Revised July 8, 2003

by Dottie Rosenbaum

PDF of this report

View Related Analyses

If you cannot access the files through the links, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader.

On June 27, the U.S. Department of Agriculture (USDA) released state and national food stamp error rates for federal fiscal year 2002 calculated through the food stamp quality control (QC) system.  The national overpayment error rate — the percentage of food stamp benefit dollars issued in excess of the amounts for which households are eligible — fell by a third of a percentage point from 2001 levels to 6.16 percent, the lowest level since USDA began the current system of mea­suring error rates in 1981.  The underpayment error rate fell to 2.1 percent, also the lowest level on record.  The combined payment error rate, which is calculated by summing the overpayment and underpayment error rates, fell to an all-time low of 8.26 percent.

Nonetheless, the number of states subject to fiscal penalties based on their error rates rose from fifteen to twenty.  This is because the food stamp QC sanction system for 2002 measures states’ performance relative to the national aver­age, ensuring that large numbers of states will be subject to sanctions even when overall performance among the states improves.

In May 2002, as part of the nutrition title of the farm bill, the President signed legislation that changes the system for assessing fiscal sanctions against states, beginning with the 2003 error rates.  The new system will focus monetary penalties on the few states with persistently high error rates instead of on a large number of states with minor problems.  This reform of the QC sanction system should lessen the pressure that states feel to adopt policies that impede access to the Food Stamp Program.  The QC system nonetheless will remain the most sophisticated system for measuring payment accuracy in any major federal public benefit program and will continue to be a critical tool for measuring and monitoring state stewardship of federal food stamp funds.

USDA also released states’ error rates for cases in which they denied or terminated benefits.  (The under­pay­ment error rate includes only cases where states gave some benefits, but not as much as the household should have received under food stamp rules.  It does not include actions that completely denied food stamps to eligible low-income house­holds.)  Nationally, in about eight percent of the instances in which house­holds were denied food stamps or terminated from the Program, the action was found to be in error.[1]  USDA did not attempt to calculate the amount of benefits that these improperly denied households would have received.  As a result, this “negative error rate” is not directly compar­able to the overpayment and underpayment error rates, but is instead a less rigorous measure of whether the state followed the proper procedures.  Nonetheless, improper denials and termi­nations result in significant, if unintended, savings to the Program.

Although food stamp error rates have received little public atten­tion in recent years, they do enter into discussions of the Program.  Sometimes these discussions fall victim to sig­nifi­cant mis­takes or mischaracter­izations of the food stamp error rates.  To understand the error rates pro­perly, several points should be kept in mind.


What the New Food Stamp Error Rates Show

Thus, for exam­ple, a state with a seven percent overpayment error rate and a two per­cent underpayment ­error rate would be reported as having a combined error rate of nine percent.  The net loss to the federal government, how­ever, from the errors in that state’s program (i.e., the bene­fits lost through overpayments minus those saved by underpayments) would be only five percent.[2]

As noted above, even this measure overstates the cost of errors to the Program.  If it were possible to quantify the amount of benefits eligible households lost due to improper denials and terminations, the net loss to the program would be less.  In­deed, it is possible that the combined savings from underpayments and improper denials is greater than the loss resulting from overpayments of benefits.  The media often pay the most attention to the com­bined error rate, pre­sent­ing it as a reflection of the dimen­sion of excessive federal expendi­tures due to er­rors.  This is incorrect since the combined error rate in­cludes underpayments that save the Pro­gram money.


The Difference between Overpayments and Fraud

Relatively few of these errors represent dishonesty or fraud on the part of recipients (e.g., recipients intentionally lying to eligibility workers to get more food stamps).  By its very nature, fraud is diffi­cult to measure accurately.  The overwhelming majority of food stamp errors, how­ever, appear to result from honest mistakes by recipients, eligibil­ity wor­kers, data entry clerks, or com­puter program­mers.  In recent years, states have reported that half of all overpayments and two-thirds of underpayments were their fault.  Most others resulted from innocent errors by households.[3]  The Food Stamp Pro­gram has numerous anti-fraud mea­sures in place, including sophis­ticated com­puter “matching” efforts to detect unre­por­ted earn­ings and assets, ex­tensive requirements that house­holds apply­ing for or seeking to con­tinue receiving food stamps prove their eligibility, and ad­mini­­strative and crimi­nal en­forcement mechanisms.

It also should be noted that an overpayment is counted in a state’s error rate whether or not the overpaid benefits are collected back from households.  In fiscal year 2001, states collec­ted over $200 million in overissued benefits.  New collection techniques, such as intercepting wage earners’ income tax refunds, are expected to increase collections further.

In addition, the error rates measure the accuracy with which benefits are issued, not whether food stamps are redeemed or spent properly.  Evidence from USDA research suggests that a very small fraction of food stamp benefits are improperly traded for cash, or “trafficked.”  In 1998, USDA found that only three-and-a-half cents of every dollar issued in food stamps was trafficked.  This has likely fallen to an even smaller proportion of benefits as the use of electronic benefit transfer (or EBT) — or providing food stamps on cards that can be swiped at stores like credit or debit cards — has expanded since 1998 to become virtually nationwide.  One of the benefits of providing food stamp benefits through EBT is that it reduces the risks of trafficking by providing an electronic record of every transaction.


What Factors Contributed to States’ Error Rates

Although this latest release does not include information on the sources of errors, trends seen in prior years likely continued.  A number of offsetting factors contribute to states’ error rates in recent years.

In earlier recessions error rates have risen modestly when food stamp caseloads have increased.  For example, between 1991 and 1993 when food stamp caseloads grew by 22 percent the combined payment error rate went from 9.3 percent to 10.31 percent.  The fact that caseloads have been increasing and states have been under budget pressures makes the decline in error rates over the past few years even more remarkable.


The Recent Changes to the Quality Control System

Prior to the 2002 reauthorization of the food stamp program, a consensus emerged among states, advocacy groups, USDA, and other policy makers that the food stamp QC system exerted an inappropriate influence on state policy.  As noted, the prior system (which remained in effect for the 2002 error rates) subjected states with combined payment error rates above the national average to sanction.  This set up half the states to be viewed as failures each year.  As a result of this QC sanction system, states with high or rising error rates were under strong pressure from USDA to adopt policies that improve their error rates.  State officials, governors, and state legislatures take these sanctions very seriously.  Receiving a fiscal sanction can be perceived as a serious negative reflection on the state’s performance, even when the performance may be only modestly worse than average.

Some ap­proaches that states may employ to reduce overpayments — improved staff training, giving eligibility workers more manageable caseloads, com­bating staff turnover, cen­tralized change report­ing functions, simplifying and better explaining households’ reporting obligations, etc. — also are likely to reduce underpayments and to improve needy families’ ac­cess to nutrition assistance.  ­Other approaches, however, such as requiring working recipi­ents to take time off work more frequently to come into the food stamp office for inter­views, and increasing the amount of documentation a household must provide to verify their income and other circumstances, can have the effect of driving eligible families away from food stamps at the very time they may need these bene­­fits to support their transition from wel­fare to work.  This may have the effect of reducing states’ error rates by reducing participation by work­ing poor families (a group with an above-average error rate).  Unfortunately, it also under­cuts efforts to make work more attractive than welfare and is likely to cause hardship for the families affected.

As a result of these concerns, the nutrition title of the 2002 farm bill included a major reform to the food stamp QC system’s sanction rules.  While retaining the program’s strong commitment to payment accuracy, the new system will focus penalties on the few states with consistently high error rates.  From a management perspective, this revised QC sanction system provides USDA with a broader range of options for how they respond to various payment accuracy concerns and how they assist states in improving their performance.  USDA is now better equipped to provide different interventions for different types of states as opposed to having only the blunt legal requirement to sanction all states with measured error rates above the national average each year, regardless of the cause.

States that have chronic, long-term, excessive payment accuracy problems will still be subject to financial penalties and the new rules actually increase the likelihood that such states will pay fiscal penalties.  However, many states experience short-term problems when, for example, they implement new computer systems, they implement a complex change in policy, or when their caseloads increase because of a downturn in the economy.  In these states, it is counterproductive to take away resources at the very time that the state needs more resources to cope with the problem.  Under the new system, states with short-term error rate problems will have time to work to correct the problems before they are faced with a fiscal penalty.

Specifically, a state will be subject to fiscal sanction if, with statistical certainty, its combined payment error rate exceeds 105 percent of the national average for two consecutive years.  The new rules will go into effect beginning with the 2003 error rates, which will be released next summer.  If the new rules had been in effect for 2002 error rates, instead of 20 states being subject to fiscal sanctions, only a handful of states would have received a fiscal penalty.  In the future USDA will be able to focus energy on these states that have chronic problems.  Another group of states — those that exceeded the threshold for the first year — would have been given notice that their error rates are high and that they are likely to be sanctioned the following year unless they take immediate corrective action.  And every state with a combined payment error rate above six percent would be required to work with USDA to develop a corrective action plan to improve performance in future years.

The new QC system also includes new performance bonuses that reward exemplary achievements in payment accuracy and service to eligible households.  Specifically, beginning in 2003, in addition awarding bonus funds to states that achieve low or improved error rates, USDA will also reward states with high or improved rates of serving eligible households and in doing so in a timely manner.

End Notes:

[1] For 2002 USDA did not release a national average for such “negative action” errors, but did publish them for each state.  The approximation of a national average of eight percent is based on weighting the state error rates by the level of issuance of food stamp benefits in the state.  While not precisely correct, this method closely approximates the national average in earlier years. 

[2] To be sure, these savings are not sought or desired by either federal or state agencies.  But in calcu­lating the net cost to the federal government of errors, or the difference between the actual cost of the Program and what it would cost in the absence of errors, the value of benefits not provided due to underpayments must be subtracted.

[3] In fiscal year 2001, over 90 percent of all overpayments states established were classified as non-fraud.  Some of these were innocent errors by households; others were mistakes the states themselves made.