Food Stamp Program
Payment Errors and Trafficking Have Declined despite Increased Program Participation Gao ID: GAO-07-422T January 31, 2007The U.S. Department of Agriculture's (USDA) Food Stamp Program is intended to help low-income individuals and families obtain a better diet by supplementing their income with benefits to purchase food. USDA's Food and Nutrition Service (FNS) and the states jointly implement the Food Stamp Program, which is to be reauthorized when it expires in fiscal year 2007. This testimony discusses our past work on two issues related to ensuring integrity of the program: (1) improper payments to food stamp participants, and (2) trafficking in food stamp benefits. This testimony is based on a May 2005 report on payment errors (GAO-05-245) and an October 2006 report on trafficking (GAO-07-53). For the payment error report, GAO analyzed program quality control data and interviewed program stakeholders, including state and local officials. For the trafficking report, GAO interviewed agency officials, visited field offices, conducted case file reviews, and analyzed data from the FNS retailer database.
The national payment error rate for the Food Stamp Program combines states' overpayments and underpayments to program participants and has declined by about 40 percent between 1999 and 2005, from 9.86 percent to a record low of 5.84 percent, due in part to options made available to states that simplified program reporting rules. In 2005, the program made payment errors totaling about $1.7 billion. However, if the 1999 error rate was in effect in 2005, program payment errors would have been $1.1 billion higher. FNS and the states we reviewed have taken several steps to improve food stamp payment accuracy, most of which are consistent with internal control practices known to reduce improper payments. These include practices to improve accountability, perform risk assessments, implement changes based on such assessments, and monitor program performance. FNS estimates indicate that the national rate of food stamp trafficking declined from about 3.8 cents per dollar of benefits redeemed in 1993 to about 1.0 cent per dollar during the years 2002 to 2005 and that trafficking occurs more frequently in smaller stores. FNS has taken advantage of electronic benefit transfer and other new technology to improve its ability to detect trafficking and disqualify retailers who traffic. Law enforcement agencies have investigated and referred for prosecution a decreasing number of traffickers; they are instead focusing their efforts on fewer high-impact investigations. Despite the progress FNS has made in combating retailer trafficking, the Food Stamp Program remains vulnerable because retailers can enter the program intending to traffic and do so, often without fear of severe criminal penalties, as the declining number of investigations referred for prosecution suggests. While both payment errors and trafficking of benefits have declined in a time of rising participation, ensuring program integrity remains a fundamental challenge facing the Food Stamp Program. To reduce program vulnerabilities and ensure limited compliance-monitoring resources are used efficiently, GAO recommended in its October 2006 trafficking report that FNS take additional steps to target and provide early oversight of stores most likely to traffic; develop a strategy to increase penalties for trafficking, working with the Inspector General as needed; and promote state efforts to pursue recipients suspected of trafficking. FNS generally agreed with GAO's findings, conclusions, and recommendations. However, FNS believes it does have a strategy for targeting resources through their use of food stamp transaction data to identify suspicious transaction patterns. GAO believes that FNS has made good progress in its use of these transaction data; however, it is now at a point where it can begin to formulate more sophisticated analyses.
GAO-07-422T, Food Stamp Program: Payment Errors and Trafficking Have Declined despite Increased Program Participation
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Testimony before the Senate Committee on Agriculture, Nutrition, and
Forestry:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 9:45 a.m. EST:
Wednesday, January 31, 2007:
Food Stamp Program:
Payment Errors and Trafficking Have Declined despite Increased Program
Participation:
Statement of Sigurd R. Nilsen, Director:
Education, Workforce, and Income Security Issues:
GAO-07-422T:
GAO Highlights:
Highlights of GAO-07-422T, a testimony before the Senate Committee on
Agriculture, Nutrition, and Forestry
Why GAO Did This Study:
The U.S. Department of Agriculture‘s (USDA) Food Stamp Program is
intended to help low-income individuals and families obtain a better
diet by supplementing their income with benefits to purchase food.
USDA‘s Food and Nutrition Service (FNS) and the states jointly
implement the Food Stamp Program, which is to be reauthorized when it
expires in fiscal year 2007. This testimony discusses our past work on
two issues related to ensuring integrity of the program: (1) improper
payments to food stamp participants, and (2) trafficking in food stamp
benefits.
This testimony is based on a May 2005 report on payment errors (GAO-05-
245) and an October 2006 report on trafficking (GAO-07-53). For the
payment error report, GAO analyzed program quality control data and
interviewed program stakeholders, including state and local officials.
For the trafficking report, GAO interviewed agency officials, visited
field offices, conducted case file reviews, and analyzed data from the
FNS retailer database
What GAO Found:
The national payment error rate for the Food Stamp Program combines
states‘ overpayments and underpayments to program participants and has
declined by about 40 percent between 1999 and 2005, from 9.86 percent
to a record low of 5.84 percent, due in part to options made available
to states that simplified program reporting rules. In 2005, the program
made payment errors totaling about $1.7 billion. However, if the 1999
error rate was in effect in 2005, program payment errors would have
been $1.1 billion higher. FNS and the states we reviewed have taken
several steps to improve food stamp payment accuracy, most of which are
consistent with internal control practices known to reduce improper
payments. These include practices to improve accountability, perform
risk assessments, implement changes based on such assessments, and
monitor program performance.
FNS estimates indicate that the national rate of food stamp trafficking
declined from about 3.8 cents per dollar of benefits redeemed in 1993
to about 1.0 cent per dollar during the years 2002 to 2005 and that
trafficking occurs more frequently in smaller stores. FNS has taken
advantage of electronic benefit transfer and other new technology to
improve its ability to detect trafficking and disqualify retailers who
traffic. Law enforcement agencies have investigated and referred for
prosecution a decreasing number of traffickers; they are instead
focusing their efforts on fewer high-impact investigations. Despite the
progress FNS has made in combating retailer trafficking, the Food Stamp
Program remains vulnerable because retailers can enter the program
intending to traffic and do so, often without fear of severe criminal
penalties, as the declining number of investigations referred for
prosecution suggests.
While both payment errors and trafficking of benefits have declined in
a time of rising participation, ensuring program integrity remains a
fundamental challenge facing the Food Stamp Program. To reduce program
vulnerabilities and ensure limited compliance-monitoring resources are
used efficiently, GAO recommended in its October 2006 trafficking
report that FNS take additional steps to target and provide early
oversight of stores most likely to traffic; develop a strategy to
increase penalties for trafficking, working with the Inspector General
as needed; and promote state efforts to pursue recipients suspected of
trafficking. FNS generally agreed with GAO‘s findings, conclusions, and
recommendations. However, FNS believes it does have a strategy for
targeting resources through their use of food stamp transaction data to
identify suspicious transaction patterns. GAO believes that FNS has
made good progress in its use of these transaction data; however, it is
now at a point where it can begin to formulate more sophisticated
analyses.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-422T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Sigurd R. Nilsen at (202)
512-7215 or nilsens@gao.gov.
[End of Section]
Mr. Chairman and Members of the Committee:
Thank you for inviting me here today to discuss our observations on the
administration of the Food Stamp Program. As you know, the U.S.
Department of Agriculture's (USDA) Food Stamp Program is intended to
help low-income individuals and families obtain a better diet by
supplementing their income with benefits to purchase food. USDA's Food
and Nutrition Service (FNS) and the states jointly implement the Food
Stamp Program, which is to be reauthorized after it expires in fiscal
year 2007. Participation in the program has been cyclical, with a
decrease in the number of recipients for a few years beginning in 1996.
Studies suggest that economic growth in the late 1990s played a major
role in this decrease. However, in recent years, the Food Stamp Program
has grown tremendously. From 2000 to 2005, the program has grown from
$15 billion in benefits provided to 17 million individuals to $29
billion in benefits to nearly 26 million individuals. Almost 1 in every
12 Americans participates in the program.
The information I am presenting today is based primarily on findings
from our past work on two issues related to ensuring integrity of the
program: (1) improper payments to food stamp participants, and (2)
trafficking in food stamp benefits.[Footnote 1] Those findings were
based on multiple methodologies, including an analysis of program
quality control data for fiscal years 1999 through 2003, case file
reviews, data analysis of the FNS retailer database, and interviews and
site visits with program stakeholders, including federal agency and
state and local officials. These efforts were conducted in accordance
with generally accepted government auditing standards.
In summary, both payment errors and trafficking of benefits have
declined in a time of rising participation, and although progress has
been made, ensuring program integrity remains a fundamental challenge
facing the Food Stamp Program. The national payment error rate for the
program combines states' overpayments and underpayments to program
participants and has declined by about 40 percent between 1999 and
2005, from 9.86 percent to a record low of 5.84 percent. If the 1999
error rate had been in effect in 2005, the program would have made
payment errors totaling over $2.8 billion rather than the $1.7 billion
it experienced. FNS and the states we reviewed have taken many
approaches to improving food stamp payment accuracy, most of which are
similar to internal control practices known to reduce improper
payments. In addition to declining payment error, FNS estimates suggest
that the national rate of food stamp trafficking declined from about
3.8 cents per dollar of benefits redeemed in 1993 to about 1.0 cent per
dollar during the years 2002 to 2005 and that trafficking occurs more
frequently in smaller stores. FNS has taken advantage of electronic
benefit transfer (EBT) and other new technology to improve its ability
to detect trafficking and disqualify retailers who traffic, while law
enforcement agencies have investigated and referred for prosecution a
decreasing number of traffickers, instead focusing their efforts on
fewer high-impact investigations. Despite the progress FNS has made in
combating retailer trafficking, the Food Stamp Program remains
vulnerable because retailers can enter the program intending to traffic
and do so, often without fear of severe criminal penalties, as the
declining number of investigations referred for prosecution suggests.
To reduce program vulnerabilities and ensure limited compliance-
monitoring resources are used efficiently, GAO recommended in its
October 2006 trafficking report that FNS take additional steps to
target and provide early oversight of stores most likely to traffic;
develop a strategy to increase penalties for trafficking, working with
the Inspector General as needed; and promote state efforts to pursue
recipients suspected of trafficking. FNS generally agreed with our
findings, conclusions, and recommendations. However, FNS believes it
does have a strategy for targeting resources through their use of food
stamp transaction data to identify suspicious transaction patterns. We
believe that FNS has made good progress in its use of these transaction
data; however, it is now at a point where it can begin to formulate
more sophisticated analyses.
Background:
The federal Food Stamp Program is intended to help low-income
individuals and families obtain a more nutritious diet by supplementing
their income with benefits to purchase nutritious food such as meat,
dairy products, fruits, and vegetables, but not items such as soap,
tobacco, or alcohol. The Food and Nutrition Service (FNS) pays the full
cost of food stamp benefits and shares the states' administrative
costs--with FNS usually paying approximately 50 percent--and is
responsible for promulgating program regulations and ensuring that
state officials administer the program in compliance with program
rules.[Footnote 2] The states administer the program by determining
whether households meet the program's income and asset requirements,
calculating monthly benefits for qualified households, and issuing
benefits to participants on an electronic benefits transfer card.
Program Participation:
In fiscal year 2005, the Food Stamp Program issued almost $28.6 billion
in benefits to about 25.7 million individuals participating in the
program, and the maximum monthly food stamp benefit for a household of
four living in the continental United States was $506. As shown in
figure 1, program participation increased sharply from 2000 to 2005
following a substantial decline, and the number of food stamp
recipients follows the trend in the number of people living at or below
the federal poverty level.
Figure 1: Food Stamp Participation and Poverty Trends:
[See PDF for image]
Source: GAO analysis of FNS and U.S. Census data.
Note: Poverty data are by calendar year and participation data are by
fiscal year.
[End of figure]
In addition to the economic growth in the late 1990s, another factor
contributing to the decrease in number of participants from 1996 to
2001 was the passage of the Personal Responsibility and Work
Opportunity Act of 1996 (PRWORA), which toughened eligibility criteria
and had the effect of untethering food stamps from cash assistance.
Since 2000, that downward trend has reversed, and stakeholders believe
that the downturn in the U.S. economy, coupled with changes in the
program's rules and administration, has led to an increase in the
number of food stamp participants.
Determination of Eligibility and Benefits:
Eligibility for participation in the Food Stamp Program is based on the
Department of Health and Human Services' poverty measures for
households. The caseworker must first determine the household's gross
income, which cannot exceed 130 percent of the poverty level for that
year (or about $1,799 per month for a family of three living in the
contiguous United States in fiscal year 2007). Then the caseworker must
determine the household's net income, which cannot exceed 100 percent
of the poverty level (or about $1,384 per month for a family of three
living in the contiguous United States in fiscal year 2007). Net income
is determined by deducting from gross income expenses such as dependent
care costs, medical expenses, utilities costs, and shelter expenses. In
addition, there is a limit of $2,000 in household assets, and basic
program rules limit the value of vehicles an applicant can own and
still be eligible for the program.[Footnote 3] If the household owns a
vehicle worth more than $4,650, the excess value is included in
calculating the household's assets.[Footnote 4]
FNS's Quality Control System Measures Improper Payments:
FNS and the states share responsibility for implementing an extensive
quality control (QC) system used to measure the accuracy of Food Stamp
payments and from which state and national error rates are determined.
Under FNS's quality control system, the states calculate their payment
errors by drawing a statistical sample to determine whether
participating households received the correct benefit amount.[Footnote
5] The state's error rate is determined by weighting the dollars paid
in error divided by the state's total issuance of food stamp benefits.
Once the error rates are final, FNS is required to compare each state's
performance with the national error rate and imposes penalties or
provides incentives according to specifications in law. The Farm
Security and Rural Investment Act of 2002 (the 2002 Farm Bill) changed
the Food Stamp Program's quality control system by making only those
states with persistently high error rates face liabilities.[Footnote 6]
The 2002 Farm Bill also provided for $48 million in bonuses each year
to be awarded to states with high or most improved performance,
including actions taken to correct errors, reduce error rates, improve
eligibility determinations, and other indicators of effective
administration as approved by the Secretary of Agriculture.[Footnote 7]
Trafficking:
Every year, food stamp recipients exchange hundreds of millions of
dollars in benefits for cash instead of food with authorized retailers
across the country, a practice known as trafficking. In a typical
trafficking situation, a retailer gives a food stamp recipient a
discounted amount of cash--commonly 50 cents on the dollar--in exchange
for food stamp benefits and pockets the difference. By trafficking,
retailers commit fraud and undermine the primary purpose of the
program, which is to help provide food to low-income individuals and
families. Recipients who traffic deprive themselves and their families
of the intended nutritional benefits.
FNS has the primary responsibility for authorizing retailers to
participate in the Food Stamp Program, monitoring their compliance with
requirements, and administratively disqualifying those who are found to
have trafficked food stamp benefits. At the end of fiscal year 2005,
more than 160,000 retailers were authorized to accept food stamp
benefits. Supermarkets account for only about 22 percent of the
authorized stores but redeem the lion's share (about 86 percent) of
food stamp benefits. To become an authorized retailer, a store must
offer on a continuing basis a variety of foods in each of the four
staple food categories--meats, poultry or fish; breads or cereals;
vegetables or fruits; and dairy products--or 50 percent of its sales
must be in a staple group such as meat or bakery items. However, the
regulations do not specify how many food items retailers should stock.
The store owner submits an application and includes forms of
identification such as copies of the owner's Social Security card,
driver's license, business license, liquor license, and alien resident
card. The FNS field office program specialist then checks the
applicant's Social Security number against FNS's database of retailers,
the Store Tracking and Redemption System, to see if the applicant has
previously been sanctioned in the Food Stamp Program. The application
also collects information on the type of business, store hours, number
of employees, number of cash registers, the types of staple foods
offered, and the estimated annual amount of gross sales and eligible
food stamp sales.
PRWORA required each state agency to implement an EBT system to
electronically distribute food stamp benefits, and the last state
completed its implementation in fiscal year 2004. Prior to EBT,
recipients used highly negotiable food stamp coupons to pay for
allowable foods. Under the EBT system, food stamp recipients receive an
EBT card imprinted with their name and a personal account number, and
food stamp benefits are automatically credited to the recipients'
accounts once a month. In a legitimate food stamp transaction,
recipients run their EBT card, which works much like a debit card,
through an electronic point-of-sale machine at the grocery checkout
counter, and enter their secret personal identification number to
access their food stamp accounts. This authorizes the transfer of food
stamp benefits from a federal account to the retailer's account to pay
for the eligible food items. The legitimate transaction contrasts with
a trafficking transaction in which recipients swipe their EBT card, but
instead of buying groceries, they receive a discounted amount of cash
and the retailer pockets the difference.
In addition to approving retailers to participate in the program, FNS
has the primary responsibility for monitoring their compliance with
requirements and administratively disqualifying those who are found to
have trafficked food stamp benefits. FNS headquarters officials collect
and monitor EBT transaction data to detect suspicious patterns of
transactions by retailers. They then send any leads to FNS program
specialists in the field office who either work the cases themselves or
refer them to undercover investigators in the Retailer Investigations
Branch to pursue by attempting to traffic food stamps for cash.
States Have Made Progress Reducing Payment Errors, and Further
Challenges Remain:
The national payment error rate for the Food Stamp Program combines
states' overpayments and underpayments to program participants and has
declined by about 40 percent, from 9.86 percent in 1999 to a record low
of 5.84 percent in 2005, in a time of increasing participation. FNS and
the states we reviewed have taken many approaches to improving food
stamp payment accuracy, most of which are parallel with internal
control practices known to reduce improper payments. Despite this
progress, improper food stamp payments continue to account for a large
amount of money--about $1.7 billion in 2005--and similar error rate
reductions may prove challenging given that the program remains
complex.
The Food Stamp Error Rate, Which Combines Overpayments and
Underpayments, Has Declined to a Record Low:
The national payment error rate for the Food Stamp Program combines
states' overpayments and underpayments to program participants and has
declined by about 40 percent over the last 7 years, from 9.86 percent
in 1999 to 5.84 percent in 2005 in a time of increasing participation
(see figure 2 below). If the 1999 error rate had been in effect in
2005, the program would have made payment errors totaling over $2.8
billion rather than the $1.7 billion it experienced.
Figure 2: Food Stamp Payment Errors Have Dropped over the Last 7 Years:
[See PDF for image]
Source: FNS.
[End of figure]
Improper payments can be in the form of overpayments or underpayments
to food stamp recipients. In fiscal year 2005, food stamp payment
errors totaled about $1.7 billion in benefits. This sum represents
about 6 percent of the total $28.6 billion in benefits provided that
year to a monthly average of 25.7 million low-income program
participants. Of the total $1.7 billion in payment error in fiscal year
2005, $1.3 billion, or about 78 percent, were overpayments.
Overpayments occur when eligible persons are provided more than they
are entitled to receive or when ineligible persons are provided
benefits. Underpayments, which occur when eligible persons are paid
less than they are entitled to receive, totaled $374 million, or about
22 percent of dollars paid in error, in fiscal year 2005.
Error rates fell in 41 states and the District of Columbia, and 18
states reduced their error rates by one-third or more between fiscal
years 1999 and 2003. Further, the 5 states that issue the most food
stamp benefits reduced their error rates by an average of 36 percent
during this period.[Footnote 8] For example, Illinois' error rate
dropped from 14.79 in 1999 to 4.87 in 2003, and New York's error rate
dropped from 10.47 to 5.88 in those same years. In addition, 21 states
had error rates below 6 percent in 2003; this is an improvement from
1999, when 7 states had error rates below 6 percent. However, payment
error rates vary among states. Despite the decrease in many states'
error rates, some states continue to have high payment error rates.
We found that almost two-thirds of the payment errors in the Food Stamp
Program are caused by caseworkers, usually when they fail to act on new
information or when they make mistakes when applying program rules, and
one-third are caused by participants, when they unintentionally or
intentionally do not report needed information or provide incomplete or
incorrect information (see fig. 3). As shown below, 5 percent of
participant-caused errors were referred for potential fraud
investigations in fiscal year 2003. Program complexity and other
factors, such as the lack of resources and staff turnover, can
contribute to caseworker mistakes. Despite the decrease in error rate
in recent years, these factors remained the key causes of payment error
between 1999 and 2003. We also found that income-related errors account
for more than half of all payment errors.
Figure 3: Caseworker-and Participant-Caused Errors in Fiscal Year 2003:
[See PDF for image]
Source: FNS and GAO analysis.
[End of figure]
FNS and States Have Taken Steps to Increase Payment Accuracy:
We found that FNS and the states we reviewed have taken many approaches
to increasing food stamp payment accuracy, most of which are parallel
with internal control practices known to reduce improper
payments.[Footnote 9] These include practices to improve
accountability, perform risk assessments, implement changes based on
such assessments, and monitor program performance. Often, several
practices are tried simultaneously, making it difficult to determine
which have been the most effective.
States we reviewed adopted a combination of practices to prevent,
minimize, and address payment accuracy problems, such as:
* increasing the awareness of, and the accountability for, payment
error;
* analyzing quality control data to identify causes of common payment
errors and develop corrective actions;
* making automated system changes to prompt workers to obtain complete
documentation from clients;
* developing specialized change units that focus on acting upon
reported case changes; and:
* verifying the accuracy of benefit payments calculated by state food
stamp workers through supervisory and other types of case file reviews.
For example, in California, state and local officials employed a
combination of practices under each internal control component over the
last several years to bring about their improved error rate. State
officials reported expanding state oversight, hiring a contractor to
perform assessments and provide training to larger counties with higher
error rates, preparing detailed error analyses, and implementation of a
quality assurance case review system in Los Angeles County, which
accounted for 40 percent of the state's caseload. California state
officials credit the adoption of a combination of approaches as the
reason for the state's dramatic error rate reduction from 17.37 percent
in fiscal year 2001 to 6.38 in fiscal year 2005 as the number of cases
increased.
In addition, 47 states have adopted some form of simplified reporting,
one of the options FNS and Congress made available to states, which has
since been shown to have contributed to the reduction in the payment
error rate.[Footnote 10] FNS and Congress made several options
available to the states to simplify the application and reporting
process. [Footnote 11] Under the simplified reporting rule issued in
November 2000 and expanded under the 2002 Farm Bill, most households
need only report changes between certification periods if their new
household income exceeds 130 percent of the federal poverty level. This
simplified reporting option can reduce a state's error rate by
minimizing the number of income changes that must be reported between
certifications and thereby reducing errors associated with caseworker
failure to act as well as participant failure to report changes.
FNS has taken several steps to increase payment accuracy, such as using
its quality control system to provide sanctions and incentives to
encourage states to reduce their payment error rates, tracking the
success of state initiatives, and providing information needed to
facilitate program improvement. FNS has long focused its attention on
states' accountability for error rates through its QC system by
assessing penalties and providing financial incentives. The
administration of the QC process and its system of performance bonuses
and sanctions is credited as being the single largest motivator of
program behavior. In fiscal year 2005, 8 states were found to be in
jeopardy of being penalized if their fiscal year 2006 error rates do
not improve. Some states have expressed concern that they may improve
their error rates and yet still be penalized because the national rate
continues to drop around them. In addition, under its new performance
bonus system, each fiscal year FNS has awarded a total of $48 million
to states, including $24 million to states with the lowest and most
improved error rates and $6 million to states with the lowest and most
improved negative error rate.[Footnote 12]
FNS has also taken many actions to track the success of improvement
initiatives and to provide the information needed to facilitate program
improvement. FNS managers and regional office staff use QC data to
monitor states' performance over time, conduct annual reviews of state
operations, and where applicable, monitor the states' implementation of
corrective action plans. FNS, in turn, requires states to perform
management evaluations to monitor whether adequate corrective action
plans are in place at local offices to address the causes of persistent
errors and deficiencies. In addition, in November of 2003, FNS created
a Payment Accuracy Branch at the national level to work with FNS
regions to suggest policy and program changes and to monitor state
performance. The branch facilitates a National Payment Accuracy
Workgroup with representatives from each FNS regional office and
headquarters who use QC data to review and categorize state performance
into one of three tiers.[Footnote 13] FNS has recommended a specific
level of increasing intervention and monitoring approaches for each
tier when error rates increase, and the FNS regional offices report to
headquarters on both state actions and regional interventions
quarterly.
FNS also provides and facilitates the exchange of information gleaned
from monitoring by:
* publishing a periodic guide to highlight the practices states are
using to address specific problems;[Footnote 14]
* sponsoring national and regional conferences and best practices
seminars;
* training state QC staff;
* providing state policy training and policy interpretation and
guidance; and:
* supporting adoption of program simplification options.
Once promising state practices have been identified, FNS also provides
funding to state and local food stamp officials to promote knowledge
sharing of good practices.
Despite the progress in reducing payment errors, future similar error
rate reductions may prove challenging. The three major causes of errors
have remained the same over time and are closely linked to the
complexity of program rules and reporting requirements. As long as
eligibility requirements remain so detailed and complex, certain
caseworker decisions will be at risk of error. Moreover, participant-
caused errors, which constitute one-third of the overall national
errors, are difficult to prevent and identify.
Estimates Suggest Trafficking Has Declined, but FNS Could Further
Enhance Program Integrity:
Since the early 1990s, trafficking has declined by about 74 percent.
FNS estimates that between 2002 and 2005, about $241 million in food
stamp benefits was trafficked annually, or about 1.0 cent per dollar of
benefits issued. Trafficking occurs more frequently in small
convenience stores, and often, we found, between store owners and food
stamp recipients with whom they were familiar. FNS has taken advantage
of EBT and other new technology to improve its ability to detect
trafficking and disqualify retailers who traffic, while law enforcement
agencies have investigated and referred for prosecution a decreasing
number of traffickers, instead focusing their efforts on fewer high-
impact investigations. Despite the progress FNS has made in combating
retailer trafficking, the Food Stamp Program remains vulnerable because
retailers can enter the program intending to traffic and do so, often
without fear of severe criminal penalties, as the declining number of
investigations referred for prosecution suggests.
FNS Estimates Suggest That the Rate of Food Stamp Trafficking Has
Declined and That It Occurs More Frequently in Smaller Stores:
The national rate of food stamp trafficking declined from about 3.8
cents per dollar of benefits redeemed in 1993 to about 1.0 cent per
dollar during the years 2002 to 2005, as shown in table 1. Overall, the
estimated rate of trafficking at small stores is much higher than the
estimated rate for supermarkets and large groceries, which redeem most
food stamp benefits. The rate of trafficking in small stores is an
estimated 7.6 cents per dollar and an estimated 0.2 cents per dollar in
large stores.
Table 1: FNS Estimates Suggest That the Trafficking Rate Has Declined:
Calendar year period: 1993;
Estimated trafficking rate percentage: 3.8;
Food stamp benefits issued annually: (Millions of dollars): 21,100;
Estimated amount of benefits trafficked annually: (Millions of
dollars): 812.
Calendar year period: 1996-1998;
Estimated trafficking rate percentage: 3.5;
Food stamp benefits issued annually: (Millions of dollars): 19,627[A];
Estimated amount of benefits trafficked annually: (Millions of
dollars): 657.
Calendar year period: 1999-2002;
Estimated trafficking rate percentage: 2.5;
Food stamp benefits issued annually: (Millions of dollars): 16,139[A];
Estimated amount of benefits trafficked annually: (Millions of
dollars): 393.
Calendar year period: 2002-2005;
Estimated trafficking rate percentage: 1.0;
Food stamp benefits issued annually: (Millions of dollars): 23,213[A];
Estimated amount of benefits trafficked annually: (Millions of
dollars): 241.
Source: FNS studies and GAO calculation.
[A] FNS reported that it annualized redemption data over the period of
the study but did not provide the annualized figures. We calculated the
3-and 4-year average of benefits redeemed for comparative purposes.
[End of table]
FNS Has Taken Advantage of New EBT Data to Improve Retailer Monitoring,
while Other Federal Entities Have Focused on Fewer High-Impact
Investigations:
With the implementation of EBT, FNS has supplemented its traditional
undercover investigations by the Retailer Investigations Branch with
cases developed by analyzing EBT transaction data. The nationwide
implementation of EBT has given FNS powerful new tools to supplement
its traditional undercover investigations of retailers suspected of
trafficking food stamp benefits. FNS traditionally sent its
investigators into stores numerous times over a period of months to
attempt to traffic benefits. However, PRWORA gave FNS the authority to
charge retailers with trafficking in cases based solely on EBT
transaction evidence, called "paper cases." A major advantage of paper
cases is that they can be prepared relatively quickly and without
multiple store visits.
These EBT cases now account for more than half of the permanent
disqualifications by FNS (see fig. 4). Although the number of
trafficking disqualifications based on undercover investigations has
declined, these investigations continue to play a key role in combating
trafficking. However, as FNS's ability to detect trafficking has
improved, the number of suspected traffickers investigated by other
federal entities, such as the USDA Inspector General and the U.S.
Secret Service, has declined. These entities have focused more on a
smaller number of high-impact investigations. As a result, retailers
who traffic are less likely to face severe criminal penalties or
prosecution.[Footnote 15]
Figure 4: As Trafficking Disqualifications Based on EBT Data Have
Increased, Those Based on Undercover Investigations Have Decreased:
[See PDF for image]
Source: FNS.
[End of figure]
Despite the Progress That Has Been Made against Trafficking,
Vulnerabilities Still Exist in the Program:
Despite the progress FNS has made in combating retailer trafficking,
the Food Stamp Program remains vulnerable because retailers can enter
the program intending to traffic and do so, often without fear of
severe criminal penalties, as the declining number of investigations
referred for prosecution suggests. FNS field office officials told us
their first priority is getting stores into the program to ensure needy
people have access to food, and therefore they sometimes authorize
stores that stock limited food supplies but meet the minimum
requirements in areas with few larger grocery stores. However, once
authorized, some dishonest retailers do not maintain adequate food
stock and focus more on trafficking food stamp benefits than on selling
groceries, according to FNS officials, and 5 years may pass before FNS
checks the stock again unless there is an indication of a problem with
the store.
Oversight of retailers' entry into the program and early operations is
important because newly authorized retailers can quickly ramp up the
amount of food stamps they traffic, and there is no limit on the value
of food stamps a retailer can redeem in 1 month. At one field office
location where retailers are often innovative in their trafficking
schemes, FNS officials noticed that some retailers quickly escalated
their trafficking within 2 to 3 months after their initial
authorization. As shown in figure 5, one disqualified retailer's case
file we reviewed at that field office showed the store went from $500
in monthly food stamp redemptions to almost $200,000 within 6 months.
Redemption activity dropped precipitously after the trafficking charge
letter was sent to the retailer in late October of 2004. In its
application for food stamp authorization, this retailer estimated he
would have $180,000 of total annual food sales, yet the retailer was
redeeming more than that each month in food stamp benefits before being
caught in a Retailer Investigations Branch investigation.
Figure 5: Food Stamp Redemptions of a Newly Authorized Store
Disqualified for Trafficking:
[See PDF for image]
Source: GAO analysis of FNS case files.
[End of figure]
FNS has made good use of EBT transaction data. However, FNS has not
conducted the analyses to identify high risk areas and to target their
compliance-monitoring resources to the areas of highest risk. For
example, our analysis of FNS's database of retailers showed that of the
9,808 stores permanently disqualified from the Food Stamp Program,
about 35 percent were in just 4 states: New York, Illinois, Texas, and
Florida, yet about 26 percent of food stamp recipients lived in those
states. However, FNS headquarters officials did not know the number of
program specialists in the field offices in these states who devote a
portion of their time to monitoring food stamp transactions and
initiating paper cases.
In addition, some retailers and store locations have a history of
program violations that lead up to permanent disqualifications, but FNS
did not have a system in place to ensure these stores were quickly
targeted for heightened attention. Our analysis showed that, of the
9,808 stores that had been permanently disqualified from the program,
about 90 percent were disqualified for their first detected offense.
However, 9.4 percent of the disqualified retailers had shown early
indications of problems before being disqualified. About 4.3 percent of
these retailers had received a civil money penalty, 4.3 percent had
received a warning letter for program violations, and 0.8 percent had
received a temporary disqualification.[Footnote 16] Most of these
stores were small and may present a higher risk of future trafficking
than others, yet FNS does not necessarily target them for speedy
attention.
Further, some store locations may be at risk of trafficking because a
series of different owners had trafficked there. After an owner was
disqualified, field office officials told us the store would reopen
under new owners who continued to traffic with the store's clientele.
As table 2 shows, our analysis of FNS's database of retailers found
that about 174, or 1.8 percent, of the store addresses had a series of
different owners over time who had been permanently disqualified for
trafficking at that same location, totaling 369 separate
disqualifications. In one case, a store in the District of Columbia had
10 different owners who were each disqualified for trafficking,
consuming FNS's limited compliance-monitoring resources.
Table 2: Some Store Locations Have Had Multiple Retailers That Engaged
in Trafficking:
Number of different owners at same address disqualified: 2;
Number of disqualified addresses: 162.
Number of different owners at same address disqualified: 3;
Number of disqualified addresses: 10.
Number of different owners at same address disqualified: 5;
Number of disqualified addresses: 1.
Number of different owners at same address disqualified: 10;
Number of disqualified addresses: 1.
Number of different owners at same address disqualified: Total;
Number of disqualified addresses: 174.
Source: GAO analysis of FNS data.
[End of table]
Our analysis of the data on these stores with multiple disqualified
owners indicates that FNS officials found this type of trafficking in a
handful of cities and states. Almost 60 percent of repeat store
locations were in 6 states, and 44 percent were in 8 cities, often
concentrated in small areas. For example, 14 repeat store locations
were clustered in downtown areas of both Brooklyn and Baltimore.
However, it is not clear whether these data indicate heightened efforts
of compliance staff or whether trafficking is more common in these
areas. Regardless, early monitoring of high-risk locations when stores
change hands could be an efficient use of resources.
In addition, states' lack of focus can facilitate vendor trafficking.
Paper cases often identify recipients suspected to have trafficked
their food stamp benefits with a dishonest retailer, and some FNS field
offices send a list of those recipients to the appropriate state. In
response, some states actively pursue and disqualify these recipients.
However, FNS field offices do not always send lists of suspected
individual traffickers to states or counties administering the program,
and not all states investigate the individuals on these lists. Instead
of focusing on food stamp recipients who traffic their benefits, states
are using their resources to focus on recipients who improperly collect
benefits, according to FNS officials. This inaction by some states
allows recipients suspected of trafficking to continue the practice,
and such inaction also leaves a pool of recipients ready and willing to
traffic their benefits as soon as a disqualified store reopens under
new management.
Finally, FNS penalties alone may not be sufficient to deter
traffickers. The most severe FNS penalty that most traffickers face is
disqualification from the program, and FNS must rely on other entities
to conduct investigations that could lead to prosecution. For example,
in the food-stamp-trafficking ramp-up case previously cited, this
retailer redeemed almost $650,000 of food stamps over the course of 9
months before being disqualified from the program in November 2004. As
of August 2006, there was no active investigation of this retailer.
Concluding Observations:
Improper food stamp payments and trafficking of benefits have declined
in a time of rising participation, and although progress has been made,
ensuring program integrity will continue to be a fundamental challenge
facing the program. We found that payment error rates have declined
substantially as FNS and states have taken steps to improve payment
accuracy and that future reductions may prove challenging. Attention
from top USDA management as well as continued support and assistance
from FNS will likely continue to be important factors in further
reductions. In addition, if error rates continue to decrease, this
trend will continue to put pressure on states to improve because
penalties are assessed using the state's error rate as compared with
the national average. We also found that FNS, using EBT data, has made
significant progress in taking advantage of new opportunities to
monitor and disqualify traffickers. However, a more focused effort to
target and disqualify these stores could help FNS meet its continuing
challenge of ensuring that stores are available and operating in areas
of high need while still maintaining program integrity. Given the size
of the Food Stamp Program, the costs to administer it, and the current
federal budget deficit, achieving program goals more cost-effectively
may become more important. FNS and the states will continue to face a
challenge in balancing the goals of payment accuracy, increasing
program participation rates, and the need to contain program costs.
To reduce program vulnerabilities and better target its limited
compliance-monitoring resources, we recommended in our October 2006
report on trafficking that FNS develop additional criteria to identify
stores most likely to traffic; conduct risk assessments, using
compliance and other data, to systematically identify stores and areas
that meet these criteria, and allocate resources accordingly; and
provide more targeted and early oversight of stores determined most
likely to engage in trafficking.
To provide further deterrence for trafficking, we recommended that FNS
work to develop a strategy to increase the penalties for trafficking,
working with the Inspector General as needed, and consider developing
legislative proposals if the penalties entail additional authority.
To promote state efforts to pursue recipients suspected of trafficking
and thereby reduce the pool of recipient traffickers, we recommended
that FNS ensure that FNS field offices report to states those
recipients who are suspected of trafficking, and revisit the incentive
structure to encourage states to investigate and take action against
recipients who traffic.
Department of Agriculture officials generally agreed with our findings,
conclusions, and recommendations but raised a concern regarding our
recommendations on more efficient use of their compliance-monitoring
resources. They stated that they believe they do have a strategy for
targeting resources through their use of EBT transaction data to
identify suspicious transaction patterns. We believe that FNS has made
good progress in its use of EBT transaction data. However, it is now at
a point where it can begin to formulate more sophisticated analyses.
For example, these analyses could combine EBT transaction data with
other available data, such as information on stores with minimal
inventory, to develop criteria to better and more quickly identify
stores at risk of trafficking.
Mr. Chairman, this concludes my prepared statement. I will be happy to
answer any questions that you or other members of the Committee may
have.
GAO Contact and Staff Acknowledgments:
For future contacts regarding this testimony, I can be contacted at
(202) 512-7215. Key contributors to this testimony were Diana
Pietrowiak and Cathy Roark.
[End of section]
Related GAO Products:
Food Stamp Trafficking: FNS Could Enhance Program Integrity by Better
Targeting Stores Likely to Traffic and Increasing Penalties. GAO-07-53.
Washington, D.C.: October 13, 2006.
Improper Payments: Federal and State Coordination Needed to Report
National Improper Payment Estimates on Federal Programs. GAO-06-347.
Washington, D.C.: April 14, 2006.
Food Stamp Program: States Have Made Progress Reducing Payment Errors,
and Further Challenges Remain. GAO-05-245. Washington, D.C.: May 5,
2005.
Food Stamp Program: Farm Bill Options Ease Administrative Burden, but
Opportunities Exist to Streamline Participant Reporting Rules among
Programs. GAO-04-916. Washington, D.C.: September 16, 2004.
Food Stamp Program: Steps Have Been Taken to Increase Participation of
Working Families, but Better Tracking of Efforts Is Needed. GAO-04-346.
Washington, D.C.: March 5, 2004.
Financial Management: Coordinated Approach Needed to Address the
Government's Improper Payments Problems. GAO-02-749. Washington, D.C.:
August 9, 2002.
Food Stamp Program: States' Use of Options and Waivers to Improve
Program Administration and Promote Access. GAO-02-409. Washington,
D.C.: February 22, 2002.
Executive Guide: Strategies to Manage Improper Payments: Learning from
Public and Private Sector Organizations. GAO-02-69G. Washington, D.C.:
October 2001.
Food Stamp Program: States Seek to Reduce Payment Errors and Program
Complexity. GAO-01-272. Washington D.C.: January 19, 2001.
Food Stamp Program: Better Use of Electronic Data Could Result in
Disqualifying More Recipients Who Traffick Benefits. GAO/RCED-00-61.
Washington D.C.: March 7, 2000.
Food Assistance: Reducing the Trafficking of Food Stamp Benefits. GAO/
T-RCED-00-250. Washington D.C.: July 19, 2000.
Food Stamp Program: Information on Trafficking Food Stamp Benefits.
GAO/RCED-98-77. Washington D.C.: March 26, 1998.
FOOTNOTES
[1] GAO, Food Stamp Program: States Have Made Progress Reducing Payment
Errors, and Further Challenges Remain, GAO-05-245 (Washington, D.C.:
May 5, 2005); Food Stamp Trafficking: FNS Could Enhance Program
Integrity by Better Targeting Stores Likely to Traffic and Increasing
Penalties, GAO-07-53 (Washington, D.C.: Oct. 13, 2006).
[2] Reimbursements for food stamp administrative costs in 44 states are
adjusted each year to subtract certain food stamp administrative costs
that have already been factored into these states' Temporary Assistance
for Needy Families (TANF) grants. As a result, these states receive
less than 50 percent of their administrative costs. See GAO, Food Stamp
Program: States Face Reduced Federal Reimbursement for Administrative
Costs, RCED/AIMD-99-231 (Washington D.C.: July 23, 1999).
[3] Households with elderly or disabled members are exempt from the
gross income limit and may have assets valued at $3,000.
[4] If a household has no other assets, its vehicle can be worth
$6,650. States also have the option to replace the federal food stamp
vehicle asset rule with the vehicle asset rule from their TANF
assistance program or use a categorical eligibility option as a way to
exclude all vehicles.
[5] The food stamp error rate is calculated for the entire program, as
well as every state, by adding overpayments to those who are eligible
for smaller benefits, overpayments to those who are not eligible for
any benefit, and underpayments to those who do not get as much as they
should. The program also calculates a negative error rate, defined as
the rate of improper denials or terminations of benefits.
[6] Before the 2002 Farm Bill, states were penalized if their combined
payment error rate was higher than the national average. As a result,
about half of states were subject to financial sanctions each year.
States are required to either pay the sanction or provide additional
state funds--beyond their normal share of administrative costs--to be
reinvested in error reduction efforts, such as additional training in
calculating benefits for certain households. Under the 2002 Farm Bill,
a state will be subject to fiscal sanction if there is a 95 percent
statistical probability that the state's payment error rate exceeds 105
percent of the national average for 2 consecutive years.
[7] The 2002 Farm Bill requires the Secretary to issue regulations for
fiscal year 2005 and thereafter that will establish criteria related to
these improved performances and be used to award performance bonus
payments.
[8] These states are New York, Florida, Illinois, Texas, and
California.
[9] See GAO, Strategies to Manage Improper Payments: Learning From
Public and Private Sector Organizations, GAO-02-69G (Washington, D.C.:
October 2001).
[10] If simplified reporting had not been implemented, FNS estimates
suggest that the payment error rate would likely be 1.2 to 1.5 points
higher. However, differences in policies and the prevalence of errors
considerably affect the potential gains from simplified reporting. For
example, effects are generally larger in states with policies that
cover a large percentage of the caseload and in those states that do
not have the waiver to act on all reported changes. FNS estimated that
if all states adopted policies to maximize the impact of simplified
reporting, the payment error rate reduction could have been larger,
dropping by as much as 2.2 points.
[11] The 2002 Farm Bill also gave states the option of adopting
provisions that could simplify program administration and possibly
reduce error rates. These options include simplifying income and
resources, housing costs and deductions, reporting requirements, and
utility allowances. See GAO, Food Stamp Program: Farm Bill Options Ease
Administrative Burden, but Opportunities Exist to Streamline
Participant Reporting Rules among Programs, GAO-04-916 (Washington,
D.C.: September 2004).
[12] The remaining $18 million was awarded for improvements not related
to error rates--the highest and most improved ratio of food stamp
participants compared with the number of persons in poverty and the
highest percentage of timely completed applications. Also, in addition
to monitoring the payment error rate, FNS estimates the rate at which
eligible households are improperly denied benefits, which is called the
negative error rate. According to a FNS QC official, this rate is not
included in the national food stamp payment error rate because it
counts the number of cases affected rather than the number of dollars
given in error.
[13] Tier 1 states have an error rate under 6 percent, and tier 2
states have an error rate of 6 percent or greater but do not fall into
tier 3. States are assigned to tier 3 when the lower limit of their
error rate estimate at the 90 percent confidence level is higher than
105 percent of the national error rate estimate.
[14] U.S. Department of Agriculture, Food and Nutrition Service,
Payment Accuracy in the Food Stamp Program (Alexandria, Va.: September
2004).
[15] When trafficking is proved, FNS penalizes the store owners,
usually by permanent program disqualification. In limited
circumstances, traffickers may receive civil penalties. These penalties
may be imposed if the retailer had taken proper measures and can prove
he was not involved in trafficking. Civil money penalties may also be
imposed against disqualified owners who sell their stores before the
expiration of the disqualification period, because they have not
completed their program suspension penalty.
[16] Civil money penalties may be imposed against a store in lieu of
disqualification. FNS collected almost $1.7 million in civil money
penalties in fiscal year 2005. Also, warning letters are sent for
lesser violations of program regulations such as charging food stamp
recipients higher prices than other customers or when the evidence is
too limited to warrant a disqualification. Temporary disqualifications
are generally for selling ineligible goods such as paper plates,
tobacco, or alcohol or providing credit to food stamp recipients.
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