TESTIMONY FOR THE COMMITTEE ON GOVERNMENTAL AFFAIRS SUBCOMMITTEE ON REGULATION AND GOVERNMENT INFORMATION Maryland Electronic Benefits Transfer Good Morning, Chairman Lieberman and members of the Subcommittee. I am David Truax, Executive Director of the Office of Information Management for the Maryland Department of Human Resources (DHR). I am pleased to be here today to give testimony on the Maryland Electronic Benefits Transfer (EBT) System. Maryland began to seriously pursue EBT as an issuance alternative in the summer of 1988. Because of the potential for cost savings and improved client services, the Office of Information Management (OIM) developed a plan for a statewide EBT system, and issued a Request for Proposal (RFP) later that year. In Maryland, the design and development, and operations of the system are contracted out to an outside vendor. The Maryland RFP and contractual agreement requires the vendor to be responsible for system processing, maintaining the database, installation of all equipment, merchant interface, and settlement. In November, 1989, an EBT pilot project was initiated in the Park Circle District of Baltimore City. In our system, we use debit card technology, and we call our card the Independence Card. Our pilot project began with the participation of 5,000 households and 160 merchants. At that time, Maryland had the first multi-program EBT project. Our project includes households receiving Aid-to-Families-with-Dependent-Children (AFDC), Food Stamps, our state funded public assistance program, which we call the Disability and Loan Program (DALP) and a small number of non-public assistance child support cases. In addition, an individual on AFDC who is eligible for a child support bonus, also receives that payment electronically. Today, the EBT system in Maryland is fully implemented statewide. Nearly 100% of all eligible recipients, or over 165,000 households in the state receive their benefits electronically. Approximately $28,000,000 in cash and $29,000,000 food stamp benefits are issued to these recipients each month. How The System Works The Independence Card allows a household to access all of their benefits on one card. The card can be used only at Point-of-Sale, or POS devices in USDA certified grocery stores for food stamp benefits. Cash can be obtained from any ATM on the MOST network, or from state-approved POS devices. The card and benefits are protected by a client selected Personal Identification Number (PIN). The Maryland EBT system offers recipients a 24-hour toll-free Audio Response Unit number that can be used to get balance information; and 24-Hour Customer Service access to report lost or stolen cards, or other system problems. Each time the client uses the card, they get a receipt printed with their balance information. EBT does not significantly change how our local offices screen recipients, or find them eligible for benefits. The basis of our system is an interface between our Department's eligibility database and the EBT database maintained by our vendor. Each night we transmit a file to them containing our authorizations for the day. The data is applied to their mainframe, and by 9:00 A.M. the following morning benefits are available to our clients. A similar scenario is repeated for monthly benefits. Monthly benefits are available at 9:00 A.M. each month on the same date. We stagger the issuance of our monthly benefits, however. Cash benefits are staggered over three days, and food benefits are staggered over a subsequent three days. Public Assistance and Child Support recipients that have bank accounts are given an option to receive their benefits through direct deposit. Settlement Each night, the EBT vendor batches the day's transactional data, and forwards it to their concentrator bank, who in turn generates a file that goes through the Automated Clearing House (ACH) process at the Federal Reserve. This enables the ATM network, and the merchants to receive next day credit for the previous day's cash transactions. Also on a daily basis, DHR does a wire funds transfer to the vendor's concentrator bank as reimbursement for EBT cash activity. Through a process called Smartlink, the vendor is directly reimbursed by USDA for food stamp transactions. Benefits Of EBT Preliminary evaluations of our project show that both recipients and merchants overwhelmingly prefer EBT to paper issuance, particularly in the food stamp program. Our clients have identified a number of reasons for preferring EBT:  they don't have to wait for mail service, nor are they at risk of having their benefits lost or stolen in the mail;  benefits are automatically made available to them at the same time each month;  the benefits are safely held, without worry about theft or loss, until the benefits are needed;  recipients can manage their benefits in a manner similar to those with bank accounts;  recipients don't have to pay check cashing fees;  it makes food stamp redemption and shopping a one-step process. In some local offices, theft of coupons in the mail forced many recipients to be in issuance systems that required them to make monthly trips to the local office or to coupon redemption sites. Additionally, the Department was gratified and surprised to learn that many recipients felt that EBT took away the stigma of using food stamps, and introduced them to a technology that they could use once they no longer were on welfare. Merchants also prefer EBT over coupons because it reduces staff time in handling the coupons, and they can receive guaranteed, next day credit in their bank accounts for food stamp transactions. Merchants also like that EBT eliminates the need for them to give change back; unlike the coupons system, all food benefits are actually spent on food. Previously, some clients would use the $1.00 coupon to purchase a small item, and use the change for non-food items, such as cigarettes. Statewide Expansion Maryland received approval to go statewide with its project in September, 1991. We expanded our system in eight phases over a period of 16 months, from January, 1992 through April, 1993. At any given time we were adding between 6,000 and 22, 000 households per phase, depending upon the size of the geographic area. During each implementation phase, the contractor and state staff were engaged in activities that included client training and card issuance, merchant installation and training, staff training and installation of personal computers in the local office. We held community meetings, and met with merchants, banks, welfare advocates and the media to prepare them for EBT. Expansion Issues Early during the pilot and during expansion, the technological feasibility of EBT was proven. Most of the performance problems that we experienced during implementation had to do with the fact that mid-way through the expansion we changed vendors. As a result, there a several systems problems during that transition period. We have now been fully operational on EBT since May 1993, and have only experienced minor technical problems. In September, 1993 we processed in excess of 2,000,000 client transactions on the system. Over 95 % of those transactions were processed in less than 15 seconds. During the implementation, we did find that we needed to strengthen the relationship between the food merchants and the state. Merchants were contractually bound to our vendor, and historically had a regulatory relationship with USDA. Once EBT was implemented, however, they felt that the state had a responsibility to be their voice on issue related to EBT. To that end, a Merchant Focus Group was formed that has been instrumental in resolving issues that came up during implementation. This group has addressed such issues as when the state will make benefits available, reducing fraud, and enhancing the EBT POS software. Early in the process we also learned that it was critical to identify special populations and ensure that they were given all of the tools necessary to deal with this new technology. A great deal of emphasis was placed on how clients were trained to use their Independence Cards. EBT training, which included hands on practice with mock ATM's and POS devices, was mandatory. We attempted to provide interpreters in areas were we thought it was necessary, provided sign language, and ensured accessibility for the handicapped at all training sites. For the elderly population, we used our social workers when necessary to locate a representative payee for recipients who were unable to use the card themselves. I feel that our efforts in this regard were overwhelmingly successful. Even in the rural and less populated areas of the state, where we had some concerns about the low number of ATMs, our recipients and social services staff give praise to the system. We found that in rural areas our clients were used to traveling longer distances for many of the services that they used, so the distance between ATMs was not a negative factor for them. The only group that criticized the system in any significant numbers were those non-pubic assistance child support recipients who represent about 4 % of all EBT authorizations. Since many in this population are employed, and receive their money through the Department from a non-custodial parent, they did not like the idea of being associated with what they considered a "welfare project", nor the inconvenience of reporting to social services offices for card issuance. As we continue to refine our system we will concentrate more on identifying our banked child support recipients, and offering a direct deposit option that is more convenient to them. Other EBT Issues DHR believes that from the standpoint of offering improved services to recipients, and from the standpoint of technical feasibility, our system has exceeded our expectations. The remaining issues from our perspective, center on the cost effectiveness of the existing system, and the affect Regulation E, of the Electronic Funds Transfer Act may have on our costs, if the Federal Reserve Board decides to apply Regulation E to EBT. The overall evaluation of the Maryland project has been sub-contracted out by USDA. It is my understanding that their preliminary cost data will be available by the end the calendar year. At that time data will be made available on the cost effectiveness of the Maryland project. While we are confident that the cost analysis will show EBT can generate savings to both state and federal agencies, the potential liabilities that could be passed on to the state as a result of this regulation cause us grave concern. In an analysis provided to the Board by our Department, we projected that Regulation E could increase the state's EBT operating costs by 100%. These increased liabilities could seriously jeopardize the future of EBT nationally, as well as cause Maryland to re-evaluate whether or not it can continue with the project. Since we began our pilot, and certainly since we completed our expansion, we have hosted a number of states who are beginning to plan their own EBT system. We believe that this enthusiastic response to Maryland's success portends a great deal of EBT activity nationwide. I thank the Sub-committee for their attention to my testimony, and I welcome your questions at this time.