of the overissued
benefits, was given to individuals who intentionally provided
inaccurate information when seeking benefits.  The remaining $5.66
billion in overpayments occurred because of recipients' unintentional
errors in providing eligibility information or state agency
caseworkers' errors in determining applicants' eligibility and
benefit levels.  GAO's review of electronic benefits transfer and
cash-out projects found that the process for determining applicants'
eligibility and benefits was the same as that used in the
coupon-based system.  Thus, overpayments due to fraudulent, abusive,
or wasteful behaviors in this part of the Program will likely
continue under electronic benefits transfer or cash-out. 

Available law enforcement evidence indicates that a considerable
number of the food stamps issued each year are sold or traded for
illegal items--referred to as trafficking--thereby diverting food
assistance benefits from their intended use.  Because of the nature
of this misuse, there is no practical way to precisely estimate the
dollar value of trafficked food stamps.  Pronouncements that about 10
percent of food stamp benefits--about $2 billion--are used illegally
each year have been widely reported in the media, but GAO could not
find evidence to corroborate this estimate.  Under the electronic
benefits transfer alternative, the need for a debit card and a
personal identification number to gain access to benefits makes the
redemption of trafficked or stolen benefits more difficult and should
reduce this type of fraud and abuse.  But such reductions have yet to
be quantitatively demonstrated.  In fact, trafficking continues to
occur at electronic benefits transfer demonstration projects. 
Cash-out eliminates trafficking altogether, since participants are
given cash instead of coupons, but there is no guarantee that
recipients will not abuse the Program by using their benefits for
nonfood purchases.  It should be noted that trafficking does not
directly affect the costs of providing benefits because illegally
used coupons are redeemed only for their face value by the U.S. 
Treasury.  But efforts to combat trafficking do affect the Program's
administrative costs, which can be extensive. 

Although losses to the Program due to the counterfeiting of food
stamp coupons and mail theft are not significant, electronic benefits
transfer and cash-out could significantly reduce the fraud and abuse
that occur when food stamps are stolen from the mail and used by
unauthorized persons. 


      CASH-OUT REDUCES
      ADMINISTRATIVE COSTS
-------------------------------------------------------- Chapter 0:4.2

Three of the cash-out demonstrations compared the administrative
costs of providing benefits under cash-out with those under the
coupon system and found that administrative costs were reduced for
all three demonstrations.  Although not projectable nationwide, GAO's
analysis of the projects' reports shows that reductions in federal
and state administrative costs at the three cash-out projects ranged
from 31 to 62 percent.  The cost savings were primarily attributable
to eliminating the need to print, control, and manage coupons.  The
cash-out option would also eliminate millions of dollars spent each
year in authorizing and monitoring retail stores participating in the
Program and in investigating food stamp trafficking.  The
administrative costs of electronic benefits transfer, however, remain
unclear.  GAO found that when the system's startup costs are
considered, the costs of delivering benefits at three of the five
electronic benefits transfer projects exceeded the costs of the
coupon-based systems they replaced. 

Complicating the electronic benefits transfer cost equation is the
Federal Reserve Board's February 28, 1994, rule that electronic
benefits transfer users should be afforded the same consumer
protection for lost or stolen benefit cards as is provided to bank
card users.  This rule could shift the responsibility for
participants' losses of benefits exceeding $50 from participants to
the states.  Consequently, millions of dollars could be added to
states' costs once the rule becomes mandatory on March 1, 1997. 


      PARTICIPATION IN THE PROGRAM
      HAS NOT INCREASED UNDER
      ALTERNATIVES
-------------------------------------------------------- Chapter 0:4.3

A large number of people are eligible for food stamps but do not
apply for benefits.  Some believe that if food stamp coupons are
replaced with another benefit delivery system, more eligible people
will apply for benefits, which would lead to an increase in the
Program's benefit costs.  Although this may be a popular assumption,
GAO found no evidence that participation in the Program increased
because of electronic benefits transfer or cash-out. 


      ELECTRONIC BENEFITS TRANSFER
      IS BEST FOR ENSURING THAT
      BENEFITS ARE USED FOR FOOD
-------------------------------------------------------- Chapter 0:4.4

Electronic benefits transfer increases the likelihood that
participants will actually use food assistance benefits to purchase
food when compared with the coupon system.  This is because
electronic benefits transfer requires a personal identification
number and a debit card to use one's benefits, thus making the
redemption of stolen or trafficked benefits more difficult.  Also,
electronic benefits transfer allows for deducting the exact amount of
the food purchases from benefits, thereby eliminating the need to
provide participants with cash change (of up to 99 cents) under the
coupon system, which could be used for nonfood purposes.  However,
evidence does not precisely measure the impact on this goal of the
Program.  Cashing-out food stamp benefits completely severs the link
between benefits and food purchases and is likely to result in a
decrease in the amount of benefits that participants spend on food. 
Reductions in food expenditures were noted at three of the four
cash-out demonstrations.  However, because of the wide variation in
reductions at the three projects, the precise impact is difficult to
quantify. 


      MOMENTUM FOR ELECTRONIC
      BENEFITS TRANSFER IS GROWING
-------------------------------------------------------- Chapter 0:4.5

Nine states now operate electronic benefits transfer projects or
systems, and over 25 other states have electronic benefits transfer
activities under way.  Those involved in these
demonstrations--financial institutions, food retailers, and
recipients--prefer this system over coupons.  In May 1994, the
Federal Electronic Benefits Transfer Task Force issued its plan for a
nationwide electronic benefits transfer system for delivering not
only food stamp benefits but also other direct federal and state cash
benefits.  The report assumes a sharing of implementation costs
between the government and the private sector and estimates the
federal share to be about $83 million.  Once implemented, the Task
Force projects annual federal savings of $195 million. 

GAO's February 2, 1994, testimony presented to the Senate Committee
on Agriculture, Nutrition and Forestry concluded that if electronic
benefits transfer systems are implemented solely to distribute food
program benefits, they could be more costly than the current
coupon-based system.  GAO further stated, and continues to believe,
that the greatest utility and value for electronic benefits transfer
is in an expanded system that provides for the delivery of multiple
government program benefits. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report contains no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

USDA, in written comments, asked that GAO clarify the treatment of
several issues in the report.  Specifically, USDA asked that GAO make
it clear that (1) there is no evidence to corroborate the estimates
of food stamp trafficking, (2) neither the electronic benefits
transfer nor the cash-out alternative will reduce errors in the
overpayment of benefits, (3) cash-out will not ensure that benefits
are used for food, and (4) cost-effectiveness was not an objective of
early electronic benefits transfer demonstrations.  Also, USDA
provided information on its recent initiatives to reduce the
overpayment of benefits.  GAO used this additional information to
clarify the report where appropriate and update its information.  The
U.S.  Secret Service, in written comments, and the U.S Postal
Service, in oral comments, generally agreed with GAO's analysis and
conclusions. 


INTRODUCTION
============================================================ Chapter 1

The Food Stamp Program provides monthly benefits to millions of
financially needy households who meet specific income, asset, and
employment-related eligibility requirements.\1 With federal
expenditures of $24.8 billion and an average monthly caseload of 27
million individuals in fiscal year 1993, the Food Stamp Program ranks
as one of the nation's largest social welfare programs and is by far
the largest food assistance program. 

Numerous reports have been issued on fraud, waste, and abuse in the
Program since its beginning over 30 years ago.  Fraud, waste, and
abuse issues generally have centered on food stamp recipients who (1)
receive benefits when they are not eligible, (2) receive more
benefits than warranted, or (3) use their benefits for nonfood
purchases.  In recent years, concern has heightened regarding the
vulnerabilities of the current coupon-based system of delivering
benefits as well as the current system's efficiency and
effectiveness.  In recognition of these concerns, the U.S. 
Department of Agriculture's (USDA) Food and Consumer Service (FCS),\2
with congressional approval, and in cooperation with various states,
has been testing and evaluating variations of two alternative systems
for delivering benefits.  The two alternatives focus on (1) the use
of electronic fund transfer systems--referred to as electronic
benefit transfer (EBT)--which use some form of debit card to deliver
benefits and (2) the use of direct cash payments to recipients in the
form of a check--referred to as "cash-out."


--------------------
\1 The basic food stamp beneficiary unit is the household.  A food
stamp household can either be an individual living alone or a group
of individuals living together who customarily purchase food and
prepare meals together.  Unrelated co-residents and certain related
co-residents may apply and be treated as separate households if they
purchase food and prepare meals separately. 

\2 Prior to USDA's October 1994 reorganization, the Food and
Nutrition Service was the name of the USDA organization responsible
for administering food assistance programs.  As part of the
reorganization, the Food and Nutrition Service was renamed the Food
and Consumer Service. 


   FOOD STAMP PROGRAM'S
   ADMINISTRATION
---------------------------------------------------------- Chapter 1:1

The Food Stamp Program is administered by FCS in partnership with
state and local governments.  Initiated as a pilot program in 1961
and made permanent in 1964, the initial goals of the Program were to
boost needy families' food-purchasing power and assist the ailing
agricultural economy.  The goals of the Program have shifted over the
years, however, and today the Program's primary goal is to increase
low-income households' food-purchasing power and, by extension, the
nutritional quality of their diets.  At the same time, however, the
goal of ensuring that benefits are used to purchase food--and only
food--remains a basic tenet of the Program. 

The Program provides more assistance than all the other 13 USDA food
assistance programs combined.  Most of the people who benefit from
food stamps are children or the elderly.  In fiscal year 1992, the
latest fiscal year for which complete data are available, 59 percent
of those receiving food stamps were children under 18 and elderly
participants age 60 or over.  Furthermore, nearly 40 percent of the
recipients' households had monthly incomes below 50 percent of the
federal poverty standards, and 80 percent had no earned income. 


      FEDERAL ROLE
-------------------------------------------------------- Chapter 1:1.1

The federal government funds all of the Program's benefits and shares
with the states in the administrative costs of distributing benefits
to eligible households.  With regard to administrative expenses, the
federal government pays all the costs for printing and distributing
food stamp coupons to the states and for destroying the coupons after
they are used.  In addition, the federal government generally pays 50
percent of the costs incurred by states in administering the Program. 
These state costs include certifying households for eligibility,
distributing benefits, and conducting quality control activities.  In
fiscal year 1993, the federal government spent $1.8 billion on
administration and oversight of the Program. 

As part of its management responsibilities, FCS promulgates the
Program's regulations and provides technical assistance to states. 
It also is responsible for oversight of the Program.  In this regard,
FCS monitors retailers that are authorized to redeem food stamp
coupons to ensure that they comply with the Program's regulations. 
Retailers suspected of abusing the Program are referred to FCS'
Compliance Branch for investigation.  In addition to FCS'
retailer-related oversight activities, USDA's Office of Inspector
General (OIG) investigates individuals and retailers involved in
misusing food stamp coupons.  FCS has also established a Quality
Control System to monitor the accuracy of states' and local
authorities' data in determining the eligibility and benefit levels
of the households applying for and receiving food stamps. 


      STATE ROLE
-------------------------------------------------------- Chapter 1:1.2

States have primary responsibility for the day-to-day administration
of the Program.  Generally, a state agency operates the Program
either directly or by delegating these responsibilities to local
governments, usually counties.  Using nationwide eligibility criteria
provided by FCS, state and local caseworkers evaluate each food stamp
application to determine a household's eligibility and to ensure that
the proper level of benefits is authorized.  Food stamp coupons are
issued to recipients in person or by mail. 

The states also share in responsibilities regarding the Program's
integrity.  Specifically, they are responsible for investigating and
prosecuting individuals suspected of falsifying information on the
number of people in their household or their economic situation to
obtain food stamps.  States often work with FCS or the OIG in
investigating abuse in the Program. 


   PRIOR GAO AND OIG REPORTS
---------------------------------------------------------- Chapter 1:2

In the past, we and the OIG have reported on fraud, waste, and abuse
in the Program.  Since 1977, we have completed over 50 reviews of the
Food Stamp Program and recommended a number of corrective actions to
reduce fraud, waste, and abuse.  In 1977, we reported that the
federal government was losing over half a billion dollars annually
because of overissued food stamp benefits.\3 Again in 1983 and 1986,
we pointed out that waste and abuse in the Program was costing
billions of dollars.\4

The OIG has devoted even more time and resources to auditing and
investigating the Program.  Since 1979, the OIG has completed more
than 440 audits of the Program and devoted a significant amount of
investigative resources to fraud and abuse in the Program.  According
to the OIG, the Program is targeted for audits and investigations
because of the large dollar amounts involved and the opportunities
for waste and abuse at all points in the system.  In fiscal year
1993, more than 40 percent of the OIG's audit and investigative
efforts were devoted to the Program. 


--------------------
\3 The Food Stamp Program:  Overissued Benefits Not Recovered and
Fraud Not Punished (CED-77-112, July 18, 1977). 

\4 Need for Greater Efforts to Recover Cost of Food Stamps Obtained
Through Error or Fraud (RCED-83-40, Feb.  4, 1983) and Benefit
Overpayments:  Recoveries Could Be Increased in the Food Stamp
Program and AFDC Programs (GAO/RCED-86-17, Mar.  14, 1986). 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:3

The Chairmen and Ranking Minority Members of the House Committee on
Agriculture and the Senate Committee on Agriculture, Nutrition and
Forestry asked us to examine two possible alternative systems for
delivering food stamp benefits--EBT and cash-out.  Specifically, they
asked us to assess whether these alternatives might reduce fraud,
waste, and abuse in the Program.  They also asked us to assess what
effect the alternatives might have on the costs of administering the
Program, participation in the Program, and the Program's goal of
ensuring that food stamp benefits are actually used to purchase food. 

In conducting our review, we first focused on the current
coupon-based Program to develop a baseline by which we could compare
the current Program with the two alternatives we were asked to
evaluate.  In pursuing this objective, we determined how the
coupon-based Program operated and gathered information on the
Program's administrative costs, participation in the Program, and the
goals of the Program.  To accomplish these tasks, we interviewed
officials from USDA's FCS and OIG and seven state/local agencies
responsible for operating the Food Stamp Program.  The agencies
visited were the Alabama Department of Human Resources; Maryland
Department of Human Resources; Montgomery County (Dayton, Ohio)
Department of Human Services; New Mexico Department of Human
Services; Pennsylvania Department of Public Welfare; San Diego
County, California, Department of Social Services; and Vermont
Department of Social Welfare.  These state agencies were selected
because they were also involved in either EBT or cash-out
demonstrations as a means of delivering food stamp benefits.  We also
reviewed pertinent documents and reports from the above-listed
agencies as well as our own reports and reports from the
Congressional Research Service to identify the strengths and
weaknesses of the coupon-based system. 

Next, we assessed the Program's vulnerability to fraud, waste, and
abuse, and gathered information on the extent of fraud, waste, and
abuse occurring in the Program.  Our approach was to assess fraud,
waste, and abuse in four basic areas:  (1) the eligibility and
benefit determination process, (2) the use of benefits for nonfood
purposes, (3) the counterfeiting of food stamp coupons, and (4) the
theft or loss of coupons in the mail.  In making our assessment, we
reviewed FCS' Financial Managers Financial Integrity Act reports for
fiscal years 1990-93 and held discussions with FCS and state agency
officials.  We also reviewed prior GAO reports and reports by USDA's
OIG concerning weaknesses in the coupon-based Program.  In addition,
to the extent possible, we gathered information on the time and
expense that USDA and other federal agencies, such as the U.S. 
Secret Service and the U.S.  Postal Inspection Service, spend on
investigating fraud and abuse in the coupon-based Program. 

We relied on data from FCS' Food Stamp Program Quality Control System
to estimate the amount of fraud, waste, and abuse that occurs at the
time that state or local government officials determine the
eligibility of applicants and the benefits to which they are
entitled.  The Program's state and local officials are responsible
for determining when a household provides fraudulent information
during the eligibility and benefits determination process--or when
other inadvertent errors in this process lead to overpayments to
applicants.  These judgments are based on imprecise criteria, thus,
there is room for differing conclusions by the countless number of
officials in the Program across the nation.  Because of this
imprecision, FCS officials expressed questions about the reliability
of the data for determining the specific amount of overpayments that
can be attributed to fraud.  While perhaps not perfect, these data
are the most comprehensive available at the current time. 

We were unable to accurately estimate the total amount of food stamp
benefits that are traded for cash or other items by recipients or
used for nonfood purchases--referred to as trafficking--because data
necessary for making such an estimate were not available from FCS or
the OIG.  We did discuss the extent of food stamp trafficking with
agents from the Secret Service, Postal Inspection Service, OIG, FCS'
Compliance Branch, and state agencies. 

Information on food stamp coupon counterfeiting was obtained from
Secret Service officials, and information on the theft or loss of
coupons in the U.S.  mail was obtained from U.S.  Postal Service
officials. 

Our second objective was to evaluate the EBT alternative against the
current coupon-based system.  In examining EBT as an alternative
delivery method, we relied heavily on FCS contractors' evaluations of
five USDA-approved EBT demonstration projects.  These evaluation
reports have certain statistical limitations that preclude making
broad-based or nationwide projections from the results of the
projects, but again they provide the best information currently
available on EBT.  We also visited four EBT demonstration projects
located in Maryland, New Mexico, Ohio, and Pennsylvania and
interviewed the state agency officials responsible for operating the
projects.  In addition, we interviewed an official from the
Department of the Treasury's Financial Management Service and
reviewed reports on EBT and electronic funds transfer. 

We also obtained information on the Federal Reserve's Electronic
Funds Transfer regulation (Regulation E), which has applicability to
the EBT system for delivering food stamp benefits.  Regulation E
provides consumers with limited financial protection against the
unauthorized use of their bank credit cards.  We obtained the Federal
Reserve Board's final rule that the EBT system will be subject to the
provisions of Regulation E, some of the comments received on the
proposed rule, and a report by a private contractor on the
applicability and costs of applying Regulation E prepared for the
Treasury Department.  We also reviewed the Office of Technology
Assessment's report on the feasibility of delivering a range of
social services with EBT and discussed the implications of using EBT
with a principal analyst of the report.  Finally, we reviewed the
Federal Electronic Benefits Transfer Task Force's implementation plan
for a nationwide EBT system that was done in response to a National
Performance Review initiative. 

Our third objective was to examine cash-out as an alternative to food
stamp coupons.  We again relied heavily on FCS contractors'
evaluations of four demonstration projects--two in Alabama; one in
San Diego, California; and one in Washington State.  We visited
officials of the two Alabama projects and the San Diego project.  As
with the EBT projects, because of their limited scope, nationwide
projections cannot be made from the results of the cash-out
demonstrations.  Although they do not have cash-out demonstration
projects, some states have been authorized to provide limited cash
food assistance benefits in emergency situations and also to provide
cash food assistance to persons aged 65 or older that receive
Supplemental Security Income.  As part of our review, we visited
Vermont, which is one of these states, to obtain information on this
type of cash-out program.  Because these programs are limited to
specific groups of individuals or specific types of situations, we
did not consider these cash-out programs in our analysis.  We also
interviewed officials from FCS and the Treasury Department to obtain
their views on the use of cash-out. 

To obtain additional views on the EBT and cash-out alternatives, we
interviewed members of, and obtained and reviewed documents from,
several associations that have an interest in the Food Stamp Program. 
These associations include the National Association of Convenience
Stores, the Food Marketing Institute, the National Grocers
Association, and the American Public Welfare Association.  Finally,
in assessing the possible effects that cash-out or EBT might have on
food stamp fraud, we interviewed officials from the Secret Service,
Postal Inspection Service, USDA's OIG, and state and/or local law
enforcement personnel from New Mexico, Ohio, and Pennsylvania. 

We conducted our review from June 1993 through November 1994.  Our
work was performed in accordance with generally accepted government
auditing standards.  We obtained written agency comments from USDA
and the U.S.  Secret Service on a draft of this report which appear,
with our evaluation, in appendixes V and VI, respectively.  Oral
comments were provided on the draft by the Postal Service. 

The balance of this report is organized as follows.  Chapter 2
discusses the current coupon-based system, chapter 3 discusses the
EBT alternative in comparison to the current coupon-based system,
chapter 4 discusses the cash-out alternative, and overall
observations and conclusions on the three systems are presented in
chapter 5.  Finally, a detailed comparison of the three benefit
delivery systems can be found in appendixes I-IV. 


FOOD STAMP PROGRAM'S CURRENT
VULNERABILITIES, COSTS, AND
PARTICIPATION LEVELS
============================================================ Chapter 2

Fraud, waste, and abuse occur in the coupon-based Food Stamp Program
in a number of ways, but the full extent of wrongdoing and wasteful
practices cannot be precisely calculated.  The overissuance of
benefits alone resulting from fraudulent eligibility and benefit
claims, applicants' inadvertent errors, and erroneous processing
errors committed by state welfare case workers was estimated to be
about $1.8 billion in fiscal year 1993.  In addition, a large, but
unquantifiable amount of coupons was sold for cash or used for
nonfood purchases by food stamp recipients.  Additional losses
occurred when coupons were stolen from the mail or counterfeited. 
Administrative costs for the Program are also substantial.  The
federal government and states are currently spending over $2 billion
each year to administer the Food Stamp Program, much of which is
directed toward policing the Program. 

Although the Food Stamp Program is one of the nation's most
responsive welfare programs, currently serving about 1 out of every
10 Americans, an undetermined number of those eligible for benefits
do not apply for assistance--some estimates suggest that millions are
forgoing assistance. 


   THE COUPON-BASED SYSTEM IS
   VULNERABLE TO FRAUD, WASTE, AND
   ABUSE
---------------------------------------------------------- Chapter 2:1

As indicated in chapter 1, fraud, waste, and abuse in the Food Stamp
Program generally occur in four basic ways as follows: 

The Program's applicants receive benefits to which they are not
entitled because of weaknesses in the eligibility and benefits
determination process. 

Participants in the Program use benefits for nonfood purposes. 

Food stamp coupons are counterfeited and used by unauthorized
individuals. 

Food stamp coupons are stolen in the mail and used by unauthorized
individuals. 

Each of these fraudulent, wasteful, or abusive practices is discussed
below. 


      WEAKNESSES IN THE
      ELIGIBILITY AND BENEFIT
      DETERMINATION PROCESS RESULT
      IN BILLIONS OF DOLLARS IN
      LOSSES
-------------------------------------------------------- Chapter 2:1.1

To qualify for food stamps, applicants must meet certain eligibility
requirements and provide proof of household income and family
composition.  States' food stamp officials evaluate each household's
application to determine eligibility and to issue the proper level of
benefits.  Despite these precautions, significant overpayments occur
when ineligible persons are provided benefits and when eligible
persons are provided more than they are entitled to receive. 
According to information from FCS' Food Stamp Program Quality Control
System, during the 6-year period from fiscal year 1988 through fiscal
year 1993, states made approximately $7.4 billion in food stamp
overpayments to the Program's recipients. 


         WHY OVERPAYMENTS OCCUR
------------------------------------------------------ Chapter 2:1.1.1

Food Stamp Program overpayments related to the eligibility and
benefit determination process result from (1) state agencies' errors,
(2) inadvertent errors by recipients, and (3) intentional violations
by recipients.  A state agency error is an error made by a state
agency's food stamp official while taking an application for food
stamps from a potential participant or in determining the level of
benefits for a participant.  This usually occurs when the state
official makes a mathematical error, does not correctly apply the
regulations, or does not get the necessary information to make a
correct determination.  An inadvertent Program recipient error occurs
when a recipient unintentionally provides incorrect information about
his/her financial or family situation during the initial application
process or after a client is in the Program.  Inadvertent errors made
by recipients in applying for food stamp benefits as well as errors
made by state agency officials are not considered to be fraudulent or
abusive behavior.  However, they do result in a waste of benefits
and, furthermore, increase the Program's costs. 

An overissuance of food stamps that occurs because a recipient has
intentionally provided inaccurate or incomplete information on the
composition of the household or its economic situation is an
intentional Program violation.  Such a violation often means that a
recipient has defrauded the Food Stamp Program.  Investigations have
disclosed elaborate schemes involving false documents, fictitious
identities, and even fraud by state welfare system employees who
create "ghost" recipients and pocket the benefits.  However, when a
recipient is suspected of intentionally violating the Program's
regulations and rules, current law requires that due process must be
followed, including an administrative disqualification hearing before
the resulting overpayment is classified as fraud. 


         LOSSES RESULT FROM
         OVERPAYMENTS
------------------------------------------------------ Chapter 2:1.1.2

Through its Quality Control System, FCS monitors states' performance
in determining applicants' eligibility and benefit levels for food
stamp assistance.  Under the Quality Control System, states are
required to perform in-depth reviews of a sample of the eligibility
and benefit determinations made by their case workers to test the
accuracy of the determinations, which include both overpayments and
underpayments to recipients.  The states' error rate findings are
provided to FCS.  FCS then reviews a sample of each state's subsample
to ensure the quality of the states' efforts.  After disagreements
with the states' reported error rates are resolved, FCS determines
the official error rate on the basis of a projection of the states'
samples.  If a state's error rate exceeds permissible tolerances,
then the state is required to reimburse the federal government for a
portion of the overpayments. 

Our review of the Quality Control System's data for fiscal years
1988-93 shows that states made an estimated $7.4 billion in food
stamp overpayments during the 6-year period.  FCS' Quality Control
System also estimates the cause of the overpayments by the type of
overpayment error.  Figure 2.1 compares the amount of overpayments by
cause category, namely, state agencies' errors, recipients'
inadvertent errors, and recipients' intentional violations.  As can
be seen, state agencies' errors account for most of the
overpayments--$3.21 billion (43 percent).  Intentional violations
account for the least amount of overpayments--$1.78 billion (24
percent). 

   Figure 2.1:  Causes and Dollar
   Amounts of Food Stamp Program's
   Overpayments Estimated by FCS'
   Quality Control System, Fiscal
   Years 1988-1993

   (See figure in printed
   edition.)

As discussed above, the overpayment estimates are based on
projections of the Quality Control System's data and not on actual
overpayments.  In discussing these estimates with FCS officials, they
believed that the Quality Control System's information is appropriate
for estimating the amount of benefit overpayments that occur, but
they have reservations about using the information to estimate the
amount of overpayments because of the specific causes of overpayments
discussed above.  FCS officials cautioned us that making judgments on
whether incorrect information provided by participants is intentional
or unintentional is a subjective decision that is made by state or
local officials.  Because of the subjective nature of these
decisions, the conclusions reached can vary widely among these
officials. 

In commenting on a draft of this report, FCS described recent actions
being taken in an attempt to reduce overpayments.  These actions
include the following: 

Establishing a FCS headquarters core group to work exclusively on the
development and coordination of issues relating to the accuracy of
payments. 

Holding a national conference with the states to discuss the
overpayment issue and to underscore FCS' commitment to reducing the
overpayment of benefits.  (The conference was held on Nov.  16-17,
1994, at which time, the FCS Administrator asked for at least a
1-percentage point reduction in the national overpayment error rate
during the next year.)

Committing $1 million to error reduction activities. 

Taking a number of aggressive actions to encourage applicants to
provide accurate information about household circumstances when
applying for benefits. 


         CLAIMS ARE NOT
         ESTABLISHED FOR A
         MAJORITY OF OVERPAYMENTS
------------------------------------------------------ Chapter 2:1.1.3

FCS' regulations require states to establish a claim for all
overpayments that they identify regardless of the cause.  However,
our analysis of states' claims data established for fiscal years
1988-93 shows that claims are established for only a small portion of
the overpayments that are estimated by FCS' Quality Control System. 

This is largely true because there is a wide disparity between FCS'
overpayment estimates and actual overpayments identified by states as
a by-product of normal day-to-day operations of the Program.  States
are able to identify and pursue only a small portion of the
overpayment cases that is statistically estimated to occur. 
Consequently, projected overpayments substantially exceed the amount
of claims established.  For fiscal years 1988 through 1993, the
states established approximately $1.25 billion in claims out of the
more than $7.4 billion in food stamp benefit overpayments estimated
by FCS to have been made. 

The amount of claims actually collected by the states is lower still. 
For fiscal years 1988 through 1993, states collected about $548
million in overpayments, about 44 percent of the dollar value in
claims established during this time frame.  Figure 2.2 compares the
states' collections with all claims. 

   Figure 2.2:  Overpayment Claims
   and Collections for the Food
   Stamp Program, Fiscal Years
   1988-93

   (See figure in printed
   edition.)

While we did not assess why states collect such as a small percentage
of overpayments, a separate GAO review is currently examining the
state agencies' effectiveness in recovering overpayments for the Food
Stamp Program and other social welfare programs.  A separate report
on the results of this review is expected to be issued early next
year. 


      PROGRAM'S BENEFITS USED FOR
      NONFOOD PURCHASES
-------------------------------------------------------- Chapter 2:1.2

Regulations for the Program specify that participants must use food
stamp benefits only to purchase food items from food store retailers
authorized by FCS to accept food stamp coupons.  Furthermore, food
stamp retailers are to forward the coupons directly to financial
institutions for redemption.  In general, the sale or trading of food
stamp coupons by food stamp recipients for nonfood items or cash is
referred to as "trafficking." In some cases, food store retailers
that accept food stamps will use the coupons as currency for their
own purposes rather than redeem them at financial institutions.  This
illegal practice is also categorized as trafficking. 

Federal and state officials involved in policing the Program told us
that food stamp trafficking is widespread and involves a significant
amount of food assistance benefits.  Numerous federal and state
officials also told us that food stamp coupons are essentially a
second currency that is often openly traded on the streets. 
According to the OIG's Semiannual Report to Congress in fiscal year
1990 (the most recent information available on trafficking), FCS
estimated that of the 220,000 food stores authorized to accept food
stamp coupons, about 53,000 (24 percent) may be selling nonfood items
for food stamps, and over 3,200 retailers may be exchanging food
stamps for cash.  That is, the recipient sells his/her coupons to the
food store--instead of using them to purchase food--below the value
of the food stamps.  The retailer then redeems the coupons at a
financial institution for full value, thereby making a profit on the
transaction. 

However, neither FCS nor the OIG has an accurate estimate of the
amount of trafficking in food stamps.  Estimates suggesting that food
stamp trafficking may run as high as 10 percent of the benefits
issued annually--about $2 billion--have been widely reported in the
media, but we were unable to corroborate this estimate with USDA or
any other officials responsible for policing the Program. 

FCS has identified the participation of authorized retailers in
illegal transactions involving the exchange of food stamp coupons for
cash, drugs, weapons, and other ineligible items as a high-risk area
and a material weakness in its Federal Managers' Financial Integrity
Act Report for fiscal years 1990 through 1993.  Although FCS is
undertaking numerous initiatives to establish controls over
trafficking, FCS has concluded that it cannot completely eliminate
this activity.  Completed improvements include new procedures and
policies to improve investigative efforts.  Many of the planned
actions to reduce trafficking are associated with using EBT
technologies rather than coupons to provide benefits to recipients. 

Precisely determining how much trafficking is occurring would be an
extraordinarily difficult and expensive effort.  Such an effort would
require an army of investigators to track a nationwide sample of food
stamp recipients for several months to determine how they used their
coupons.  Because of the resource requirements and expense to do so,
we did not attempt to estimate the amount of trafficking that occurs
in the Program. 

Although not considered to be trafficking or an illegal activity,
some participants use the cash change they receive when they make
purchases with coupons to then buy nonfood items.  Retailers are
permitted to return up to 99 cents in cash change for a food stamp
coupon purchase.  Although the Program's regulations do not restrict
recipients from using cash change, purchasing nonfood items with this
cash change is considered a diversion of benefits from their intended
purpose.  FCS does not collect data on the amount of such diversion
occurring in the Program.  However, an FCS contractor's evaluation of
EBT demonstration projects estimated that just over one-half of 1
percent of coupon benefits was diverted to nonfood purchases in the
locations where the projects took place.\1 If this were the case
across the Program, about $123 million of the $23 billion in food
assistance benefits may have been diverted to nonfood items in fiscal
year 1993 as a result of cash change nationwide. 


--------------------
\1 The Impacts of the State-Initiated EBT Demonstrations on the Food
Stamp Program, Abt Associates, Inc., June 1993. 


      COUNTERFEITING OF FOOD STAMP
      COUPONS IS NOT A MAJOR
      THREAT
-------------------------------------------------------- Chapter 2:1.3

Based on available evidence, counterfeiting does not pose a major
threat to the Program.  According to the Secret Service,
counterfeiting of food stamps is not a major problem because people
with the skills necessary to be successful counterfeiters generally
devote their energies to counterfeiting currency of higher
denominations than food stamps, which have a maximum denomination of
$10.  In 1993, the Secret Service investigated 96 food stamp
counterfeiting cases.  According to information from the Secret
Service and Federal Reserve System, from October of 1986 through
January of 1992, the total amount of counterfeited food stamp coupons
was approximately $1.2 million. 


      SOME FOOD STAMPS ARE STOLEN
      IN THE MAIL
-------------------------------------------------------- Chapter 2:1.4

As with counterfeiting, the theft of food stamp coupons mailed out to
participants does not appear to cause significant losses of benefits. 
For fiscal year 1993, almost $6.3 billion in food stamps was issued
through the mail.  The states reported $23.9 million in mail
losses--or about 0.4 percent of the total value of stamps mailed to
recipients.  According to information provided to us by the U.S. 
Postal Inspection Service, the Service received 30,226 reports of
food stamps that were lost or stolen in the mail in fiscal year 1993. 
The Postal Inspection Service initiated 79 separate criminal
investigations in response to these reported losses. 

Although not appearing to be a major problem, USDA's OIG recently
issued a report showing that the systems of internal control used by
state agencies and contractors in distributing food stamps through
the mail are generally not adequate to ensure the physical security
of food stamps.\2 The control weaknesses include (1) inadequate
physical security over food coupon inventories, (2) insecure methods
used to transport envelopes containing food coupons to the Postal
Service, and (3) inadequate controls over undeliverable coupons
returned by mail to the Postal Service.  The OIG did not find any
actual cases of mail theft in its audit.  The report did state,
however, that part of the $23.9 million in mail theft in fiscal year
1993 may have resulted because of the weaknesses noted in the OIG's
report. 


--------------------
\2 Distribution of Food Coupons Through Direct Mail Issuance (OIG,
No.  27600-0012, Mar.  1994). 


   FEDERAL COSTS FOR ADMINISTERING
   AND POLICING FOOD STAMP PROGRAM
   EXCEED $1 BILLION
---------------------------------------------------------- Chapter 2:2

While FCS provides overall oversight of the Program, the day-to-day
responsibility for administering it rests largely with the states. 
However, the federal government shares these state costs roughly on a
50-percent cost-sharing basis.  In fiscal year 1993, the federal
government spent nearly $1.8 billion to administer the Program.  As
shown in table 2.1, most of these expenditures (about $1.5 billion)
involved federal reimbursements to the states.  The remainder covered
federal oversight costs, including the expenses of detecting and
pursuing fraud, waste, and abuse. 



                          Table 2.1
           
             Federal Administrative Costs for the
             Food Stamp Program, Fiscal Year 1993

                        (In millions)

USDA's costs                                            Cost
--------------------------------------------------  --------
FCS' costs to administer program
Oversight of program                                   $58.0
Production and printing of food stamps                  71.0
Monitoring of retailers                                  4.0
Other program costs                                     18.0
Reimbursement to states
Administration of program                            1,463.0
Employment and training efforts                        167.0
Office of Inspector General                             10.5
Other federal agencies
Secret Service                                           0.5
Postal Service                                           1.6
============================================================
Total federal < costs                               b>$1,793
                                                          .6
------------------------------------------------------------
Of the $1.8 billion in total federal cost, $113 million, or 6
percent, was spent in combating fraud and abuse.  Most of the federal
policing costs ($97 million) involved reimbursements of state costs
to conduct antifraud investigations of recipients.  Using this money,
the states conducted over 543,000 investigations of individuals who
were suspected of defrauding the Food Stamp Program.  In addition,
FCS' Compliance Branch spent $4 million in monitoring and
investigating retail food stores.  The Compliance Branch investigated
4,644 food retailers in fiscal year 1993 and disqualified 842 of
them. 

USDA's OIG, the Postal Inspection Service, and the Secret Service are
also involved in policing the Program.  As shown in table 2.1, the
OIG spent over $10 million in fiscal year 1993 on audits and
investigations of the Program.  About 90 percent of the OIG's money,
or $9.4 million, was spent in investigating food stamp fraud and
abuse--this represented more than 40 percent of the OIG's total
investigative resources in fiscal year 1993.  While the Postal
Inspection Service and Secret Service do not spend nearly as much as
the OIG, collectively, they spent over $2 million in investigating
food stamp fraud and abuse in fiscal year 1993. 


   ALL WHO ARE ELIGIBLE DO NOT
   APPLY FOR FOOD STAMPS
---------------------------------------------------------- Chapter 2:3

The Food Stamp Program is very responsive to changes in the economy,
and participation has expanded substantially in the past 2 years. 
Currently, the Program provides assistance to more than 1 in 10
Americans.  The average monthly participation during fiscal year 1993
was 27 million--up 1.6 million from fiscal year 1992.  Although the
Program provides benefits to more people than any other food
assistance program, there are still millions of persons eligible for
food stamps that do not apply for benefits for various reasons. 

The precise numbers of those eligible for food stamp benefits who do
not participate in the Program are not available.  However, an FCS
study published in 1992 estimated that 60 percent of eligible
households participate.\3 By applying this participation rate to the
actual number of participating households in fiscal year 1993, we
calculated that approximately 7 million eligible households may not
be participating in the Program. 

According to a 1988 Congressional Budget Office report, certain
demographic groups are more likely to participate in the Food Stamp
Program than others.\4 The report showed that eligible households
with children had higher-than-average participation rates (between 59
percent and 81 percent).  In contrast, participation rates for
households with elderly members were lower, at 34 to 44 percent. 
Households without children or elderly members had still lower
participation rates.  Participation rates for this group ranged from
24 to 39 percent. 

Another study we reviewed discussed the impediments to participation
in one state.\5 On the basis of this study, all eligible persons do
not obtain food stamps for several reasons.  The barriers to
participation include

the Program's complex rules and the sheer volume of rule and
procedural changes that "force clients through hoops" and make
administration difficult,

the lack of information about the Program, and

negative public attitudes toward food stamp users. 


--------------------
\3 Participation in the Food Stamp Program:  A Multivariate Analysis,
Mathematica Policy Research, Inc., Mar.  1992. 

\4 The Food Stamp Program:  Eligibility and Participation,
Congressional Budget Office, Nov.  1988. 

\5 The Food Stamp Program in Minnesota, Barriers to Participation and
Outreach Strategies, Minnesota Food Education and Resource Center,
Apr.  5, 1994. 


THE BENEFITS OF EBT AS AN
ALTERNATIVE TO FOOD STAMP COUPONS
ARE NOT CLEARLY ESTABLISHED
============================================================ Chapter 3

EBT has certain advantages as an alternative to the coupon-based
system, but it will not eliminate fraud, waste, and abuse in the Food
Stamp Program.  Although EBT has the potential to reduce some forms
of fraud, waste, and abuse, demonstrations to date suggest that
problems are continuing.  For example, like all other issuance
systems, EBT will have no effect on the errors committed during the
eligibility and benefits determination process.  One major antifraud
advantage of EBT is that it allows FCS to determine where recipients
actually use their benefits, which FCS is unable to do under the
current coupon-based system.  Hopefully, this would dissuade
recipients from selling or trading their food assistance benefits to
unscrupulous food retailers.  Another advantage is that EBT
eliminates the need to provide recipients with cash change from food
coupon purchases--thus, increasing the probability that benefits will
be used only for food purchases.  However, EBT may not be
cost-effective, especially with the Federal Reserve Board's recent
regulation requiring that EBT users be provided with consumer
liability protection.  Evaluations to date indicate no increase in
participation in the Program due to EBT. 


   HOW EBT DIFFERS FROM THE
   COUPON-BASED SYSTEM
---------------------------------------------------------- Chapter 3:1

The EBT system for delivering food stamp benefits differs from the
current coupon-based system in that EBT uses automated financial
transaction processing and debit card access technologies to
electronically deliver food stamp benefits.  Rather than receiving
coupons, recipients use plastic debit cards, similar to bank debit
cards, to access their food stamp benefits through point-of-sale
(POS) terminals installed at check-out counters in food stores.  In
most cases, the POS terminals access a central computer that
maintains information on each recipient's food stamp account.  At the
time of purchase, the recipient inserts the plastic card into the POS
terminal and keys in a personal identification number (PIN).  The
amount of the benefits to be drawn is keyed into the terminal, and an
electronic message is sent to an EBT central computer facility.  The
EBT computer verifies that sufficient funds exist in the account and
returns an on-line authorization message to the inquirer.  Once the
purchase is authorized, the amount is debited from the recipient's
account and credited to the retailer's system account.  At the end of
each business day, retailers' authorized EBT sales are totaled, and
funds are transferred electronically to retailers' bank account.  An
alternative to this type of EBT system used in some locations is the
so-called off-line, or "smart card" system.  In these systems,
benefit information is stored on the card itself, thus eliminating
the need to access an EBT central computer with each purchase. 

Eight states currently have an operational on-line EBT system, and
one state has an operational off-line system.  The first EBT
demonstration began in 1984 in Reading, Pennsylvania, and included
only food stamps.  Two more demonstrations became operational in
1991--in Ramsey County, Minnesota, and Albuquerque, New Mexico; these
demonstrations integrated the delivery of electronic benefits between
the Program and other assistance programs, such as Aid to Families
with Dependent Children (AFDC).  Operations began in March 1992 for
an off-line EBT demonstration in Dayton, Ohio.  The state of Maryland
implemented an EBT project in the Park Circle District of Baltimore
in 1989, and expanded the system statewide by May 1993.  Maryland's
EBT system also combines several assistance programs including food
stamps, AFDC, and public assistance for adults.  The state was
evaluating the system's impact at the time of our field work.  These
five systems were included in our review.  Four additional on-line
systems were not included in our review because they had just started
operations and would not have been far enough along in implementation
to have produced evaluative information for our analysis.  One of
these systems, which was started in April 1993, is in Linn County,
Iowa; another system, in Camden, New Jersey, became operational in
January 1994.  The latest two projects were initiated in Texas in
October 1994 and in South Carolina in November 1994. 


   EBT WILL NOT ELIMINATE FRAUD,
   WASTE, AND ABUSE IN THE FOOD
   STAMP PROGRAM
---------------------------------------------------------- Chapter 3:2

EBT offers the potential to reduce some but not all fraud, waste, and
abuse in the Food Stamp Program, especially not that which occurs
during the eligibility and benefit determination process.  Also, the
extent to which EBT will reduce trafficking is not clear on the basis
of the demonstration projects' results to date.  Counterfeiting has
not been a problem with EBT, and EBT has reduced the vulnerability of
the Program to mail theft. 


      EBT HAS LITTLE POTENTIAL TO
      REDUCE FRAUD, WASTE, AND
      ABUSE DURING THE ELIGIBILITY
      AND BENEFIT DETERMINATION
      PROCESS
-------------------------------------------------------- Chapter 3:2.1

Because EBT is simply another vehicle for distributing food stamp
benefits, it will not affect fraud, waste, and abuse occurring during
the eligibility and benefit determination process.  Our review of the
project evaluation reports for the Albuquerque, New Mexico; Maryland;
Ramsey County, Minnesota; and Reading, Pennsylvania, EBT systems
found that no changes had been made in the application processes used
to determine eligibility in the Program and food assistance benefit
levels.  Unless better ways of verifying applicant-supplied
information and avoiding errors made by state agencies' case workers
are established prior to the eligibility and benefit determination
decisions, individuals will continue to receive benefits to which
they are not entitled regardless of whether these benefits are
distributed by coupon or EBT.  Consequently, food stamp overpayments,
which appear to account for the largest amount of quantifiable fraud,
waste, and abuse in the Program, will most likely continue to occur
at a level comparable to that experienced under the current
coupon-based system. 


      EVIDENCE ON THE EXTENT THAT
      EBT WILL REDUCE FOOD STAMP
      TRAFFICKING AND RELATED
      FRAUD SCHEMES IS
      INCONCLUSIVE
-------------------------------------------------------- Chapter 3:2.2

According to USDA's OIG, FCS, and some state officials, EBT has the
potential to significantly reduce food stamp trafficking as well as
other forms of the loss and diversion of benefits.  They believe that
two key attributes of the EBT process make this reduction likely. 
First, EBT provides an audit trail that links individual purchases to
specific retailers.  Unlike food stamp coupons, every EBT transaction
is recorded to properly debit the beneficiary's food assistance
account and credit retailers' accounts.  This makes it possible to
identify where recipients redeem their food stamp benefits.  Thus, if
a retailer is found to be trafficking food stamps, it is easy to
determine which recipients use the retailer and which recipients may
be using their benefits for nonfood purchases.  Because EBT
transactions can be traced to individual recipients and retailers,
Food Stamp Program officials believe potential traffickers will be
less likely to sell, trade, or use their benefits for other purposes. 
Second, redeeming benefits obtained from participants through
fraudulent activities is more difficult with EBT because the
redemption process for participants is different from that for the
coupon-based system.  Under the coupon system, a person merely
presents coupons to a food retailer to pay for food purchases.  Under
EBT, traffickers have to know the recipients' PIN and have access to
a POS terminal in order to use food stamp benefits. 

While Food Stamp Program officials are confident that EBT will reduce
trafficking, they could only provide estimates instead of tangible,
quantifiable evidence of reductions for the demonstrations we
examined.  For example, security experts evaluating the New Mexico
and Ramsey County, Minnesota, demonstration projects believe EBT will
reduce benefit trafficking by 50 percent.  Experts evaluating
Maryland's EBT project estimated a reduction in trafficking of 10
percent. 

Not everyone believes EBT will reduce trafficking.  Secret Service
agents that we interviewed believe retailers that purchase food stamp
coupons will also traffic EBT benefits.  In addition, they expressed
concern that newer and perhaps more expensive types of fraud may
occur with EBT, such as cases where individuals obtain welfare
benefits through computer fraud, unauthorized retailers fraudulently
obtain POS terminals that accept EBT cards, or individuals
counterfeit EBT cards.  USDA's OIG officials also expressed the
concern that with EBT, the potential exists for large fraud losses by
use of a computer, particularly by transferring or debiting funds
from the system at some point. 

Clearly, EBT has not eliminated the problem of trafficking.  It is
occurring at several locations where an EBT system has replaced the
coupon-based food stamp system.  Both state investigative agencies
and USDA's OIG have identified cases of the trafficking of benefits
provided through an EBT system.  For example, during the OIG's first
major fraud investigation involving EBT in Reading, Pennsylvania, the
OIG found that a small sandwich shop conducted over $151,000 in
fraudulent EBT transactions over a 2-year period.  These transactions
accounted for 76 percent of the shop's total EBT dollar volume, and
173 food stamp recipients were convicted for illegally selling their
benefits.  More recently, a food retailer in Reading was permanently
disqualified from the Program for trafficking food stamp benefits
totaling approximately $200,000.  During this investigation, OIG
agents found that the retail establishment had illegally obtained 79
EBT cards along with the recipients' PINs. 

A New Mexico State OIG official told us that food stamp trafficking
is occurring at that project as well.  His office recently found an
individual who was purchasing EBT cards from the homeless and selling
the food stamp benefits at two food stores.  The amount of benefits
involved was approximately $60,000.  Furthermore, another state OIG
official said that although his office had seen a 10- to 15-percent
reduction in the number of food stamp fraud referrals received since
EBT has been operating, he believes that trafficking will increase as
recipients and individuals who purchase food stamp benefits learn
more about the EBT system.  In Dayton, Ohio, FCS Compliance Branch
undercover agents identified five stores that were exchanging cash
for food stamp benefits on EBT cards.  However, 10 stores were
willing to traffic coupons but not electronic benefits.  USDA's OIG
is continuing this fraud investigation because of the high dollar
amount of trafficking. 

In addition to trafficking, other types of fraud and abuse have
occurred at the EBT demonstration projects that we visited.  For
example, state OIG officials in New Mexico told us about various
schemes used to defraud the EBT system.  In one scheme, the retailer
defrauded recipients by "double swiping" their EBT cards during sales
transactions, thereby obtaining additional credits from the cards. 
In Maryland, a state official provided examples of other types of EBT
fraud that had been uncovered.  These included instances where a
recipient's relatives or friends (who knew the card holder's PIN)
stole benefits and state employees fraudulently obtained EBT cards
and used the benefits. 

Although EBT provides an audit trail to facilitate the detection of
food stamp trafficking and fraud, it may not be used to its full
advantage.  For example, one state official responsible for directing
an EBT system said his state does not have the necessary resources to
use the data from the system in conducting investigations of fraud. 
Furthermore, USDA's OIG officials also expressed concern that FCS is
not adequately using transaction data available from the EBT systems
to identify and track fraud and abuse. 

In discussing this issue with Food Stamp Program officials at the
close of our study, we were told that FCS is currently working with a
contractor and USDA's OIG on a plan to use EBT data from all states
to create a national data bank.  These data will then be the basis
for exception reports that target retailers likely to be engaged in
trafficking.  FCS officials said that these exception reports will
also be shared with other federal agencies such as the Secret Service
and with state enforcement authorities. 


      INSTANCES OF COUNTERFEITING
      EBT CARDS TO DATE ARE NOT
      KNOWN
-------------------------------------------------------- Chapter 3:2.3

As with food stamp coupons, the counterfeiting of EBT cards is not a
demonstrated problem.  But according to Secret Service agents, the
potential does exist for individuals to counterfeit EBT cards.  For
example, one agent said retailers can obtain enough information from
POS terminals to counterfeit a recipient's EBT card and fraudulently
obtain benefits.  However, to date, there are no reported instances
of counterfeiting of the EBT cards in any of the operational projects
and, according to an evaluation report of two EBT projects, such
counterfeiting is not likely. 

In commenting on a draft of this report, the Secret Service
reaffirmed that the counterfeiting of EBT cards is currently not a
problem.  However, they cautioned that EBT cards could become more
attractive to counterfeiters if multiple social program benefits are
placed on each card.  This would raise the amount of benefits being
placed on cards and could increase the likelihood of counterfeiting. 


      MAIL THEFT OF FOOD STAMP
      BENEFITS IS SUBSTANTIALLY
      REDUCED WITH EBT
-------------------------------------------------------- Chapter 3:2.4

Mail theft of food stamp coupons is not high, but some mail theft
losses do occur.  EBT has the potential to reduce this problem even
further.  For example, in Bernalillo County, New Mexico, where
coupons were replaced by EBT, approximately $22 million in food stamp
coupons was issued by mail between October 1989 and July 1990.  Mail
losses for that time period were approximately $170,000, or 0.77
percent of the value of the food stamps issued via the mail.  Under
New Mexico's EBT program, food stamp recipients do not receive any of
their monthly benefits through the mail.  Rather, the recipients
attend a training session at which time they learn how to use the EBT
system, select a PIN, and receive their cards.  Once they have the
EBT card, monthly benefits are posted to their accounts
electronically.  Thus, the potential for losses due to mail theft is
substantially reduced, if not eliminated, with EBT. 

In commenting on a draft of this report, a Postal Inspection Service
official said that it may not be practical for all recipients to
visit a food stamp office to obtain an EBT card--especially those
that are handicapped.  In such cases, it may be necessary to deliver
the EBT card by mail.  Should this be the case, there is the
possibility that the cards could be stolen from the mail.  The Postal
Inspection Service official suggested that a card activation system,
such as that used by some credit card companies, could be used to
activate EBT cards that may be mailed to recipients.  According to
him, this would reduce the potential for card theft through the mail. 
Under a card activation system, a mailed EBT card would not be
activated until the recipient called one of the Program's offices and
provided specific personal information to an official, who would then
activate the card. 


      APPLICATION OF FEDERAL
      RESERVE BOARD'S ELECTRONIC
      FUNDS TRANSFER REGULATION
      COULD RESULT IN INCREASED
      EBT FRAUD AND ABUSE
-------------------------------------------------------- Chapter 3:2.5

While EBT has the potential to reduce fraud, waste, and abuse in some
respects, there is concern that it may generate a new kind of fraud. 
EBT demonstration projects implemented to date have not been subject
to the consumer protection provisions provided to electronic funds
transfer users under the Federal Reserve Board's Regulation E.  This
regulation implements the Electronic Funds Transfer Act of 1978,
which establishes the basic rights, liabilities, and responsibilities
of consumers who use electronic funds transfer systems and the
financial institutions that offer these services.  Regulation E
provides that consumers who properly report the loss of an electronic
card are liable for no more than $50 of the fraudulent charges on a
stolen card. 

The Federal Reserve Board's final rule applying Regulation E to EBT
systems became effective on February 28, 1994; however,
implementation is being delayed until March 1, 1997.  Under the
Board's final rule, recipients will be liable for up to $50 if the
EBT card is lost or stolen.  USDA officials told us that under the
Program's current regulations, the Department's position is that the
states will be liable for losses that exceed the $50 liability
limit--but this is an unresolved question.  By contrast, under the
current coupon-based system, neither the states nor FCS is
responsible for replacing recipients' lost or stolen benefits once
they have been received. 

According to FCS, Regulation E substantially reduces a recipient's
responsibility for EBT card and PIN protection and makes it possible
for recipients to report false losses to receive additional benefits. 
FCS believes Regulation E introduces an opportunity for additional
abuse of the Program under EBT that is not present under the
coupon-based system. 

In November 1993, at the request of the Vice President's National
Performance Review, an interagency task force was formed to develop
an implementation plan to support the rapid development of a
nationwide system for delivering government benefits.  In its May
1994 report, the Federal Task Force presented its plan for a
nationwide EBT system.  The Task Force, in its report, also
recognized that Regulation E could impose a large, unfunded liability
on the states.\1

During the next 3 years, the federal government will evaluate the
potential costs and impacts of Regulation E on EBT.  The plan is to
develop administrative procedures for resolving disputes that arise
when unauthorized persons use EBT cards to obtain benefits. 


--------------------
\1 Creating a Benefits Delivery System That Works Better and Costs
Less:  An Implementation Plan For Nationwide EBT, Federal EBT Task
Force, May 1994. 


   COST COMPETITIVENESS OF EBT
   REMAINS UNCERTAIN
---------------------------------------------------------- Chapter 3:3

Whether EBT will reduce federal and state costs to deliver food stamp
benefits is not certain.  Our analyses of the five EBT project
evaluation reports showed considerable variation in the costs of
providing benefits via EBT.  Moreover, future changes to EBT (e.g.,
the application of Regulation E) will certainly affect the cost of
EBT to the states and, perhaps, even the federal government if it is
decided that the federal government should share in the liability
costs covered by Regulation E.  While the federal and state cost
impacts have been mixed, all five demonstration projects show that
EBT is less costly for recipients, retailers, and financial
institutions. 


      FEDERAL AND STATE COSTS ARE
      UNCERTAIN
-------------------------------------------------------- Chapter 3:3.1

Our review of the evaluation reports' cost comparisons between the
five EBT systems and the coupon systems they replaced shows that
three of the EBT systems were less expensive to the federal and state
governments.  The cost comparisons are shown in table 3.1. 



                          Table 3.1
           
           Costs to Deliver Food Stamp Benefits via
             EBT Versus Coupon-based Systems--per
                     Household, per Month

                                      Ramsey
                                      County
                      Readin     New       ,  Dayton  Maryla
Costs                 g, Pa.  Mexico   Minn.  , Ohio      nd
--------------------  ------  ------  ------  ------  ------
Coupon costs           $2.74   $4.04   $4.53   $2.89  $4.70\
                                                           a
EBT costs               9.14    3.07    4.38    8.21    3.92
Difference            +$6.40       -       -  +$5.32       -
                               $0.97   $0.15           $0.78
------------------------------------------------------------
\a Maryland's EBT system provides benefits for the Food Stamp Program
as well as four other welfare programs.  The costs per case-month for
Maryland represent only the Food Stamp Program's allocation of the
EBT costs. 

Source:  FCS Project Evaluation Reports. 

The cost comparisons shown in table 3.1 do not, however, include
design, development, and implementation costs for the EBT systems. 
These costs are significant.  For example, the cost of the New Mexico
system totaled $1.58 million, and the cost of the Ramsey County,
Minnesota, and Reading, Pennsylvania, systems each totaled $2.1
million.  The EBT start-up costs in Maryland and Dayton, Ohio, were
even higher--costing $7 million and $3.4 million, respectively. 

For our cost comparison analyses, we included the startup costs for
the EBT systems to show the total amount of resources necessary to
develop, implement, and operate the systems.  For our analysis, we
amortized these costs over a 7-year time frame.  We used a 7-year
time frame in order to be consistent with FCS regulations
implementing the requirement in the Food, Agriculture, Conservation,
and Trade Act of 1990 (P.L.  101-624) that the federal costs of
providing food assistance benefits through EBT systems should not
exceed the federal costs of providing benefits through the
coupon-systems they replace.  We then added these costs to the EBT
systems' costs shown in the evaluation reports and recalculated the
difference between the coupon and EBT systems' costs.  The results of
our analyses, as shown in table 3.2, indicate that

Ramsey County's EBT cost was more--not less--than the cost of the
coupon-based system it replaced,

the EBT cost savings at the Maryland and New Mexico projects are less
than shown in the evaluation reports, and

the additional cost of delivering benefits via EBT at the Dayton and
Reading projects is greater than that shown in the reports. 



                          Table 3.2
           
             GAO Calculated Costs to Deliver Food
           Stamp Benefits via EBT and Compared Them
            With Coupon-based Systems' Costs--per
                     Household, per Month

                                      Ramsey
                                      County
                      Readin     New       ,  Dayton  Maryla
Costs                 g, Pa.  Mexico   Minn.  , Ohio      nd
--------------------  ------  ------  ------  ------  ------
Coupon costs           $2.74   $4.04   $4.53   $2.89  $4.70\
                                                           b
EBT costs             13.92\    3.60    5.45   11.93    4.09
                           a
Difference            +$11.1       -  +$0.92  +$9.04       -
                           8   $0.44                   $0.61
------------------------------------------------------------
Note:  Start-up costs for EBT systems are included. 

\a A Pennsylvania state official told us that the EBT cost has been
reduced significantly and in 1993 was $2.77 per case-month. 

\b The costs per case-month for Maryland include only the Food Stamp
Program's share of the EBT costs. 

As indicated earlier, the federal statute authorizing EBT issuance of
food stamp benefits requires that such systems must be cost neutral
to the federal government.  FCS' implementing regulations were issued
in 1992 subsequent to the start of the five EBT demonstration
projects we reviewed.  Thus, the cost analyses for these projects do
not reflect the cost comparison methodology provided for in the
regulations.  Projects started subsequent to the regulations,
however, must comply with the cost neutrality requirement, which
requires that capital expenditures and other normal startup costs be
included in the cost analysis.  According to FCS, expanding EBT to
include more food stamp recipients, providing multi-program benefits
such as AFDC and other welfare program payments on an EBT card, and
integrating EBT with existing commercial financial fund transfer
systems will reduce EBT's operating costs.  However, replicating
these systems on a nationwide basis or even at another location will
not be easy.  For example, the New Mexico EBT system's evaluation
report points out that it cannot be taken for granted that EBT
systems in other locations will be as cost-effective as New Mexico's
system.  The evaluation report states that many factors affect the
likelihood of a cost-effective EBT system, since coupon issuance
costs vary substantially from one location to another.  The
cost-effectiveness of the system would vary depending on (1) the
efficiency of training participants in the use of EBT cards, (2) the
amount of fees and other charges paid to the EBT system's operator,
(3) the extent to which POS network costs are shared with retailers
and third-party networks, and (4) the amount of EBT project
management and support costs. 

According to a recent Office of Technology Assessment (OTA) report,\2

many important EBT cost-related questions remain unanswered.  The
report also outlines new opportunities for cost-sharing and
partnership between the federal and state governments and the need
for the private sector to help offset and defray some of the start-up
costs associated with EBT.  OTA estimates that it will cost between
$160 million and $520 million to implement a nationwide EBT system
for delivering multiple program benefits and that annual operating
costs could be as high as $1.04 billion.  OTA believes that EBT will
ultimately save money in the delivery of multiple benefits if the
Program's enrollment and disbursement processes are streamlined.  An
OTA analyst told us that by integrating social service programs into
one EBT system, fewer federal resources would be required to oversee
and monitor the programs. 

OTA's notion of combining benefits provided through a number of
federal programs with a single EBT system is reflected in the
implementation plan developed by the National Performance Review
Federal EBT Task Force.  The plan identifies 12 federal and state
programs that could use EBT to replace current paper delivery methods
for making government payments.  The Task Force's report plan calls
for full implementation of EBT nationwide by 1999 and estimates
federal savings of $195 million annually by reducing paper costs
associated with current delivery systems.  The implementation plan
calls for a sharing of the costs to implement EBT among federal and
state governments, food retailers, and financial institutions.  The
Task Force estimates the total federal share to implement EBT to be
about $83 million. 


--------------------
\2 Making Government Work:  Electronic Delivery of Federal Services,
Office of Technology Assessment, Sept.  1993. 


      REGULATION E MAY ADVERSELY
      AFFECT FEDERAL AND STATE EBT
      ADMINISTRATIVE COSTS
-------------------------------------------------------- Chapter 3:3.2

In our analyses, we did not factor in the costs of Federal Reserve
Regulation E, which we discussed earlier in this chapter.  The
regulation could add several hundred million dollars annually to
states' EBT costs.  None of the FCS demonstration projects considered
the effects of this regulation because it was not applicable when the
projects were initiated. 

Compliance with Regulation E implies incorporating a number of new
factors in EBT systems' cost estimates, such as the direct cost of
replacing benefits, administration of a Regulation E compliance
program, claim processing and investigation, card replacement, and
other costs.  Hard data on these costs are generally unavailable,
since EBT programs have previously been exempt from compliance with
Regulation E. 

The only formal study of the effects of Regulation E on EBT was
completed by the Department of the Treasury's Financial Management
Service in 1993.\3 The report, which was conducted by contractors,
found that costs for complying with Regulation E may exceed any cost
savings of providing benefits through EBT.  For example, cost
estimates for complying with Regulation E ranged from $69 million to
$464 million per year for the Food Stamp Program alone, and these
estimates do not include indirect costs, such as antifraud
enforcement.  For EBT systems that provide multiple-program benefits
such as AFDC and state general assistance, the cost estimates of
Regulation E are much higher, ranging from $122 million to $827
million per year. 

State EBT providers have voiced concern about their liability for
unauthorized transfers, particularly those related to recipients'
negligence and fraud.  Given the fraud in the paper-based delivery
system, states fear that the cost of applying Regulation E to EBT
programs will exceed the advantages of providing benefits
electronically. 

USDA recommended that Regulation E not be applied to EBT systems,
contending that Regulation E would increase the cost of delivering
food stamp benefits to the point where EBT might not be economically
feasible.  FCS is committed to testing an EBT system in accordance
with Regulation E to determine how it will affect states' liability. 
According to an FCS official, FCS needs to determine (1) what claims
should be paid because not all losses have to be automatically
replaced and (2) what administrative procedures can be put in place
to limit losses.  FCS expects that some of the losses will be due to
fraud and some to recipients who improperly handle their cards. 


--------------------
\3 Implications of Regulation E in Electronic Benefit Transfer
Programs, Aug.  31, 1993.  U.S.  Department of Treasury, Financial
Management Service. 


      COSTS TO RECIPIENTS ARE LESS
      WITH EBT
-------------------------------------------------------- Chapter 3:3.3

According to the evaluation reports of all five EBT projects, the EBT
systems reduce the costs for recipients to participate in the
Program.  The cost reductions ranged from 46 percent at the Ramsey
County, Minnesota, project to 88 percent at the Reading,
Pennsylvania, project. 

These cost reductions are achieved in several ways.  Under the
current Program, recipients incur some time and money costs to
collect their food stamps.  These costs include those associated with
visiting a welfare office to pick up their food stamp benefits. 
Under EBT, recipients would not incur these costs after their initial
visit to pick up their EBT card. 

The evaluations also reported that recipients were less likely to
lose their benefits to theft when they were provided through EBT. 
Under the current system, coupons that are lost or stolen after being
received by a recipient are not usually replaced; therefore, the
recipient must bear this cost.  With EBT, however, the likelihood of
such losses to the recipient is less because an EBT card thief would
also need a PIN to access the recipient's benefits.  In addition, if
the recipient reports the card as lost or stolen, the account is put
on hold.  Consequently, the probability of lost benefits, and the
associated cost to recipients from lost benefits is less with EBT. 


      COSTS TO RETAILERS ARE LESS
      WITH EBT
-------------------------------------------------------- Chapter 3:3.4

According to the EBT evaluation reports, EBT also reduced retailers'
costs to participate in the Program.  Retailers' estimated
participation costs were reduced by less than 1 percent at the
Maryland project.  At the other four projects, however, the costs
reductions were greater--ranging from 20 percent at the Ramsey
County, Minnesota, project to 38 percent at the Dayton, Ohio,
project.  These savings resulted primarily from a decrease in the
time and resources spent in collecting, handling, and reconciling
food stamp coupons.  The Food Marketing Institute recently published
a study that corroborates the evaluation reports.\4

The study shows that the retailer's average cost in accepting EBT
payments is $0.1497 per transaction whereas the average cost of a
food stamp transaction is $0.1630. 

Retailers' costs under EBT systems could increase, however, if
retailers pay to acquire the POS terminals.  At the five
demonstration sites, the POS terminals were installed in retail
stores at no cost to the retailers.  Current law prohibits state
agencies from requiring food retailers to purchase equipment or incur
other costs as a condition of participation in EBT systems.  However,
the Federal Electronics Benefit Transfer Task Force, in its May 1994
report, suggests that expanding EBT nationwide would require a
sharing of costs between government and industry and recommends that
retailers finance the costs of POS terminals. 

OTA also raised concerns that under the current law, retailers are
not encouraged to share the cost of EBT.  According to an OTA
analyst, food retailers would stand to benefit from EBT, and
therefore, the federal government should encourage them to invest in
such a system.  According to a nonprofit food retailer association,
if the POS terminals could accommodate both food stamp and nonfood
stamp customers, then the retailers would be willing to purchase the
terminals, since this would benefit all their customers.  However,
the costs associated with the purchasing of POS terminals by
retailers are not known at this time nor is the impact that these
costs would have on retailers' costs under future EBT systems. 


--------------------
\4 Benchmarking Comparative Payment Methods:  Costs and Case Studies,
Food Marketing Institute, 1994. 


      COSTS TO FINANCIAL
      INSTITUTIONS ARE LESS WITH
      EBT
-------------------------------------------------------- Chapter 3:3.5

A shift to EBT would also generate a substantial reduction in costs
to financial institutions that process food stamp coupons redeemed by
retailers.  Local banks would realize the majority of the cost
reduction, since EBT would eliminate expensive coupon redemption
activities.  Currently, bank personnel must (1) count the coupons
numerous times to verify totals, (2) complete internal ledger and
transmittal forms to transport coupon deposits to the appropriate
operations area of the bank, (3) endorse each coupon with a bank
stamp, (4) organize the coupons into bundles, (5) complete a coupon
deposit document identifying the bank and the total value of the
coupons for the Federal Reserve Bank, and (6) deliver the coupons and
forms to the Federal Reserve Bank.  According to EBT evaluation
reports, local bank costs were completely eliminated at two projects
and reduced by 90 percent or more at the three other projects.  Costs
incurred by Federal Reserve Banks are also reduced under EBT but by a
smaller margin than that for local banks. 


   EBT HAS NOT AFFECTED
   PARTICIPATION IN THE PROGRAM
---------------------------------------------------------- Chapter 3:4

Providing food stamp benefits through EBT has apparently not had any
impact on participation in the Program.  According to FCS, measuring
EBT's impact on participation is challenging at best.  Since EBT is
being introduced while many other changes such as economic shifts and
changes in requirements for eligibility in the Program may be
occurring, it is necessary to control for the influence of these
factors.  One approach is to compare changes in participation levels
for an area with EBT with participation levels in comparable areas
without EBT.  This kind of analysis was conducted for one EBT
evaluation, and there was no evidence of any impact on participation
from EBT.  Another EBT evaluation report found no serious evidence
that EBT systems had affected participation in any way. 

Stating that EBT has not caused participation to increase or
decrease, seven FCS and three state agency officials that we
interviewed corroborated these findings.  Some of these officials
said that changes in participation rates are caused primarily by
changes in the economy, rather than the way in which benefits are
delivered, such as EBT. 


   EBT COULD RESULT IN THE USE OF
   MORE BENEFITS FOR FOOD
   PURCHASES
---------------------------------------------------------- Chapter 3:5

When recipients purchase nonfood items with cash change from food
stamp purchases, it undermines the Program's objective of increasing
the food-purchasing power of recipients.  EBT provides for an exact
deduction of benefits from a recipient's benefit account, eliminates
the need for cash change, and thus eliminates the possibility that
recipients will use the change for nonfood purchases. 

The EBT evaluation reports we reviewed showed that a small amount of
benefits were being diverted from food purchases as the result of
cash change.  For example, in New Mexico and Ramsey County,
Minnesota, the evaluation report estimated that about 0.54 percent of
coupon benefits in both sites were diverted to nonfood items with
cash change.  It is important to note, however, that these estimates
are based on economic assumptions and not actual results.  Although
quantifiable data on the amount of diversion in the coupon-based
system are not available, all of the state agency personnel and FCS
officials that we interviewed believed that recipients will spend
more of their monthly benefits on food when provided through EBT. 


CASH-OUT REDUCES THE PROGRAM'S
COSTS BUT PROVIDES NO ASSURANCE
THAT BENEFITS WILL BE USED FOR
FOOD PURCHASES
============================================================ Chapter 4

The cash-out alternative to the current coupon-based system would
eliminate trafficking but not all fraud, waste, and abuse in the Food
Stamp Program.  Providing food stamp recipients with cash benefits in
lieu of coupons can save millions of dollars in costs for federal,
state, and local governments.  Federal savings would accrue from
eliminating the administrative costs to maintain a coupon currency
and from reduced spending to combat coupon-related fraud and waste. 
State and local governments would save through more efficient food
assistance distribution activities.  Concurrent with these savings,
however, is the loss of assurance that food assistance dollars are
actually spent for food.  Also, contrary to popular assumption, it
does not appear that participation by eligible households increased
at any of the cash-out projects as a direct result of providing
benefits in the form of cash rather than coupons. 


   HOW CASH-OUT DIFFERS FROM THE
   COUPON-BASED SYSTEM
---------------------------------------------------------- Chapter 4:1

Under cash-out, state agencies provide eligible individuals with
benefits in the form of state or U.S.  Treasury checks.  Recipients
may transact these checks at any financial institution for cash and
may then use the cash to make food purchases at any retailer they
choose, rather than at only those stores that receive FCS' approval
to accept food stamp coupons. 

A call for a program of widespread experiments in welfare policy in
the 1980s led FCS to approve four demonstration projects to evaluate
the effects of replacing food stamps with cash assistance.  The four
projects were (1) the Alabama Avenues to Self-Sufficiency through
Employment and Training Services (ASSETS) project, (2) the Alabama
"Pure" Cash-Out Demonstration, (3) the San Diego Food Stamp Cash-Out
Demonstration, and (4) the Washington State Family Independence
Program (FIP) project.  Table 4.1 provides an overview of the
projects. 



                                    Table 4.1
                     
                     Overview of FCS' Cash-out Demonstrations

                                                San Diego,      Washington State
Category        Alabama "Pure"  Alabama ASSETS  Calif.          FIP
--------------  --------------  --------------  --------------  ----------------
Programs        Food Stamp      Food Stamp      Food Stamp      Food Stamp
affected        Program only    Program and     Program only    Program, AFDC,
                                AFDC                            and Medicaid

Percentage of   4 percent of    100 percent of  20 percent of   Five welfare
food stamp      caseload in 12  caseload in 3   caseload in     offices selected
caseload        counties        counties        first year,     statewide
cashed out                                      100 percent
                                                thereafter

Project's       8 months (May   4 years (May    6 years, 3      5 years (July
duration        1990 to Jan.    1990 to Apr.    months (July    1988 to June
                1991)           1994)           1989 to Oct.    1993)
                                                1995)

Project's
evaluation
covered

Administrative  Yes             No              Yes             Yes
costs

Food            Yes             Yes             Yes             Yes
expenditures

Other           Yes             Yes             Yes             Yes
expenditures

Recipients'     Yes             Yes             Yes             Yes
adequacy of
food supply

Participation   No              No              Yes             No

Cash-out        No              Yes             Yes             No
effects on
retailers
--------------------------------------------------------------------------------
In the Alabama "Pure" and San Diego Cash-out Demonstrations,
providing cash assistance for food was the only change to the Program
that was introduced and evaluated.  However, the other
demonstrations--Alabama ASSETS and Washington State FIP-- introduced
other welfare reform initiatives concurrent with cash-out.  For
example, the Alabama ASSETS demonstration consolidated two separately
administered programs--Food Stamp Program and Aid to Families With
Dependent Children--by standardizing some eligibility requirements
and providing a single cash grant.  The Washington State FIP combined
the Food Stamp Program, AFDC, and Medicaid into one grant program
with benefits for the first two programs combined into one check for
participants.  The four demonstrations also varied considerably in
terms of geographic location, degree of urbanization, and caseload
demographics. 

In addition to these major demonstration projects, seven states have
been given limited authorization to issue food stamp benefits in the
form of cash rather than coupons in specific situations.  Minnesota
and Vermont distribute cash for the initial month of expedited food
assistance because their systems cannot issue food stamp coupons
within the required time frame.\1 Vermont along with Utah and some
counties in Minnesota, Ohio, Oregon, New York, and Virginia also
provide food stamp benefits in the form of cash to persons who are
age 65 or older and receive Supplemental Security Income.  These
areas began providing cash benefits as part of FCS' first cash-out
demonstration, conducted from April 1980 through the summer of 1981. 
The Congress extended the cash benefits for these states beyond the
demonstration period and has since reauthorized them on two occasions
through October 1, 1995. 

According to FCS, additional states have received approval to provide
cash in lieu of coupons on a limited basis as part of a state welfare
reform initiative.  Under these demonstrations, states will be
testing new approaches to welfare, including the consolidation of the
Food Stamp and AFDC programs.  These states are Colorado, Minnesota,
Missouri, New York, Oregon, Pennsylvania, Utah, and Wisconsin. 
Evaluation data on the effects of cash-out are not yet available on
these projects.  FCS is also reviewing cash-out proposals in eight
other states. 

The 1995 Agriculture, Rural Development, Food and Drug
Administration, and Related Agencies Appropriations Act (P.L. 
103-330) limits USDA to no more than 25 cash-out projects, and the
total participation in these projects cannot exceed 3 percent of the
estimated national household level of participation in the Program. 
According to FCS, as of October 1994, 18 cash-out projects had been
approved. 


--------------------
\1 In emergency situations, the Program's regulations call for
benefits to be issued under less stringent verification standards and
within 5 days of initial application rather than 30 days. 


   CASH-OUT WILL ELIMINATE FOOD
   STAMP TRAFFICKING BUT NOT OTHER
   KINDS OF FRAUD, WASTE, AND
   ABUSE
---------------------------------------------------------- Chapter 4:2

The cash-out alternative to the current coupon-based system would
eliminate one type of food stamp fraud and abuse--trafficking--but it
will not eliminate all fraud, waste, and abuse in the Program. 
Eligibility fraud, waste, and abuse will remain unchanged, but mail
theft and counterfeiting will remain minimal. 


      ELIGIBILITY AND BENEFIT
      DETERMINATION FRAUD AND
      WASTE WOULD NOT BE REDUCED
-------------------------------------------------------- Chapter 4:2.1

As with EBT, simply providing food stamp benefits in cash instead of
coupons will not reduce the overpayments that occur each year because
of fraud, waste, and abuse in the eligibility and benefits
determination process.  Once again, this is because changing the
method of delivering benefits does not modify the eligibility and
benefits determination processes used by the states.  Unless better
ways of verifying applicant-supplied information prior to the time
that eligibility and benefit determinations are made, individuals
choosing to provide erroneous or incomplete information can receive
benefits to which they are not eligible, regardless of whether the
benefits are disbursed as coupons or as cash. 


      TRAFFICKING WOULD BE
      ELIMINATED
-------------------------------------------------------- Chapter 4:2.2

Cash-out will inherently eliminate food stamp trafficking.  The
illegal bartering of food stamp coupons--either by recipients or food
retailers--ceases to be a problem, since the benefits are issued in
cash.  Although trafficking would be eliminated with a cash-out
system, there is no guarantee that cash benefits would be used to
purchase food.  That is, recipients who use their benefits for other
than food purchases would still be abusing the Food Stamp Program. 
The potential use of cash benefits for nonfood purchases is also
discussed in a later section of this chapter. 


      MAIL THEFT WOULD REMAIN
      MINIMAL
-------------------------------------------------------- Chapter 4:2.3

Mail theft under cash-out was evaluated in the San Diego and Alabama
"Pure" demonstration projects.  The San Diego evaluation indicated
that the cash-out system was less vulnerable to losses than the
coupon-based system.  Under this demonstration project, food stamp
benefits lost through mail theft decreased from approximately $22,000
to $1,000 per month, or 95 percent, after food stamp coupons were
replaced with cash benefits.  Furthermore, the evaluation found that
although checks can be lost or stolen from the mail, misuse of the
benefits is more difficult because personal identification is
generally required to cash a check.  No identification is required to
redeem food stamp coupons.  Additionally, the Treasury Department and
states can place a stop-payment order on checks reported stolen but
not on food stamp coupons. 

In contrast, the evaluation for the Alabama "Pure" project found more
losses from mail theft when food stamps were cashed-out; however, the
theft losses remained small--only 12 of 16,737 checks were stolen and
fraudulently cashed.  The total loss in benefits was $2,285, and as
is generally the case, losses resulting from forged checks are
usually borne by the institutions that cashed the checks--not the
federal or state governments. 


      COUNTERFEITING LOSSES WOULD
      BE MINIMAL
-------------------------------------------------------- Chapter 4:2.4

Since food stamp coupons are eliminated under the cash-out approach,
any counterfeiting of food stamp benefits would occur in the form of
counterfeited state- or perhaps U.S.  Treasury- issued checks.  On
the basis of information supplied by the Secret Service, the
counterfeiting of Treasury Department checks is not widespread, but
the relatively few occurrences represent a sizable dollar value.  In
fiscal year 1993, the Secret Service discovered that 58 Treasury
Department checks valued at $9.4 million had been counterfeited and
cashed.  An additional 37 counterfeit checks valued at $11.9 million
were seized by the Secret Service before they were cashed.  Since
most household food assistance benefits are relatively small in
dollar value, it would not seem that food assistance checks would be
a target for counterfeiters. 


   CASH-OUT WILL REDUCE
   ADMINISTRATIVE COSTS
---------------------------------------------------------- Chapter 4:3

Replacing food stamp coupons with cash could significantly reduce the
Program's overall administrative costs both at the federal and state
or local levels.  The cost impact on retailers, banks, and food stamp
recipients is, however, uncertain. 


      FEDERAL AND STATE COSTS ARE
      REDUCED
-------------------------------------------------------- Chapter 4:3.1

Three of the four cash-out project evaluations compared
administrative costs for cash-out with those of the coupon-based
systems they replaced and identified savings in all three locations. 
As shown in table 4.2, the estimated cost savings per case month
ranged from $1.02 to $2.35.  The $1.02 reduction at the Alabama
"Pure" project represents an approximate 50-percent reduction in the
joint federal/state cost to administer the Program, the $1.70
reduction at San Diego represents a 62-percent reduction in
administrative costs, and the $2.35 in the Washington State
demonstration represents a 31-percent reduction in administrative
cost.  The fourth evaluation--Alabama ASSETS--did not assess the
effect that cash-out had on the Program's administrative costs. 



                          Table 4.2
           
             Estimated Federal, State, and Local
               Government Cash-out Savings--per
                     Household, per Month

                                               San
                                 Alabama     Diego  Washingt
Category                          "Pure"    County  on State
------------------------------  --------  --------  --------
Federal-level issuance savings
Coupon printing                   $0.180    $0.180     $0.18
Coupon storage and                  .020      .020       .02
 transportation
Federal Reserve fees                .170      .170       .17
Authorizing and monitoring of       .140      .140       .14
 retail stores
============================================================
Subtotal                            .510      .510     .51\a
Federal/state reimbursement
 savings\b
1/2 state/county issuance           .255      .595       .92
 savings
============================================================
Total federal savings               .765     1.105      1.43
State/county unreimbursed           .255      .595       .92
 savings
============================================================
Total savings                     $1.020     $1.70   $2.35\c
------------------------------------------------------------
\a The Washington State study's report did not include an estimate
for the reduction in federal administrative costs.  According to FCS
officials, the federal administrative cost reductions in the Alabama
and San Diego projects are reasonable estimates to use in the
Washington State analysis. 

\b States are reimbursed for at least one-half of their
administrative costs for distributing food assistance. 

\c The Washington State project's cost analysis represents only the
Food Stamp Program's costs associated with the project. 

Table 4.2 also illustrates that much of the administrative cost
savings achieved through cash-out accrued to the federal government. 
In fact, the federal administrative cost reductions ranged from 35 to
68 percent at the three cash-out projects.  As indicated, these
savings resulted primarily by eliminating the costs associated with
printing and redeeming food stamp coupons and authorizing and
monitoring retail food stores and by reducing the costs reimbursed to
the states.  On the other hand, the state and local governments'
administrative cost reductions ranged from 26 to 54 percent at the
three projects.  These savings occurred for a number of reasons,
including the elimination of processing and reporting requirements
associated with issuing food stamp coupons.  Also, cash-out freed
welfare office personnel from coupon inventory management activities,
such as the daily reconciliation, ordering, receipt, and tallying of
coupons. 

In addition to reducing administrative costs, cash-out can save the
federal government at least part of the millions of dollars spent
annually in policing the Program.  Since cash-out would eliminate
food stamp trafficking, the money spent on investigating trafficking
could be saved or redirected to more productive uses. 


      COSTS TO RETAILERS, BANKS,
      AND RECIPIENTS ARE UNCERTAIN
      WITH CASH-OUT
-------------------------------------------------------- Chapter 4:3.2

Unlike the EBT project's evaluations, the cash-out project's
evaluations did not fully address the cost impacts that cash-out
would have on retailers, financial institutions, or food stamp
recipients.  Absent such an analysis, we have drawn on information
from other sources, including the EBT evaluations, to provide a
limited assessment of what cost impacts cash-out might have on these
groups. 


         RETAILERS' COSTS SHOULD
         DECREASE
------------------------------------------------------ Chapter 4:3.2.1

The EBT project's evaluations show that the major costs to retailers
under the coupon-based system result from labor-intensive activities,
such as collecting and separating the coupons by denomination;
accounting for, bundling, and endorsing the coupons; and then
forwarding them to a financial institution for cash redemption. 

Under the cash-out alternative, only checks would be involved in the
redemption process, thus the time involved in collecting, accounting
for, and forwarding deposits to the bank could be reduced, which
would reduce the retailer's costs.  The reduction would vary by
retailer. 

A recently released Food Marketing Institute report shows that cash
payments are less expensive for food retailers to transact than any
other form of payment.  The study found that the average cost to
retailers for accepting food stamp coupons as a method of payment is
$0.163.  By contrast, the average cost of a cash transaction is
$0.0716--less than half the cost of a food stamp coupon transaction. 
(Cash is also about half the cost of an EBT transaction.) However,
the study also found that the average cost for accepting a check as a
method of payment is $0.4256--significantly higher than both food
stamps and cash.  Thus, if a food stamp recipient pays for food
purchases with a check, a retailer's cost could be more than the cost
of accepting food stamps.  But if the recipient cashes the benefit
check at a bank or some other entity and then uses cash for food
purchases, the retailer's cost would be less. 


         COST IMPACTS ON BANKS
         UNCERTAIN
------------------------------------------------------ Chapter 4:3.2.2

As discussed in chapter 3, the EBT project's evaluations show that
the elimination of food stamp coupons resulted in a reduction of
costs for financial institutions.  The majority of these savings
occurred because labor-intensive activities such as counting,
endorsing, and bundling loose coupons for forwarding to the Federal
Reserve were reduced or eliminated under EBT.  These same savings
would occur under a cash-out system. 

However, under a cash-out system, the processes associated with
redeeming food stamp coupons would be replaced with those associated
with accepting and processing food assistance benefit checks.  The
banks' costs associated with processing these checks would have to be
considered in calculating the net savings to commercial banks in
changing from a coupon system to a cash-out system.  However, the
Federal Reserve does not have specific information on the resources
or amount of time that commercial banks spend in processing checks or
food stamp coupons.  Therefore, a direct comparison of the two is not
possible. 


         EFFECTS ON RECIPIENTS IS
         DIFFICULT TO PROJECT
------------------------------------------------------ Chapter 4:3.2.3

The effects that cash-out would have on food stamp recipients is also
not entirely clear.  On the one hand, three of the four evaluations
of cash-out projects show that most recipients did not have to pay a
check-cashing fee when they redeemed their benefits.  Also, in all
four locations, researchers found that recipients preferred cash to
food stamp coupons because of increased flexibility in purchasing
decisions. 

On the other hand, because purchases made with food stamp coupons are
not subject to sales tax, recipients in the 20 states that impose
such a tax could see a decrease in the purchasing power of their
benefits if food stamp benefits were cashed-out and purchases were
made with cash.  To avoid reducing recipients' food purchasing power,
those states that tax food purchases are currently required to
increase food assistance allotments to households in order to
compensate or offset the sales tax that households would have to pay
when using their benefits.  These states would recoup the money they
provided when the food assistance benefits were actually used, but
the states would have to budget for the money and provide it
up-front. 

For some states, providing this one-time, up-front funding may be
difficult and a disincentive for providing cash food stamp benefits. 
Recently, for example, in seeking FCS' approval to continue the
ASSETS project for 2 years, Alabama officials elected to return to a
coupon-based system.  The state could not afford the $2.4 million
up-front funding necessary to increase cash food assistance benefits
to offset the impact of the state sales tax. 


   CASH-OUT HAS NOT AFFECTED
   PARTICIPATION IN THE PROGRAM
---------------------------------------------------------- Chapter 4:4

Cash-out supporters argue that the overt identification of food stamp
recipients when using coupons to buy food is a stigma that
discourages many who are eligible from participating in the Program. 
The coupon system's supporters maintain that the coupon system is
needed to ensure that benefits are actually used to purchase food. 
Also, there is concern that the cash-out system will result in
increased participation and drive up benefit costs.  However, we
found no evidence that participation in the Food Stamp Program
increased because benefits were cashed-out. 

The San Diego County project's evaluation was the only evaluation
that formally assessed the effects on participation of introducing
cash assistance, and it identified no significant impact resulting
from replacing food stamp coupons with cash.  While San Diego
County's food stamp caseload did in fact increase by 27 percent
during the first 2 years of cash assistance, this increase was
attributed to factors such as poor economic conditions--not to
cash-out. 

Likewise, although they prepared no formal evaluation, Alabama
officials responsible for operating the Program told us that the
increased participation they experienced during cash-out most likely
occurred because of simplified public assistance rules and poor
economic conditions.  An Alabama ASSETS project official said that an
initial influx of homeless applicants occurred with cash-out but
subsided to normal levels once the project's work and training
requirements for food assistance were widely publicized. 


   CASH-OUT MAY REDUCE FOOD
   EXPENDITURES
---------------------------------------------------------- Chapter 4:5

Extremely different outcomes resulted from the recent cash-out
demonstrations' analysis of households' food expenditures.  At one
extreme, the evaluation of the Alabama ASSETS project identified an
18-percent decline in food expenditures by cash recipients.  In
contrast, researchers in the other Alabama project found virtually no
change in the value of household food purchases resulting from the
switch from coupons to cash.  Findings in the San Diego County and
Washington State demonstrations fell between the Alabama extremes. 
The San Diego study identified what researchers termed a "small" but
statistically significant downward impact of about 5-percent on
household food expenditures.  Similarly, Washington State researchers
identified a 12-percent drop in the dollar value of household food
purchases by cash recipients.  These different results make it
difficult to precisely quantify cash-out's overall effect on
households' food expenditures.  In discussing this point with FCS
officials, they agreed that it would be difficult to quantify the
impact that cash-out would have on food purchases on the basis of
these demonstrations.  However, they did point out that three of the
studies showed a decline in food expenditures, which strongly
suggests that cash-out would lead to some decrease in food
expenditures. 


OBSERVATIONS AND CONCLUSIONS
============================================================ Chapter 5

While both the EBT and cash-out alternatives offer certain advantages
over the coupon-based system for delivering food stamp benefits,
neither of the two has a clear-cut advantage over the current system. 
Currently, there is momentum to change from the current system to
EBT.  The EBT system being advocated, however, is a broad-based
application that envisions providing benefits for a number of federal
and state programs in addition to food stamp benefits. 


   NO ONE SYSTEM HAS A CLEAR
   ADVANTAGE
---------------------------------------------------------- Chapter 5:1

Both EBT and cash-out show promise for reducing certain types of
fraud, waste, and abuse that plague the coupon-based system. 
However, as shown in appendix I, neither will reduce the nearly $1.8
billion in estimated overpayments resulting from fraud, waste, and
abuse that occur during the eligibility and benefit determination
process.  EBT has the potential to reduce, but not eliminate,
trafficking; however, the reduction has not been demonstrated in
quantifiable terms.  Cash-out offers the best opportunity for
reducing the illegal use of food stamp benefits because it eliminates
trafficking. 

Administratively, cash-out is clearly the least expensive of the
three systems as a means for delivering benefits.  It is unclear from
the demonstrations to date whether EBT is less expensive to
administer than the coupon system.  Two major EBT cost issues remain
to be resolved:  (1) the administrative cost of expanding the system
nationwide and (2) the potential liability costs that would result
from the application of Federal Reserve Regulation E to EBT systems. 
From a cost standpoint, EBT reduced costs for retailers, financial
institutions, and recipients.  Such reductions were less clear under
cash-out, and recipients' costs could increase because of
requirements to pay state and local sales taxes at the time they use
their benefits.  A comparison of the administrative costs of the
three systems--coupon, EBT, and cash-out--is shown at appendix II. 

On the basis of demonstrations, neither EBT or cash-out plays a
significant role in an individual's decision to apply for food
assistance.  Therefore, the number of people participating in the
Program is not likely to increase or decrease by any measurable
number if the current coupon-based system is replaced with either
alternative.  (See app.  III for a comparison between systems.)

With regard to the Program's objective of ensuring that food
assistance benefits are actually used to purchase food, the EBT and
cash-out demonstrations have not provided conclusive evidence to
determine if either system would be more effective than the current
coupon system.  However, EBT does increase the likelihood that
participants will use benefits for food.  On the other hand, cash-out
severs the link between food stamps and actual food purchases and may
lead some recipients to spend less on food purchases.  (See app.  IV
for a comparison between systems.)


   PROSPECTS FOR CHANGE
---------------------------------------------------------- Chapter 5:2

Between the EBT and cash-out alternatives, EBT currently has wider
acceptance as a possible replacement for the coupon-based system,
including support from the Congress and USDA.  This wide support of
EBT seems to center on the replacement of outmoded government
disbursement systems through the use of modern electronic banking
technology.  However, some state and local agencies remain interested
in replacing food stamp coupons with cash benefits. 


      MOMENTUM FOR EBT IS BUILDING
-------------------------------------------------------- Chapter 5:2.1

The momentum to replace the paper-based, government-funded benefit
systems with EBT is building.  The movement toward EBT has been
strongly endorsed by the Secretary of Agriculture, who is encouraging
states to pursue EBT for delivering food stamp benefits.  Currently,
nine states operate EBT systems, and the Treasury Department is
demonstrating the use of EBT for direct federal programs in Houston
and Dallas, Texas.  All parties involved in USDA's EBT
demonstrations--financial institutions, food retailers, and food
stamp recipients--prefer EBT over food stamp coupons.  Furthermore,
over 30 additional states are anticipating implementation of EBT
systems for delivering government-funded benefits. 

Interest in EBT has heightened recently.  For example, the Chairman
of the Senate Agriculture, Nutrition and Forestry Committee
introduced Senate bill 1646, the Food Stamp Fraud Reduction Act of
1993.  The bill would mandate EBT for the Food Stamp Program and
eliminate food stamp coupons nationwide (with certain exceptions)
within 3 years from enactment.  In May 1994, the Federal EBT Task
Force issued its recommended implementation plan to the Vice
President for a nationwide EBT system for delivering
government-funded benefits, including food stamps, AFDC, certain
direct federal cash benefit programs, and some state general
assistance programs.  As indicated earlier in this report, the Task
Force concluded that the development and implementation of EBT will
require a sharing of costs between government and the private
sector--with the federal share of the investment estimated to be
about $83 million.  After the infrastructure has been developed and
the EBT system is in place, savings are expected to accrue from
combining multiple program benefits on a single magnetic stripe card. 
Annual federal savings of $195 million are projected. 


      CASH-OUT HAS LESS SUPPORT
-------------------------------------------------------- Chapter 5:2.2

Cash-out has never had much of a constituency.  However, recipients
in the FCS cash-out demonstration projects preferred cash benefits to
coupons, and state and local officials expressed support for
continuing cash food stamp assistance.  Officials in Alabama and San
Diego County prefer the cash-out system to coupons because it is
easier to administer, permits efficiencies through the combining of
food stamp operations with other public assistance activities, and
allows caseworkers to concentrate on eligibility decisions rather
than maintaining accountability over food stamp coupons. 

San Diego County requested and received FCS' approval to continue
providing food stamp benefits via cash until October 1995.  In
addition, other states have recently requested approval to cash-out
for at least part of their food stamp recipients.  As indicated in
chapter 4, 18 states have now been authorized to proceed with
cash-out demonstrations.  A number of these states-- for example,
Colorado, Oregon, and Pennsylvania--have requested authority to
provide cash food assistance as part of broad reform efforts
combining food stamp benefits with other public assistance, such as
AFDC and child care benefits.  South Carolina has sought approval to
provide cash food stamp benefits to Supplemental Security Income
recipients. 


   USE OF EBT FOR FOOD STAMPS
   SHOULD BE LINKED WITH THE
   DELIVERY OF OTHER WELFARE
   BENEFITS
---------------------------------------------------------- Chapter 5:3

As discussed in chapter 3, many important questions concerning the
cost-effectiveness of EBT remain unanswered, especially using EBT for
a single-benefit program.  Both OTA and the Federal EBT Task Force
reports found that the greatest payoff for EBT is likely to come from
combining multiple-benefit programs into one system.  In this vein,
states that are using EBT to deliver food stamps and other welfare
program benefits may be laying the foundation for reforming the
nation's system for delivering welfare benefits. 

In our February 2, 1994, statement-for-the-record testimony presented
to the Senate Committee on Agriculture, Nutrition and Forestry, we
concluded that if EBT systems were put in place solely to distribute
food program benefits, they could be more costly to the federal
government than the current coupon-based system.\1 We further stated
that EBT could be more cost-effective if it were used in conjunction
with other federal and state assistance programs.  We continue to
believe that the greatest utility for EBT is an expanded system that
provides for the delivery of multiple government-program benefits. 


--------------------
\1 \1 Food Assistance:  Reducing Fraud, Waste, and Abuse in the Food
Stamp Program with Electronic Benefit Transfer Technologies
(GAO/T-RCED-94-125, Feb.  2, 1994). 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 5:4

USDA, in written comments, asked that we clarify discussions in the
report regarding the lack of evidence to support estimates of food
stamp trafficking, the fact that benefit overpayment errors would be
basically the same under any of the three issuance systems, the
inability of cash-out to ensure that benefits are used for food, and
the cost effectiveness of electronic benefits transfer.  Also, USDA
provided information on its recent initiatives to reduce the
overpayment of benefits.  USDA also provided a number of technical
comments to improve the clarity and currency of information contained
in the report.  We have included the additional information provided
by USDA in the report where appropriate.  The U.S.  Secret Service,
in written comments, and the U.S Postal Service, in oral comments,
generally agreed with our analysis and conclusions. 


COMPARISON OF FRAUD, WASTE, AND
ABUSE UNDER THE COUPON-BASED
SYSTEM AND THE EBT AND CASH-OUT
ALTERNATIVES
=========================================================== Appendix I

Fraud, waste, and   Coupon-based
abuse category      system              EBT option          Cash-out option
------------------  ------------------  ------------------  --------------------
Eligibility and     $1.8 billion in     Overpayments would  Overpayments would
benefit             overpayments was    not be reduced      not be reduced
determination       estimated in FY     because no changes  because no changes
process             1993.               are made in the     are made in the
                                        eligibility/        eligibility/benefit
                                        benefit             determination
                                        determination       process
                                        process.

Trafficking         Accurate, reliable  EBT has the         Trafficking would be
                    data are not        potential to        eliminated because
                    available to        reduce              recipients would be
                    document the        trafficking, but    given checks rather
                    amount of food      the effects have    than coupons or an
                    stamp trafficking   not been            EBT card.
                    that is occurring.  quantified in the
                                        demonstration
                                        projects.
                                        Trafficking in EBT
                                        cards has been
                                        found at three
                                        demonstration
                                        projects.

Counterfeiting      $1.2 million in     Potential exists,   Counterfeiting of
                    counterfeited food  but no cases have   checks providing
                    stamps occurred     been reported to    benefits is
                    from October 1986   date.               possible.
                    through January
                    1992. Not viewed
                    as a problem.

Mail theft          $23.9 million in    Mail theft would    Mail theft would be
                    losses occurred in  be reduced if       reduced because
                    FY 1993--less than  recipients receive  identification is
                    1/2 of 1 percent    their EBT card in   needed to cash a
                    of total dollar     person rather than  state or U.S.
                    amount of stamps    through the mail.   Treasury check.
                    issued by mail.     Also, thieves
                                        cannot use an EBT
                                        card without the
                                        recipient's PIN.
--------------------------------------------------------------------------------
Legend

EBT = electronic benefit transfer. 

FY = fiscal year. 

PIN = personal identification number. 


COMPARISON OF ADMINISTRATIVE COSTS
UNDER THE COUPON-BASED SYSTEM AND
THE EBT AND CASH-OUT ALTERNATIVES
========================================================== Appendix II

Administrative      Coupon-based
costs category      system              EBT option          Cash-out option
------------------  ------------------  ------------------  --------------------
Federal Costs       $1.8 billion in FY  It is unclear if    Costs were reduced
                    1993. Includes      costs would be      from $0.76 to $1.43
                    federal             reduced on the      per case month (35-
                    reimbursement to    basis of the        to 68-percent
                    states ($1.46       results of the      reduction) at cash-
                    billion) as well    demonstration       out demonstration
                    as USDA's and       projects            sites.
                    other federal
                    agencies' costs
                    associated with
                    policing the
                    program.

States' costs       $1.46 billion       It is unclear if    Costs were reduced
                    minimum estimated   costs would be      from $0.26 to $0.92
                    on the basis of     reduced on the      per case month (26-
                    50/50 cost share    basis of the        to 54-percent
                    with federal        results of the      reduction) at cash-
                    government.         demonstration       out demonstration
                                        projects.           projects.

Retailers' costs    Retailers' coupon   Retailers' cost     Retailers' costs
                    cost estimates      reductions ranged   were not evaluated.
                    ranged from $17.83  from $3.98 to       It is not clear if
                    to $46.05 per       $9.52 per $1,000    check-handling costs
                    $1,000 in coupon    in coupon           would be less than
                    redemptions at EBT  redemptions at EBT  food stamp-handling
                    demonstration       demonstration       costs.
                    sites prior to      sites.
                    converting to EBT.

Financial           Cost estimates      Cost reductions     Costs were not
institutions'       ranged from $3.29   ranged from $3.19   evaluated. It is not
costs               to $5.52 per        to $5.63 per        clear if check-
                    $1,000 in coupon    $1,000 in coupon    handling costs would
                    redemptions at EBT  redemptions at EBT  be less than food
                    sites prior to      demonstration       stamp-handling
                    converting to EBT.  sites.              costs.

Recipients' costs   Costs estimated to  Recipients' costs   Recipients' costs
                    range from $3.03    were reduced from   were not evaluated.
                    to $13.39 per       $1.29 to $10.87     Check-cashing fees
                    household per       per household per   could be more than
                    month at sites      month at EBT        costs under the
                    prior to            demonstration       coupon program. Loss
                    converting to EBT.  sites.              of sales tax
                                                            exemption, unless
                                                            mitigated by states,
                                                            would also increase
                                                            costs.
--------------------------------------------------------------------------------
Legend

EBT = electronic benefit transfer. 

FY = fiscal year. 

USDA = U.S.  Department of Agriculture. 


COMPARISON OF RECIPIENTS'
PARTICIPATION UNDER THE
COUPON-BASED SYSTEM AND THE EBT
AND CASH-OUT ALTERNATIVES
========================================================= Appendix III

                                                      Dollar value of benefits
Participation category     Participation              paid to recipients
-------------------------  -------------------------  --------------------------
Coupon-based system        Participation averaged 27  Approximately $23 billion
                           million per month in FY    in benefits was provided
                           1993.                      in FY 1993.

EBT                        Demonstration projects     No increase occurred,
                           showed no increase in      since there was no
                           participation as a result  increase in the number of
                           of introducing EBT.        recipients after the
                                                      introduction of EBT.

Cash-out option            The only demonstration     No increase occurred
                           project that evaluated     because no increase in
                           participation showed no    participation occurred at
                           increase as a result of    the one project that
                           introducing cash-out.      evaluated participation
                                                      when cash-out was
                                                      introduced.
--------------------------------------------------------------------------------
Legend

EBT = electronic benefit transfer. 

FY = fiscal year. 


COMPARISON OF USE OF BENEFITS FOR
FOOD UNDER THE COUPON-BASED SYSTEM
WITH USE UNDER EBT AND THE
CASH-OUT ALTERNATIVES
========================================================== Appendix IV

System                Trafficking                   Cash change
--------------------  ----------------------------  ----------------------------
Coupon-based system   Coupons are being used for    Cash change is provided to
                      nonfood purchases. No         recipients for coupon
                      concrete estimate exists of   purchases and used for
                      the amount of coupons not     nonfood purchases. Change
                      used to purchase food.        ranged from $1.83 to $2.01
                                                    per case per month at two
                                                    sites prior to its
                                                    conversion to EBT.

EBT option            EBT could reduce use of       No cash change is provided
                      benefits for nonfood items;   under EBT system. EBT
                      however, this has not been    demonstration project's
                      demonstrated under the EBT    studies predict additional
                      projects.                     1/2 of 1 percent of benefits
                                                    will be used for food
                                                    purchases.

Cash-out option       Cash-out would lessen the     There is less assurance
                      assurance that benefits are   under cash-out that benefits
                      used for food purchases. One  are used for food.
                      cash-out project suggested a
                      reduction of 10 percent.
                      However, cash-out would give
                      beneficiaries more
                      flexibility to choose where
                      they wish to shop and could
                      result in increased buying
                      power for the benefits they
                      receive.
--------------------------------------------------------------------------------
Legend

EBT = electronic benefit transfer. 




(See figure in printed edition.)Appendix V
COMMENTS FROM THE U.S.  DEPARTMENT
OF AGRICULTURE
========================================================== Appendix IV

See comment 1. 



(See figure in printed edition.)

See comment 2. 

See comment 3. 



(See figure in printed edition.)

See comment 4. 

See comment 5. 



(See figure in printed edition.)

See comment 6. 

See comment 7. 

See comment 8. 


The following are GAO's comments on the U.S.  Department of
Agriculture's letter dated November 30, 1994. 


   GAO COMMENTS
-------------------------------------------------------- Appendix IV:1

1.  As we stated in our report, we could not find any evidence to
corroborate the widely reported estimates of food stamp trafficking. 
However, because this estimate is widely cited in discussions of food
stamp fraud, we believe it should be addressed in our report. 

2.  We agree with USDA that neither the electronic benefit transfer
(EBT) or cash-out alternatives will affect the fraud, waste, and
abuse that occur during the participant eligibility and benefit
determination process.  Each of the three benefit distribution
systems retains the same eligibility and benefit determination
process.  We have clearly made this point in the report. 

3.  We have revised the report to recognize USDA's recent initiatives
to reduce the overpayment of benefits. 

4.  USDA points out that although not illegal, under cash-out, there
is a greater likelihood that benefits would be used for nonfood
purchases, which runs counter to the purpose of the program.  We have
revised the report to clarify our treatment of this issue. 

5.  In chapter 2 of the report, we indicated that in fiscal year
1993, the federal government spent about $113 million to combat
fraud, waste, and abuse in the current coupon-based system of
delivering benefits.  This includes the cost of investigating
eligibility fraud as well as the costs of investigating both
retailers' and participants' trafficking.  Under cash-out, the cost
of investigating trafficking would be eliminated.  In a draft of the
report, we mistakenly implied that the full $113 million in policing
costs would be eliminated under the cash-out option.  Only the
portion of the policing costs associated with trafficking would be
eliminated.  Data are not available to precisely calculate this
portion of the policing cost; however, available information
demonstrates that these costs total in the millions.  We have revised
the report accordingly to clarify this point. 

6.  Our report recognizes that the Maryland demonstration has been
the only statewide application of EBT.  We agree that the other four
projects, including the Ohio and Pennsylvania projects, were
limited-scale applications and note this in our report.  We also
state that the cost-effectiveness of these applications could change
as they are expanded to include more participants.  In our view, cost
information was important at all the limited-scale demonstrations
regardless of whether they were intended to measure the
cost-effectiveness of the projects.  We believe our report fairly
portrays the purpose and cost experience of the EBT demonstrations. 

7.  We believe our report accurately identifies where estimates are
based on quantitative data and where estimates are based on
professional opinions. 

8.  USDA provided a number of technical suggestions and corrections
to improve the clarity and accuracy of the report.  We have
incorporated these changes in the report as we deemed appropriate. 




(See figure in printed edition.)Appendix VI
COMMENTS FROM THE U.S.  SECRET
SERVICE
========================================================== Appendix IV



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)

See comment 1. 



(See figure in printed edition.)



(See figure in printed edition.)

See comment 2. 



(See figure in printed edition.)

See comment 3. 



(See figure in printed edition.)


The following are GAO's comments on the U.S.  Secret Service's letter
dated September 13, 1994. 


   GAO COMMENTS
-------------------------------------------------------- Appendix IV:2

1.  The Secret Service makes reference to an Automated Fingerprint
Identification System that could be used to reduce fraud by
applicants.  This automated computer system, according to the Secret
Service, has been used in the Los Angeles (California) County Welfare
system to verify the identity of welfare applicants and defeat
fraudulent application schemes.  Our review focused on the broader
issues of fraud, waste, and abuse and not necessarily on technologies
for detecting wrongdoing.  Thus, this automated system and its
application were outside the scope of our review and are not
addressed in this report. 

2.  The use of point-of-sale scanners was also outside the scope of
our review. 

3.  We have modified the report to reflect the Secret Service's
comment that EBT cards could become attractive to counterfeiters,
should the number of programs and dollar amount of benefits on the
cards increase. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Robert A.  Robinson, Associate Director
James A.  Fowler, Assistant Director

DALLAS REGIONAL OFFICE

James G.  Cooksey, Evaluator-in-Charge
Frederick D.  Berry, Staff Evaluator
Sally S.  Moino, Staff Evaluator
Mary L.  White, Staff Evaluator

OFFICE OF SPECIAL INVESTIGATIONS

Thomas L.  Sipes, Senior Special Agent

