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 | By PHILLIP M. GREGG Fraud, theft and administrative errors accounted for as much as 20 per cent of the entire cost of the nation's Food Stamp Program — $ 1.2 billion of the $5.9 billion total in 1976. In Illinois, these losses would be about $50 million. What the media called the "food stamp mess" was finally tackled by Congress. But the Food Stamp Act of 1977 does not solve the fundamental problem — a perverse incentive structure that penalizes states for administrative improvements. In fact, the legislation will increase the number of people using food stamps during the recession that economists predict for 1979-80. As a result, the reforms may actually increase, not decrease, the "food stamp mess." Food stamp mess Illinois was ranked as one of the worst states in food stamp administration during the 1974-75 recession by officials in the U.S. Department of Agriculture (USDA). Generally, the cause was staff overload. Specifically, local welfare offices were incorrectly determining eligibility for about one-half of all applicants; caseworkers were authorizing too many or too few food coupons for more than one-half of recipient households; and due to backlogs, welfare workers failed to authorize benefits for eligible recipients for one or more months during which they were legally entitled. There was also outright theft and fraud. Ineligible persons were using fradulent applications to get food coupons. Welfare staff or others were stealing authorization to purchase cards (ATPs) and food coupons from local welfare offices. Large numbers of ATPs and identification cards were stolen from the U.S. mails. Workers in food stamp sales agencies, primarily the currency exchanges in Chicago, were issuing large numbers of food coupons in return for stolen ATPs. Eligible recipients were claiming that their ATPs had been lost or stolen and were getting two or more allotments of food coupons in the same month. Counterfeit and stolen food coupons were selling in Chicago's black markets for 50 cents on the dollar. The Lincoln National Bank of Chicago and sales agents were taking away interest revenues from the U.S. Department of the Treasury by holding the cash paid for food coupons substantially longer than the 48-hour limit. Because of administrative shortcomings, the Illinois Department of Public Aid (IDPA) could not handle many of these problems. The Legislative Advisory Committee on Public Aid estimated in early 1977 that Illinois recipients illegally obtained up to 15 per cent of their food coupons at an annual cost of $25 million to the federal government. Earlier, the U.S. Treasury reported that sloppy administration by the states plus fraud and theft cost the federal government over one-half billion dollars in 1974, almost 20 per cent of the nearly $3 billion spent. As a result of the states' problems, Congress and the Carter administration cooperated to reform the program during 1977. The important question now is whether these reforms will solve Illinois' food stamp problems. An answer requires an understanding of the politics behind food stamp reform, the provisions in the amendments, and their likely results. Politics of food stamps In response to media stories about the "food stamp mess," Congress examined |
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the Food Stamp Program(FSP) in 1974 and 1975. On the basis of USD A reports of high and increasing administrative error rates, and fraud, the Ford administration proposed new rules on December 6, 1974, that would have substantially reduced benefits and participation. Congress responded by freezing program benefits and participation at their previous levels and requesting the administration to submit its reforms as legislation.
As a result, Congress considered nearly 200 separate pieces of legislation during 1975 and 1976. On May 7,1976, in the midst of Ronald Reagan's conservative challenge for the Republican presidential nomination, President Ford issued an executive order to accomplish the program cutbacks. The new criteria would have eliminated five million recipients, reduced benefits by $1.2 billion, and required about four million persons to increase the amount they paid to get bonus food coupons. A coalition including a welfare rights organization, a labor union and a food producer association defeated the action in federal court. In early September prior to the 1976 national elections, the House stalled a compromise reform measure already passed in the Senate that would have reduced the program.
The election of Jimmy Carter and a more liberal Congress in 1976, followed by Carter's appointment of Robert Bergland to head the USDA, created a more favorable political atmosphere for consideration of FSP policies. As a Democratic senator from Minnesota, Bergland had voted for both crop subsidies and food stamps, and was the first secretary to support the FSP since its inception in 1964.
Congress included the food stamp reforms in the 1977 omnibus agriculture bill that included crop subsidies. This established a basis for logrolling between congressmen of liberal urban persuasion and the conservative rural interests, a tactic that President Johnson's administration had used to start the program 13 years earlier. After negotiation in a House and Senate conference committee, Congress passed the Food and Agriculture Act of 1977 on September 16 and Carter signed it into law on September 29. The new political climate and aggressive logrolling produced the congressional reforms that were substantially more liberal than those nearly enacted just 16 months earlier. Food stamp participation and benefits would increase rather than contract.
Reform improvements
Public Law 95-113, called the Food Stamp Reform Act of 1977, contains important amendments to the 1964 Food Stamp Act. They are designed to (1) reduce problems of state administration and eligibility and benefit determination, (2) increase national participation by 1.7 million (about 10 per cent) to a total of 18.5 million, and (3) increase national expenditures to $5.8 billion by fiscal 1979, according to estimates by Congress and the administration.
Congress made six major changes in the FSP, the single most important of which eliminates the purchase requirement. Since substantial numbers of the very poor were not using food coupons because of their high cost, participants will now receive their coupons without paying an average of 25 per cent of their income. The administration believes that this reform will increase nationwide participation among this income class by about three million persons.
But the new legislation makes more than 30 million Americans eligible, and skeptics are predicting increases up to six million. Proportionate increases will occur in (1) the number of food stamp applications, (2) the eligibility and benefit determinations (which are calculated monthly for a large proportion of recipients), and (3) the issuance and negotiations of authorization cards.
Because recipients no longer have to purchase coupons, the dollar amount of coupons in circulation and the number of coupons in circulation, will decrease (about $3 billion or 40 per cent of coupons nationwide in fiscal 1977). If this change had taken place in fiscal 1977, Illinois sales agents would have issued approximately $196 million less in coupons. The change will reduce associated costs of storage, security, accounting, auditing, reporting and bookkeeping by the food vendors, sales agents, local banks, state food stamp agencies, federal reserve banks and the U.S. Treasury.
This reform was aimed at reducing losses caused by sales agents for the FSP and by financial institutions which were abusing the program by holding receipts for periods substantially longer than the 48-hour limit. Some sales agents in: Illinois — primarily 537 currency exchanges, local post offices downstate and a few savings and loan companies — had been using fraudulent book-keeping to siphon unknown amounts ok money paid to them as purchase re-quirements.
The "short-term loans" which benefited the financial institutions cost the national government at least $34 million in interest revenues during 1976,ac-cording to the General Accounting Office (GAO). Delays in holding receipts for as long as 18 days were discovered in an audit of the Lincoln National Bank in Illinois conducted bj the Chicago Regional Office of the USDA in the fall of 1975, and the USDA ordered the bank to revamp procedures to reduce these interest losses, which totaled $250,000 in 1975,
The amendments also reduce and simplify the deductions that local welfare workers use to calculated justed net income for allocating fool stamps. The numerous deduction required time-consuming paper work and accounted for up to 30 per cent of overpayments nationwide. This would have totaled about $.2 billion for the nation in fiscal 1976 and about $9 million for Illinois in fiscal 1976.
This provision will also concentrate benefits among the poor. Lower-middle income households that previously qualified because of numerous, large deductible expenses will no longer be eligible. The maximum possible gross. income for a family of four with all possible deductions will be about $10,000.
A third change sets the poverty level — $5,850 for a nonfarm family of four in July 1977 — as the adjusted net income ceiling for eligibility. This provision in combination with the more stingy
March 1979/Illinois Issues/22
deductions will eliminate about 1.5 million persons nationwide in households with incomes above the new ceiling. These changes are aimed at the "welfare Cadillac" syndrome.
Another amendment put a yearly spending cap on food stamp expenditures. The limit begins at$5.85 billion in fiscal 1978 and increases by steps to $6.24 billion in fiscal 1981. Other reforms establish two incentives for states to improve administration. If a state reduces its error rates to less than 5 per cent, USDA will increase the reimbursement level for the state's administrative costs from 50 to 60 percent. USDA willalso pay75 percent of a state's cost to investigate and prosecute theft and fraud, and the state will keep any money recovered.
A sixth set of changes, in work registration and certification periods, will alter administrative procedures that have caused paperwork problems and certification errors in local welfare offices. USDA is also given additional authority to set specific staffing and other administrative standards for the state food stamp agencies.
The major accomplishments of the 1977 amendments are the elimination of the purchase requirement and the redistribution of a larger proportion of program benefits to the poor. But to achieve these results, nationwide parti-cipation must increase substantially — by at least 1.7 million persons. This administrative burden will fall on the hard-pressed state food stamp agencies and welfare offices in metropolitan areas.
Illinois problems remain
Because of increasing Medicaid costs and enrollments, ongoing problems in Aid to Families with Dependent Children, the state's fiscal crunch, and frozen budgets, state administrators will have difficulty justifying additional manpower for food stamps. In fact, the participation increases will aggravate the "food stamp mess" — primarily problems of overloaded state administration and fraud and theft stimulated by the rapid growth of the program in 1974 and 1975. The recession predicted for 1979-80 will throw large numbers out of work, and compound the prob-lem of increased enrollments.
The amendments will increase the absolute food stamp workload of the local welfare offices in large cities by requiring a greater number of applicant interviews and application reviews, more eligibility determinations, more benefit level calculations and more authorization cards. (The last three processes are completely on a monthly basis for a substantial proportion of applicants.) If food stamp participation increases 10 per cent in Illinois (the projected national average), the number of recipient households will rise about 31,600, on a yearly basis, and the increase in applications would be substantially greater. About 75 percent of this new food stamp case work will be done in the local welfare offices of Chicago with a large proportion of the remainder done in East St. Louis.
Application backlogs and delays in issuing benefits will increase, and the threat of court awarded damages to clients and warnings of USDA penalties will create pressures for the state to speed up the processing of applications. Errors in eligibility and benefit determinations may increase.
Overpayments continue to be a serious nationwide problem, estimated at $12 of every $100 in bonus coupons, in a July 1977 study by GAO. This added up to $.65 billion nationwide and approximately $30 million in Illinois in fiscal 1976. The simplified deductions and work registration requirements will offset somewhat the increases in eligibility and benefit errors.
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Incentives unworkable The incentive designed to cope with these problems is an increase in administrative reimbursement from 50 to 60 per cent for states that reduce error rates below 5 per cent, but the incentive will have little impact for two reasons. First, given the enormous number of errors and associated problems in large cities, it is unlikely that states with a large urban clientele like Illinois, New York and California will reduce error rates below 5 percent. This reform is largely irrelevant for Illinois because of the difficulties of food stamp administration in the Chicago and East St. Louis areas. Illinois figures already reflect large reductions in error rates but the lower figures are hopelessly distant from the 5 per cent margin that would qualify the state for an additional administrative reimbursement from the USDA. Illinois error rates during the second half of 1977 pertinent to the new reimbursement incentive were between 37.6 and 58.1 per cent, depending on how the USDA interprets the rules and regulations which implement Public Law 95-113. Over the past two years the I DP A has tried to bring its FSP into full compliance under the threat of USDA penalties and court awarded damages. They reduced total errors in eligibility determination from 62 to 39 per cent, between December 1975 and December 1976. A disproportionate number of these errors occur in Cook County where local welfare offices administer about 75 per cent of the state's food coupon benefits, but with all the levels of government and multiple agencies involved, the director's influence is greatly limited there. The second reason the new incentives will not work is because the amendments actually reinforce the perverse structure that penalizes states which try to tighten food stamp administration. The Illinois situation demonstrates this. The state spent about $11.28 million before reimbursement in fiscal 1977 to administer more than $250 million in bonus coupons. If the state could reduce its cumulative allotment error rate below 5 per cent, its share of administrative costs would drop from $5.64 to |
March 1979/Illinois Issues/23
$4.52 million, a $1.13 million savings. This amount would pay salaries for about 77 employees of the Caseworker I classification and would have represented a 30 per cent increase in the food stamp staff during fiscal 1977.
But the reduced error rates would cut the flow of federal food coupon benefits into the state's economy — primarily Chicago — by at least $47.9 million! The arithmetic is simple. In the second half of 1977, the state was overpaying its food stamp clients at a rate of 26.3 per cent of the total bonus value of food coupons. Underpayments were 8.5 per cent of the total bonus value. By reducing overpayments to 5 per cent, Illinois would have lost $53.2 million in food stamp benefits. If underpayments were reduced in the same proportion — from 8.5 to 1.7 per cent — the state would gain back $4.2 million in bonus food coupons, or a net loss of $49.0 million. When the $1.13 million increase in federal administrative reimbursement representing the incentive payment is added, the state's net loss would drop to $47.9 million.
Although the magnitude of such losses would not be as great elsewhere, other states that might cut error rates will also suffer. These huge dollar losses combined with much more costly penalties, damages and administrative problems in AFDC and Medicaid, make it very difficult for state administrators to justify spending more of their bitterly contested tax dollars to upgrade a program of the federal government. Perversely, in other words, Illinois would actually lose millions of dollars if it improved the administration of its food stamp program. Pumping money into welfare budgets will actually yield bigger returns for the state's treasury, economy, businessmen and poor citizens.
Fraud, theft, counterfeiting
The elimination of the purchase requirement will increase the absolute number of households in low income areas of Illinois' large cities that receive authorization cards and negotiate them with sales agents for food coupons. But these increases will amplify ongoing problems of fraud, theft and counterfeiting.
The illegal authorizations that result from applicant and staff fraud are difficult to halt. A welfare worker determines eligibility and benefit levels on the basis of information from the applicant. Unless an independent unit in the IDPA conducts a financial check of the household, the accuracy of the information that the case worker enters on the application is difficult to verify. Limited financial checks are now conducted for public welfare cases, but these do not cover the nonwelfare classification (20 per cent of the total) where fraud is probably most serious.
On June 22, 1977, the U.S. attorney for Chicago indicted 93 federal and local government employees who were illegally enrolled for welfare benefits — including food stamps — in Illinois. The federal task force of FBI investigators, postal inspectors, Illinois Bureau of Investigation and IDPA investigators reviewed government payrolls and welfare rolls with the assistance of computers. They uncovered 800 cases of fraud which amounted to more than $5 million a year.
Nationally, the GAO reported in July 1977 that fraud accounted for up to 55 per cent of all overpayments in the low income neighborhoods of large cities. With increased participation, opportunities for staff to make fraudulent authorizations will also increase, and even if extra staff can be hired to handle the increased workload, training and security will create additional difficulties.
There will be more opportunities to steal authorization cards and coupons from the mails as more households become eligible. Personnel in the sales agents for the large cities — primarily the 512 currency exchanges in Chicago — will also be open to more bribes to cash large numbers of stolen authorization cards. And theft and fraudulent issue of food coupons by staff in sales agents will inevitably continue.
It should also become easier to sell counterfeits on the black market and negotiate them in grocery stores as the total number of recipients, authorization cards and food coupons increases in low income neighborhoods. In summary, the reforms may increase rather than reduce the opportunities and incentives for crime among the nation's lowest income, most unemployed and most victimized citizens.
The amendment designed to cope with this problem is not adequate. The 75 per cent reimbursement of the state's costs for investigation and prosecution may put some more people in jail, but it does not reduce the opportunities for these crimes nor does it significantly alter the balance of incentives. Prosecution among this income class will not -put many dollars into Illinois' treasury. But the policy could substantially increase the demands and stresses on the already overloaded law enforcement capacity of low income neighborhoods in Illinois' metropolitan areas.
Alternatives
Given the apparent ineffectiveness of the recent reforms in the Food Stamp Program, legislators will need to reexamine what they passed. Two minor changes in terms of technology, administration and law, but alas not politics, would substantially reduce the ongoing problems that the recent reforms aggravate: overloaded state administration and food stamp fraud and crime. The proposed changes would also reduce Illinois' administrative costs, errors in eligibility determinations and the overpayments of food coupon benefits.
First, a food allowance check should be substituted for the dollar value of bonus food coupons that the welfare worker authorizes for each household. Second, each state should be required to pay 5 per cent of total program costs for administration and benefits. This matching payment would replace the state's 50 per cent share of administration costs. The 5 per cent figure is used to illustrate the proposal. Other figures or combinations of different matching requirements might be advantageous. For example, a higher matching percentage (10 per cent) could be applied to the cost of program benefits and a lower matching figure (2.5 per cent) could be applied to the cost of program administration.
March 1979/Illinois Issues/24
'Cash out' the program
Under the first change, Illinois would issue monthly food allowance checks with the same computer technology now used to disribute payroll, unemployment and public assistance checks. Most states would not incur additional administrative costs by printing out a check as opposed to a food coupon authorization card. Authorization cards, sales agents and food coupons would be eliminated. Recipients would no longer negotiate authorization cards with sales agents to obtain a food coupon allotment. The change would eliminate the serious problems of authorization card theft, sales agent fraud, and food coupon counterfeiting. Granted, the food allowance checks would be subject to theft, but experience in Chicago indicates that theft and fraud are substantially less for welfare checks than for food stamp authorization cards.
This change would also reduce the states' administrative costs. The substitution of a check for an authorization card would eliminate about 15,000 food coupon sales agents nationwide. States pay the sales agents about one dollar for each monthly negotiation of a household's authorization card. The negotiation fees and related costs account for nearly one-half of the states' total administrative expenses. These fees and costs added up to nearly $250 million nationwide in fiscal 1977, and Illinois paid $5.5 million to sales agents for ATP negotiations in fiscal 1977. This was nearly half of the FSPI's total administrative expenditures of $11.28 million that year.
Other costs would also diminish. The nationwide expenditures for printing, distributing and auditing approximate- ly$5 billion worth of bonus coupons to the 15,000 sales agents would disappear. Food markets, banks and the federal reserve system would no longer keep extra accounts for food stamps. Reci- pient households would eliminate the monthly trip and wait in line to nego- tiate their authorization cards.State matching
The second proposal replaces a state's obligation to pay one-half of its administrative costs with an obligation to pay 5 per cent of its total program costs. It replaces a disincentive with an incentive. Under the Food Stamp Act as amended in September 1977, if a state invests in better administration it must pay 50 per cent (40 per cent if error rates go under 5 per cent) of all increases in administrative costs and also lose federal food coupon benefits as error rates decline. Under this proposal a state pays only 5 per cent of its costs to improve administration. But it gains 5 per cent of the reductions in benefit payments that it creates by cutting ineligibles, overpayments, fraud and theft.
The national government would pay 95 per cent of the costs of program administration and bonus coupons. This would provide ample financial incentive for Illinois to continue the program, and it would increase citizen buying power in the major metropolitan areas. This, in turn, would stimulate the state's economy, and ultimately reduce the number of recipients.
Political opposition
Despite their apparent reasonableness, these two proposed changes would stimulate political opposition, as they have already in Congress, which has voted down similar proposals in the past. The changes constitute a "piecemeal reform" that advances the objective of redistributing income to Illinois' working poor as well as its welfare recipients. This is accomplished with dollars rather than services. It takes into account differences in family spending patterns, cost and food consumption between households and communities across the state. When linked with other welfare programs, the combination of payments provides a flexible benefit schedule that meets diverse household needs and costs among communities and avoids problems of a negative income tax or single cash grant. The reform replaces a disincentive to improve state administration with an incentive.
It eliminates the substantial paper work, administrative procedures, contractual costs and crime associated with the transaction of authorization cards, sales agents and circulation of food coupons. Continued problems in the Food Stamp Program combined with the failure of Carter's comprehensive welfare reform proposal might encourage Congress to consider such amendments when the current FSP authorization expires in 1981. The proposal would not stimulate the warring factions that attempts for comprehensive welfare reform inevitably do, and lead time and implementation time should be short in comparison. The combination of a "liberal" and "conservative" provision in a proposal of narrow scope should also increase the political feasibility of the measures.
March 1979/Illinois Issues/25
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