This is the accessible text file for GAO report number GAO-07-422T 
entitled 'Food Stamp Program: Payment Errors and Trafficking Have 
Declined despite Increased Program Participation' which was released on 
January 31, 2007. 

This text file was formatted by the U.S. Government Accountability 
Office (GAO) to be accessible to users with visual impairments, as part 
of a longer term project to improve GAO products' accessibility. Every 
attempt has been made to maintain the structural and data integrity of 
the original printed product. Accessibility features, such as text 
descriptions of tables, consecutively numbered footnotes placed at the 
end of the file, and the text of agency comment letters, are provided 
but may not exactly duplicate the presentation or format of the printed 
version. The portable document format (PDF) file is an exact electronic 
replica of the printed version. We welcome your feedback. Please E-mail 
your comments regarding the contents or accessibility features of this 
document to Webmaster@gao.gov. 

This is a work of the U.S. government and is not subject to copyright 
protection in the United States. It may be reproduced and distributed 
in its entirety without further permission from GAO. Because this work 
may contain copyrighted images or other material, permission from the 
copyright holder may be necessary if you wish to reproduce this 
material separately. 

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. 

GAO's Mission: 

The Government Accountability Office, the audit, evaluation and 
investigative arm of Congress, exists to support Congress in meeting 
its constitutional responsibilities and to help improve the performance 
and accountability of the federal government for the American people. 
GAO examines the use of public funds; evaluates federal programs and 
policies; and provides analyses, recommendations, and other assistance 
to help Congress make informed oversight, policy, and funding 
decisions. GAO's commitment to good government is reflected in its core 
values of accountability, integrity, and reliability. 

Obtaining Copies of GAO Reports and Testimony: 

The fastest and easiest way to obtain copies of GAO documents at no 
cost is through GAO's Web site (www.gao.gov). Each weekday, GAO posts 
newly released reports, testimony, and correspondence on its Web site. 
To have GAO e-mail you a list of newly posted products every afternoon, 
go to www.gao.gov and select "Subscribe to Updates." 

Order by Mail or Phone: 

The first copy of each printed report is free. Additional copies are $2 
each. A check or money order should be made out to the Superintendent 
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 
more copies mailed to a single address are discounted 25 percent. 
Orders should be sent to: 

U.S. Government Accountability Office 441 G Street NW, Room LM 
Washington, D.C. 20548: 

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202) 
512-6061: 

To Report Fraud, Waste, and Abuse in Federal Programs: 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: fraudnet@gao.gov 
Automated answering system: (800) 424-5454 or (202) 512-7470: 

Congressional Relations: 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 U.S. 
Government Accountability Office, 441 G Street NW, Room 7125 
Washington, D.C. 20548: 

Public Affairs: 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800 
U.S. Government Accountability Office, 441 G Street NW, Room 7149 
Washington, D.C. 20548: