SPEAKERS CONTENTS INSERTS
Page 1 TOP OF DOCOVERSIGHT OF THE IMPLEMENTATION OF THE ELECTRONIC BENEFIT TRANSFER SYSTEM FOR THE FOOD STAMP PROGRAM
WEDNESDAY, MARCH 12, 1997
House of Representatives,
Subcommittee on Department Operations,
Nutrition, and Foreign Agriculture,
Committee on Agriculture,
The subcommittee met, pursuant to call, at 9:40 a.m., in room 1302, Longworth House Office Building, Hon. Bob Goodlatte (chairman of the subcommittee), presiding.
Present: Representatives Ewing, Foley, Thune, Clayton, Thompson, Berry, and Bishop.
Staff present: Lynn Gallagher, senior professional staff; Kevin Kramp, subcommittee staff director; Julia Paradis, deputy minority counsel; Callista Bisek, assistant clerk/scheduler; and Wanda Worsham, clerk.
OPENING STATEMENT OF HON. BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Mr. GOODLATTE. Good morning.
The Subcommittee on Department Operations, Nutrition and Foreign Agriculture will come to order.
The purpose of this hearing is to receive testimony and written statements reviewing the status of the electronic benefit transfer system for the Food Stamp Program.
The Welfare Reform Program bill that we passed last year generally deferred to States to implement EBT systems for delivery of benefits. These systems used ATM-like cards, instead of paper coupons. States are expected to implement EBT systems by the year 2002.
Page 2 PREV PAGE TOP OF DOC States have been given more control over the design of their EBT systems without prior Federal approval, and requirements for showing the systems are cost-mutual are eased. Their EBT system expenses are limited for replacing EBT cards.
The Federal Reserve Board ruled Regulation E has been overridden, thereby increasing incentives for States to operate EBT systems by removing the potential financial liability posed by the rule.
I support the rapid implementation of EBT systems because I have long been concerned about the integrity and dignity of the Food Stamp Program. EBT gives us a great opportunity to reduce waste, fraud, and abuse that costs the Food Stamp Program and taxpayers millions of dollars a year. It also injects dignity into the program by allowing the participants to use the same point-of-sale card-like machine that credit card users are afforded. No longer will Food Stamp Program beneficiaries have to use the unique and sometimes embarrassing coupons.
I have heard several complaints and success stories about the implementation process. Several issues will be discussed this morning, some of which will improve the security of the EBT card, tracking practices which States have to employ, the interoperability of the State systems. And that last issue is very important to me. Last year the full committee accepted my Sense of the Congress amendment to encourage States to design their EBT systems to be interoperable with each other.
I look forward to hearing the witnesses' testimony today. We have assembled uniquely qualified witnesses who will provide insight into EBT implementation progress, successes, and weaknesses.
I'd now like to recognize the ranking member of the subcommittee, Mrs. Clayton, for a statement.
OPENING STATEMENT OF HON. EVA M. CLAYTON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Page 3 PREV PAGE TOP OF DOC
Mrs. CLAYTON. Good morning. And I also want to welcome the witnesses we will have here today and look forward to their testimony.
As we begin the subcommittee work for the 105th Congress, I want to thank our chairman for his leadership and his cooperation and the teamwork. I look forward to working with him on matters or issues that come before this committee.
Turning to the matter at hand, I'm anxious to receive further information on the implementation process for the electronic benefit transfer system within States and the state of the innovative technology intended to reduce fraud. In fact, in my home, in North Carolina, about 250,000 families receive food stamps. Those recipients use their benefits to make over $2 million in purchases each month. North Carolina officials estimate that the use of EBT technology could cut costs to our State of $1.7 million a year. Retailers will also achieve savings in that they would not have to expend man-hours to count and sort the actual food stamps.
Also, a cost we will see diminish is that a benefit would also be more difficult to divert for the illegal use. In turn, this is a boon for retailers. North Carolina alone would receive a 10 percent increase in food purchases as a result of the inability of recipients to traffic with their EBT cards.
I look forward to hearing the testimony.
Mr. GOODLATTE. Thank you, Mrs. Clayton.
We would be pleased to invite our first panel to the table. Ms. Mary Ann Keeffe is the Acting Under Secretary for Food and Consumer Services. And she is accompanied today by Ms. Yvette Jackson, Deputy Administrator for the Food Stamp Program.
Also on our first panel is Mr. Roger Viadero, U.S. Department of Agriculture Inspector General. Accompanying Mr. Viadero is James R. Ebbitt, Assistant Inspector General for Audit; and Craig L. Beauchamp, Assistant Inspector General for Investigations.
Page 4 PREV PAGE TOP OF DOC I would like to welcome all of you and to tell you that your written statements will be made a part of the record. We will proceed to receive your testimony at this point, starting with Ms. Keeffe.
Ms. KEEFFE. Thank you very much. Good morning, Mr. Chairman and members of the committee.
STATEMENT OF MARY ANN KEEFFE, ACTING UNDER SECRETARY FOR FOOD, NUTRITION AND CONSUMER SERVICES, U.S. DEPARTMENT OF AGRICULTURE
Ms. KEEFFE. I am pleased to join you today to discuss the use of electronic benefit transfer systems in delivering nutrition assistance benefits to food stamp recipients.
We are living in an historic time of change. Just 6 months ago, President Clinton signed into law bipartisan legislation to end welfare as we know it and replace it with a system that offers hope, demands responsibility, and rewards work.
The new law recognizes our Federal responsibility to preserve the national nutrition safety net, as well as our commitment to continue a proud 30-year tradition of providing nutrition assistance to those who need it. The law promotes self-sufficiency and personal responsibility, enhances State flexibility, simplifies program administration, and strengthens program integrity. It also reaffirms EBT's role in bringing about these changes.
We owe a debt to this subcommittee for its unflagging commitment to the Food Stamp Program and sustained leadership in encouraging EBT technology as a means of delivering nutrition benefits to recipients in a way that would protect the integrity of the program and would bring dignity to recipients. This subcommittee saw early on the great promise EBT offers for improving service to clients, protecting food stamp benefits from fraud and abuse, and reducing the costs associated with the coupon system.
Page 5 PREV PAGE TOP OF DOC From the start, this administration has also championed the use of electronic benefit transfer technology to deliver benefits to people and recognized the opportunities to streamline benefit delivery, improve service, and deter fraud.
Vice President Gore's September 1993 report of the National Performance Review called for the rapid development of a nationwide system to deliver Government benefits. The next year, the EBT Task Force report, ''From Paper to Electronics: Creating a Benefit Delivery System That Works Better and Costs Less,'' was released.
Since then we have made tremendous strides in realizing the vision of that report: to make EBT nationwide in the fullest sense: one card, user-friendly, with a unified electronic delivery of Government-funded benefits under a Federal-State partnership. Every State in the country as well as the District of Columbia and the Commonwealth of Puerto Rico is planning for EBT implementation.
I am very proud of the Food and Consumer Service's role as the lead Federal agency for EBT. EBT started as a small demonstration project supported by food stamp research funds more than 10 years ago in Reading, PA. Further research in the years that followed sustained and supported early EBT development, providing the first evidence of EBT's feasibility and cost-effectiveness.
The pace of expansion in recent years has accelerated dramatically. The Food Stamp Program has progressed from having just six operational EBT sites in 1993 to 18 sites today.
Eight States now operate statewide EBT systems. They are Texas, Maryland, New Mexico, South Carolina, Utah, Kansas, North Dakota, and South Dakota. Thirty other States are well along in plans to implement EBT, negotiating and getting approval for contracts.
Overall, EBT participation has increased from roughly 2 percent of the total food stamp benefits delivered in 1993 to more than 16 percent today. By the end of this fiscal year, we anticipate that 25 States will have operational EBT systems, representing 30 percent of the total food stamp benefits delivered.
Page 6 PREV PAGE TOP OF DOC Mr. Chairman, I believe you and members of the committee have a couple of charts that demonstrate these numbers I've just mentioned. The one chart shows the country and the various degrees States are in with EBT implementation. As you can see, everyone is doing something.
The second chart illustrates through December 1998 the percentage of food stamp households, that will have EBT for food stamps.
This administration is fully committed to seeing the promise of EBT become a reality in every State by October 1, 2002. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 contains a number of new provisions to speed the States' transition from paper coupons to safe, cost-effective electronic delivery of benefits.
Now that we are well on our way to realizing our goal of nationwide EBT, there are a number of efforts underway that I would like to mention that I think you will be interested in.
The Department plans to publish a request for information shortly to obtain public input regarding interoperability across EBT systems and the so-called gateway fees associated with interstate transactions.
We are committed to maintaining a healthy balance between ensuring adequate retailer and recipient access, on the one hand, and maximizing State flexibility and minimizing EBT costs, on the other.
We welcome public comment and suggestions on these issues and will use the feedback we receive to clarify our policies to States or, if necessary, to propose new regulations.
Along these lines, we are pleased to announce that Texas and New Mexico have become interoperable, the first States with two distinct EBT systems to have succeeded in doing so. A Texas recipient can now use his or her card on New Mexico equipment and vice versa.
We also continue to support the efforts of the National Automated Clearinghouse Association EBT Council as they strive to facilitate, among other things, nationwide interoperability.
Page 7 PREV PAGE TOP OF DOC Mr. Chairman, I am pleased to be joined this morning in this panel by the Inspector General. As you know, his office recently conducted an audit on the current status of EBT implementation and made a number of recommendations for improving program integrity.
We welcomed the very constructive input the Inspector General provided and look forward to implementing the five major recommendations of that report.
We have already made great progress in implementing some of these recommendations. Our newly developed REDE System, which stands for Retailer EBT Data Exchange, expedites the process of making changes to the States' retailer database by giving States and their processors electronic access to the FCS retailer file.
The Inspector General's Office also provided a number of recommendations to expand the uses of ALERT. We share their interest in maximizing ALERT's anti-fraud capabilities, and we are looking carefully at their suggestions to identify how we can use this technology to the fullest extent practicable.
It is exciting and gratifying to witness the transformation of the Food Stamp Program into a streamlined electronic benefit transfer system, delivering benefits to families and individuals who are in need of support while they make the transition from welfare to work. Secretary Glickman has made nationwide EBT implementation a top Department priority, and we look forward to working with this committee as we move toward this goal.
Mr. Chairman, this concludes my prepared remarks, and I will be happy to take questions.
[The prepared statement of Ms. Keeffe appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you, Ms. Keeffe.
Mr. VIADERO. Thank you, sir. Thank you, Mr. Chairman and members of the committee.
STATEMENT OF ROGER C. VIADERO, INSPECTOR GENERAL, U.S. DEPARTMENT OF AGRICULTURE
Page 8 PREV PAGE TOP OF DOC
Mr. VIADERO. I am pleased to be here to provide testimony about the electronic benefits transfer, or EBT, system, through which Food Stamp Program benefits are issued to recipients and the Office of Inspector General's efforts to assure that this new system works properly.
With me today are: James R. Ebbitt, Assistant Inspector General for Audit; and Craig L. Beauchamp, Assistant Inspector General for Investigations.
The Food Stamp Program is the U.S. Department of Agriculture's largest program activity and is administered by the Food and Consumer Service. For fiscal year 1997, the Food and Consumer Service estimates about $20.8 billion in food stamp benefits is expected to be issued, of which $3.3 billion is expected to be issued through EBT.
Currently 18 States have operational food stamp EBT systems, with eight of the States operating statewide systems or expanding statewide. Thirty other States are in various EBT developmental stages.
The Federal EBT Task Force designed a five-point plan that was to lead to nationwide availability of EBT services by early 1999. In all, it was estimated that over $110 billion in Federal and State benefits would be issued through EBT systems annually.
EBT has been operational since 1984, first as a pilot project. Over the years, we had supported EBT as an alternative to paper coupons. The EBT card is less negotiable on the street. EBT-generated records have enabled us to better target stores that may be trafficking. The EBT benefits are attached electronically to individual traffickers.
The first criminal investigation of trafficking in EBT food stamp benefits occurred in 1991. Currently, about half of our investigative resources are devoted to investigating fraud in the Food Stamp Program.
Since EBT started, we have initiated 199 EBT investigations, resulting in 261 indictments and 198 convictions. Monetary results have yielded nearly $4.5 million.
Page 9 PREV PAGE TOP OF DOC Recently, a number of measures have been taken to strengthen the program. In testimony before the House Committee on Agriculture in February 1995, I made a number of recommendations, some of which required legislative change.
I am pleased to note that the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, the Welfare Reform Act, contained a number of provisions I recommended that will help in combating program fraud in authorized stores.
The act authorizes forfeiture of properties from persons convicted of felony violations of the Food Stamp Act. It also requires that USDA or a designated State or local official visit stores to be authorized or reauthorized as part of determining their eligibility.
There are provisions to require applicant stores to submit relevant income and sales tax-filing documents, require stores to provide written authorization for USDA to verify the relevant tax filings, and require authorized stores that are disqualified from the Special Supplemental Nutrition Program for Women, Infants, and Children, known as WIC, also be disqualified from the Food Stamp Program as well.
Not only has the Office of Inspector General been supportive of EBT, we have taken an active role in monitoring and reviewing EBT systems since we reviewed the first pilot project in 1986.
Based on our investigative model, the Food and Consumer Service developed a new nationwide computer system to detect potentially fraudulent EBT activity. This new system, known as the Anti-Fraud Locator using EBT Retailer Transactions, or ALERT, is now available online for two Food and Consumer Service and two Office of Inspector General investigative regions.
In 1995, during August, under the President's Council on Integrity and Efficiency, we consolidated the Inspector General community's reported findings and concerns with implementation of EBT nationwide to include making EBT processor records available to Federal and State auditors and investigators, increasing security measures over employees' access to EBT systems, and limiting the number of unsuccessful attempts to access benefits, reducing the length of time EBT cards are valid--at the time of our review, all had 1999 expiration dates--securing EBT cards returned as undeliverable and prohibiting the selection of personal identification, or PIN, numbers during nonbusiness hours.
Page 10 PREV PAGE TOP OF DOC We also issued in September 1996 a nationwide report entitled ''Monitoring EBT System Development and Implementation.'' Security policies and control processes in the four States we reviewed were deemed adequate to ensure the timely and accurate availability of food stamp benefits to recipients and payments to retailers. However, Food and Consumer Service Program regulations do not require that EBT cards have increased EBT card security features recommended by the United States Secret Service.
The Food and Consumer Service has drafted regulations to require these features. But until the regulations are final, there is no avenue to require compliance. These regulations are currently in the clearance process.
One of the primary focuses of opposition to the increased card specifications is the related increased costs. Best estimates indicate that the increased costs would be just over $2 million nationwide, a modest investment compared to the dollars being issued.
We continue to be the lead agency for the President's Council on Integrity and Efficiency on EBT activities for State-administered programs. As States come online, we will begin to audit their individual systems.
Mr. Chairman, this concludes my statement. I thank you again for the opportunity to address this committee. And I will be pleased to answer any questions you or any member of the committee may have.
[The prepared statement of Mr. Viadero appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you, Mr. Viadero. And thank you, Ms. Keeffe.
We held hearings on this issue in this subcommittee a couple of years ago. And I am pleased that we have made considerable progress. At that time I believe there were only about maybe two systems that were operational and many others were barely off the ground.
This map that you provided is very helpful in indicating the number that are now in various stages of completing these systems but still shows that virtually every State with a couple of exceptions is well underway to getting something accomplished and that we're now at the 16 percent.
Page 11 PREV PAGE TOP OF DOC This chart shows a projection of 30 percent by June. Do you think, Mr. Viadero, that is an accurate projection? It's likely you'll achieve that level of participation in the next few months?
Mr. VIADERO. I haven't seen the chart yet, sir. I just got it now.
Mr. GOODLATTE. OK.
Mr. VIADERO. Mr. Chairman, I think Mrs. Keeffe is in a better position to answer that question.
Mr. GOODLATTE. All right. Good.
Ms. KEEFFE. Yes. As you can see, Mr. Chairman, from the chart, we are projecting that by June of this year, we will be at the 30 percent mark. And that is from information that we've received in terms of where States are in their EBT process.
Mr. GOODLATTE. Do you think a goal of 2002 is an achievable one for having 90 percent or better participation?
Ms. KEEFFE. We certainly hope so. And I think if there is any indication in terms of the rapid progress that we have made in just these few recent years, that we're on target for that.
Mr. GOODLATTE. Is there anything that the committee or the Congress as a whole should be doing that would ease this implementation process? That's an open-ended question.
Ms. KEEFFE. I know. We hate to let you off the hook here, but I think you've really been doing all the necessary things, been very supportive of our efforts in this regard. And we certainly will keep everybody abreast of actions here and should we run into some difficulty certainly alert you to that.
Mr. GOODLATTE. Looking at it from the other standpoint, what kinds of concerns are you hearing from the State EBT managers? Are there problems there that we need to be aware of?
Ms. KEEFFE. I'm going to ask Ms. Jackson to maybe get into this because she deals day to day with the food stamp area and is more in touch with the individual States on what they're doing and what their needs are.
Page 12 PREV PAGE TOP OF DOC Ms. JACKSON. Thank you, Mr. Chairman.
I think one of the biggest obstacles for the expansion of EBT was really taken care of by the welfare reform legislation and the removal of Regulation E being applicable to State EBT systems.
As you know, that particular provision basically is the same protection that protects your and my credit reports whereby if we report the losses in 48 hours, we're only liable for the first $50 of use.
So there is a major concern because the Federal Reserve Board had ruled that Regulation E would also apply to State EBT systems. Of course, States were concerned about the potential cost due to fraud and abuse or administrative costs if that were to apply to the EBT card.
The legislation that was passed last year basically established that Regulation E did not apply to State EBT systems. So that was a major obstacle that was removed by Congress.
I believe States are moving very aggressively. I know, as you stated in your opening statement, that they're very interested in the issue of interoperability. Certainly it is something that we support, but it is really at this point in time a State decision.
They're very interested in whether or not that could come from mandate and, if so, how would the potential increased costs be covered. And, as the Acting Under Secretary indicated, that's the reason why we are about to put out a request for information so that we can gather information that will be helpful both to us as the Government as well as the States in determining the best way to approach the interoperability and the associated costs of that.
Mr. GOODLATTE. Thank you.
My time has expired. Mrs. Clayton.
Mrs. CLAYTON. Thank you.
North Carolina is part of the Southern Alliance of States. We call an RFP. My question is to either one of you, is what the expansion possibilities are?
Page 13 PREV PAGE TOP OF DOC Ms. JACKSON. Thank you, Congresswoman Clayton.
As you know, one issue that did pop up last year that I think may have slowed down the Southern Alliance of States' progress was a question about whether or not the IEI process that was used by Treasury to------
Mrs. CLAYTON. And that's invitational------
Mr. VIADERO. That's the invitation for expressions of interest.
Mrs. CLAYTON. Thank you.
What does that mean now that I know what it is?
Ms. JACKSON. The issue there, of course, was that the process in Treasury did limit the competition to financial institutions. And while that issue was being worked out legally, there was some slowdown in the progress of it.
Nevertheless, the Southern Alliance of States is moving independently. Each State is moving at its own speed in moving forward with its EBT implementation.
Alabama has actually already completed their systems testing. And they expect to begin pilot operations in April. Missouri also is scheduled to begin testing their system this very month. And, if successful, they expect their pilot operations to begin in May.
We know that Arkansas and Georgia have both signed contracts with Citibank and are expected to begin pilot operations this summer. Florida has also signed a contract. They expect to begin their operations this fall.
And North Carolina and Tennessee are both right now engaged in contract negotiations with Citibank. Once they conclude those contract negotiations, we expect them to move forward in beginning testing operations and implementation.
So the progress is well-underway. The States in the Southern Alliance of States are in different segments of implementation, but we believe they're all moving forward.
Mrs. CLAYTON. I'm just curious. Do you know if all systems use the same kind of program?
Page 14 PREV PAGE TOP OF DOC Ms. JACKSON. Well, the Southern Alliance of States because they are moving together, those States will all be compatible. They are using a single contractor. Even though they're moving and negotiating separately, they will have a similar platform.
There will be interoperability amongst the States that are in that particular alliance. There are similar alliances in other parts of the country that will also have interoperability among their various consortiums.
Mrs. CLAYTON. Both of you said that--do you know what the budget request is for this item or was that completed in the total of the Welfare Reform Act? What is the budget requirement this year?
Ms. KEEFFE. Well, it's a 50/50 match, the Federal Government and the States.
Mrs. CLAYTON. And that's what it has been as a result of the report?
Ms. KEEFFE. That's what it has been.
Mrs. CLAYTON. Continuously?
Ms. KEEFFE. That's correct.
Mrs. CLAYTON. That's all I'm interested in.
Mr. GOODLATTE. Thank you.
The gentleman from Mississippi, Mr. Thompson.
Mr. THOMPSON. Thank you, Mr. Chairman.
I have a couple of questions. With respect to, I guess, Ms. Jackson, implementation of programs, have you found any potential small businesses being excluded from participation in this new program?
Ms. JACKSON. As of now, we have not. As you know, the statute does not allow costs to be shared with retailers, which means that the Federal Government and the State Government have to provide the point-of-sale devices to stores, regardless of their size. And we're to allow them to participate in the program.
Page 15 PREV PAGE TOP OF DOC Right now, as long as the store is authorized to participate in the Food Stamp Program, it is our expectation that those stores must also be equipped to participate in EBT in those States.
Mr. THOMPSON. So, to your knowledge, everyone is allowed to participate?
Ms. JACKSON. As long as they're qualified to participate as retailers in the Food Stamp Program, yes.
Mr. THOMPSON. OK. The other question is: As it relates to contracting opportunities in the overall implementation of the system, is there any data that might show whether or not any minorities have benefitted from any of the contracting so far in the implementation of this system?
Ms. JACKSON. I don't have any detailed information to advise you in that regard. I can get back to you. I do know that Federal contractors have subcontracted with minority organizations to do recipient training.
We do require that recipients be trained in how to utilize the EBT systems as they're rolled out. And many contractors have recognized the value that smaller, locally based organizations can provide that type of training.
In terms of the larger issue in terms of the large vendors that are participating in the program, I'd have to get back to you in terms of what we know in terms of subcontracting to minority vendors.
Mr. THOMPSON. I would like for you to provide this committee with that detailed breakdown, if possible, of minorities so we can see whether or not opportunity exists across the spectrum.
Ms. JACKSON. Certainly.
[The Department responded for the record as follows:]
Page 16 PREV PAGE TOP OF DOCFCS does not require States to include specific provisions for minority businesses in their EBT contracts. Such provisions are driven by State laws and policies. For this reason, the terms vary greatly from State to State. Many State contracts do not contain any special requirements in this area while others require a specific percentage of participation by minority-owned businesses. The following is a sampling of State RFP and/or contract language which specifically address minority businesses.
Indiana expects reasonable participation of minority business enterprises in the EBT contract, with a goal of 5 percent minority business enterprise participation as established under Indiana Public Law 341983.
Minnesota's RFP states, ''Vendors are strongly encouraged to subcontract at least 5 percent of their training component to a targeted group business or individual.''
Ohio's RFP states that their EBT contractor must identify a role for Ohio Certified Business Enterprises substantial enough to involve at least 15 percent of the total contract amount.
New York sets a goal of 15 to 20 percent of the contract be set aside for minority- and women-owned businesses.
Connecticut's RFP calls for the contractor to use its best efforts in using minority business enterprises.
New Jersey's EBT RFP required contractors use 7 percent minority-owned and 3 percent women-owned businesses.
Texas's EBT contract terms and conditions required 30 percent of the total contract go to Historically Underutilized Businesses (HUB) which included minority- and women-owned businesses.
Colorado's RFP stated that offerors must agree to use the maximum amount of minority business firms consistent with the efficient performance of the contract. Colorado's contract states, the contractor will take all necessary affirmative steps, as required by 45 CFR 92.36(e) and (Colorado Executive Order, Procurement Rules) to assure that small and minority businesses and women business enterprises are used, when possible, as sources of supplies, equipment, construction and services purchased under this contract.
Page 17 PREV PAGE TOP OF DOCIn Virginia, while there is no specific percentage requirement, they have indicated to potential bidders that Offeror's proposals will be evaluated based on their planned involvement of these types [Minority Business Enterprise/Women Business Enterprise] of businesses in this contract.
Michigan does not require specific use of minority- or women-owned businesses under the EBT contract, however, the contractor must provide a quarterly report on expenditures to minority, women, and handicapped-owned businesses to monitor their participation.
Wisconsin encourages vendors to explain how they will use targeted groups but neither requires nor considers as part of the RFP evaluation the offeror's use of minority- or women-owned businesses.
Missouri's contract contains the following provision: ''. . . State agencies shall have a goal of awarding at least 5 percent of the total value of all contracts to businesses that qualify as minority business enterprises'' as defined by State law. In accordance with this language, the State requires that the EBT contractor make a good faith effort to obtain minority participation in subcontracting activities.
Mr. GOODLATTE. Just as a general item, I think what practice we ought to follow in this subcommittee, where possible, is to recognize the order that they arrived, rotating between the parties except when I have backup on my side.
[Laughter.] At this point we'll recognize the gentleman from Georgia, Mr. Bishop.
Mr. BISHOP. Thank you very much, Mr. Chairman.
I have a statement for the record that I would like to submit at this time.
Mr. GOODLATTE. Without objection, so ordered.
[The prepared statement of Mr. Bishop follows:]
Statment of Hon. Sanford D. Bishop, Jr., a Representative in Congress from the State of Georgia
Page 18 PREV PAGE TOP OF DOCI'd like to thank the witnesses in advance for their testimony today.
The successful delivery of Federal nutrition benefits electronically seems to me a good test of how our Federal and State Governments can truly take advantage of technology for the good of our citizens. This delivery system puts the fruits of technology in the hands of our economically least fortunate.
I hope that we in the Congress, and the officials from the Federal agencies represented here today, ultimately succeed in this endeavor.
However, I urge my colleagues and the Federal Government witnesses to continually remain mindful that the initiatives we in Washington believe to be new innovative ideas, can often be felt at the State level as unfunded mandates.
I trust that as a result of our discussion here today, I'll leave satisfied that the successful implementation of electronic benefit transfer throughout the country is indeed a result of Federal and State cooperation.
Mr. BISHOP. I would like to welcome all of the witnesses. I am very pleased and very supportive generally of the EBT concept. Georgia, my State, has begun a program of implementation. And we are so far monitoring it and hoping that it will prove continually successful.
I want to continue to follow along the lines that Mr. Thompson mentioned about access. Rural areas really need to have access to the EBT simply because there are many rural outlets that are now servicing the food stamp population. I thought I understood Ms. Jackson to say that any eligible outlet would be equipped with the necessary hookup for Citibank so that they can be equipped. Is that correct?
Ms. KEEFFE. Yes.
Mr. BISHOP. And who is going to assume the cost of this?
Ms. JACKSON. The cost is currently being borne by the Federal and State Governments because the statute currently does not permit to do any cost-sharing with food retailers. So right now these costs are being borne 50 percent by State Governments and 50 percent by Federal.
Page 19 PREV PAGE TOP OF DOC Mr. BISHOP. But that is being mandated, as I understand it. Do I understand you to be saying that every outlet, whether it's a mom and pop grocery store or whether it's a Winn-Dixie, would have to be equipped with this Citibank ATM-equivalent machine?
Ms. JACKSON. That's correct. The only issue for us would be to make sure that the store does meet the eligibility requirements to participate in the Food Stamp Program.
Mr. BISHOP. My next question has to do with the interoperability. Some of us come from States that border, actually, several other States. And the departments who administer the EBT Program have raised some questions regarding the progress for interoperability on use of the EBT access across State lines and the specific requirements that are set nationally.
How are those doing? And is this or would that be what we have come to call unfunded mandates for States?
Ms. KEEFFE. Well, currently, Congressman, where we have border situations, the regulations require that border stores receive a point-of-sale device if needed for client access. And, if I'm correct, that cost is borne by the host State in those circumstances.
Once they are interoperable, all stores within one State will be able to accept the other States' regards, regardless of proximity to the border. And the next phase that we're moving to in the New Mexico-Texas situation will be in about 3 or 6 months, where they're also going to add cash programs to that. But currently the border situation is generally in areas where it requires client access.
There are some situations where a store decided to do it for convenience purposes. They want to get the business. And in those cases, they bear the cost of it.
Mr. BISHOP. Is it a requirement for border States to have the interoperability capabilities? Is it a mandate?
Ms. KEEFFE. No, it is not.
Mr. BISHOP. So you're suggesting, then, that this would not be an unfunded mandate on the States? They don't have to have across State line or across jurisdiction line access?
Page 20 PREV PAGE TOP OF DOC Ms. KEEFFE. Only in the cases where it is needed for client access, where there would be no other choice for where clients would have to go, that the closest available stores to them were across the border. Then they do have to.
Mr. BISHOP. As part of the food stamp reform legislation passed year, I offered an amendment where they set a kind of resolution that the States should make them compatible with
but they didn't require it.
We think that the retailers in the Food Stamp Program and utilizers of food stamps will put a lot of pressure on States because they're going to want to be able to go across the border and shop in adjoining jurisdictions.
So it's our hope that it won't need to be mandated, but it will somehow block the process of demand from the local folks.
Mr. GOODLATTE. Would the gentleman yield?
Mr. BISHOP. Yes.
Mr. GOODLATTE. It seems, then, that it's going to be across the budgets for putting out the resources available within the States to accomplish this. And we all now are scrambling with diminishing budgets. And I'm just wondering what this is going to do with access across States lines and interoperability.
Mrs. CLAYTON. Will the gentleman yield?
Mr. BISHOP. Yes.
Mrs. CLAYTON. The Southern alliance, which I think your State, along with--how many States are in the Southern alliance?
Ms. JACKSON. Eight States.
Mrs. CLAYTON. Those States are voluntarily agreeing to do that to put forth that commitment. But your point is for the Nation at this time. If we find out the Nation required transfer, it will become a problem. But at least those eight States have made that commitment without budget consideration.
Page 21 PREV PAGE TOP OF DOC Mr. BISHOP. Reclaiming my time, I have been contacted by State people. They're very concerned about a mandate.
Mrs. CLAYTON. Even if they volunteer to do it?
Mr. BISHOP. Apparently so. Apparently it must be awfully strong.
Mr. GOODLATTE. We encouraged them, and they volunteered to do it without a mandate.
The gentleman from Illinois.
Mr. EWING. Thank you, Mr. Chairman. Thank you for holding this meeting.
I'm sorry I missed the testimony, but looking at the map as far as the EBT development, I see my home State has a little red at the bottom. And it kind of tapers off to light red. Could you tell me how that's being implemented? Is it a standard amount that's paid or is it moving from south to north?
Ms. KEEFFE. The States' RFP was first issued in fiscal year 1994 to acquire contractor services to implement and operate the EBT system. The contract was approved by the Food and Consumer Service the end of May 1996 and implemented, the pilot, in Sangamon County in October 1996. Expansion in several areas of Chicago actually just got underway. And we expect that statewide roll-out should be completed by October of this year. So it's moving well along.
Mr. EWING. So the pilot program within Sangamon County and then it's moved into Cook County?
Ms. KEEFFE. Yes.
Mr. EWING. Thank you. Mr. Chairman, I am finished.
Mr. GOODLATTE. Thank you, Mr. Ewing.
We are pleased to have with us two new Members of Congress on this committee. We have tended to have more veteran members on this subcommittee. We're delighted to have some new members. Mr. Thune from South Dakota was here earlier and had to step out, but he will be back. We're also pleased to have Marion Berry from the State of Arkansas.
Page 22 PREV PAGE TOP OF DOC Mr. BERRY. Thank you, Mr. Chairman. It's also a pleasure to see my former colleagues from the Department of Agriculture here.
I have just one question. Is there any necessary infrastructure in rural areas that must be in place that's required to operate this system, like power or phone lines or something like that?
Ms. JACKSON. We require every State to negotiate their contracts for EBT, that the contractor has to guarantee that all of those issues can be addressed. And, as I said earlier, it is our requirement that any store that is authorized to participate in the Food Stamp Program, whether that be an urban store or a rural store, whether it be a large market or a small independent grocery store, as long as they're eligible and are authorized to participate in the program, then they must be equipped.
Mr. BERRY. Thank you.
Ms. KEEFFE. Mr. Chairman, I wonder if I could just get back a moment to Congressman Bishop's query in terms of the interoperability. The bottom line is that because we are about to publish the request of information, we're hoping that we're going to get feedback from a lot of the issues and concerns that you raised.
And I think that's really going to tell us how this is going to move forward and what the obstacles are out there, what additional needs we may have to look at in that regard. And we expect to have that out shortly.
Mr. BISHOP. Thank you very much. We are very much interested in moving forward. I think Georgia has begun to move forward. Obviously they are encountering some issues and concerns, which probably will be responded to.
Mr. GOODLATTE. Thank you.
The gentleman from Florida.
Mr. FOLEY. Thank you very much, Mr. Chairman.
Page 23 PREV PAGE TOP OF DOC My question is really along the same line of questioning as Mr. Bishop on the interoperable cash transactions between the States. So you expect the pilot project to reveal the transactional costs between the States that you------
Ms. KEEFFE. What we're doing is publishing a request for information so that we can hear from the public what the thinking is, what are the obstacles to doing this, what are the pluses, and then move from there.
What is currently operational is the interoperable system in Texas and New Mexico. Obviously we will be looking at that in terms of being up and running to see what we learn from that.
Mr. FOLEY. Because I would assume, then--I'm sure Mr. Bishop shares this concern--people who live near the borders and are living in rural communities will be more likely to shop possibly in another State using the EBT Program. Those are obviously some of the kinks that do need to be worked out, if you're in Tallahassee, FL and you decide to go to Thomasville, GA to do shopping, how that will all mesh together so the benefits that are actually being directed towards Florida, into a block grant, contract proposal, or what have you, how does it get shifted out so that Georgia has the credit for the purposes or giving the allocations, truly the Florida residents, and then how it interacts across the State, the same thing, which transactions that maybe Georgia residents coming to Tallahassee for commerce might suggest that then be satisfied. So that's the one thing maybe in this global picture I see as being some of our problems.
When you live on a State line, you do have a tendency to shift over to other States for transactions on the other side. Maybe sales tax is lower in the State. It could affect purchases in Florida. It could have some effect on the purchase. So I hope that we move expeditiously on that.
Ms. KEEFFE. Well, we certainly intend to. And I think you raised a lot of the questions that obviously we'll be looking at. You know, going back to the Vice President's original thoughts along these lines, it was hoped that there would be one coordination line that could operate. But clearly you have to move sequentially here and look to see how long this will work out.
Page 24 PREV PAGE TOP OF DOC Mr. BISHOP. Will the gentleman yield?
Mr. FOLEY. Yes, indeed.
Mr. BISHOP. Will your database allow you to capture information so that maybe some formula can be developed to allocate funds between States with allocations?
Ms. JACKSON. What we are hoping to get out of the Texas and New Mexico demonstration that's operating now is to get a better handle on how much movement there really is between residents from one State to the next so that we can get an idea of the kind of traffic that can be expected.
We hope to get a lot of information out of the Texas and New Mexico demonstration as well as information, especially information from the private sector, from the industry, because there's a lot of information out there now based on the commercial use of credit and debit cards that we hope will be applicable to this situation, at least in terms of giving us a better handle on the amount of traffic and some information about associated costs.
Mr. BISHOP. You're going to have an income disparity if you use your database for the other cards.
Ms. JACKSON. We recognize that when talking about food stamps and timed benefits, where it's not really comparable, but we still hope to get information in terms of what those transaction costs actually are.
Mr. GOODLATTE. Mr. Viadero?
Mr. VIADERO. Yes. Mr. Chairman, if I can, I might be able to put a little more light on this, particularly in dealing with the interstate operability issue. We're also recommending that Food and Consumer Service visit each store in the interoperability area to ensure that there is such a store. That goes back to one of our basic issues, ''Is there a store?'' because we're still doing criminal investigations and finding the stores. That's item 1.
Item 2, in answer to the settlement agreement, since we have new members, let me first say we're going to send a copy of the latest nationwide EBT report up to each member. That's a September 30, 1996 report.
Page 25 PREV PAGE TOP OF DOC And let me quote, if I can, from our report. It reads,
FCS allows contractors to develop settlement procedures that vary in how daily settlement is initiated. As EBT moves forward, nationwide implementation consistency in settlement procedures must exist if States are to exchange data.
If the procedure remains inconsistent, the contractor could accumulate Federal funds for several days before depositing the funds to the retailers' account. However, EBT contractors in three of the four States we reviewed settle with retailers once a day.
This approach provides an accurate evaluation of program expenses. And such evaluation is important for fiscal year end closeout for financial statement purposes for both the vendor and for the Government. We believe that this also imposes an added discipline on the EBT system.
So these vendors already recognize this issue. And they're working with FCS and us to correct this condition.
Mr. FOLEY. Would the chair yield an additional minute?
Mr. GOODLATTE. Yes.
Mr. FOLEY. The States that are operational now in EBT, have any of them been allowed to or have chosen to isolate certain food groups purchased or allowed to be purchased with food stamps, such as--well, I don't want to get into the specifics--the food snacks. I'm not even going to mention names. I'm trying to determine if any States have banned or what they consider allowing and if the Food Stamp Program isolates certain products that they may not allow that anybody is aware of.
So say somebody isolates or does not allow ice cream or may not allow sodas or may not allow those things that are barred by law.
Ms. KEEFFE. Yes. I mean, non-food items, of course, are isolated and charged separately if the client wants to purchase other than the food stamps. But all of the food stamp items are not put into any particular groupings.
Page 26 PREV PAGE TOP OF DOC Mr. FOLEY. So the States are following basically the Federal guidelines now. Are they eligible to create their own programs? Can the States enact restrictions further than the Federal Government laws?
Ms. KEEFFE. No. There has not been a request to do that.
Mr. FOLEY. Go ahead.
Mr. BISHOP. That's an interesting line of inquiry because there has been some discussion within various States to allow certain foods to be covered and certain foods not to be covered. We get back to the interoperability issue.
Can beneficiaries then go from one State to the other to purchase items that are not allowed in the neighboring State, which is an issue? It's not if everybody is following the same guidelines. It seems to me that there is the potential for that.
Ms. KEEFFE. There probably could be, but I would assume that Federal regulation would prevail here.
Mr. GOODLATTE. Mr. Viadero?
Mr. VIADERO. Yes, sir.
Mr. GOODLATTE. You, I know, wish to prohibit the selection of personal identification numbers during nonbusiness hours. Can you explain what the need is for that?
Mr. VIADERO. Yes, sir. We feel that the system is subject or more subject to manipulation if we allow people to get PIN numbers out of normal working hours. This also ties in with the number of times a person would have to put their PIN number in at any given transaction. As it is with an ATM card, I believe if you put your number in, it's not correct a third time, the machine eats it.
We're not saying that the machine should eat the card or the card should be removed. That's all we're saying, that they keep a better control on these PIN numbers.
We feel that it's very important to be done during normal business hours. It provides less of an opportunity for any collusive activity.
Page 27 PREV PAGE TOP OF DOC Mr. GOODLATTE. Can you explain how that works? How does one ordinarily get the PIN number? And what is the difference between those numbers?
Mr. VIADERO. I'll ask Mr. Ebbitt to answer that.
Mr. EBBITT. Thank you, Mr. Chairman. Essentially the client will work with the caseworker. And PIN numbers will be assigned by the State that's administering the program throughout the course of the business day.
Our suggestion was since States running the program normally have an 8:00 to 5:00 business day, it would be highly unusual to have PINs assigned, for example, at 10 o'clock in the evening. You'd have to wonder what's going on there.
So our suggestion was to limit PIN assignment to normal business working day, as the IG indicated, to prevent any kind of collusive activity that could exist.
Mr. GOODLATTE. Very good. I also understand you support an expiration date for the EBT cards. Is that necessary where you have food stamps that are a time-limited benefit?
Mr. VIADERO. Well, Mr. Chairman, we would like them to expire when a person's eligibility expires or has to be renewed. This way we have to see the person in order to reissue the card.
We have some States, and we're doing a follow-up audit on one large city right now where the people are being certified or recertified on the program. We want to see the persons to ensure that there's a person who goes with the card. That's why we want that.
Mr. GOODLATTE. Does anybody else have any additional questions for these witnesses?
Mr. FOLEY. I may have one. We're just trying to find some information on the welfare bill that may give the authority to the Department in 2 years for each State to be able to enact certain guidelines. I want to make certain both that it's on the record and that the Department is working consistently with the welfare bill.
Ms. KEEFFE. I may have some more information on that. The experts behind me here have something. The welfare reform legislation required that we look into the practicality of using standards with EBT and do so within a 2-year time period. Our Office of Analysis and Evaluation, is planning the study to assess that.
Page 28 PREV PAGE TOP OF DOC Mr. FOLEY. I guess it does have quite an impact, obviously, as Mr. Bishop suggested, if the State is allowing one product and one isn't. I would assume Georgia wants to allow purchase of the syrup you drink somewhere in their boundaries, Florida would not. And so there would be certainly the distinction of products purchased through that item.
Ms. JACKSON. If I could just clarify, I don't think the idea was to not have uniform Federal standards in terms of what are allowable purchases with the Food Stamp Program and what are not. But the idea is to sort of combine the EBT technology with the scanning technology which is used, which is two different technologies, to use those two in tandem to ensure that people absolutely could not use their food stamp benefit to buy items that are not allowable under the Food Stamp Act so that we could basically combine those two technologies and use EBT to ensure that the program is not abused and that the benefit was not used for things that are not allowable.
But I don't think the idea was to give States independent authority to establish what are eligible foods and what are not eligible foods but to ensure integrity in the use of that EBT card.
Mr. FOLEY. Yes. I think you're absolutely correct. It doesn't actually speak to the types of foods that may be judged by the individual States. It does say that, to the extent practicable, measures that permit a system to differentiate items of food that may be part of the law from items of food that may not be a part.
So, in essence, they scan for beer, which obviously would get kicked out. It would allow the States to differentiate, then, saying, no you can or cannot use this product. It's merely following the item, I guess putting a system in place that reads the product and would kick it out of the computer, say, as they do with the new scanner will pop up that says, ''check that product,'' it will be a similar really mechanical operation, rather than a judgment call on the product.
Page 29 PREV PAGE TOP OF DOC Ms. KEEFFE. Correct. And, of course, it gives us an added tool of monitoring in terms of the stores.
Mr. GOODLATTE. Thank you.
Any other questions?
Mr. GOODLATTE. Well, we want to thank all of you very much for your participation today. It has been very helpful. And we will continue to stay in touch with you as you continue to make progress on this issue. Thank you again.
Ms. KEEFFE. Thank you.
Mr. VIADERO. Thank you, Mr. Chairman.
Mr. GOODLATTE. We'd now like to invite the second panel to the table. Mr. Gregory Coler is the president and CEO for Transactive Corporation of Austin, Texas. Mr. G. Edward DeSeve is Controller at OMB; and Mr. Bob Rasor, Deputy Assistant Director for the Office of Investigation in the U.S. Secret Service.
Thank you. Mr. Coler, you are recognized. Please give your name.
Mr. COLER. Gregory Coler, president and chief executive officer of Transactive Corporation.
Mr. GOODLATTE. We invite you to begin. We remind everyone that your entire written statement will be submitted for the record. Give us the highlights of that testimony, starting with Mr. Coler.
Mr. COLER. Thank you, Mr. Chairman. I'll present a very abbreviated statement of my testimony, which has already been submitted.
STATEMENT OF GREGORY L. COLER, PRESIDENT AND CEO, TRANSACTIVE CORPORATION
Page 30 PREV PAGE TOP OF DOC Mr. COLER. I'm extremely grateful for this opportunity to testify today. Transactive Corporation is the Nation's leading implementer of electronic benefit transfer systems. We have established the Nation's largest EBT system in the State of Texas. Transactive won the EBT contract in the State of Illinois. And we have recently been awarded the right to negotiate contracts for the States of Indiana and Mississippi.
My purpose in being here today is to tell you that the U.S. Treasury and other Federal agencies without the appropriate oversight of Congress are adversely and obtrusively attempting to eliminate fair competition for EBT contracts.
The U.S. Treasury Department has aggressively promoted the single procurement process for EBT, known as an invitation for expression of interest, or an IEI. There are many problematic aspects of the IEI procurement process.
The IEI violates Department of Agriculture regulations governing the procurement of EBT systems and services. Those regulations require that all State agency procurement transactions shall be conducted in a manner that provides maximum open and free competition and expressly prohibits procurement procedures that contain features restricting or eliminating competition.
In short, the IEI process limits competition, shifts what has been a function of the States to the Federal Government, and accords taxpayers no assurance of receiving value or confidence in the integrity of the procurement.
On May 10, 1995, this subcommittee, under the direction of its late chairman, Congressman Bill Emerson, conducted a hearing regarding EBT. The hearing testimony raised several significant concerns.
The committee at that time asked the Treasury's Commissioner of Financial Management Service why the Treasury was using the IEI process, rather than following normal procurement procedures and using an RFP. The committee was told by the commissioner that applicable law required Treasury to proceed in that manner.
Page 31 PREV PAGE TOP OF DOC The United States Court of Appeals for the D.C. Circuit ruled unanimously last August that Treasury did not have to use an IEI process and restrict the bidding to only financial institutions. In fact, the court said the Treasury's decision to use the IEI procedure was arbitrary and capricious.
The committee also expressed concern about the anti-competitive nature of the IEI and was told in response to that that 650 invitations were sent out to various financial institutions. And their expectation was that they would receive between 30 and 40 proposals.
Treasury received only four expressions of interest, and only one of them was found to be non-responsive. Therefore, there were only three bidders for the selection.
Following the committee hearing, Congressmen Emerson and Condit wrote to Secretary Rubin. In their June 26, 1995 letter, they expressed concern with the IEI and asked that it be suspended until Congress was able to exercise some oversight. Treasury chose to deny Congressmen Emerson's and Condit's request.
On August 13, 1996, the U.S. Court of Appeals ruled unanimously that the Treasury acted arbitrarily when it concluded that only a financial agent of the Treasury could administer the EBT system for the Southern Alliance of States.
However, on September 28, 1996 in the waning hours of the legislative session, at the urging of Treasury, language was included in the omnibus appropriations bill that essentially nullified the Court of Appeals decision.
Sections 664 and 665 not only allowed the SAS procurement to proceed using IEI but, incredibly, exempted the process from judicial review. Even more alarming, section 665 of the legislation permits Treasury to respectively select financial agents to provide EBT services in accordance with any process the Secretary deems appropriate. This appears to give the Secretary unlimited, unreviewable, unilateral discretion in selecting EBT vendors in the future.
I'm confident that no member of this committee was aware of the inclusion of these sections. And I'm likewise confident that the handful of members who were aware of sections 664 and 665 had no idea what that language does.
Page 32 PREV PAGE TOP OF DOC We request your action to address this important issue and to preserve fair and open opportunity in Government contracting for EBT. We respectfully request that the subcommittee initiate actions to repeal sections 664 and 665 of last session's omnibus appropriations bill.
The Congress should act definitely to protect the integrity of the Court of Appeals decision and to restrict the use of an unfair procurement process for EBT contracts.
Second, we respectfully request your consideration of legislation that would eliminate the use of the IEI process for future procurements. USDA regulations require that State EBT procurements that involve food stamps may not contain features that restrict competition. Why is Federal procurement exempt from this requirement?
Thank you for your time and your continued interest in this subject.
[The prepared statement of Mr. Coler appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you, Mr. Coler.
Mr. RASOR. Thank you, Mr. Chairman, for the opportunity to address the subcommittee on the subject of an electronic benefits transfer for the Food Stamp Program.
STATEMENT OF ROBERT RASOR, DEPUTY ASSISTANT DIRECTOR FOR THE OFFICE OF INVESTIGATION, U.S. SECRET SERVICE
Mr. RASOR. My name is Robert Rasor. And I'm representing the United States Secret Service in my capacity as the Deputy Assistant Director for Investigations. As you know, we have submitted a statement for the record. I would like to just briefly summarize that statement and then be available to answer some questions.
I think one of the things that we need to look at very briefly is the reason that the Secret Service is here this morning to testify here in this particular matter. The reason is really threefold. There is a jurisdictional issue in that any current fraud or future fraud relative to the EBT system falls within the investigative jurisdictions of the Secret Service relative to access to vice fraud.
Page 33 PREV PAGE TOP OF DOC The second reason, and a very important consideration, is the fact that the Secret Service has become well-known here and around the country for its risk analysis process relative to the investigations. What we do in our process is we look at the problem, we look at what we're doing relative to arrests and investigations, and we go into the particular system and we recommend changes that would stop the fraud that's occurring and future fraud in those areas. We have a great deal of expertise in that arena relative to our views on the commercial or business side relative to debit and credit cards.
The third reason is that we were asked pursuant to Congress to make recommendations to the EBT Task Force in relationship to types of fraud that could occur and some basic considerations relative to the system.
We have made those recommendations to the EBT Task Force. Briefly, they are in the areas of applicant/recipient verification, card user verification, physical card security, authorized purchases, card issuance controls, and computer system integrity.
In that process, the Secret Service identified two major areas where problems would be occurring in this system or any reoccurring system. Those really fall into the areas of authorization to become involved in the program; and counterfeiting or manipulation of systems that control the program.
Application fraud is a growing area not only in some types of fraud relative to Government programs, but there is huge growth on the commercial side. Application fraud grew somewhere near one-third last year in relation to credit/debit cards on the commercial side.
The problem with application fraud is it allows for a systemic attack on the system by large groups of people getting into the system that don't belong, taking benefits or monies out of the system and continuing on.
The solution that we have recommended time and time again to this and actually basically all types of fraud that occur is in the area of biometrics and what biometrics does, in large part, it protects the individuals who are part of the program from anyone else using their benefits for their system.
Page 34 PREV PAGE TOP OF DOC And it also ensures that within a single program, only one particular individual or entity is ever allowed into that program for benefits, for transactions. That's a very important issue because in some other countries around the world, I think England most notably recently, had a tremendous problem with multiple groups coming into their systems and draining Federal or Government funds out of systems.
So biometric identifiers are a big area of our interest. They have been proven effective in a number of systems around the country. California, most notably in Los Angeles County, has used a biometric system. And by their records alone, they've saved somewhere around $14 million once they instituted the program.
The counterfeiting of these devices is also a concern to the Secret Service. We have recommended a number of visual enhancements on a card which would not prevent counterfeiting because in today's technology, it's impossible to create something that can't be duplicated. But what it does, it creates barriers and reduces the odds relative to individuals being able to perpetrate that type of fraud.
Finally, I would like to say that our recommendations and our statements show that as we have made progress in these areas, there are still a number of areas where we feel continuing expanded activity should occur. And that would be in having the program that gives you indicators of fraud and assesses continually your ongoing programs.
There are approximately six items in that that I would like to highlight. They would be: developing programs that would give you indications in relationships to numbers of people in the program in relation to an area; tracking the number of lost or stolen cards; tracking the number of reloaded cards; tracking recipient and program problems; number of duplicate applications; and, six, which is a very interesting issue, that has been touched upon here, is system linkages.
As we talk about the interoperability of these systems, one of the things that's of concern and one of the things that biometrics would help resolve is in border States and border areas, what you don't want is you don't want to have people in a program here and then the same people in another program right across the border. So that interrelationship of being able to tell who is ultimately in the program is a significant issue.
Page 35 PREV PAGE TOP OF DOC Those are my comments. And I will be ready for any questions that you have.
[The prepared statement of Mr. Rasor appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you.
Mr. DESEVE. Thank you, Mr. Chairman.
STATEMENT OF EDWARD DeSEVE, CONTROLLER, OFFICE OF MANAGEMENT AND BUDGET
Mr. DESEVE. I am Edward DeSeve, the Controller of the Office of Federal Financial Management in the Office of Management and Budget. In this capacity, I work with the Federal EBT Task Force, which is chaired by OMB and supported by program and financial management experts from the Departments of Agriculture, Health and Human Services, and Treasury, as well as the General Services Administration and the Social Security Administration.
The administration appreciates the opportunity to testify before you today on the status of electronic benefits transfer for the Food Stamp Program. The administration's goal, articulated by the Vice President in the May 1994 EBT Task Force report, is to build a nationwide EBT system by 1999 that uses one card, is user-friendly, and provides recipients with dignity, security, and access.
EBT brings dignity to benefit programs and recipients by delivering benefits in a manner that looks and feels like a commercial bank card. EBT brings security to benefit programs and recipients by storing benefits securely in accounts until needed by recipients. And EBT brings access to benefit recipients by putting a card in the hand of a recipient that can be used wherever commercial shopping patterns support access, not just where the Government decides benefits should be accessed.
EBT provides an opportunity to increase the management integrity of benefit delivery programs, such as food stamps, by a magnitude simply not feasible in paper-based coupon, check, and voucher environments.
Page 36 PREV PAGE TOP OF DOC At the same time, decreased transaction time, increased transaction volume, and increased velocity bring additional risk into EBT systems that was not present in paper systems. These characteristics alter the credit and fraud risk exposure. For example, fraudulent EBT transactions could be generated at a rate several times higher than in a paper system of checks and coupons.
As administrators of benefit programs, the Government must rise to meet this challenge as a matter of public trust and develop not just the EBT systems but secure EBT systems that include management controls to prevent fraud, detect and contain fraud and abuse related to benefit deliver.
Designers of EBT systems should take systematic and proactive measures to develop and implement appropriate, cost-effective management controls. Commercial management controls in similar systems can often be used as a benchmark for judging what management controls should be used. At the same time, however, using commercial management controls should not substitute for solid analysis of the risks involved in doing business given the potential exposure in EBT.
The administration is committed to ensuring that the EBT systems used to distribute public funds to individuals are secure, that EBT systems should contain assurances of program and recipient security.
In 1995, the EBT Task Force formed a risk management advisory committee, including representation from program agencies, the President's Council on Integrity and Efficiency, the Secret Service, the Federal Bureau of Investigation, and the Postal Inspection Service. This group, working under the auspices of the EBT Task Force, has overseen the development of several documents, which we've described here today. We believe the continued use of this group in a proactive manner will be very effective.
In paper benefit delivery systems, there is a negotiable instrument, such as a check or food coupon, which can be lost or stolen. EBT, however, is like a vault with two keys: the card and a PIN. Because the card and the PIN must be used together to withdrawal value, many losses that could have occurred in the paper environment are prevented.
Page 37 PREV PAGE TOP OF DOC One way to prevent theft and to deter fraud is the use of strong card specifications. Card specifications help provide the security necessary for benefit recipients to access benefits in a distributed environment.
Tough card specifications are important for three reasons. First, in a manual environment, as required in food stamp regulations, where the card is the primary deterrent against fraud, tough card specifications deter individuals from counterfeiting cards. Tough card specifications make it easier for merchants and law enforcement officials to detect counterfeit cards. And, finally, tough card specifications allow for easy verification of cards as counterfeit, which, in turn, provides for easier investigation and prosecution under laws.
One of the types of fraud which tough card specifications deter is attempts to game the system by withdrawing large blocks of benefits which the online system is inoperable or at authorized food retailers, such as rural farm stands and low-volume stores, that are not online. Finally, tough card specifications also identify the card as an item of value, encouraging recipient behavior which safeguards the card and benefits.
One of the key management controls to detect and contain fraud, waste, and abuse in EBT systems is a regular independent audit of the entire system. The Risk Management Advisory Forum is working on establishing Government-wide audit requirements. These requirements will include several components to ensure appropriate audit coverage.
First, State and local governments are subject to the Single Audit Act requirements of 1996. EBT will be included in these audits. The Risk Management Advisory Forum is also working with OMB to ensure that OMB is addressed in its compliance supplement for conducting single audits.
In addition, the audit requirements for EBT vendors will include: requiring contractor self-certification and examination in accordance with the AICPA's statement on attestation engagements;--that's the SSAE No. 3, which results in an opinion as to whether the EBT contractor's assertion about compliance with banking regulations and EBT program-specific requirements is fairly stated, based on established criteria--and requiring audits of EBT vendors in accordance with AICPA's SAS, statement of auditing standards, No. 70, ''Reports on the Processing of Transactions by Service Organizations,'' which provides guidance on what an independent auditor should consider when auditing the financial statement of an entity.
Page 38 PREV PAGE TOP OF DOC As to the interoperability of EBT systems, we believe that EBT should provide access without adding or removing any mandates on portability of benefits. We believe that social Security recipients, for example, should be able to use ATM machines in any State and ensure this access through our Federal agreements for service.
Food stamp regulations currently require that benefits be available in a manner that does not disrupt commercial shopping patterns, which in practical terms has meant that benefits are available nationwide. We support continuing this requirement through the transition from coupon systems to EBT systems.
In May 1994, the plan for EBT provided national interoperability among EBT systems through a standard set of commercially based operating rules. Currently, the private sector-based EBT council has provided the QUEST operating rules to fulfill this function.
In conclusion, EBT recipients should receive dignity, security, and access by following and using commercial practices where available. At the same time, EBT should bring taxpayers more confidence in Government stewardship of public funds than taxpayers have in paper-based delivery systems.
EBT should use card specifications consistent with commercial specifications for cards in similar situations. EBT systems should be subject to commercial auditing and accounting practices, just as any similar commercial system would be. And EBT systems should provide recipients access based on commercial shopping patterns, not jurisdictional lines.
Thank you very much. I'd be happy to answer any questions.
[The prepared statement of Mr. DeSeve appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you, Mr. DeSeve.
It's my understanding that a bank must be involved in the delivery of electronic benefits, even when the prime contractor is not a financial institution. Why are we limiting competition by only allowing financial institutions to participate in the bidding process?
Page 39 PREV PAGE TOP OF DOC Mr. DESEVE. I'm going to defer to my colleagues at the Treasury. I am not from Treasury and have not participated in the development of the IEI process or its use.
In terms of the requirement that there be financial institutions involved in terms of the ultimate delivery of the benefit, I believe that's something Treasury can answer. I apologize for not being able to do so.
Mr. GOODLATTE. All right. We'll find someone to answer that. Is that beyond your scope, Mr. Rasor?
Mr. RASOR. Absolutely. [Laughter.]
Mr. GOODLATTE. All right. Mr. Coler, I'll give you an opportunity to take a stab at that from your own perspective. What institutions are involved in setting up the EBT system? How does your company work with State and local agencies and retailers and stores and banks to ensure that the system works efficiently?
Mr. COLER. Well, we certainly have bank partners wherever we operate a system. The only thing that a bank must do with an EBT system is settle at the end of the day. For the other eight major functions of an EBT system a bank certainly is not required.
And it's not just an issue of being a bank. The IEI requires that the institution be an agent of the Treasury, which is a designation that goes beyond being a bank. And only banks can be obviously designated as agents of the Treasury. It's a statute that goes back 100 years, at the time of the Civil War, that allows Treasury to select agents to do what traditionally were banking operations dealing with the matters of Treasury.
Mr. GOODLATTE. Well, I have a number of concerns about the bidding process. Not having anybody here who can answer that from Treasury, we will write a letter to the Treasury Department asking them the question I just posed as well as the question of whether or not we in Congress shouldn't be concerned with the fact that billions of dollars will have to be awarded without following the procurement laws and whether or not there is any meritorious specification for using the IEI process. Do you have any comment on that?
Page 40 PREV PAGE TOP OF DOC Mr. COLER. I would say that the arguments, which were long and arduous before both the District Court and the Court of Appeals, all of this is in that testimony. The Appeals Court that after hearing all of that evidence and all of the arguments from Treasury and from us, that Treasury had acted in a capricious manner and that indeed there was no reason that a lead contractor for an EBT system would have to be: one, a bank; or, two, an agent of Treasury.
And we were, of course, quite dumbfounded to find out that in the waning moments of the legislation at the level settling the appropriations bill for the United States of America that sections 664 and 665 had been inserted but basically overturned or nullified the Appeals Court decision and said this will no longer be subject to judicial review, something I'll have to say I never heard of before in my life.
Treasury then petitioned the court to stay their order and vacate their opinion, which the Appeals Court refused. So we have now these sections, and we have the Appeals Court decision.
I would think that everything that the Congress has done in recent years had sought to ensure that there be fair and competitive practices, when these Government contracts are being let. I would hope that would continue to be the case.
Mr. GOODLATTE. So this matter is unresolved in the courts what------
Mr. COLER. Oh, it's resolved in the courts. The opinion is there.
Mr. GOODLATTE. Does Treasury abide by the opinion or are they abiding by------
Mr. COLER. No, they are not. They wrote to all of the States in the SAS and said we have this new legislation.
Mr. GOODLATTE. And what steps do you then take with regard to litigation? Do you go back to court and say, ''How do you justify your order in relation to the statute of the Department of Treasury and in relation to the statute they are claiming to be operating under?''
Mr. COLER. I would say that is uncharted water. The court might comment unless the matter is brought before it. But when Treasury did ask that their opinion be vacated, they received a rather quick answer that said their request was denied.
Page 41 PREV PAGE TOP OF DOC Mr. GOODLATTE. Are you planning on any further litigation in light of the fact that the court did make that denial of their request, which obviously would seem to indicate the court had some differing point of view about the fact of the statute?
Mr. COLER. I, frankly, don't know what it is we'd do. We did go to court and seek relief, received it, and now we don't have it because of the legislation that was enacted that didn't go through any process of hearing or oversight by this committee, we obviously has jurisdiction over food stamps. And it said it's no longer subject to judicial review. So apparently it has been inoculated from, according to the language in the statute, review by the courts.
Mr. GOODLATTE. We will continue to look at the issue.
The gentlewoman from North Carolina is recognized. We do have a vote on. Would you prefer to go vote and come back or ask your questions first.
Mrs. CLAYTON. I just have a couple of questions. Then we could go out maybe before the next panel is called.
Mr. GOODLATTE. I do have a couple of more questions.
Mr. COLER. Mr. Chairman, I have a clarification. That legislation did nullify the court decision. The decision is still on the books and would be effective if the legislation were repealed.
Mr. GOODLATTE. Thank you for that clarification.
We will recess for about 20 minutes, and as soon as we get back from the vote, we will continue with this panel.
Mr. GOODLATTE. The gentlelady from North Carolina.
Mrs. CLAYTON. As to this zoning, is it true that companies would no longer be eligible because the IEI prevents that?
Page 42 PREV PAGE TOP OF DOC Mr. COLER. Where an IEI procurement process is utilized, we would not be able to bid as the lead company.
Mrs. CLAYTON. Could you share with me how it was that your company was selected, if that procedure included------
Mr. COLER. Texas was not a member of the SAS. They put out their own procurement under their own State law.
Mrs. CLAYTON. I see. So you were selected by the State.
Mr. COLER. Through a competitive bidding process.
Mrs. CLAYTON. And since then, the Treasury has interpreted the procedure that when it managed all of the electronic transfer programs, to follow the procedure of the IEI.
Mr. COLER. I couldn't answer that question. That stems from what future plans are for utilization and the innovation to express interest.
Mrs. CLAYTON. Well, I share the concern or the observation you made that if this precludes procurement with maximum competition and having a variety of inquiries, providing that, I just------
Mr. COLER. Well, it's not just that, Congresswoman. I mean, the technological advances in EBT have served State and Federal Government well, and the clients well, and then the grocers. And what's involved there is the bringing of technological innovation to what used to be a system that was ripe with fraud and very embarrassing to clients that had to use those paper coupons.
And when you restrict competition, you're telling people that, ''Don't invest money in innovation because you're not going to be able to compete.'' My company has invested tens of millions of dollars in developing that system, and indeed we think we have something to offer by the fact that we have been selected in competition with other companies. And indeed, we have achieved interoperability, which nobody else has done. I would think that might be of some interest.
Page 43 PREV PAGE TOP OF DOC The sad part is is that when we started in this business there were many more competitors than there are now. To tell you the truth, a number of major companies in this country no longer compete. And I would suggest my interpretation of one of the reasons is there is not an open and competitive playing field for them to have an opportunity to get the business.
Because in order to involve yourself in EBT, a company has got to be willing to take on very, very large debt loads on the front end because the capital expenditure to set these systems up is huge on the front end. And any money that you might make, well, it's not going to appear until year 2 or year 3. So it's not something that anyone can just opt into lightly. It takes a tremendous financial commitment on the part of the companies that compete.
When you restrict competition, you don't get companies investing in technological innovations, which we certainly need. Nobody has figured out how to do WIC yet with this card. Very difficult problem. And a number of other areas--interoperability being one of them.
Mrs. CLAYTON. Could you comment on if there are any other competitors who are operating EBT projects that you know of in the States, where States might have selected bank institutions to be demonstrated for------
Mr. COLER. Well, I know that the State of Maryland is run by Deluxe, and they're not a bank.
Mrs. CLAYTON. OK.
Mr. COLER. I mean, there is only four or five States that are rolled out. Frankly, progress is not going ahead as quickly as it might, and I think one of the problems is because, you know, we have had these legal battles going on about whether or not non-banks can compete. And, you know, we think we should have a right to do that--that we have something to bring to the table. That's a reason to restrict it.
Mrs. CLAYTON. Thank you.
Mr. Chairman, can I ask a dumb question?
Page 44 PREV PAGE TOP OF DOC Mr. GOODLATTE. Oh, please.
Mrs. CLAYTON. Moving to the Secret Service comment, I was struck by your comment about the protection of your observation that this is one way of securing benefits. I gather this technology is the technology that is being applied to cards across the board, not just food stamps.
Mr. RASOR. Yes, ma'am. The issue of biometrics transcends basically all kinds of payment systems. One of the things that is problematic in recurring payment systems is the ability of someone to either duplicate your identification or to create multiple identifications of people that technically don't even exist, because everything is read and done electronically.
Therefore, what biometrics does, in a broad sense, is it brings down to the initiation of the transaction for the verification of the transaction a single individual.
Mrs. CLAYTON. So would you be using like fingerprint, blood, or something that identifies me as a------
Mr. RASOR. Yes, that's the theory that's involved. Yes.
Mrs. CLAYTON. I've seen that version on the computer. But other than that, just having a signature card in terms of that.
Mr. GOODLATTE. Thank you.
In fact, let me follow up on that, if I might, Mr. Rasor. To your knowledge, are the fraud vulnerabilities of these EBT systems and cards being examined before they're being implemented by Government agencies?
Mr. RASOR. Well, I would hope that they would be. I think that we've made some significant progress in our interrelationships with the EBT task force. I think that it is not a process that can have a beginning or an end. There needs to be a continuing engagement in the process. As we've testified to here, a number of these systems have not rolled out yet. The concept is there. The systems will eventually be rolled out.
Page 45 PREV PAGE TOP OF DOC I alluded to in my testimony that in addition to the front end basics, which we have already recommended which were relative to just creating a standard on the front end, that the introduction, then, of biometrics to the process, and then the ability to audit and monitor the ongoing programs for fraud indicators, is a continuing and extremely important issue.
One example that I can give you on the continuing ability to have to monitor these is we list in one of our ingredients, if you may, for success reported problems on a system. What happens in a number of criminal activities is the bad guys will figure out some sort of weakness in a system. In the old days, it used to be as simple as gluing shut ATM machines, putting your own ATM machine in a particular situation, having everybody use that ATM system, and taking and downloading PIN numbers and account numbers off the bad guy's ATM system.
The way you get to some of those type things is you would get complaints from the system that all of the ATM systems in a particular area were shut down for a particular reason. So systems failures, activities in the system, are as important as any number of other things that we've listed in our testimony.
Mr. DESEVE. May I add to that, Mr. Chairman?
Mr. GOODLATTE. Sure.
Mr. DESEVE. I think what we have here, at least we hope we have, is over the last 2 years, before the systems have rolled out, we've got everybody together at the front end who is going to have to worry about these issues at the back end, and we said, ''How would you best design this? Given what you know now, how would you best design this to be as little susceptible to fraud as possible as we design it?''
It's almost like having an architect come in and help design your house in such a way to lower the cost of heating. You'd never get it down to zero, but you can get it down as close as you can.
Now, it is our intention as an administration, through the audit process in each of the individual States, through the oversight of the appropriate inspectors general, as the volume builds we won't see for a period of time--now, whether that's 3 months, 6 months, or a year--until there's enough volume out there that, as Mr. Rasor calls them, ''the bad guys'' (a) figure out how to beat the system, because they will, and figure out that there's enough volume in the system that perhaps they can go undetected, because if they come in early they will be detected easily in a small environment.
Page 46 PREV PAGE TOP OF DOC So what we have to do with our inspectors general is be very vigilant, because when we start putting cash benefits on the system--I should say when the States start putting cash benefits on these systems--and when we add direct Federal benefits like Social Security payments--the volumes will increase exponentially during that period. So if it's not done well, it's not designed properly now, the potential for fraud later is so much greater, and the ability to detect it as it's going on will be so much less.
So we've been committed over the last 2 years, working with the Secret Service, the FBI, and others, to make sure, as best we can, that we've done all we could to build protection into this system at the front end.
Mr. GOODLATTE. In that regard, Mr. Rasor, and based upon the expertise of your office, are there any recommendations which might be characterized as preventive or systemic problems which you've identified in relationship to the program?
Mr. RASOR. Yes, there are. I think that we've alluded to a number of them in our testimony. I would say that some of the things that are currently being built into this system are very good. The PIN number, as an example, is a great deterrent. Also, the ability to track the data that is collected relative to the actual transactions are vital to not only monitoring the system but to good law enforcement reaction when problems do occur.
I would say that continuing on from that point that the ability of organized groups to move freely through the United States if these systems don't interlock in some capacity is a real concern. I come back to the biometric discussion in relation to that being a way of helping solve that problem that helps solve the counterfeit problem and any attendant problems, if you have a system built that uses a biometric in either authenticating an activity or initiating an activity within a financial payment system.
That probably, now and in the future, is one of your best deterrents. I would caution all of that by saying, as I mentioned before, that what we're trying to do here is build barriers to keep the bad guys out and protect the good system. So what we're talking about, really, is the ability to not only deter fraud but protect the legitimate users of whatever system it is from the inconvenience, from really some remarkably debilitating things that can happen when your goods or services are stolen by someone else.
Page 47 PREV PAGE TOP OF DOC Mr. GOODLATTE. Thank you.
Mr. Coler, I expressed earlier my concern about your problem. We will prepare a letter asking a number of questions about what you've been asked today, along with anything that the gentlewoman from North Carolina might want to add or anybody else on the committee. We'll hold the record open for the testimony of this hearing to receive that answer, and we will, once we receive that, review it and act accordingly.
Do you have any questions?
Mrs. CLAYTON. I just wanted to spend a minute on my understanding of what Mr. Coler presented. You are in Texas now and are also in Mississippi?
Mr. COLER. And Indiana.
Mrs. CLAYTON. And Indiana. Do you perceive there are any problems with those States giving you the location or interpretation of the------
Mr. COLER. I'm not sure I understand your question.
Mrs. CLAYTON. Well, I assume the States have chosen you in those States. It was------
Mr. COLER. Under their stated procurement laws, by holding a competitive bid.
Mrs. CLAYTON. So, my understanding is other States could elect to do that. These States have elected to do that.
Mr. COLER. That is correct.
Mrs. CLAYTON. They would use the same provisions to choose you or similar non-bank entities. I just want to be clear that that is your understanding, too--that you have a right to------
Mr. COLER. States have a right to choose the manner in which they want to procure EBT services, and I don't know of any State that demands competitive bidding.
Mrs. CLAYTON. So you would not be precluded from a fair bidding process if those States elected to do that?
Page 48 PREV PAGE TOP OF DOC Mr. COLER. If elected to mail out an RFP, that is right. No, we can compete when any State has a competitive procurement.
Mrs. CLAYTON. So our concern would be perhaps in the future, where there may be a need, one party providing all of these services--SSI, and other services to the States--they're going to do that, because there are considerations of having applied for all of the benefits. And so in the future you probably will have some------
Mr. COLER. The only interesting question about that is that the States have absolutely no responsibility for Social Security. To my knowledge, they have no statute authority or budgetary authority. I can't believe that States are going to expend State dollars for a program that is not within the jurisdiction. Social Security is strictly a Federal program.
Mrs. CLAYTON. So there would be a problem, then, with------
Mr. COLER. There would be a problem if the Treasury decides to, in the procuring of an EBT card for those Social Security recipients, which I understand is about 10 percent of the total population who aren't paying--under the current section 665, 664, they can elect to use the IEI process and thereby deny anyone except an agent of Treasury the right to compete.
Mrs. CLAYTON. Thank you, Mr. Chairman, for allowing us to ask further questions that are written, and I will do that.
Mr. GOODLATTE. And I want to thank all of you for your contribution today, your testimony, and we will get back to you, Mr. Coler, with additional questions.
Mr. COLER. Thank you, Mr. Chairman.
Mr. GOODLATTE. Thank you.
Mr. GOODLATTE. We will now invite our final panel to the table. On this panel we have Ronald Spendal, manager, policy and budget section, adult and family service division of the Oregon Department of Human Services; Annette LoVoi, EBT liaison to the Comptroller of Texas' Office; Roberta York, EBT manager, San Bernardino County, Department of Social Services; Jerri Thomas, the EBT project director for Maryland, who is accompanied by Mr. Mark Reger, chief deputy treasurer for the State of Maryland; and our final panelist is Melba Price, associate director for policy coordination, Missouri Department of Social Services.
Page 49 PREV PAGE TOP OF DOC Mr. Spendal, we'll proceed with you whenever you are ready.
STATEMENT OF RONALD SPENDAL, MANAGER, POLICY AND BUDGET SECTION, ADULT AND FAMILY SERVICE DIVISION, OREGON DEPARTMENT OF HUMAN SERVICES
Mr. SPENDAL. Thank you, Mr. Chairman, and members of the subcommittee.
I am here representing the State of Oregon as well as the American Public Welfare Association, which is a bipartisan organization representing State and local Government human service agencies.
The American Public Welfare Association calls on your assistance to help prevent the administration from requiring States to apply credit card security features to their EBT card system, which is essentially a debit card system not a credit card system. The security standards for debit cards adequately address, we feel, the potential for any EBT fraud.
At a State level, speaking from the State of Oregon, we have collaborated for a great time, a considerable period of time now, with our local banking partners as well as our Department of Treasury officials, and we are confident that the debit card specifications are more than adequate in securing the system that we are proposing to put in place in approximately 6 months.
The language regarding the EBT system security enacted by Congress just last year clearly provides States the flexibility to establish security features under the EBT programs. And the EBT debit cards do possess the security features that are sufficient for reducing fraud and, in fact, critical security features--what credit cards lack in terms of the PIN numbers that have been discussed earlier.
On an earlier panel, the Office of Inspector General indicated that the credit card standards would cost only $2 million, if implemented, and we feel that the figure is substantially higher. There are also other considerations to take into account.
Page 50 PREV PAGE TOP OF DOC For example, within the fiscal resources available for the State of Oregon, we have concluded that if the credit card standards were adopted, and we had to go to embossing our EBT cards, we could not afford to install embossing equipment in all of the 50 welfare office branches across our State, and we would have to go to a central issuance model, which would be terribly cumbersome.
For one thing, it would add an additional approximately $150,000 a year just on distribution costs. It would also make local branches totally incapable of responding to local emergencies when someone lost or had their card stolen. They would have to report it. That report would have to be filed centrally. We would have to basically issue a card from the central office and mail it out to the branch. It is not a very responsive mechanism for an emergency.
In our current planning model where we're not having to emboss the cards, we can respond immediately to lost or stolen card reports at the local level.
The draft proposed rule, if it were to take effect, would be very cumbersome to most State systems. And we feel it offers no real benefit in terms of the security issues as we see them at the State level. If those rules were adopted, we feel it would be the fiscal responsibility of the Federal Government to bear the financial cost for retrofitting all of the State EBT systems as they come on line so far.
The welfare requirement that States adopt food stamp EBT standards and have the program implemented by 2002 dramatically shifts the medium through which this portable benefit of distribution occurs from a system for which the Federal Government bore the expense in terms of the fact that food coupons were portable nationally, to a system in which the States carry a proportionately larger fiscal burden, and that if interoperability does become a mandate that the Federal program participate and bear the costs of such a feature.
To summarize, basically, we feel that the debit card specifications are more than adequate to meet the security and fraud risks of our EBT systems as they have been designed, and feel that applying the credit card specifications are not only unnecessary but represent a large fiscal impact, as well as a service delivery strategy impact, that for many States would make the system much less responsive.
Page 51 PREV PAGE TOP OF DOC Thank you.
[The prepared statement of Mr. Spendal appears at the conclusion of the hearing.]
Mr. GOODLATTE. Next we'll recognize Jerri Thomas.
STATEMENT OF JERRI THOMAS, EBT PROJECT DIRECTOR, STATE OF MARYLAND
Ms. THOMAS. Good morning. It is a pleasure to be here this morning. I have with me my colleague, Mark Reger, who is chief deputy treasurer for the State of Maryland, and I am the Maryland EBT project director.
Maryland is in the enviable position of having been the first State to implement a statewide EBT, and it has been operating for 4 years now statewide. So what we bring to the table today is a track record--a track record of being the model for the rest of the States that have now been implemented.
We began a pilot program in November 1989, and that program brought not only food stamp benefits but various other cash benefits to our recipients. At the time, Aid to Families with Dependent Children, the Disability Loan Program, child support bonus, and non-public assistance child support participated in that pilot.
That pilot was done in a district of Baltimore City and represented only 5,000 recipients and 150 stores. That's an inner city location. The success of that pilot led to statewide implementation, and now we have over 168,000 households who receive some form of public assistance using our independence card. And I did bring an independence card with me today.
In December 1996, we authorized over $52 million worth of cash and food stamp benefits. We currently have over 99 percent of our recipients receiving all benefits on EBT. We also give access to cash benefits through ATMs, both on the MOST and MAC networks--that's about 2,400 ATM machines--as well as provide a cash through point of sale devices located throughout the State. That's over 3,500 merchants and about 7,600 point of sale devices in both urban and rural area.
Page 52 PREV PAGE TOP OF DOC Despite early resistance, when it was an idea versus a reality, many of our recipients now acknowledge that there is a great benefit by employing this technology. They don't have to worry about when it comes in the mail. They can utilize their funds appropriately throughout the month. They are protected from loss and theft by utilizing the debit card technology with PINs. They don't have to withdraw all of their benefits at one time. It is very convenient and secure.
We have also utilized extensive resources to train all of the recipients in all of their local offices, and there are 48 of them.
One of the things that we learned as a byproduct of this--what was an experiment is that the recipients felt greater self-esteem in being able to utilize this technology. The same sort of stigma that may have been attached to food coupons did not come along with the EBT card product.
Overall, the Maryland project has demonstrated that a nationwide system can be successful and cost effective, as well as moving recipients toward the age of technology and to self-sufficiency.
There are several new challenges that face Maryland as we go forward into welfare reform and with retrofitting our system to meet these requirements. They are card specifications, as has been indicated before, and nationwide interoperability. We estimate that a minimum of $500,000 for the State of Maryland would be required just to implement the card security, not biometrics, which we believe would be much more costly.
I yield to my colleague, Mr. Reger.
[The prepared statement of Ms. Thomas appears at the conclusion of the hearing]
Mr. GOODLATTE. Thank you. As you've heard, the bells have gone off. We have a vote in progress, and I will ask that we recess for a few moments while we give members a chance to vote. We'll hopefully start back in five to seven minutes. As soon as we can run back here, we'll reconvene immediately. We'll be back. Thank you.
Page 53 PREV PAGE TOP OF DOC [Recess.]
Mr. GOODLATTE. We will proceed. I apologize for the interruption.
Mr. Reger, chief deputy treasurer for the State of Maryland. You may proceed for 5 minutes.
STATEMENT OF MARK REGER, CHIEF DEPUTY TREASURER, STATE OF MARYLAND
Mr. REGER. Thank you, sir.
One of the largest issues facing the creation of the nationwide EBT system is this question of interoperability. I would like to say that it's very reassuring to see the committee has been studying the issue and is quite aware of it.
Interoperability for us is defined as transactions between EBT systems. You'll hear a lot about the SAS and some of the other alliances, and, of course, they have less issues than those of us who came up here--a single contract.
When Maryland initiated the first statewide EBT system many years ago, we had no questions about interoperability. There was nobody to be interoperable with. In order to serve our clients in Delaware, Pennsylvania, Washington, and Virginia, we equipped the source in those jurisdictions along the border regions with EBT terminals. Those terminals were set up through the Maryland system and appeared to be a logical extension of that system.
When Texas implemented its EBT system a number of years ago, it had no impact on Maryland. We didn't have any border activities and no transactions between us. However, things are changing. As Pennsylvania implements, the Maryland terminals will be removed because the grocers will not be able to maintain two terminals and two selling processes. Maryland's project will no longer provide clients access to stores in Pennsylvania unless we negotiate separate agreements with the Pennsylvania processor. Washington, DC.'s project will have a similar effect.
Suddenly, the border--the system's functionality will effect the intent to deliver benefits to the clients. These over-the-border transactions will affect settlement processes and costs. As EBT systems proliferate, it is time to consider the implications of multi-application processes across the street and across the Nation.
Page 54 PREV PAGE TOP OF DOC Why would a Nation adopt an EBT without considering interoperability? Interoperability would provide benefits to all EBT providers. Standardizations of EBT systems will allow uniformity of software and hardware, definition of program costs, better service of clients, and enhanced competitiveness when contracts are rebid.
Recognizing the lack of interoperability as an impediment to the eventual growth of the EBT, a number of groups were enlisted to formalize national EBT rules. The National Automated Clearing House Association formed a counsel of all stakeholders and promulgated the operating rules. These rules will help make various EBT systems currently being implemented interface with each other in uniform ways.
Maryland joined NACHA EBT Council to protect its existing system. We wanted to make sure that whatever rules the body adopted would not prevent us from maintaining the system we had pioneered, and not subject the State to uncontrolled costs. Much has changed. Even though we are still discussing the politics of allowing Maryland residents to spend State benefits outside our State, we acknowledge that single national base rules governing transactions is needed and a wise value.
We see the need to assure that nationwide clients, grocers, networks, banks, and States are treated the same. For the Federal Government, too, a uniform set of operating rules would seem extremely beneficial. The old food stamp system certainly operated under a uniform set of rules and with reasonable assurance that functions were occurring throughout the Nation.
As EBT is adopted as the modernization of that system, we should accept nothing less than we had, and in fact should demand more. The Federal Government must move with some haste to catch up with the implementation pace of the States. Agriculture, Treasury, and OMB have been supportive in helping. The question is: Now where do they stand on a single set of national rules?
Will EBT progress as 50 independent systems, each operating differently? Or will the common elements of these systems be combined, and the items such as funds settlement and card security be established once and for all?
Page 55 PREV PAGE TOP OF DOC Maryland is very intent on its independence. We were on the forefront in the benefit delivery in 1989 when EBT first became a reality, and we will remain on the cutting edge of improvement. We believe as other States accept this technology, rules governing common elements must be adopted. We believe Maryland's next EBT contract will specify interoperability. But even if it does not, it will require interfaces with other interoperable systems, and many other elements found today in the Quest operating rules.
[The prepared statement of Mr. Reger appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you very much, Mr. Reger.
Annette LoVoi, EBT liaison to the Comptroller of Texas.
STATEMENT OF ANNETTE LoVOI, EBT LIAISON TO THE COMPTROLLER OF TEXAS
Ms. LOVOI. Yes, sir. Good afternoon. It's a pleasure to be here today to represent Comptroller John Sharp of the State of Texas, and Deputy Comptroller Billy Hamilton.
We were asked today to bring you up to date on the progress in the State of Texas and I look forward to doing so. We, too, were one of the pioneers with EBT and are proud to be fully rolled out at this point with both Aid to Families with Dependent Children, our welfare program, and food stamps.
I appreciate the kind words this morning from the other witnesses about our interoperability demonstration that is underway right now. We are passing transactions with the State of New Mexico in a little town called Anthony, TX, and we're operating there with three retailers. This little town sits right on our border with New Mexico, and we're very pleased with the results of the demonstration thus far and would be happy to keep the subcommittee briefed on the progress of that project.
In Texas, we do everything big. We let the numbers from our EBT system speak for themselves. We are the largest public EBT system, having processed in excess of 175 million transactions, totally over $4.1 billion of benefits since implementation. We currently deliver benefits to 2.2 million food stamp recipients and 600,000 AFDC recipients through EBT. We are completely paperless at this point for those two programs.
Page 56 PREV PAGE TOP OF DOC We believe that we are helping to pave the way for the Federal Government with this project, both in terms of complying with the Federal Debt Reduction Act of 1996 and leading the way toward assuring that we can have food stamp benefits via EBT by the year 2000.
Our roll out occurred in record time. We did not pilot. We simply began roll out, and our State is so large that we rolled out in five phases and based on the geography of this State. We are deeply appreciative of the Federal and private sector partnerships that made this possible. Our Federal partners were enormously helpful in granting waivers that we've laid out for you on the final page of our testimony. We could not have proceeded without these waivers and we're deeply grateful for them.
We have had a happy working relationship with our 14,000 retailers in the State of Texas, with our vendor-Transactive Corporation, and of course with our clients for whom this system is designed.
Our roll out occurred in a 10-month period, and once again, this was a phased roll out that covered more geography faster, we believe, than any other project of its kind. In addition to the experiment that we have going with interoperability on our New Mexico border, we are serving our clients in the State of Arkansas. They are permitted under the rules to secure EBT equipment to service our Texas residents that wish to shop across the border.
We view our project as a win-win-win. The clients tell us that they are satisfied for many of the reasons that you mentioned earlier this afternoon, Representative Clayton. They indicate that they are able to learn the banking system through the card, and we are pleased that the transition from paper to electronic benefits has proceeded so smoothly.
The private sector, both the retail and banking communities, tell us that they are pleased with eliminating the need to handle the paper that they handled before. We've reduced the time to process paper benefits, and we have also reduced the security expenses that both retailers and banks found necessary under the paper system.
Page 57 PREV PAGE TOP OF DOC The Secret Service did a good job this morning of outlining the law enforcement benefits of EBT, and I'd just like to reiterate that we are delighted with the audit trail that we have now that permits us to note the date, time, and place in which an EBT transaction has occurred.
Our project is inflation free through the year 2001, because our State locked in its 1994 costs for the life of the project.
And finally, our State Department of Social Services reports to us that they are economizing in terms of worker time, because food stamp payment accuracy has been improved. Our workers are freed from the clerical tasks that used to be related to the paper-based system, such as replacing benefits, and are now able to work with clients directly and ensure more accuracy in the system.
In summary, this technology has proven successful for the State of Texas. As we move into the next century, this technology will have utility for many other programs, and we look forward to continuing to work with you.
Thank you very much.
Mr. GOODLATTE. Thank you very much, Ms. LoVoi.
[The prepared statment of Mr. Hamilton as read by Ms. LoVoi appears at the conclusion of the hearing.]
And the next participant will be Melba Price, associate director for policy coordination, Missouri Department of Social Services. You may proceed.
STATEMENT OF MELBA PRICE, ASSOCIATE DIRECTOR FOR POLICY COORDINATION, MISSOURI DEPARTMENT OF SOCIAL SERVICES
Ms. PRICE. Thank you. Good afternoon.
Page 58 PREV PAGE TOP OF DOC I'm the associate director of the Missouri Department of Social Services, and I also serve as chair of the Southern Alliance of States you've been hearing about today. The Alliance contains Alabama, Arkansas, Florida, Georgia, Kentucky, Missouri, North Carolina, and Tennessee--the States in this coalition.
I want to thank the committee for inviting me to testify today. I also want to thank this committee for your support of the repeal of Regulation E. That has been extremely helpful to the States.
My testimony will cover three areas. I want to report on the status of SAS, interoperability of EBT, and card specifications. SAS was formed in 1994, the first group of States, to jointly procure EBT together to take advantage of tier pricing. We were also designated in 1994 by Vice President Gore to be the first prototype in the country to deliver State benefits and Federal benefits on a single card system.
You have already heard in earlier testimony on timelines. I would like to reiterate what they are. Alabama will be starting their first cards in 2 weeks. We are very pleased about that. Missouri will be starting in May, Georgia and Arkansas will actually be starting in July, and the State of Florida will be starting in October.
I also want to mention that Congressman Emerson was a very good friend to the State of Missouri. And as a tribute to the late Congressman, we did select his district to be the first area in Missouri that EBT will be piloted in. I have now shared this with Congresswoman Emerson, and she is very delighted about that tribute as well.
SAS is scheduled, as I've said, to go on line very quickly. We are using, as you've already heard, the model called Quest, and I'll address comments on that more so in a minute. Regarding interoperability benefits, SAS has always approached EBT with the thinking that EBT should closely emulate, as much as possible, the access avenues we've enjoyed in this country with the paper food stamp program for the many years it has been in place.
Page 59 PREV PAGE TOP OF DOC And what do I mean by that? I mean that the clients, all of this time with paper food stamp coupons, havee had the freedom to shop in this country wherever they could maximize their food dollar best. And they have never had to pay attention, frankly, to any arbitrary boundaries in their shopping. They have had that freedom from day one. After all, the food stamp program is the program in this country that feeds the poor. Maximizing those dollars is key.
This would be the key today that some States are viewing, and in fact the Federal regulations show that you need to provide access to your clients to shop. Access to some is not necessarily freedom to shop wisely where they see fit.
The merchant community in the United States turns food stamps into food products. We have large chains, for an example, in this country that may have stores in 11 States as an example. And all of this time, in a paper food stamp program, when a client gave them a coupon and it was exchanged for food, the merchant has never had to ask ever, ''What State issued this coupon to you?'' It was irrelevant.
As has already been described on this panel, there is a national EBT council that exists. I sit on the board of that council. It is made up of all stakeholders. We have already developed nationwide standards that could be utilized if a State chose to use them.
Food stamps are still a benefit provided by the Federal Government. It is the States' responsibility to deliver the benefit, but the benefit itself is still of a national origin, i.e. it is provided by the Federal Government through your appropriations, not ours.
To date, 28 States have agreed to utilize the Quest operating rules. Our belief is that many more States will also agree to use those rules before this is over. However, you have already heard today that there is a study USDA is looking to undertake to examine the cost of switching transactions amongst projects. We believe that the investment to do that is very, very small.
Our industry experts and people we've talked to have suggested that for a reinvestment of between 1 and 3 percent--very rough figures--of what the USDA agency here in D.C. saves by the food stamp coupons no longer being paper but going to plastic is all it would take to ensure switching amongst jurisdictions and to have portability, of which the paper program has always had since the beginning of time.
Page 60 PREV PAGE TOP OF DOC Regarding card specifications, the Southern Alliance of States supports debit card specifications. We believe, certainly, that if a State wants to add security features they can do so; it's up to them. But we are trying to emulate with EBT, the open commercial framework that the banking industry uses today as an example. And if debit card specifications are good enough for the banking industry, we have to feel like they should be good enough for the Government.
In my summary, I would just like to share that the Southern Alliance of States, once again, is implementing in 2 weeks. The first State will be on line in 2 weeks. We are supporting the full usage of the Quest operating rules which already provide a framework for national interoperability standards. We support the Federal Government assisting us a bit in some incentive fees to get some of that crossover of jurisdictions accomplished.
And finally, we do not support a mandate to have any higher card specifications on debit cards. That concludes my testimony, and I would be happy to answer any questions.
[The prepared statement of Ms. Price appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you very much, Ms. Price.
STATEMENT OF ROBERTA YORK, EBT MANAGER, SAN BERNARDINO COUNTY, DEPARTMENT OF SOCIAL SERVICES
Ms. YORK. Hi. I'm Roberta York. I am the EBT manager for the County of San Bernardino, Department of Public Social Services, in California. My statement will update the committee on the status of EBT in California and review barriers we have had to confront in moving towards implementation.
San Bernardino County and San Diego County will jointly implement the first EBT system in California later this year for the Food Stamp Program. These two counties are well suited to be the lead in the State because of their size and their current POS infrastructure is already in place.
Page 61 PREV PAGE TOP OF DOC The current approach to statewide EBT in California is to implement a food stamp EBT program in San Bernardino and San Diego counties, which together represent approximately 15 percent of the food stamp cases in California.
We released our RFP--request for proposal--in August of 1996 to solicit a food stamp EBT service provider for a joint procurement with San Diego County. After the evaluation and the selection process, the county announced its intent to award to Deluxe Data as the prime contractor, and Bank of America as the subcontractor. the post-award appeal process has been completed, and we expect to begin EBT implementation by September 1997.
We have not adopted the Quest rules in our project. Since Federal EBT program requirements don't specify the use of Quest rules, San Bernardino County, San Diego County, and the State of California need to address the business case for adopting them. This will be considered during the State's analysis and planning for statewide implementation. Pending this analysis, advantages of using standard operating rules can be achieved without specifically following the Quest rules, and this is how our project is proceeding.
The county proposed to provide interoperability for the food stamp EBT program by requiring in our RFP that the EBT contractor follow the International Standards Organization, or ISO, card specifications, and that the cardholders be able to access their benefits outside the San Bernardino and San Diego pilot area. Any gateway feels associated with the point of sale transactions will be included in the EBT contractor's cost per case month.
The exemption from Regulation E was a liability that provided relief in California. The county of San Bernardino was working towards implementing EBT for seven years, and we had to delay the RFP until statutory relief was enacted.
The county was adamant that it would not assume any unknown liability cost of Regulation E and would not be responsible for any costs above our cap. We appreciate the support that came from members of this committee.
Page 62 PREV PAGE TOP OF DOC Another potential barrier with EBT is the proposed regulation to mandate specific card features. This proposed regulation would add significant costs for producing cards and have administrative implications that would also drive operating costs higher.
The most expensive proposed security feature is the hologram. Additionally, the expiration date requirement would result in the unnecessary replacement of the EBT card every two years. This would increase the number of cards to be issued in San Bernardino County by an estimated 25 percent per year, which is a significant additional expense.
These recommended card specifications increase costs with little or no added value to the counties, the State, and the retailers, and should not be mandated.
[The prepared statement of Ms. York appears at the conclusion of the hearing.]
Mr. GOODLATTE. Thank you very much. And I apologize to all of you for not catching all of your testimony. I'm in a three-ring circus here, and sometimes we have to jump into another ring.
If I ask you a question that you've already answered, please forgive me.
I'd like to start by asking all of you if you could give me an estimate of what it costs per card for you to implement your system. Do any of you have that information? What does it cost for each card? Ms. York?
Ms. YORK. We're in the process of signing a contract, and the per case per month price was $1.39.
Mr. GOODLATTE. $1.39 per month?
Ms. YORK. Per month, per recipient. We have 80,000 food stamp recipients in the county of San Bernardino.
Mr. GOODLATTE. So it costs over a million dollars a year for the------
Page 63 PREV PAGE TOP OF DOC Ms. YORK. Correct.
Ms. PRICE. We actually are putting cash as well as food stamps on our EBT card, and the cash amount is in the mid 50-cent to 55-cent range, hopefully the same as what it costs us to print a check per client per month. And the food stamp range is about $1.04 per SAS. That's significantly less than what it costs us to put paper in place.
Mr. GOODLATTE. Ms. LoVoi?
Ms. LOVOI. We held our per case fees at the same level they were under the paper system, which is $2 per case per month for food stamps, and 97 cents per case per month for AFDC.
Mr. GOODLATTE. That sounds a little high. Is there a reason for that?
Ms. LOVOI. We were one of the early States to have EBT. I think competition has helped reduced the price.
Mr. GOODLATTE. Will those costs drop as you see how those things go and competition------
Ms. LOVOI. We think that they will.
Mr. GOODLATTE. Ms. Thomas?
Ms. THOMAS. I have the cost per case month in my briefcase, which of course is back there. I can only share with you at this point the actual costs that our card would cost if it were not included in a cost per case month, and that is that the cost is 37 cents. They're giving me an estimate of the increased security features to be another 25 cents per card.
Mr. GOODLATTE. Now, I missed your testimony regarding the security features. Some of these folks are resisting those. Are you------
Ms. THOMAS. We are resisting, yes.
Mr. GOODLATTE. But you are planning some of your own measures that you have seen fit?
Ms. THOMAS. Yes. That's right.
Mr. GOODLATTE. Does that include a PIN number?
Page 64 PREV PAGE TOP OF DOC Ms. THOMAS. It does. All of our cards are issued from local offices. They are not mailed. We did that at one point, and it did not work out very well. And all of our PINs are selected PINs.
Mr. GOODLATTE. Mr. Spendal?
Mr. SPENDAL. I'm sorry. I don't have the costs with me on what the exact costs are, but they are probably very close to what San Bernardino County costs would be. Our State is approximately the same size as their county in terms of population.
Mr. GOODLATTE. And do you all oppose the Federal mandates on the increased security?
Ms. THOMAS. Yes.
Mr. GOODLATTE. Ms. Thomas, in your Maryland system, at the point of sale at the grocery stores, is there more than one machine that food stores are required to have? And is it compatible with the credit card machine?
Ms. THOMAS. It's both. They have the option of utilizing the same equipment for both commercial credit and debit transactions. But we provide, through our vendor, a State-supplied point of sale device. So if they opt to utilize that same device for a commercial credit or a debit transaction, then they may do so. We also allow the opportunity for third-party processor interface.
Mr. GOODLATTE. Does anybody have any different type of system?
Mr. Spendal, you just testified to the claim that shoulder surfing can defeat the security features of a PIN number. Could you explain what shoulder surfing is, and do you think that this would be a problem when you use a system like this for a credit card or a debit card transaction?
Mr. SPENDAL. I would defer to Ms. Thomas on shoulder surfing.
Ms. THOMAS. It's the perhaps ability of someone looking over my shoulder as I enter my PIN. So the merchant typically is swiping the card. I am entering the PIN as the customer. And if you should be able to memorize my PIN number, if you should be able to be in collusion with the person who knows the PIN number, you might be able to access those benefits. It's a fraudulent transaction.
Page 65 PREV PAGE TOP OF DOC Mr. GOODLATTE. Has there been much incidence of that occurring that you know of?
Ms. THOMAS. I am not sure that there has been much instance of that. It primarily would occur, I believe, through some sort of manual transaction.
Mr. GOODLATTE. My telephone credit card number was stolen recently, and they used binoculars from across the street. I've been instructed on how close to the numbers I'm supposed to stand when I punch the credit card number in. But at a grocery store, it is going to be even less secure, isn't it, than under those kinds of circumstances? People standing in line right behind you?
Ms. THOMAS. Well, I think they have to have both. I mean, they have to have both the number of the card and the PIN number.
Mr. GOODLATTE. Well, that's true. With a credit card you only need the number.
Ms. THOMAS. So we're really talking about two different situations. The debit card industry primarily does go into point of sale. However, the PIN number is the security feature. So you have to have both. In the ATM environment, you're looking at a totally different kind of process. It's a cash-only process. We're not talking food benefits.
Mr. GOODLATTE. Thank you.
Ms. THOMAS. I used to manage an ATM network and issued cards. So I've seen what goes on in the industry.
Mr. GOODLATTE. Ms. Thomas--and Ms. LoVoi, you may want to answer this, too--has your State noticed a decrease in transaction volume after the State converted from the coupon basis into the EBT system?
Ms. LOVOI. Yes, we have.
Mr. GOODLATTE. Can you explain that?
Ms. LOVOI. We've noticed it primarily on the food stamp side, and our conjecture is that clients may feel more comfortable, may feel that their benefits are more secure, and so they don't need to cash out the benefits or buy groceries with the full body of benefits early in the month, but instead can carry over benefits throughout the month. In fact, we've noticed the shopping patterns are starting to look more like middle class shopping patterns.
Page 66 PREV PAGE TOP OF DOC Mr. GOODLATTE. Is that a considerable increase in the cost of administering the program?
Ms. LOVOI. Under our contract and our system, it is not.
Mr. GOODLATTE. Very good.
Ms. THOMAS. We see their shopping patterns becoming what we consider to be more normalized. We do see our system at the time we implemented it--we have unlimited access to transactions, both on the food stamp side and on the cash side.
So as a pioneer, we were able to investigate that kind of access. That does drive up the cost for the vendor, certainly. And I would expect my other colleagues, since I believe their transactions are going to be certainly more limited than--some I think are two ATM withdrawals a month and some four--we certainly see about 20 percent of our recipients utilizing their ATM card more than four times. So it is certainly a cost component.
Mr. GOODLATTE. Ms. Price, could you explain what the Quest rules are? And do you think the same advantages can be realized by using standard operating rules without specifically following the Quest rules?
Ms. PRICE. The Quest operating rules are simply utilizing networks and banks and various stakeholders in the country who have basically designed operating rules similar, like, to what a Mastercard or a Visa, what they typically have behind them.
The rules simply mean that when a card has that symbol on it of Quest, and when a merchant has Quest on their door, when a transaction occurs it acts the same all the time, just like you and I enjoy walking around with our Mastercard or Visa cards, or our bank card with Cirrus on it, as an example.
We think that that is very important to allow the maximum freedom for a client to shop and use their food dollars wisely. There should not be an arbitrary boundary that they can only shop so far when with a food stamp coupon maybe they went three blocks further. You know, I had the situation in Kansas City that the line between Missouri and Kansas is literally a city street.
Page 67 PREV PAGE TOP OF DOC And you have stores, you know, back and forth. The clients have been used to shopping with paper coupons to buy at the cheapest price possible. And maybe Missouri clients go over to Kansas on Tuesdays and get hamburger cheaper, and maybe the Kansas folks come into Missouri to get dairy products cheaper on a certain day. We have eight States around us.
We think it's important that clients have that freedom to shop. But if you have a standard set of rules, and in them state for the States to use those rules, you've got to stress that incentive. We think that gets you the maximum portability of the benefits the clients have always had in a paper system, and the merchants to have a seamless entry that when they're handed an EBT card it acts alike all the time.
We think that's important, because they have stores all over the country, like a chain store for example. They shouldn't have to deal with 50 different ports of entry. So we feel like the rules are very important.
Mr. GOODLATTE. Good. Thank you.
Have my questions prompted any comment that anybody else wants to make? If not, I'll ask the other members of the committee if they have any questions.
I do want to thank all of you for your participation today. We are very interested in what you're doing. At least I personally am not interested in mandating solutions to these problems for you. We do want to help you with problems that do arise. We are excited about what you're doing. Compared to 2 years ago in Maryland where the view was that it didn't have much going at all, there have been a lot of changes that have been made and it's very, very encouraging.
So, again, we thank you all for your contribution today.
At this point, I would seek unanimous consent to allow the record of today's hearing to remain open for 10 days to receive additional material and supplementary written responses from witnesses to any question posed by a member of the panel. Without objection, it is so ordered.
Page 68 PREV PAGE TOP OF DOC This hearing of the Subcommittee on Department Operations, Nutrition, and Foreign Agriculture is adjourned. Thank you.
[Whereupon, at 12:45 p.m., the subcommittee was adjourned, subject to the call of the Chair.]
[Material submitted for inclusion in the record follows:]
STATEMENT OF G. EDWARD DESEVE, CONTROLLER, OFFICE OF FEDERAL FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET
Thank you Mr. Chairman. I am the Controller of the Office of Federal--Financial Management in the Office of Management and Budget. In this capacity, I work with the Federal EBT Task Force, which is chaired by OMB and supported by program and financial management experts from the Departments of Agriculture, Health and Human Services, and Treasury as well as the General Services Administration and the Social Security Administration. The Administration appreciates the opportunity to testify before you today on the status of Electronic Benefits Transfer (EBT) for the food stamp program. The Vice President's goal, articulated in the May 1994 EBT Task Force report, is to build a nationwide EBT system by 1999 that uses one card, is user friendly, and provides recipients with dignity, security and access.
EBT brings dignity to benefit programs and recipients by delivering benefits in a manner that looks and feels like a commercial bank card.
EBT brings security to benefit programs and recipients by storing benefits securely in accounts until needed by recipients.
And EBT brings access to benefit recipients by putting a card in the hand of a recipient that can be used wherever commercial shopping patterns support access, not just where government decides benefits should be accessed.
Page 69 PREV PAGE TOP OF DOCA PROGRAM OF MANAGEMENT INTEGRITY
EBT provides an opportunity to increase the management integrity of benefit delivery for programs such as food stamps by a magnitude simply not feasible in paper-based coupon, check and voucher environments. At the same time, decreased transaction time, increased transaction volume, and increased velocity bring additional risk into EBT systems that was not present in paper systems. These characteristics alter the credit and fraud risk exposure. For example, fraudulent EBT transactions could be generated at a rate several times higher than in the paper system of checks and coupons.
As administrators of benefit programs, the government must rise to meet this challenge as a matter of public trust and develop not just EBT systems, but secure EBT systems that include management controls to prevent, detect and contain fraud and abuse related to benefit delivery.
Designers of EBT systems should take systematic and proactive measures to develop and implement appropriate, cost-effective management controls. Commercial management controls in similar systems can often serve as a benchmark for judging what management controls should be used. At the same time, however, using commercial management controls should not substitute for solid analysis of the risks involved in doing business. Given the potential exposure in EBT--more than $110 billion in public funds is expected to flow through EBT systems as they grow much larger by 1999--proper stewardship is essential.
RISK MANAGEMENT ACTIVITIES
The Administration is committed to ensuring that the EBT systems used to distribute public funds to individuals are secure; that is, EBT systems should contain assurances of program and recipients security. In 1995, the Federal EBT Task Force formed a Risk Management Advisory Forum, including representatives from program agencies, the President's Council on Integrity and Efficiency (PCIE), the Secret Service, the Federal Bureau of Investigation, and the Postal Inspection Service. This group, working under the auspices of the EBT Task Force, has overseen the development of several documents, including a detailed risk assessment of EBT systems, a risk management plan for EBT, and a risk management handbook, the last of which is still in draft. The Risk Management Advisory Forum has examined card specifications and is now looking at audit guidelines for EBT systems. Finally, this group has been working with Treasury at each step to ensure EBT systems for direct Federal benefits are being implemented in a secure manner. This partnership among different parties interested in EBT risk management has been quite successful and could serve as a model for managing risk in future endeavors.
Page 70 PREV PAGE TOP OF DOCEBT CARD SPECIFICATIONS
In paper benefit delivery systems there is a negotiable instrument, such as a check or food coupon, which can be lost or stolen. EBT is like a vault with two keys: the card and the PIN. Because the card and the PIN must be used together to withdrawal value, many losses that could have occurred in the paper environment are prevented with EBT. Situations such as coupon or check theft, lost coupons or checks, accidental destruction or mutilation of coupons, and mail losses are avoided.
One of the ways to prevent and deter fraud for EBT systems is through the use of strong card specifications. Card specifications help provide the security necessary for benefit recipients to access benefits in a distributed environment. Tough card specifications are important for three reasons.
In a manual environment--as required in Food Stamp Regulation--where the card is the primary deterrent against fraud, tough card specifications deter individuals from counterfeiting cards;
Tough card specifications make it easier for merchants and law enforcement officials to detect counterfeit cards; and finally,
Tough card specifications allow for easy verification of cards as counterfeit, which in turn provides for easier investigation and prosecution under laws governing financial crimes.
One of the types of fraud which tough card specifications deter is attempts to game the system by withdrawing large blocks of benefits when the on-line system is inoperable or at authorized food retailers, such as rural farm stands and low volume stores, that are not on-line. Finally, tough card specifications also identify the card as an item of value, encouraging recipient behavior which safeguards the card and benefits.
EBT AUDIT AND CERTIFICATION
One of the key management controls to detect and contain fraud, waste and abuse in EBT systems is a regular independent audit of the entire system. EBT is a distributed system under the control of independent organizations, including Federal and State program agencies, their card issuers, third party transaction processors, merchants and ATM operators. As is the case in other commercial distributed systems, there are standard, commercial accounting, auditing, and reporting practices to provide assurance that systems operations are reported on in a timely manner and that material weaknesses in management controls are identified early and corrected immediately thereafter.
Page 71 PREV PAGE TOP OF DOCThe Risk Management Advisory Forum is working on establishing governmentwide audit requirements for EBT. These requirements will include several components to ensure appropriate audit coverage of each EBT system. First, State and local governments are subject to the Single Audit Act Amendments of 1996 and EBT will be included in these audits. The Risk management Advisory Forum is working with OMB to ensure that OMB is addressed in its compliance supplement for conducting single audits. In addition, the audit requirements for EBT vendors will include:
Requiring contractor self certification and examination in accordance with the American Institute of Certified Public Accountant's (AICPA's) Statement on Standards for Attestation Engagements (SSAE) No. 3, which results in an opinion as to whether the EBT contractor's assertion about compliance with banking regulations and EBT program specific requirements is fairly stated, based on established criteria; and
Requiring audits of EBT vendors in accordance with the AICPA's Statement of Auditing Standards No. 70 (SAS 70), ''Reports on the Processing of Transactions by Service Organizations'' which provides guidance on what an independent auditor should consider when auditing the financial statement of an entity that uses a contractor to process transactions, including agreed-upon procedures specific to EBT.
These activities are significant because they provide assurance to Federal and State auditors so that they may render an opinion on the financial statements of entities whose programs deliver benefits through EBT. These assurances are consistent with the assurances that a commercial entity would need from a third party transaction processor in order to fairly present financial statements.
INTEROPERABILITY OF EBT SYSTEMS
Finally, EBT should provide access without adding or removing any mandates on portability of benefits. We believe that Social Security recipients should be able to use ATM machines in any State, and ensure this access through our Federal agreements for service. Food Stamp Regulations currently require that benefits be available in a manner that does not disrupt commercial shopping patterns, which in practical terms has meant benefits are available nationwide. We support continuing this requirement through the transition from coupon systems to EBT systems. The May 1994 plan for nationwide EBT provided for national inetroperability among EBT systems through a standard set of commercially based operating rules. Currently, the private sector based EBT Council has provided the QUEST operating rules to fulfill this function.
Page 72 PREV PAGE TOP OF DOCCONCLUSION
EBT should bring recipients dignity, security and access by following and using commercial practices wherever they are available. At the same time, EBT should bring taxpayers more confidence in government's stewardship of public funds than taxpayers have in paper-based delivery systems, which are too often beset by fraud and abuse.
EBT systems should use card specifications consistent with commercial specifications for cards used in similar situations and with similar exposure. EBT systems should be subject to commercial accounting and auditing practices just as any similar commercial system would be. And EBT systems should provide recipients access based on commercial shopping patterns, not jurisdictional lines.
This concludes my remarks and I would be happy to answer questions at the appropriate time or provide the Committee with more information as needed.
TESTIMONY OF MARY ANN KEEFFE, ACTING UNDER SECRETARY FOOD, NUTRITION AND CONSUMER SERVICES, U.S. DEPARTMENT OF AGRICULTURE
Good morning, Mr. Chairman, and Members of the Committee. I am pleased to join you today to discuss the use of electronic benefit transfer (EBT) systems in delivering nutrition assistance benefits to food stamp recipients.
We are living in an historic time of change. Just six months ago, President Clinton signed into law bipartisan legis-lation to end welfare as we know it and replace it with a system that offers hope, demands responsibility, and rewards work.
The new law recognizes our Federal responsibility to preserve the national nutrition safety net, as well as our commitment to continue a proud thirty year tradition of providing nutrition assistance to those who need it. The law promotes self-sufficiency and personal responsibility, enhances State flexibility, simplifies program administration and strengthens program integrity. It also reaffirms EBT's role in bringing about these changes.
We owe a debt to this subcommittee, for its unflagging commitment to the Food Stamp Program and sustained leadership in encouraging EBT technology as a means of delivering nutrition benefits to recipients in a way that would protect the integrity of the program and would bring dignity to recipients. The nutrition subcommittee saw, early on, the great promise EBT offers for improving service to clients, protecting food stamp benefits from fraud and abuse, and reducing the costs associated with the coupon system.
Page 73 PREV PAGE TOP OF DOCFrom the start, this Administration has also championed the use of electronic benefit transfer technology to deliver benefits to people and recognized the opportunities to streamline benefit delivery, improve service, and deter fraud.
Vice President Gore's September 1993, ''Report of the National Performance Review, From Red Tape to Results'', called for the rapid development of a nationwide system to deliver government benefits. The next year, the EBT Task Force Report, ''From Paper to Electronics: Creating a Benefit Delivery System That Works Better and Costs Less'', was released.
Since then, we have made tremendous strides in realizing the vision of that report: to make EBT nationwide in the fullest sense--one card, user friendly, with a unified electronic delivery of government funded benefits under a Federal-State partnership. Every State in the country as well as the District of Columbia and the Commonwealth of Puerto Rico, is planning for EBT implementation.
I am very proud of the Food and Consumer Service's role as the lead Federal agency for EBT. EBT started as a small demon-stration project supported by food stamp research funds more than 10 years ago in Reading, Pennsylvania. Further research in the years that followed sustained and supported early EBT develop-ment, providing the first evidence of EBT's feasibility and cost-effectiveness. The pace of expansion in recent years has accelerated dramatically. The Food Stamp Program has progressed from having just six operational EBT sites in 1993 to 18 sites today. Eight States now operate statewide EBT systems: Texas, Maryland, New Mexico, South Carolina, Utah, Kansas, North Dakota and South Dakota. Thirty other States are well along in plans to implement EBT, negotiating and getting approval for contracts. Overall, EBT participation has increased from roughly 2-percent of the total food stamp benefits delivered in 1993 to more than 16-percent today. By the end of this fiscal year, we anticipate that 25 States will have operational EBT systems, representing 30 percent of the total food stamp benefits delivered.
This Administration is fully committed to seeing the promise of EBT become a reality in every State by October 1, 2002. The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 contains a number of new provisions to speed the States' transition from paper coupons to safe, cost-effective electronic delivery of benefits.
Page 74 PREV PAGE TOP OF DOCThe new law also exempts State-administered EBT systems from Regulation E (Reg E), resolving the issue of whether Reg E should apply to food stamp benefits delivered electronically.
Now that we are well on our way to realizing our goal of nationwide EBT, there are a number of efforts underway that I would like to mention.
The Department plans to publish a Request for Information (RFI) shortly to obtain public input regarding interoperability across EBT systems and the so-called ''gateway'' fees associated with interstate transactions. We are committed to maintaining a healthy balance between ensuring adequate retailer and recipient access on the one hand, and maximizing State flexibility and minimizing EBT costs on the other hand. We welcome public comment and suggestions on these issues and will use the feedback we receive to clarify our policies to States, or, if necessary, to propose new regulations.
Along these lines, we are pleased to announce that Texas and New Mexico have become interoperable--the first States with two distinct EBT systems to have succeeded in doing so. A Texas recipient can now use his or her card on New Mexico equipment and vice versa. We also continue to support the efforts of the National Automated Clearinghouse Association EBT Council as they strive to facilitate, among other things, nationwide inter-operability.
Mr. Chairman, as you know, USDA's Office of Inspector General (OIG) recently conducted an audit on the current status of EBT implementation and made a number of recommendations for improving program integrity. We welcomed the very constructive input OIG has provided and look forward to implementing the five major recommendations of their report:
Developing strategies to deal with cases of recipient fraud;
Working with States to explore what legislation may be needed at the State level to deal with EBT-related fraud and recipient privacy issues;
Implementing procedures to improve the reconciliation process;
Ensuring that all changes to an EBT processor's retailer data base are correctly entered into the system; and
Page 75 PREV PAGE TOP OF DOCDeveloping a Federal model for exception-based reporting to identify patterns of abnormal transactions and trafficking of benefits.
We have made great progress in implementing these recommendations. Our newly developed ''REDE'' System--Retailer EBT Data Exchange--expedites the process of making changes to the States' retailer database by giving States and their processors electronic access to the FCS retailer file.
The ALERT system--Anti-Fraud Locator Using EBT Retailer Transactions--has been implemented in FCS' Mid-Atlantic and Southwest regions and will be expanded to the rest of the offices throughout this year. ALERT was developed in response to the President's Council on Integrity and Efficiency recommendation that we develop the capability to identify trafficking through on-line exception reporting.
OIG has also provided a number of recommendations to expand the uses of ALERT. We share OIG's interest in maximizing ALERT's anti-fraud capabilities and are looking carefully at the OIG's suggestions to identify how we can use this technology to the fullest extent practicable.
It is exciting and gratifying to witness the transformation of the Food Stamp Program into a streamlined electronic benefit transfer system, delivering benefits to families and individuals who are in need of support while they make the transition from welfare to work. Secretary Glickman has made nationwide EBT implementation a top Department priority, and we look forward to working with this Committee as we move toward this goal.
Mr. Chairman, this concludes my prepared remarks. I would bedelighted to answer any questions the Committee has.
TESTIMONY OF ROBERT H. RASOR, DEPUTY ASSISTANT DIRECTOR, OFFICE OF INVESTIGATIONS, U.S. SECRET SERVICE
Mr. Chairman, thank you for the opportunity to address this subcommittee on the subject of Electronic Benefits Transfer (EBT) system for the Food Stamp Program. My name is Robert H. Rasor, and I am representing the United States Secret Service in my capacity as the Deputy Assistant Director, Office of Investigations.
Page 76 PREV PAGE TOP OF DOCAs a law enforcement bureau of the Department of Treasury, the Secret Service is tasked with helping to ensure the integrity of our Nation's financial systems. Historically, we have accomplished that mission by not only investigating and apprehending those responsible for such fraud attacks against government payment systems, i.e., as counterfeiting of U.S. currency, Treasury check forgery and food stamp coupon trafficking; but also by investigating and apprehending those responsible for fraud attacks on payment systems utilized by the commercial banking, credit/debit card, and telecommunications industries. We also advise those responsible for the administration of these government and commercial payment systems on safeguards that will discourage future fraud attacks.
On February 1, 1995, I testified before the House of Representatives Committee on Agriculture concerning Food Stamp Program fraud and EBT security. Due to the similarities in the fraud investigated by the Secret Service in the commercial credit/debit card industry and the fraud that will potentially occur in government EBT systems, the Secret Service was requested by Senator Patrick Leahy, to join the national EBT task force. In response to that invitation, the Secret Service has advised the Federal EBT task force on how best to design safeguards to prevent fraud in the EBT system.
Specifically, the Secret Service identified six components of a secure system to deliver government benefits electronically:
1) applicant recipient verification-prevention of multiple fraudulent applications by individuals utilizing false documents.
2) card user verification--measures to ensure intended recipient is the presenter of the card.
3) Physical card security--features in the EBT card to prevent counterfeiting of the card.
4) Authorized purchases--measures to ensure that program funds are spent for intended purposes.
5) Card issuance controls--safeguards to prevent theft of genuine cards and card stocks.
Page 77 PREV PAGE TOP OF DOC6) Computer system integrity--technology to prevent compromise of the computer systems that control the interchange networks and administrative files.
The Secret Service recognizes the new EBT system has the potential to be a much more efficient delivery method of government benefits than the current paper food stamp coupon and U.S. Treasury check methods of payment. However, based on our experience investigating commercial credit/debit card and other electronic funds transfer frauds, we must note that just as the electronic transfer of funds allows program administrators to perform their tasks in a more efficient manner than paper-based systems, the electronic nature of EBT allows criminals to commit fraud more quickly and in much greater amounts than paper systems. Therefore, proper safeguards must be included in the design of a new EBT system. A properly designed EBT program can deter fraud and assist investigators in identifying and apprehending individuals that attempt to defraud the government.
Fraud in both credit/debit and EBT card systems involves the unauthorized use of an access device, defined in title 18 USC, section 1029 as any number used to access cash, goods, or services. This agency has proven expertise in investigating crimes relating to credit/debit cards. Since 1984, the Secret Service has worked closely with the credit/debit card industry to identify systemic weaknesses in their systems that allow fraud to occur. The lessons learned from this association has led to many fraud prevention implementations by the credit/debit card industry.
The new EBT system should benefit from these learned lessons and not repeat the same mistakes. We need to continue to strengthen appropriate security features to the EBT cards and corresponding safeguards to the computer systems maintaining this program.
Based on our investigative experience, we have determined that both the paper-based food stamp coupon program and EBT payment systems are susceptible to trafficking fraud. However, EBT offers an audit advantage not available with paper food stamp coupons that may deter trafficking schemes.
While use of this EBT audit trail to detect trafficking merchants is a vast improvement over means currently available in the paper based food stamp coupon program, we have noted that trafficking is only one type of fraud scheme that will potentially attack EBT. Our risk assessment of existing financial systems has led us to conclude that all recurring payment systems, including EBT, are susceptible to fraud by two primary means of access: fraudulent applications and counterfeit instruments. For EBT to become a secure method of annually delivering $24 billion in food benefits and an additional $83 billion in Social Security, health and human services, veterans compensation, Federal pensions and numerous other government payments, this new payment system must address trafficking of benefits and be designed to deter application fraud and counterfeit instrument access.
Page 78 PREV PAGE TOP OF DOCApplication fraud, the first type of criminal attack that all recurring payments are susceptible to, occurs when an individual applies for benefits in more than one name and produces false identification documents to prove his/her identity. This form of fraud allows the criminal to open, access, and obtain funds from multiple accounts. Elimination of fraud in the applicant process by more stringent verification procedures would take EBT food benefits out of the hands of recipients who traffic their benefits for cash or contraband. Without the cooperation of the recipient, the middle-man or the collusive merchant in all likelihood, would not exist.
The Secret Service has found that applicant fraud may not be addressed because this fraud must be first detected by program agencies and then referred to law enforcement agencies for investigation. Our investigations of multiple application fraud have led us to conclude only pro-active preventive measures can deter this recurring problem. A method to reduce applicant fraud is reliable verification of the applicant's identity. The Secret Service has determined that one method of reliable applicant identity verification is available by use of biometric identifiers.
Biometrics is a distinctive means of individual identification by physical characteristics. For application verification purposes, fingerprint identification has already been used successfully.
State of the art technology in fingerprint identification is available in the Automated Fingerprint Identification System (AFIS). This computer driven system serves as a depository for electronically scanned fingerprint files and this technology allows for a rapid comparison of these records. It is important to note that this system is not a ''ten print'' procedure used for criminal identification purposes.
Some municipalities are using biometrics to deter fraud in their social welfare benefits program. For example, the Los Angeles County Department of Public Services reported savings of $14 billion solely attributable to such a system from June 1991 to July 1994.
Fingerprint biometrics has shown to be an accurate, reliable, quick, and cost effective method of determining whether an applicant is already receiving aid under multiple identities. All recurring payment systems are vulnerable to counterfeiting of instruments used to access any electronic payment accounts, including credit cards, cash debit cards, and electronic payment systems. Counterfeiting of the EBT card offers criminals an opportunity to fraudulently gain access to EBT accounts just as they have in the past by counterfeiting credit and debit cards. The Secret Service has recommended to the Federal EBT task force that EBT cards be designed with the same counterfeit deterrents that are currently used by the commercial credit and debit card companies. These deterrents include, but are not limited to, the use of four color graphic printing, embossing, fine line printing, holograms, ultraviolet ink and the encryption of the information included on the card magnetic stripe that is transmitted for transaction validation. Visual counterfeit deterrents potentially aid merchants at the point of sale in detecting counterfeit cards in the event the magnetic stripe verification is compromised or counterfeit cards are presented for manual transactions. Furthermore, EBT cards with visual security features provide reason to hold collusive merchants accountable for accepting counterfeit cards.
Page 79 PREV PAGE TOP OF DOCThe Secret Service continues to play an active advisory role to the risk management advisory forum (EBT task force).over the past several years representatives of the Secret Service have met with various State officials to observe their State EBT systems. Most recently, In January of this year, Secret Service agents met with representatives of the Texas Department of Human Services regarding fraud investigations of their Lone Star Card (EBT), which is used to disburse A.F.D.C. payments and food stamp benefits. The Texas officials also advised that they were currently conducting a two-county pilot program using biometric identification for applicant screening.
In closing, the Secret Service recognizes that EBT offers administrators a more efficient method to deliver government benefits than paper food stamp coupons. We further recognize the potential for use of the EBT audit trail to deter trafficking schemes that have plagued the Food Stamp Program in the past.
However, we must not let these advantages offered by EBT overshadow the need to prevent other types of fraud attacks such as application fraud and counterfeiting already experienced by commercial credit and debit card payment systems. Current internal assessments that look for and report those indicators of fraud could and should be enhanced. This assessment should be geared to extract indicators such as the following:
(1) Number of people in the program in relation to the area.
(2) Tracking the number of lost / stolen cards.
(3) Tracking the number of reloaded cards.
(4) Tracking recipient and program problems.
(5) Number of duplicate applications.
(6) System linkages--networking of existing programs and data bases to identify and minimize overpayments.
Although the Secret Service is very pro-active in our risk assessment process, law enforcement agencies generally stand in a reactive mode when it comes to fraud investigations. Unless systems are in place to report fraud indicators, or are available for law enforcement to examine, fraud will go unreported.
Page 80 PREV PAGE TOP OF DOCour pro-active approach is exemplified in our ongoing T.R.I.P. program (Treasury Recipient Integrity Program). This program is designed to attack systemic weaknesses in the Federal entitlement program. One recently completed overseas pilot program in which the Secret Service worked with the department of defense has saved the U.S. Government upwards of $6.2 million annually. The results have shown that once proper mechanisms are in place we can identify and correct system weaknesses. That concludes my prepared remarks. I will be happy to answer any questions that you, or members of your committee, may have at this time.
STATEMENT OF ROBERTA YORK
Mr. Chairman, Members of the Committee, I am Roberta York, the electronic benefits manager with the San Bernardino County Department of Public Social Services in California. My statement will update the committee on the status of EBT in California and review barriers we have had to confront in moving toward implementation.
STATUS OF EBT IN CALIFORNIA
San Bernardino County and San Diego County will jointly implement the first EBT system in California later this year, for the Food Stamp program. These two counties are well suited to lead the State into electronic issuance of benefits because of their size and the current Point of Sale (POS) infrastructure already in place.
The current approach to addressing statewide EBT in California is to implement a Food Stamp EBT program in San Bernardino and San Diego Counties, which together represent approximately 15 percent of the Food Stamp population in California. California is reassessing its approach in light of Federal Welfare Reform mandates for EBT implementation.
We released our Request for Proposal (RFP) in August of 1996 to solicit Food Stamp EBT services for a joint procurement with San Diego County. After the evaluation and selection process the County announced its Intent to Award to Deluxe Data as the prime contractor with Bank of America as the sub-contractor. The post-award appeal process has been completed, and we expect to be up and running by September 1997.
Page 81 PREV PAGE TOP OF DOCOUR PROCUREMENT
Invitation for Expression of Interest (IEI)
In developing our RFP, we did not adopt the IEI process. The County felt the Invitation for Expression of Interest process is restrictive because only banks can participate. Through our open procurement a variety of experienced bidders were able to compete.
We have not adopted the Quest Rules in our Project. Since Federal EBT program requirements don't specify the use of the Quest Rules, San Bernardino County, San Diego County, and the State of California need to address the business case for adopting them. This will be considered during the State's analysis and planning for statewide EBT implementation. Pending this analysis, advantages of using standard operating rules can be achieved without specifically following the Quest Rules, and this is how our project is proceeding.
The County proposed to provide interoperability for the Food Stamp EBT program by requiring in the RFP that the EBT contractor follow the International Standards Organization (ISO) specifications, and that the card holders be able to access their benefits outside the San Bernardino County and San Diego County project area. Any gateway fees associated with the Point of Sale (POS) will be included in the EBT Contractors cost per case month.
BARRIERS TO IMPLEMENTATION
The exemption from Regulation E liability that was provided in the Welfare Reform law is essential to implementation in California. The County of San Bernardino has been working towards implementing electronic benefits for the past seven years and had to delay the RFP until statutory relief was enacted.
The County was adamant that it would not assume the unknown liability costs of Reg E and would not be responsible for any Regulation E costs above our cap. We appreciate the support that came from members of this committee for the exemption.
Page 82 PREV PAGE TOP OF DOCMandatory Card Specifications
Another potential barrier within EBT is the proposed regulation to mandate specific features for the EBT cards. This proposed regulation would add significant costs for producing cards and have administrative implications that will also drive higher operating costs.
The most expensive proposed security feature is the hologram. The expiration date requirement would result in unnecessary replacement of the EBT card every two years. This would increase the number of cards to be issued in San Bernardino County by an estimated 25 percent per year, a significant additional expense.
These recommended card specifications increase costs with little or no added value to the county, States, or retailers, and they should not be mandated.
Thank you for the opportunity to discuss EBT in California with the subcommittee. I will be happy to answer questions.
TESTIMONY OF MELBA L. PRICE
Good morning. My name is Melba Price. I am an associate director with the Missouri Department of Social Services. I also serve as chair of the Southern Alliance of States or SAS (Alabama, Arkansas, Florida, Georgia, Kentucky, Missouri, North Carolina and Tennessee). I want to thank the committee and especially you, Mr. Chairman, for inviting me to speak on the topic of electronic benefits transfer (EBT). I also want to thank this committee for your support of the repeal of Regulation E. We appreciate this committee's interest in EBT and hope to provide helpful information to you today.
My testimony will cover three areas:
(1) Status of the Southern Alliance of States
(2) Interoperability of EBT
(3) Card specifications
SAS was formed in 1994 to purchase EBT services in the most cost effective way by using a volume pricing model.
Page 83 PREV PAGE TOP OF DOCIn May 1994, Vice President Gore designated SAS as the first prototype in the country to deliver Federal and State benefits through the same delivery system and on the same card. By placing Federal and State benefits on a single plastic card thus eliminating the need for each of us to issue our own card, we would spend taxpayer dollars only one time instead of twice. One jointly designed system riding on the commercial infrastructure eliminates the need for government to develop parallel systems. The clients only have to keep track of one card and can be provided access wherever commercial cards are accepted.
SAS is scheduled to go on-line with cards in the next two weeks. Alabama will begin pilots April 1 with Missouri piloting in May. The States of Georgia and Arkansas are scheduled for June piloting with Florida scheduled to begin October 1. Tennessee, North Carolina and Kentucky are in the process of negotiating contracts with Citibank at this time. Timelines for statewide rollout vary with each State.
Regarding interoperability of benefits, our thinking has been that EBT should emulate as closely as possible, the food stamp and cash models today with paper benefits.
In today's world, a client can use their paper benefits without regard to State or county boundaries. Therefore, if clients in Kansas City, Missouri, want to shop for lower-priced hamburger on Tuesday in Kansas, they can. And vice-versa, if Kansas food stamp holders want to come to Missouri retailers for cheaper dairy products on Thursdays, they can. The food stamp program is designed to feed the poor in this country. The Federal Government maximizes the client utilization of those benefits in a uniform paper food stamp model. Missouri has eight States that border us. Prior to EBT, neither the Federal Government, the State governments or merchants ever worried about where benefits were issued or accessed.
The merchant community in the United States turns food stamps into food products for our clients. Merchants in the paper food stamp world never were concerned about what State issued food stamps to the client shopping in their store. Every store in a grocery chain-store environment dealt with food stamps consistently. Food stamp coupons and cash have been universally accepted coast to coast. As a service to the clients that benefit from the system and the merchants that service the system, the merchant community with EBT should similarly have a universal acceptance method regardless of which State issued the benefit.
Page 84 PREV PAGE TOP OF DOCWhen EBT was first piloted in this country, it was done so as stand alone State pilots with no universal standards in place. Approximately 10 States have implemented EBT in this environment. Most of these States embarked on implementation of EBT prior to national standards being in place.
In 1994, the Federal Government along with SAS agreed to utilize the open, commercial framework for EBT. This means that EBT should be accessible on point of sale (POS) machines and ATMs throughout the country similar to a MasterCard or Visa. In other words, the client should be able to use their card wherever they see a specific symbol on the door. The same holds true for a merchant. When a merchant is presented a card with a specific symbol on it, the card should be accepted and should should operate the same. This allows for a seamless, universally-accepted card in the open commercial framework.
The National Automated Clearing House (NACHA) has sponsored a National EBT Council made up of the Federal and State governments, networks, merchants, banks and EBT vendors to establish standards for universal usage. I sit on the board of this council representing SAS. NACHA purchased a symbol, QUEST, for usage by the States for EBT at no charge.
Jim McCarthy, executive vice president of the STAR System network serves as chair of the council and describes the need for national rules as follows: ''In the commercial world, banks cannot afford to have artificial geographic boundaries preclude access for their customers. We've linked together point of sale terminals and ATMs throughout the country through technical standards and operating rules. The Quest operating rules allow the same thing to happen for EBT.''
To date, 28 States (including SAS) have agreed to use the national standards for implementation. We believe that Congress agrees with using the open commercial framework by language in the welfare reform bill passed and signed last summer.
Food stamps are still a benefit provided by the Federal Government. It is the State's responsbility to deliver these benefits in the most cost effective way possible. Standardization significantly reduces the cost of EBT contracts to States and these costs will continue to decrease as EBT becomes more of a commodity. On the other hand, there are costs associated with providing seamless access across a wide array of EBT processors for start up. To help States get over this hump, the Federal Government can assist in reaching coast to coast uniform accessibility by providing an incentive model for States to achieve uniformity. More than half the States have adopted these uniform standards. By our estimates as well as private industry's estimates, by providing incentive fees to States of 1 percent to 3 percent of the total savings the Federal Government realizes by converting from paper to EBT, the Federal Government can once again achieve a seamless, client freedom of choice system, a consistent merchant accessible system, and a more efficient system resulting in savings to the taxpayers. In other words, a small incentive for switching interoperable transactions can achieve a win/win for all entities involved.
Page 85 PREV PAGE TOP OF DOCRegarding card specifications, the Southern Alliance of States (SAS) supports debit card specifications in use today by the banking industry for debit cards. States can always add features such as client photos or credit card specifications if they so choose. Depending on how a State delivers cards such as over-the-counter versus centrally mailed can greatly impact how much the addition of credit card specifications can cost. You have heard prior testimony today regarding these cost estimates. We believe that if debit card specifications are good enough for the banking industry, they should be good enough for the government.
In conclusion, the Southern Alliance of States is implementing EBT this Spring. We absolutely support national operating standards already in place through QUEST and also support an incentive model for States to use Quest for switching transactions regardless of borders. This results in a win/win for clients, merchants and the taxpayers. We also support debit card specifications with State options to add further security measures.
Thank you, Mr. Chairman, for allowing me to testify today. I will be happy to answer any questions when appropriate.
STATEMENT OF GREGORY L. COLER, PRESIDENT, TRANSACTIVE CORPORATION
Thank you Mr. Chairman. I very much appreciate your invitation to address this subcommittee, and I am extremely grateful for this opportunity.
Transactive corporation is the Nation's leading implementor of electronic benefit transfer systems.
We have established the Nation's largest EBT system in the State of Texas. Currently we serve more than 3 million people and disperse $3 billion of benefits through a network of 16,000 retailers throughout the State.
The Lone Star program has been recognized for success in reducing fraud, increasing retail sales and providing a new sense of dignity and security for recipients.
In part, as a result of our success in Texas, Transactive won the EBT contract in the State of illinois-- a project we are in the process of implementing--and we have recently been awarded the right to negotiate contracts for the States of Indiana and Mississippi.
Page 86 PREV PAGE TOP OF DOCFEDERAL INTERVENTION
EBT has proven to be an important part of the national agenda to reform welfare.
The program's benefits have been well documented and welcomed by recipients, retailers and taxpayers. EBT is a positive initiative that is working.
However, my purpose in being here today is to tell you that the U.S. Treasury and other Federal agencies, without the appropriate oversight of Congress, are adversely and obtrusively attempting to eliminate fair competition for EBT contracts.
Over the last 2 years, the United States Treasury Department in concert with the Federal EBT task force and their consultant, Phoenix Planning and Evaluation, have aggressively promoted a single procurement process for EBT.
The vehicle for that process is known as an invitation for expression of interest, or an IEI. The Treasury initially utilized the IEI in a multi-State procurement which included eight southern States.
This consortium, known as the Southern Alliance of States (SAS), was intended to serve as the prototype for other multi-State procurements using the IEI throughout the country.
The problem for transactive and many other qualified EBT providers is that the IEI eliminates our ability to compete for EBT contracts as a prime vendor. In the case of the sas contract, our company and many others, were precluded from competing as a prime vendor for more than 20 percent of the national market.
There are many obvious unfair and misguided elements and ramifications of the IEI procurement process.
First, the IEI restricts competition and inherently favors only a select few major financial institutions. As a result of this restricted competition States have no guarantee that they are receiving the best possible price for EBT services. The limiting of competition has eliminated alternatives for states and has ultimately led to higher cost with no guarantee of best value for taxpayers.
Page 87 PREV PAGE TOP OF DOCSecond, since the number of possible vendors is inherently limited through the IEI, one EBT vendor, citibank, has been able to dominate the market. the IEI process has therefore facilitated one vendor having a considerable implementation commitment to be completed in a relatively limited time period. the result has been extended delays in project implementations.
Third, and perhaps most disconcerting, is that the IEI has ensured that citibank will process literally billions of dollars of transactions to the unbanked population in the future. in effect the government has sought to promote a monopoly in the industry.
There are other problematic aspects of an IEI which present serious conflicts:
It violates USDA requirements that State Food Stamp Program procurements engender the maximum possible competition;
The Treasury has the ultimate authority to select the vendor for States;
It entrusts the responsibility for implementing EBT systems to banks despite the fact that they play only an ancillary role in the EBT process;
The IEI does not provide for public access to evaluation criteria and scoring of respective proposals. Also unlike an RFP, the contract award is not subject to review or protest; and,
Utilizing the IEI process may present a conflict with individual State public procurement requirements.
In short, the IEI process limits competition, shifts what has been a function of the States to the Federal Government, and affords the taxpayers no assurance of receiving the best value or confidence in the integrity of the procurement.
as a result, many non bank EBT vendors have avoided a confrontation with the treasury department by withdrawing from the industry due to the Federal Government's onerous and unfair intervention in the procurement process.
We at transactive have not.
Instead, at considerable risk and expense we objected to this unfair action by taking the issue both to you in Congress and to the United States District Court here in Washington, D.C.
Page 88 PREV PAGE TOP OF DOCand despite the assistance and leadership of this subcommittee and a decision in the United States Court of Appeals, the Treasury has been undeterred in moving forward with this ill conceived and regressive agenda.
On may 10, 1995 this subcommittee, under the direction of its late chairman, Congressman Bill Emerson, conducted a hearing regarding EBT, and specifically the Federal Government's role in the procurement process. during the hearing, members of the subcommittee, including Representative Emerson, Representative Calvert, Representative Bishop, Representative Thurman and Representative Latham raised concerns regarding the Federal EBT task force's role in the national EBT implementation process.
Most significantly, subcommittee members drew attention to the fact that the Federal EBT task force was embarking on a process that would usurp the traditional role of the Federal departments, make changes in Federal regulations and impact the retailers and recipients autonomously without the benefit of congressional oversight.
Importantly, the hearing testimony raised several significant concerns. We now have the benefit of 2 years hindsight to see if the concerns of this committee were justified. We no longer have to deal in projections and expectations as we did 2 years ago. With the facts now in, I ask the committee to consider the following issues raised by you on May 10, 1995, and what eventually came to pass.
The committee asked the Treasury's commissioner of financial management service why the Treasury was using the IEI process rather than following normal procurement procedures and using an RFP. You were told by the commissioner that applicable law required Treasury to proceed in that manner.
The United States Court of Appeals for the D.C. Circuit ruled unanimously last August that Treasury did not have to use an IEI process and restrict the bidding to only financial institutions. In fact, the Court said that Treasury's decision to use the IEI procedure was arbitrary and capricious.
Page 89 PREV PAGE TOP OF DOC The committee expressed concern about the anti-competitive nature of the IEI. You were told that 650 invitations were sent out to various financial institutions and their expectation was that they would receive between 30 and 40 proposals.
Treasury received only four expressions of interest, and one of them was found to be nonresponsive. Therefore, there were only three bidders eligible for selection.
The committee asked the executive director of the EBT task force about the level of participation in the task force of organizations representing recipient groups. The director assured you that the task force was indeed talking to recipient groups. However, 3 months later, the Consumers Union, the Food Research and Action Center, the National Association of Child Advocates, and Public Voice for Food and Health Policy wrote to Vice President Gore and said: ''Although we have individually and collectively corresponded with the Federal EBT task force for more than a year, we do not feel that we have been part of a 'collaborative' effort with that group on the development of the invitation for expression of interest (IEI) for the Southern Alliance of States (SAS).''
The letter later stated: ''We also disagree with Mr. Jack Razikowski's statement in the referenced attachment that 'the EBT prototype system for the Southern Alliance of States will meet the needs of recipients . . . ' To the contrary, we feel that the SAS procurement does not address a multitude of important issues.''
Following the committee hearing on May 10, 1995, the then-chairman and ranking member, Congressmen Emerson and Condit, wrote to Secretary Rubin. In their June 26, 1995, letter they expressed concern with the IEI and asked that it be suspended until Congress was able to exercise some oversight.
Treasury chose to deny Congressmen Emerson's and Condit's request and moved forward with the IEI. On August 3, 1995, Congressman Emerson introduced an amendment on the floor of the House restricting some of the funding for the EBT task force. His stated purpose was to send a clear message to the Treasury and the EBT task force that Congress should not be cut out of the process through which a role is created for the Federal Government in the execution of State administered Federal benefits. His amendment was unanimously approved.
Page 90 PREV PAGE TOP OF DOCDespite all of this, the Treasury has continued to force the IEI process and ignore normal procurement procedures.
While working to generate interest in this issue with the Congress, on March 30, 1995, 21 days after the Treasury issued the IEI for the SAS procurement, transactive filed a lawsuit in the United States District Court for the District of Columbia.
In that lawsuit we contended that the IEI unlawfully restricted competition and that the Treasury was arbitrary and capricious in their use of the IEI.
On September 7, 1995 Judge Emmitt Sullivan ruled against Transactive. Transactive filed an appeal of that decision with the U.S. Court of Appeals for the District of Columbia Circuit.
On August 13, 1996, the Court of Appeals overruled the District court's decision and remanded the decision back to the District court for action consistent with the higher court's opinion.
In its decision the Court of Appeals ruled unanimously that the Treasury acted arbitrarily when it concluded that only a financial agent of the Treasury could administer the EBT system for the SAS.
Accordingly, the Treasury's use of the invitation of expression of interest process to select an EBT vendor for the SAS States was determined to be unlawful under the Federal administrative procedures act.
Despite the resounding decision of the Court of Appeals the Treasury would not be denied in their effort to preserve this unfair procurement process.
On September 28, 1996, in the waning hours of the legislative session, language was included in the omnibus appropriations bill that essentially nullified the Court of Appeals decision.
Section 664 allowed the SAS procurement to proceed using the IEI, but incredibly exempted the process from judicial review. Even more alarming, section 665 of the legislation permits Treasury to prospectively select financial agents to provide EBT services, in accordance with any process the secretary deems appropriate. This appears to give the secretary unlimited, unreviewable unilateral discretion in selecting EBT vendors in the future.
Page 91 PREV PAGE TOP OF DOCI am confident that no member of this committee was aware of the inclusion of these sections, and am likewise confident that the handful of members who were aware of sections 664 and 665 had no idea what that language actually does--sections 664 and 665 mandate a procurement process that was unanimously held by the United States Court of Appeals to be arbitrary and capricious, and they waive Federal procurement law even though the SAS procurement will involve $13 billion in Federal benefits and an estimated revenue to the prime contractor of $400 million.
Why is Treasury insisting on financial institutions being the only eligible prime contractor for Federal EBT? We contract with federally insured financial institutions to do end of the day reconciliation. so a financial institution is always used in an EBT contract.
We were extremely pleased and encouraged that shortly after the Treasury's legislative action, Senator Santorum of Pennsylvania issued a statement in the Congressional Record raising objection to the Treasury's 11th hour legislative maneuvering.
The Treasury and the Federal task force have also utilized a consultant, phoenix planning and associates, to assist in promoting their efforts.
Phoenix has been paid more than one million in us taxpayer dollars. I draw the committee's attention to the general accounting office report dated March 27, 1996. Phoenix not only received a contract from the EBT task force, the task force also granted $642,000 to the Western Governor's Association who in turn contracted Phoenix.
According to the GAO, it was Phoenix who developed the task force's blueprint for the systems development and implementation for nationwide EBT.
Finally, we are also concerned that the Federal EBT task force is exclusively promoting regional systems and shunning States that initiate single State procurements. The Treasury's actions in the EBT procurement process and their promotion of the IEI procurement process raise serious questions.
Page 92 PREV PAGE TOP OF DOCWhy is the Federal Government influencing the procurements of State-managed welfare programs?
Why has the Treasury Department taken an unprecedented interest in directing State procurement processes for programs that have historically never been involved?
Why has the Treasury Department taken the unusual step of using an arcane Federal procurement process, the IEI, to achieve control over State procurements for EBT?
Why has the Federal EBT task force been openly disingenuous in advising States of their procurement options?
Why did the Federal EBT task force arrange for its consultant to be compensated more than $600,000 in Federal money to assist in one procurement.
And most significantly, why has the Treasury attempted to arrogantly promote their agenda, cutting Congress out of the process and in direct conflict with a recent decision of the United States Court of Appeals?
We respectfully request that the Congress and this committee exercise your oversight power and ensure that the Treasury Department and the EBT task force remove themselves from involvement in State EBT procurements. Let States develop their own programs rather than be forced into regional systems under the control of the Federal Government.
We request your action to address this important issue and to preserve fair and open opportunity in Government contracting for EBT.
(1) We respectfully request that the subcommittee initiate action to repeal sections 664 and 665 of last session's omnibus appropriations bill. The Congress should act definitively to protect the integrity of the Court of Appeals decision and to reject the use of an unfair procurement process for EBT contracts.
(2) We respectfully request your consideration of legislation that would eliminate the use of the IEI process for future procurements. usda regulations require that State EBT procurements that involve food stamps may not contain features that restrict competition--why is Federal procurement exempt from this requirement?
Page 93 PREV PAGE TOP OF DOC(3) We respectfully request that the committee review and examine the nature of the appropriations of Federal funds used to compensate phoenix planning and associates.
Thank you for your time and continued interest in this important issue.
TESTIMONY OF ROGER C. VIADERO, INSPECTOR GENERAL, USDA
Thank you, Mr. Chairman and members of the Committee. I am pleased to be here to provide testimony about the Electronic Benefits Transfer (EBT) system through which Food Stamp Program benefits are issued to recipients and the Office of Inspector General's (OIG) efforts to assure that this new system works properly. With me today are James R. Ebbitt, Assistant Inspector General for Audit, and Craig L. Beauchamp, Assistant Inspector General for Investigations.
The Food Stamp Program is the U.S. Department of Agriculture's largest program activity and is administered by the Food and Consumer Service. For fiscal year 1997, the Food and Consumer Service estimates about $20.8 billion in food stamp benefits will be issued to about 23.9 million people. Of the $20.8-billion, $3.3 billion is estimated to be issued through EBT to a monthly average of 3.8 million people. About 197,000 stores are authorized to accept food stamps or EBT cards. As of February 1997, 16 States had operational on-line food stamp EBT systems with 8 of the States operating statewide systems or expanding statewide. Two States had operational off-line systems using smart cards (cards containing a microcomputer chip with all processing capabilities built-in.) Twenty-seven States had selected EBT vendors and were at various stages of awarding contracts. Another three States had issued requests-for-proposals as a prelude to selecting an EBT vendor.
The Federal EBT Task Force designed a five-point plan which was to lead to nationwide availability of EBT services by early 1999. In addition to the U.S. Department of Agriculture's (USDA) Food Stamp Program and Special Supplemental Nutrition Program for Women, Infants and Children (WIC), EBT was also to provide cash benefits for assistance programs such as the U.S. Department of Health and Human Service's Aid to Families with Dependent Children Program (the Temporary Assistance for Needy Families Program as a result of welfare reform), the Social Security Administration's Social Security and Supplemental Security Income Programs, U.S. Department of Veterans Affairs' Veterans and Pension Benefits, and States' general assistance programs. In all, it was estimated that over $110 billion in Federal and State benefits would be issued through EBT systems annually.
Page 94 PREV PAGE TOP OF DOCEBT has been operational in a pilot mode since 1984 when the Food and Consumer Service funded and managed a demonstration project in Reading, Pennsylvania. Other demonstration projects followed in New Mexico, Minnesota, Maryland, Iowa, Ohio, and Wyoming.
Over the years we have supported the implementation of EBT to issue food stamp benefits as an alternative to paper coupons. The EBT card is less negotiable on the street and thus does not lend itself for use as a ''second currency'' as readily. While the EBT card has not eliminated trafficking, the selling of food coupons at a discount for cash, by authorized stores and program recipients, EBT-generated records have enabled us to better monitor and analyze sales and redemption activity and better target stores that may be trafficking. This same data also makes it possible to identify recipients who may be trafficking their benefits, something that was not possible in the paper coupon environment. A reduction in trafficking does not cause a similar reduction in program benefits, rather benefits will be available for their intended purpose, the purchase of food. There are some problems with EBT that need to be addressed, and I will highlight these later, but our work to date indicates that EBT systems are working in that they ensure timely and accurate availability of food stamp benefits to recipients and payments to stores, and EBT provides a record trail that previously did not exist.
The first criminal investigation of trafficking in EBT food stamp benefits occurred in Reading, Pennsylvania (the site of the first EBT pilot project) in 1991, and resulted in the convictions of the two sandwich store owners and over 140 recipients who sold their benefits at the store. Currently, about half of our investigative resources are devoted to investigating fraud in the Food Stamp Program. Since the first Reading investigation, an ever increasing amount of our investigative time is being dedicated to investigations involving EBT as more States convert their issuance systems. Since EBT started, we have initiated 199 EBT investigations, resulting in 261 indictments and 198 convictions and monetary results of nearly $4.5 million.
A recent example of our EBT investigative work involves our investigation of a small convenience store owner in Baltimore who recently plead guilty to trafficking in over $700,000 in EBT food stamp benefits during an 18-month period. He subsequently was sentenced to 2 years in prison and was ordered to pay restitution of $250,000 to USDA. In addition, over $92,000 from the proceeds of these illegal transactions have been seized or forfeited to the Government. Store employees admitted to our investigators that the store owner instructed them to add three dollars and change to all trafficking transactions at the store. This was done in an attempt to disguise their trafficking pattern so the EBT system would not show even-dollar transactions at their store, one of the tell-tale signs of trafficking. During our investigation we reviewed all transactions which exceeded $20 and determined that 92 percent of these transactions, totaling over $745,000, included the additional three dollar charge.
Page 95 PREV PAGE TOP OF DOCA valuable benefit of the EBT system involves the ability to identify the food stamp recipients who are involved in benefit trafficking activities. In contrast to paper food stamp coupons, which lose their ownership identity immediately upon being used in a transaction, EBT benefits are attached electronically to the recipient. When the benefits are redeemed, they are stored on the computer system showing when and where the benefits were used. Once we identify a store at which trafficking is occurring, we are also able to identify recipients who appear to be involved in the scheme. This information has become extremely valuable during the course of our investigations of the stores, as well as providing key evidence to allow for criminal prosecution and/or administrative disqualification of the recipients.
The authorized store is the key to redemption of food stamp benefits both in the paper coupon and EBT card environments. It is therefore imperative that stores authorized to accept benefits meet program eligibility criteria and are in business primarily to sell eligible foods.
There are other measures that have been taken to strengthen the program. In testimony before the House Committee on Agriculture, in February 1995, I made a number of recommendations, some of which required legislative change. I am pleased to note that the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (the Welfare Reform Act) contained a number of provisions I recommended which will help in combating program fraud as it relates to authorized stores. The act authorizes the forfeiture of property from persons convicted of felony violations of the Food Stamp Act. It also requires that USDA or, if practicable, an official of the State or local government designated by USDA, visit stores to be authorized or re-authorized as part of determining their eligibility. The act authorizes requiring applicant stores to submit relevant income and sales tax filing documents and permits regulations to require stores to provide written authorization for USDA to verify relevant tax filings with the appropriate agencies. The act also requires the disqualification of authorized stores from the Food Stamp Program who are disqualified from the WIC Program.
Page 96 PREV PAGE TOP OF DOCMonitoring and Review of EBT Systems Implementation
Not only has OIG been supportive of EBT, we have taken an active role in monitoring and reviewing EBT systems. In this respect, we view our role as providing assurances to program managers that the systems are operating as intended, or reporting the problems that need to be addressed so that the systems operate properly.
In 1986 we reviewed the Reading, Pennsylvania, EBT pilot project focusing on system controls and controls over access to the system. Some items which needed attention then remain issues for new systems today. Employees' access capabilities to the EBT system were not restricted to only functions or accounts over which they had responsibility. This continues to be an issue.
In May 1995 we issued an OIG evaluation report on the ''Status of Electronic Benefits Transfer Developments.'' Our objectives were to determine if the Food and Consumer Service had developed EBT goals and objectives, used studies of EBT systems to identify weaknesses requiring corrective action, and had a process to entertain States' applications to develop EBT systems. As part of this review we visited EBT systems operating in Maryland, Minnesota, and Pennsylvania.
EBT systems now capture data such as the food stamp transaction amount, what time it occurred, at which register, and the recipient's account number. During our first EBT investigation in Reading in 1991, we developed a method to use the computerized electronic data, generated and stored through EBT, as an investigative tool by which to identify and track potential trafficking activity by authorized retailers and food stamp recipients. We recommended that the Food and Consumer Service develop a similar method to use this data to better identify stores and recipients who violate the program.
Our EBT data analysis system was used as a model by the Food and Consumer Service in the development of a new nationwide computer system to detect potential fraudulent EBT activity. This new system, known as the Anti-Fraud Locator using EBT Retailer Transactions, or ALERT, is now available, on-line, for two Food and Consumer Service and OIG investigation regions. Hard copies are available for the other regions.
Page 97 PREV PAGE TOP OF DOCIn August 1995, under the President's Council on Integrity and Efficiency (PCIE) we consolidated reported findings and currently identified concerns of the Inspector General community with implementation of EBT nationwide. We issued our report to the Office of Management and Budget and the Federal EBT Task Force. Other Inspectors General who participated with us included the U.S. Department of Health and Human Services, Social Security Administration, Railroad Retirement Board, U.S. Department of Defense, Office of Personnel Management, U.S. Department of Veterans Affairs, U.S. Department of Education, U.S. Department of Labor, and U.S. Department of the Treasury.
Major cross-program issues which needed to be addressed included:
Making EBT processor records available to Federal and State auditors and investigators.
Increasing security measures over employees' access to EBT systems by limiting the number of users, particularly those authorized to make additions or changes to program benefits.
Limiting the number of unsuccessful attempts to access benefits, reducing the length of time EBT cards are valid (at the time of our review all had 1999 expiration dates), securing EBT cards returned as undeliverable, and prohibiting the selection of personal identification numbers (PIN's) during nonbusiness hours.
We also issued, in September 1996, a nationwide report, ''Monitoring EBT System Development and Implementation,'' based on work we did at the Food and Consumer Service's national office and the States of Maryland, New Jersey, South Carolina and Texas. This review focused on determining if controls for developing and operating EBT systems were adequate and in place, and identifying problems we could foresee in the implementation of EBT as an integrated, nationwide system.
Security policies and control processes in the four States we reviewed were adequate to ensure timely and accurate availability of food stamp benefits to recipients and payments to retailers. However, there are areas that need improvement and there are some issues that may impact nationwide implementation.
Page 98 PREV PAGE TOP OF DOCThe Southern Alliance of States has proposed to allow its contractor to expand the Southern Alliance's EBT network into States with no existing EBT program and enroll food stores in those States without securing an agreement between the store and the State. Also, there was no provision for an on-site visit to determine the store's continued eligibility to participate as an authorized retailer. We believe the proposal would have opened the program to additional risks. The Food and Consumer Service continues to have many stores in its database of authorized retailers that are ineligible or questionable. Based on our concerns the Food and Consumer Service is developing procedures to overcome the risks by requiring visits to out-of-project stores and requiring that these stores sign operating agreements with the EBT contractor.
Food and Consumer Service program regulations do not require that EBT cards have increased EBT card security features recommend by the U.S. Secret Service. These include fine-line printing, ultraviolet ink, holograms, embossing the card number over the hologram, and expiration dates. While the Food and Consumer Service supports these features, and at our recommendation, has drafted regulations to require them, until the regulations are final there is no avenue to require compliance. These regulations are currently in the clearance process. OIG has championed these additional security features to decrease the risk of EBT card counterfeiting. The Inspector General community, through the PCIE, Office of Management and Budget, the Secret Service, and the Federal EBT Task Force have also supported the additional security features and continue to do so.
There are basically two arguments made in opposition to the increased features: (1) the use of a PIN to access benefits through the EBT card provides adequate security; and (2) the increased costs of the additional features are substantial and cannot be justified.
Statistics on EBT card fraud, specifically counterfeiting, are not yet available. However, since EBT cards mirror how debit cards work in the commercial world, we can look at debit card experience to guide us to assess EBT card risks. A 1995 study, conducted by a private firm, reported that debit card losses are increasing and that more of the losses are being attributed to debit card counterfeiting. It was estimated that counterfeiting accounted for 54 percent of debit card fraud which is now in the millions of dollars.
Page 99 PREV PAGE TOP OF DOCThis same study also reported that while PIN's were once thought by the industry to provide absolute security, experience is now showing that PIN's are vulnerable to disclosure through ''shoulder-surfing'' and long-distance observation. Other more sophisticated means, through technology, are also now available to obtain the PIN. Combining knowledge of the PIN, with the EBT account number, which is obtained more readily, leads to the logical step of counterfeiting EBT cards to gain access to benefits.
One of the primary focuses of opposition to the increased card specifications is the increased costs. Costs data has varied. For example, the bid for the Southern Alliance of States (SAS), a coalition of eight States, indicated the proposed card specifications would cost an additional 22 cents per card or of one cent per case, per month. In another two-State project area, with a significantly lower case load than the SAS, they have been verbally quoted approximately 3 cents per case, per month, by their EBT contractor for the enhanced features. Based on the higher quote of 22 cents per card, the increased cost using the food stamp caseload for 1997, would be just over $2-million, of which FCS would share half of the cost. A modest investment compared to the dollars being issued.
ADP security policies and control processes at the three EBT processors visited were generally well documented and followed. However, the Food and Consumer Service needs to strengthen control requirements so that security clearances and periodic training in computer security awareness meet Federal standards. Also, security certification standards for third-party processors (i.e., companies that operate the electronic systems capable of relaying transactions to a central database computer for authorization) have not been established. As a result, third-party processor agreements with the State's EBT contractor lack specificity and were inconsistent in their certification requirements.
We have made appropriate recommendations to the Food and Consumer Service to improve these areas. The agency agrees with them and is moving to implement them.
Page 100 PREV PAGE TOP OF DOCWe continue to be the lead agency for the President's Council on Integrity and Efficiency on EBT activities for State administered programs. Our plan is to continue monitoring EBT systems as they are implemented. We have completed audits in Ohio and Wyoming, two States with off-line EBT systems, and Wyoming having a system that also issues WIC Program benefits. We noted in several cases, that one EBT system did not allow WIC clients to purchase the full amount (quantity) of their food prescription due to the computer logic used in rounding the weights of items purchased for the WIC program. Also, variations in product coding sometimes prevented clients from purchasing sale items and unnecessarily increased program costs. FCS has agreed to work with the State to coordinate efforts to modify the system design as a part of a new contract for Statewide rollout.
We are completing work in Illinois, New Mexico and North and South Dakota, where systems currently exist, as well as the Account Management Agent (AMA). The Federal Reserve Bank of Richmond serves as FCS' AMA to monitor and control the level of funding in the FSP EBT benefit account and the movement of funds for electronic benefit operations. We have also attended acceptance tests for several States to ensure that the EBT systems contained the necessary edit checks and correctly processed transactions including those passing through the gateway. The gateway routes inter-State transactions to the correct EBT processor. As individual States in the Northeastern Coalition, the Southern Alliance of States, and the Western Governors' Association come on-line we will begin audits of these systems.
This concludes my statement, Mr. Chairman. I thank you again for the opportunity to address the committee, and I would be pleased to answer questions you and members of the committee may have.
TESTIMONY OF RON SPENDAL
Chairman Goodlatte, Representative Clayton, and Members of the Subcommittee:
Thank you for the opportunity to testify today. I am Ron Spendal, a Manager in the Policy and Budget Section of the Adult and Family Services Division of the Oregon Department of Human Resources. I am testifying today on behalf of the American Public Welfare Association (APWA). Gary Weeks, our Director at the Department of Human Resources, chairs APWA's National Council of State Human Service Administrators Information Systems Management Committee. APWA is a bipartisan organization that represents State and local human services agencies, their administrators, and their program directors, including those with responsibility for human service electronic benefits transfer systems.
Page 101 PREV PAGE TOP OF DOCEBT AND HUMAN SERVICE BENEFIT DELIVERY
Electronic benefits transfer (EBT) applies electronic funds transfer technology to the delivery of government benefits. EBT allows recipients of taxpayer-funded benefits who lack a bank account to access funds in a government-owned account using a plastic card and a personal identification number (PIN) at both automated teller machines (ATMs) and point-of-sale (POS) terminals.
State and local human service agencies have been the leaders in the use of EBT. It is used for delivering food stamps and Temporary Assistance for Needy Families (TANF) benefits, and in some cases other needs-tested benefits such as general assistance, child support, the Special Supplemental Feeding Program for Women, Infants and Children (WIC), child care, Medicaid, and Supplemental Security Income. The States have implemented EBT technology entirely on their own volition and with a significant investment of State funds, resulting in multiple EBT systems that are designed to meet the needs and requirements of each State.
The welfare law enacted last year, the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), requires all States to utilize EBT for food stamp delivery by 2002. It is the only State-administered needs-tested benefit required by law to be delivered through EBT. While the States opposed this provision because it is an unfunded mandate, they are working to comply with the mandate.
ADVANTAGES OF EBT
State and local governments have selected EBT for the delivery of human service benefits because of its numerous advantages over paper-based benefits, including:
(1) increased fraud detection, by providing investigators an electronic trail of activity;
(2)reduced paperwork for both recipients and government;
(3)increased security of benefits for recipients; and,
(4)increased self-sufficiency of recipients (many of them without bank accounts), by allowing them to become participants in the electronic financial services arena.
Page 102 PREV PAGE TOP OF DOCGiven these advantages, State and local government agencies are including EBT and other electronic funds transfer technologies in their portfolio of human service benefit delivery mechanisms, and hope to continue to do so as long as they are unencumbered by onerous Federal requirements.
I would be remiss if I did not extend APWA's gratitude for the leadership of this subcommittee in the past Congress to exempt State and local needs-tested benefits delivered via EBT from Regulation E of the Electronic Funds Transfer Act. As you know, Congress included a Regulation E exemption for State and local needs-tested benefit programs in PRWORA. Regulation E, which was enacted to regulate commercial electronic funds transactions, establishes that issuers of credit or debit cards are liable for all but $50 if a card is lost or stolen. If State and local needs-tested benefit programs, which Congress never intended to subject to Regulation E coverage, had not been exempted from the regulation, State EBT programs would have been fiscally devastated.
APWA is committed to ensuring that there is no retrenchment on the Regulation E exemption, either in law or in practice. The States would vigorously oppose any action that eviscerates it. We urge Congress to monitor the exemption's implementation to ensure that it is in keeping with the letter of the law and with Congressional intent.
While the Regulation E exemption did remove a substantial obstacle to State and local implementation of EBT, new barriers have surfaced. Just as States needed Congressional intervention with Regulation E to ensure relief from the misapplication of commercial credit card standards to State and local needs-tested benefit programs, we now must direct your attention to another area in which the viability of State EBT programs is threatened by the misapplication of commercial standards. The balance of my testimony addresses two of these emerging concerns mandatory EBT card specifications and nationwide portability of food stamp benefits in an EBT environment.
EBT CARD SPECIFICATIONS
Page 103 PREV PAGE TOP OF DOCThe Clinton Administration is considering the promulgation of a proposed rule that would require the States to apply commercial credit card security features to State food stamp EBT cards in an effort to reduce counterfeit fraud. While APWA strongly supports measures to reduce the fraudulent use of food stamp benefits, it believes that the security standards for debit cards adequately address potential EBT fraud. Accordingly, APWA opposes the promulgation of any rule that would mandate that States use credit card features for EBT cards. We request Congressional assistance in relieving States from the mandate.
In November 1996, the U.S. Department of Agriculture Food and Consumer Service (USDA/FCS) submitted a draft proposed rule on EBT card specifications to the Office of Management and Budget (OMB) for review. It has not yet been formally issued, but OMB could clear the proposed rule for publication in the Federal Register any day now. It is APWA's understanding that the proposed rule will prescribe that food stamp EBT cards contain the following credit card security features:
Tamper-evident signature panel;
Embossed name and program account number (PAN), with at least three characters of the PAN embossed over the hologram;
Microscopic print bordering the benefit security mark; and,
Liability language and a toll-free number imprinted.
EBT CARD SPECIFICATIONS RULE CONFLICTS WITH STATUTE
APWA is raising this matter with Congress for several compelling reasons. First, we are concerned that the draft proposed rule contradicts the statutory language regarding EBT system security enacted by Congress just last year language that clearly provides States the flexibility to establish security features of their EBT programs according to the specific circumstances of each State. Under the prior law (7 U.S.C. 2016(i)(B)(2)(D)) the Secretary of Agriculture was given the authority to establish system security standards generally. However, Section 825(a)(2) of PRWORA narrows the Secretary's authority to establish the security standards that a State agency must meet before its EBT system can qualify for USDA approval, allowing each State to decide what measures best meet the circumstances of its caseload and its program environment. Specifically, in the system security area, Section 825(a)(2)(C) of PRWORA limits the Secretary to establishing only:
Page 104 PREV PAGE TOP OF DOCmeasures to maximize the security of a system using the most recent technology available that the State agency considers appropriate and cost effective and which may include personal identification numbers, photographic identification on electronic benefit transfer cards, and other measures to protect against fraud and abuse (PL 104193, Section 825(a)(2)(C)) (emphasis added).
The new provision clearly grants States, not the Federal Government, the flexibility to determine which security measures are appropriate and cost-effective. Thus the draft proposed rule, which would impose a uniform mandatory security measure on all State food stamp EBT systems, contradicts the statutory language of PRWORA. On this basis we call on Congress to help prevent the Administration from requiring States to apply credit card security features to their EBT cards.
APWA POLICY ON MANDATORY EBT CARD SPECIFICATIONS
In April 1996, APWA's National Council of State Human Service Administrators adopted a Resolution opposing mandatory Federal credit card security features for EBT cards unless the Federal Government can substantiate the critical need, cost effectiveness, and feasibility of such a mandate (a copy of the Resolution is attached). In our view, the Federal Government has yet to satisfy these conditions.
APWA's opposition to mandatory Federal credit card security features for EBT cards is based on the following assertions:
EBT debit cards do possess security features that are sufficient for reducing fraud, and in fact, include critical security features that credit cards lack.
The States recognize debit card security features as reasonable measures to protect against EBT fraud. These features include:
Personal Identification Number (PIN)
Magnetic stripe, with encrypted Program Account Number (PAN), expiration date, and card authentication value (CAV) or PIN-offset;
Page 105 PREV PAGE TOP OF DOCPAN on the face of the card, either embossed, laser engraved, indent printed, or hot stamped;
Signature panel or signature image; and,
Office address to return found cards.
The PIN is an especially important security feature--one that credit cards lack. The PIN serves as an access code unique to each EBT cardholder, just as PINs allow bank customers only to access their bank accounts. Only card holders and others with whom they share the PIN can access the account even when the card is lost or stolen.
Equally important, the PIN feature shifts the burden of fraud detection away from individuals and onto technology itself. Credit cards require visual inspection to determine possible counterfeiting, thus placing the onus on retailers and cashiers to serve as fraud police. Furthermore, visual inspection of card authenticity is impossible at an ATM device. The PIN feature of the debit card, on the other hand, makes utilization of a counterfeit card extraordinarily difficult.
In addition, many States have established security measures that are not captured in either the credit or debit cards themselves. For example, many States require face-to-face issuance of cards at county food stamp offices, with clients required to present proof of identification prior to the card's issuance. These States require clients to sign their EBT cards on-site, as well as to sign a receipt form attesting that he or she understands the use, rights, and penalties associated with the EBT card.
One of the most difficult credit card security features for States to implement is the requirement that an expiration date be embossed on the card. Given that food stamps are time-limited benefits, an expiration date is unnecessary. The date will also cause client confusion if it does not match the benefit recertification date, or when the expiration or recertification dates for food stamps and other programs that are carried on the same card expire at different dates.
The embossing requirements will compel some States, especially those that cannot afford to purchase embossing equipment for each local card issuance facility, to restructure their entire EBT delivery procedure. The result will be that the States will have less opportunity to establish contact with clients, thus impeding both effective case tracking, face-to-face card delivery, and an opportunity to educate the recipient about the EBT card.
Page 106 PREV PAGE TOP OF DOCStates will incur substantial costs if the draft proposed rule takes effect--costs that are not likely to be compensated by speculative fraud reduction because of the enhanced security features.
Among the costs States will incur to meet the new mandate will be: hologram development and imprinting, purchase of new supplies, card replacement (both at roll-out and upon periodic expiration), embossing, and information system modifications. New equipment purchases, such as embossing equipment, as well as equipment retrofits at a central manufacturing and issuance facility or at each local facility if such functions are decentralized, will require a large capital investment. Not to be overlooked are the increased staff salary costs resulting from retrofitting existing equipment or installing new equipment, retraining and increased staff time devoted to card issuance.
The costs associated with the enhanced specifications are far from minimal. For example, South Dakota estimates that it will experience start-up costs in the range of $454,000, in the first year alone. Annual operating costs will be nearly $72,000. South Carolina estimates the rule will add $1.6 million to its annual EBT program expenditures. Illinois estimates that purchasing embossing equipment alone will cost the State nearly $2.0 million.
States contribute fifty percent of the administrative costs of operating the food stamp program; the benefit itself is 100 percent federally-financed. Nevertheless, Federal regulations will not allow the Federal Government to reimburse a State for EBT conversion and operation costs beyond the level it would have reimbursed the State for a paper-based system. This poses a problem when States switch from coupons to EBT in that: (1) the expenses associated with the initial conversion requires an extraordinary one-time investment, and (2) it forces States to absorb the costs of mandatory Federal requirements, such as the Administration's proposed mandatory credit card specifications. The States already struggle to stay within the cost-neutral threshold given EBT start-up costs. Mandatory credit card security features are expected to push many States beyond it. Thus, implementation of the credit card mandate could come entirely out of State funds, thus imposing an unfunded mandate on the States.
Page 107 PREV PAGE TOP OF DOCMandatory credit card security features for EBT cards are a solution in search of a problem. The potential universe for counterfeit fraud in the EBT debit card environment is relatively small. Only about one percent of EBT transaction volume does not involve the use of a PIN (for example, when an on-line system is down, or in areas where there is no on-line access (farmer's markets, route vendors). In these scenarios, retailers must use paper vouchers with card imprints or hand-written card information. It is these limited transactions rather than the huge percentage of EBT transactions that are most vulnerable to counterfeit fraud.
While credit card security features may be justifiable in the commercial credit environment where credit limits are high and PINs are not used, and therefore the potential loss is greater, they have little purpose in the EBT debit card environment. The notion that the counterfeiting of EBT debit cards would be a profitable endeavor is faulty since most food stamp EBT cards do not even allow the individual access to cash, only to food purchases.
Electronic funds transfer technologies, including EBT, are constantly improving as innovations in communications, information processing, and materials science and engineering are applied to the credit and debit card arena. The States will be unable to avail themselves to new technology, that may be more protective and less costly than the credit card security features, if they are bound to Federal agency-mandated technology-based standard. The States should have the flexibility to operate their EBT systems according to performance-based standards, as envisioned by Congress in Section 825(a)(2) of PRWORA (which allows more responsive adaptation to new technology as well as to any changes in caseloads and operating environments.)
APWA RECOMMENDATIONS ON MANDATORY EBT CARD SPECIFICATIONS
If the States are to fulfill the mandate contained in PRWORA to have operational EBT systems for food stamp delivery by 2002, then they need Congressional assistance once again to ensure that the Administration discards the unnecessary and costly mandatory credit card security features draft proposed rule.
Page 108 PREV PAGE TOP OF DOCIf the draft proposed rule were to take effect, APWA firmly believes that the Federal Government, not the States, should assume responsibility for the costs of retrofitting State EBT systems necessary to comply with it. In addition, the Federal Government should pay the cost-per-card differential between the debit and smart card industry standards now utilized by the States for their EBT cards and the unnecessary credit card standards.
NATIONWIDE INTEROPERABILITY OF FOOD STAMP EBT SYSTEMS
At the inception of the food stamp program in 1974, the Federal Government selected a standard coupon, made it nationally portable, and took responsibility for all of the costs of such portability. The PRWORA requirement that States adopt food stamp EBT by 2002 dramatically shifts the medium through which this portable benefit is distributed from a system for which the Federal Government bore the expense to one for which States carry a proportionally larger fiscal burden. Yet, Congress did not change the 50 percent administrative match rate to provide States the necessary funds to retrofit or overhaul EBT systems to accomplish this portability, even though those costs had formerly been absorbed by the Federal Government under the coupon system.
APWA calls on Congress to help ensure that no new cost shifts to State EBT programs result either directly or indirectly from future Federal policy decisions regarding interoperability among State EBT systems. States currently are required to ensure use of EBT at locations on State borders. However, States would oppose any new pressure whether issued through regulation or through the USDA contract approval process to require interoperability among State EBT systems because it would entail cost shifts to State and local governments. Once again, such a cost shift could make EBT fiscally non-viable at the State and local level.
The States are moving forward in implementing EBT systems to deliver food stamp and other human service benefits, not only because it is required by law, but also because it has the promise for cost savings, enhanced tracking of fraud, and improved service delivery. However, obstacles such as the possibility of new unfunded mandates and cost-shifts to States impede our progress. APWA urges Congress to address these concerns so that we can achieve our common goal--the cost-effective and expeditious delivery of human services benefits through electronic benefits transfer.
Page 109 PREV PAGE TOP OF DOCTESTIMONY OF JERRI THOMAS, EBT PROJECT DIRECTOR, DEPARTMENT OF HUMAN RESOURCES, STATE OF MARYLAND
Mr. Chairman and members of the Subcommittee, thank you for inviting me to testify this morning. I am the Project Director for Electronic Benefits Transfer for the State of Maryland, and with me today is Mark Reger, Chief Deputy Treasurer for the State of Maryland. Both Alvin C. Collins, Secretary for the Department of Human Resources and Richard Dixon, Treasurer of Maryland send their regards. We are here today to bring you up to date on EBT in Maryland both from an historical , as well as, prospective perspective.
As the first statewide implementer of multiple welfare and food stamp benefits delivered on one card, the Independence Card, the State has a long track record of electronic benefit delivery. Included in the package that we forwarded earlier in the week there are statistics about our program, if I may summarize:
In November 1989, the State of Maryland began the pilot of an Electronic Benefits Transfer System (EBTS) project that delivered multiple welfare benefits using a single plastic debit card known as the Independence Card. Recipients eligible for food stamps, Aid to Families with Dependent Children (AFDC), Disability Loan Program (DALP--formerly General Public Assistance), child support bonus, and non-public assistance child support participated in the pilot. The pilot project began in the Park Circle District of Baltimore City with approximately 5,000 recipients and 150 stores. The success of the pilot has led to statewide expansion of the EBTS project.
Today in Maryland, over 168,000 households receive a public assistance benefit using the ''Independence Card''. In December 1996, we authorized in excess of $52,000,000 in cash and food stamp benefits electronically. Over 99 percent of our recipients receive benefits using EBTS. Recipients can access their cash benefits from ATM's on the MOST or MAC network or get cash at the Point of Sale (POS) devices located throughout the State.
Despite early resistance from a number of recipients, much of the skepticism has disappeared. The recipients began to depend upon the efficiencies of the system and would name the very same benefits that we used initially as a selling point of the system.
Page 110 PREV PAGE TOP OF DOC(1) knowing when the benefits would be available without depending on the mail
(2) better money management
(3) protection against loss and theft
(4) no need to withdraw all benefits at one time
(5) convenience and security
In the area of recipient training and card issuance, the Maryland Department of Human Resources and Federal agencies has a great deal of concern about how recipients would accept this new technology and how the card would be managed among so diverse and challenged a population. We also have a larger proportion of elderly, disabled and addicted. It was for this reason that we gave so much attention to the design of the recipient training session prior to receiving a card. Recipients view a video that introduces them to the card, then are given a follow up explanation of the fine points of the card use. The training emphasized: the recipients personal responsibility of protecting the card, selecting a personal identification number (PIN) that will be easily remembered, but not compromised, and the importance of not sharing the card and PIN. At the end of the training session, the recipients are given lists of the location of local POS devices and ATM's. Each recipient also receives a wallet sized card with phone numbers for the Automated Response Unit where they can call from a touch tone phone to get their balances 24 hours a day, seven days a week. The card also contains the customer service phone number used to report card related problems or to report a card lost or stolen. The training site is equipped with a mock ATM machine, a POS device, and a touch tone phone so that recipients can get hands on training with the different types of devices that they will be using. Once the hands on training is complete, recipients are allowed to select their PIN and receive their cards.
Maryland learned after the fact that the recipients felt greater self-esteem since they were using the same technology found among banking customers. Many state that they just liked the idea of having plastic in their pocket. We now know that recipients transact more than half of their cash from ATM's averaging for (4) ATM transactions per case.
Page 111 PREV PAGE TOP OF DOCOverall, the Maryland project has demonstrated that a nationwide system can be successful and cost effective, as well as moving recipients towards the age of technology and self sufficiency.
There are several new challenges that face Maryland as we go forward with Welfare Reform and with issues of retrofitting our systems to meet new requirements, such as card specifications and nationwide interoperability. I will speak to the proposed card specifications while Mr. Reger will speak to interoperability.
The proposed rule, as we understand it, will impose credit card standards on what is a debit card application. This, in our view, constitutes a new Federal mandate, without corresponding prorated Federal financial participation in what is essentially a shared risk.
In addition, more complex card specifications will require more complex and more expensive machinery to produce the cards. Maryland might have to centralize card issuance which will slow down card delivery, jeopardizing our ability to meet expedited service deadlines. We estimate that the start-up cost of reissuing all our cards is in the $400,000 to $600,000 range. Where will we, the State, find the money to retrofit new cards, equipment, and procedures to accomplish the new specifications?
We are very concerned about shouldering the additional financial burden that these proposed rules require. In the credit card industry the burden of additional counterfeit deterrents on their cards are recouped by the profits that they, as issuers, generate. We, in the State of Maryland, do not have that option.
STATEMENT OF MARK REGER
Chairman Goodlate and Committee members:
One of the largest issues facing the creation of a nationwide EBT system is the question of interoperability. Interoperability is defined as transactions occurring between EBT systems. When Maryland initiated the First EBT system eight years ago there were no interoperable systems with whom to interface. In order to serve clients who lived in border regions of Delaware, Pennsylvania, Washington D.C. or Virginia, the State of Maryland equipped stores in those other States with EBT terminals. Those terminals settled through the Maryland system and appeared to be a logical extension of that system. When Texas implemented it's EBT system a number of years ago there was no impact on Maryland. However, as other States proceed with their projects it is clear that border regions are going to be issues. As Pennsylvania implements the Maryland terminals will be removed because the grocers will not want to maintain two terminals and two settlement processes. The Maryland project will no longer provide clients access to stores in Pennsylvania unless we negotiate a separate agreement with the new Pennsylvania processor. Washington, D.C.'s project will have a similar result. Suddenly the borders of a system's functionality will affect the intent of delivery of benefits to clients. These over the border transactions will affect settlement processes and costs. As EBT systems proliferate it is time to consider the implications of multi-application process occurring across the street and across the Nation.
Page 112 PREV PAGE TOP OF DOCHenry Toll once said, ''Make no small plans''. Why would the Nation adopt EBT without considering interoperability? Interoperability will provide benefits to all EBT providers. These benefits will include:
(1) Standardize transactions in EBT systems to allow for uniform use of software and hardware and to provide for settlements within the existing banking system in the Nation.
(2)Definition of Program Costs--Transactions which occur outside a system should have a definitive costs and settlement process.
(3) Better Service to Clients--Clients will be able to use their benefits in the most logical places regardless of systems application.
(4) Enhance Competitiveness when Contracts are Rebid--Similarities between system would permit contractors to bid on services easier.
(5) Recognizing the lack of interoperability as an impediment to the eventual growth of EBT, a number of groups were enlisted to formalize national EBT rules. National Automated Clearing House Association formed a council of all the stake holders and promulgate the Quest Operation Rules, which broadly defined the guidelines for the national exchange of EBT transactions. These rules will help make the various EBT systems currently being implemented interface with each other in uniform ways.
Maryland joined the NACHA EBT council to protect the existing system in our State. We wanted to make sure that whatever rules this body adopted would not prevent us from maintaining the system we had pioneered and not subject the State to uncontrolled costs. Much has changed. Even though we are still discussing the politics of allowing Maryland residents to spend State benefit dollars at out of State grocery stores, we have acknowledged that a single, national based set of rules governing transactions which occur outside our system is needed and will add value. As we look to add benefits to our card and hold discussions concerning adding Federal benefits to our existing cards though the existing processes we see the need for assurance that nationwide clients, grocers, networks, banks, and States are treated the same.
Page 113 PREV PAGE TOP OF DOCFor the Federal Government too, a uniform set of operating rules would also seem extremely beneficial. The old food stamp system certainally operated under a uniform set of rules and with reasonable assurance that functions were occurring throughout the Nation. As EBT is adopted as the modernization of that system, we should accept nothing less than we had and in fact, demand more. The Federal Government must move with some haste to catch up with the implementation pace set by the States. Almost every State government is now in the process of investigating or implementing EBT payment systems. Much of this has been accomplished with the help of the key Federal agencies. Agriculture, Treasury and OMB have been supportive and helpful. The question now is where do they stand on a single set of national rules. Will EBT progress as 50 independent systems each operating differently or will the common elements of these systems be combined and items such as fund settlement, card specs and security be established once and for all?
Maryland is very intent on it's independence. We were on the forefront of benefit delivery in 1989 when EBT first became a reality. We will always remain in the cutting edge of process improvement and in that regard we support the adoption of national rules for elements of EBT transactions. We believe as other States accept this technology rules governing common items must be adopted. We will fight to make sure these rules do not impose unnecessary or becomes more common place certain elements must be taken for granted and uniformity imposed. We believe Maryland's next EBT contract will specify interoperability but even if it does not, it will require interfaces with other interoperable systems and many other elements found today in the proposed Quest Rules.
Letter from Chairman Goodlatte to Secretary Rubin
April 29, 1997
The Honorable Robert Edward Rubin
Page 114 PREV PAGE TOP OF DOCUnited States Department of Treasury
Washington, DC 20220
Dear Mr. Secretary:
The Subcommittee on Department Operations, Nutrition and Foreign Agriculture recently held a hearing on the food stamp program and the status of electronic benefit transfer (EBT) systems as a method to deliver food stamp benefits. During the hearing I raised questions concerning the process used to solicit bids for state EBT systems. One of the witnesses at the hearing, Mr. Edward DeSeve, the Controller for the Office of Federal Financial Management at the Office of Management and Budget, suggested such questions should be presented to your Department.
I am informed that the Department of the Treasury requires the use of an Invitation for Expression of Interest (IEI), available only to financial institutions, to solicit bids for procurement of EBT systems. Will you kindly explain why the federal government chooses to limit competition by allowing only financial institutions to participate in the EBT bidding process for the food stamp program and other similar programs?
Additionally, I am concerned that billions of dollars in federal benefits will be distributed through EBT systems that are not selected through regular procurement processes, such as the request for proposal (RFP) process. Please explain whether, in your opinion, there is any meritorious specification for use of this IEI process.
Thank you for your attention to this matter. I look forward to hearing from you in response to the questions I have raised.
Page 115 PREV PAGE TOP OF DOC