Payment Limitation--Paper Entities

A recent case:

The owners of a central Illinois farming business that will pay $5.3 million to settle allegations it faked partnerships to avoid limits on subsidies say they did nothing wrong.

The U.S. Department of Justice on Wednesday said Dowson Farms of Divernon agreed to the settlement. The department accused three of the owners of creating fake partnerships in the names of employees between 2002 and 2008 to bypass caps on subsidies. The three didn’t admit any wrongdoing.

Read more: http://www.sj-r.com/article/20140130/NEWS/140139902#ixzz2s5rq0FYo

Grassley and Delegation of Authority

From Chris Clayton at DTN:

"Discussing the farm bill, Grassley said the principal negotiators may take his language defining an actively engaged farmer out of the farm bill and leave it up to USDA to determine who is actively engaged. This Congress is filled with lawmakers who have criticized administrative rulemaking usurping congressional authority. Yet, farm-bill conferees now seem intent on turning over rulemaking to USDA to redefine who is actively engaged as a farmer.

"The people who want to shovel this off to the administration for rulemaking, they don't want anything," Grassley said. "They want to take it out. If they could get away with taking it out, they would just take it out ... They think they can accomplish the same thing by giving to the department and the department might not do anything very significant."

Grassley's actively engaged rule only allows one person designated as the farm manager. He noted the Government Accountability Office has cited instances of 16 people classified as "managers" for a single farm entity.

Grassley reiterated there was no need to change anything in the payment-limit provisions because they were the same in both the House and Senate bills."

 I don't trust my memory because I tried and failed to find documents supporting the following: when "actively engaged" first became law, ASCS wrote regulations implementing the provision.  But I believe that the powers that be in Congress (Jamie Whitten perhaps, as he was head of House Ag and represented MS) got ASCS to back off a bit.  Don't know whether that was a provision in another law or just pressure on the USDA hierarchy.  Anyway, I'm sure FSA is looking forward to having this responsibility once again.  I'm sure.

AGI on Crop Insurance

Chris Clayton at DTN reports both Houses are generally in agreement on limiting crop insurance subsidies for high income insureds:

"On Friday evening, House Budget Chairman Paul Ryan, R-Wis., saw his resolution tightening income eligibility pass the House on a voice vote. The language was comparable to the Senate provisions. While a voice vote doesn't get everyone on record, the resolution does show GOP House leaders support the provision.

Conferees will have to begrudgingly keep the income cap or find some way to pivot around the issue."

Wonder how USDA would administer this?  Conceivably through FSA, I suppose, so USDA hits IRS only once.  But that assumes the rules for determining a person between crop insurance and USDA are the same, doesn't it?  (As time goes by I"m more and more aware that what I used to know is getting obsolete.)  Given how long it took for RMA and FSA to coordinate on acreage reporting dates, I wouldn't hold my breath for that result.  Might be simpler (remember KISS?) to leave the two operations completely separate and put up with complaints from farmers and Congress about the duplicate paperwork and discrepancies in rules. 

"Actively Engaged" in Farming Revisited

You'd think we'd know what a farmer is; after all people have been farming for thousands of years.

But, here, via FarmPolicy at Sen. Grassley's website, is the latest GAO report on FSA enforcement of the rules.

I remember the people (WP and SN) originally developing the rules after the 1985 farm bill.  Amazing to realize that they might well be grandparents by now.  If I remember, the first crack at implementing the provisions got overridden by Congress.  That sort of history is probably why FSA is saying they won't change rules now without having Congress act.  Part of the problem is, once provisions are in the farm bill and passed, members' attention shifts elsewhere, so the members who are more responsive to their farmer constituents gain in influence.
 

Why Washington Employment in FSA Grows

From a recent GAO report on FSA enforcement of the adjusted gross income limits:

" For example, GAO found errors in 19 of the 22 tax return files it reviewed from FSA offices in two states; one of these errors led to a potentially improper payment of $40,000. FSA headquarters does not monitor state offices' reviews of tax returns to ensure that the offices are applying program guidance consistently and making accurate eligibility determinations, even though federal standards for internal control direct agencies to monitor and assess the quality of performance over time. Also, 2008 Farm Bill provisions requiring a distinction between farm and nonfarm income make it difficult for agency officials to verify if participants' incomes exceed the limits without making errors. Because the statutory limits for farm and nonfarm income differ, to verify such income, FSA officials must comb through sometimes long and complex tax returns to classify and calculate income--a difficult task for those who are not accountants or tax preparers. Recent bills in the House and Senate have proposed using total adjusted gross income instead of farm and nonfarm income, which would reduce the need for FSA to review tax returns."  [emphasis added]

People like to talk about the top-heavy Washington bureaucracy of various agencies, including FSA (yes, I'm looking at you NASCOE).  It's good to mock the proliferation of well-paid bigshots at both departmental and agency levels. But one should also remember that no one outside the agency is ready to trust field (in this case, state office) people to do things 100 percent right and to accept the mistakes if they don't.

I'd praise GAO for recommending simplifying the rules.  I'd also note the indications that some accountants and attorneys actually lie to FSA!  I'm shocked, shocked I say.

"Actively Engaged" Versus "Primary Activity"

Who has it worse--IRS or FSA employees?

Kevin Drum blogs about the problems IRS employees have in determining what "primary activity" means in regards to organizations who try to claim § 501(c)(4) status.  I sympathize, but I believe the controversy and unclarity over what is "actively engaged in farming" for payment limitation purposes trumps the IRS problem.  Come back to me in 28 years and we'll see whether IRS is still grappling with unclear rules.

(BTW, I've not blogged on the new farm bill versions, but it does seem that the Senate version revives last year's clarifications of what counts as actively engaged.  Now if I could only remember what they are, I could save some research.)

The GRH Zombie Rises from the Dead?

Reading the Congressional Research Service report on sequestration it seems to me that Gramm-Rudman-Hollings is starting to stir.  (GRH for the whippersnappers in the audience was the attempt in 1985 to fix federal budget deficits, by applying a flat percentage reduction to federal expenditures if certain conditions weren't met.  In 1986 we reduced deficiency payments by a factor (I think 4.6 percent) under GRH.  The result, when combined with the System 36 automation and the new farm bill, was total disaster administratively.  That was partially my fault because of the way we ended up applying payment limitation, and partially fiscals because we didn't have the coding and entries for refunds in place.) 

I wish FSA well if they have to apply sequestration in the new year.

Payment LImitation and OIG: a Puzzle

OIG tried to do an audit of FSA's administration of the payment limitation  rules in the 2008 farm bill, notably the "attribution" of payments made to legal entities to the natural-born persons who comprise the entity.  Ferd Hoefner at Sustainable Agriculture notes the report, and comments.  The gist is summed up in his title: "Commodity Payment Limitations, Weak System, Weak Report."

I may comment more later, or I may lose interest, but I am puzzled by one aspect of the report.

OIG says they couldn't audit because of problems with the system, specifically including this point:

"Specifically, we learned that joint ventures without permanent identification numbers were not recorded in FSA’s entity database,..."

As they recognize in a footnote, FSA doesn't make payments to such joint ventures, payments are made to the members. That should mean the payments are automatically attributed to members. To me that says it doesn't constitute a weakness in the system and shouldn't be considered a problem in auditing.

FSA's response doesn't point this out.

If I follow correctly, Environmental Working Group has been "attributing" payments for some time now, using the same data as OIG refused to tackle. 

Pay Limit on Insurance/Conservation Compliance

From Chris Clayton:

The U.S. Senate voted Wednesday evening to reduce the taxpayer share of crop insurance premium subsidies for the largest farmers.

Along with that, farmers would not be able to ignore conservation compliance requirements if they forego commodity programs and rely strictly on crop insurance for their safety net.

[Updated: Carl Zulauf of Ohio State has a discussion of the history of payment limits and the crop insurance proposals here.]

Flash from the Committee: Pay Limit

Chris Clayton reports the Senate Ag committee plans to wrap up its version of the 2012 farm bill today.  He says:

The bill considered by the committee on Thursday also lowered the adjusted gross income eligibility to $750,000. Moreover, the bill makes major changes to language involving "actively engaged" to further restrict who is eligible for payments.

There will be a study to determine the feasibility of whether popcorn should be considered a commodity crop.

 Apparently they agreed to tweak the bill enough to satisfy the cotton/rice/peanut group.[Updated: according to Politico they did something for cotton, but not peanuts and rice, much to the disgust of  Chambliss and Cochran.]

Implementing Payment Limitation on Crop Insurance

I blogged about the GAO report on the impact of instituting a payment limitation on crop insurance. If adopted, FSA should send flowers to Sen. Coburn because I can't see any way for RMA/crop insurance companies to implement the limitation without FSA.

I'm not sure how it would work in practice--FSA has some experience with this sort of thing--I'm thinking of trying to apply payment eligibility and limitation rules on members of cotton and rice co-ops.  I suspect there'd be the same sort of problems with crop insurance.

Payment Limitation on Crop Insurance?

NY Times reports Sen. Coburn asked GAO to study the possible impact of payment limitations on crop insurance.  The report was released today and is here.http://gao.gov/products/GAO-12-256.  The first two paragraphs from the summary:

If a limit of $40,000 had been applied to individual farmers’ crop insurance premium subsidies, as it is for other farm programs, the federal government would have saved up to $1 billion in crop insurance program costs in 2011, according to GAO’s analysis of U.S. Department of Agriculture (USDA) data. GAO selected $40,000 as an example of a potential subsidy limit because it is the limit for direct payments, which provide fixed annual payments to farmers based on a farm’s crop production history. Had such a limit been applied in 2011, it would have affected up to 3.9 percent of all participating farmers, who accounted for about one-third of all premium subsidies and were primarily associated with large farms. For example, one of these farmers insured crops in eight counties and received about $1.3 million in premium subsidies. Had premium subsidies been reduced by 10 percentage points for all farmers participating in the program, as recent studies have proposed, the federal government would have saved about $1.2 billion in 2011. A decision to limit or reduce premium subsidies raises other considerations, such as the potential effect on the financial condition of large farms and on program participation.

Since 2001, USDA has used data mining tools to prevent and detect fraud, waste, and abuse by either farmers or insurance agents and adjusters but has not maximized the use of these tools to realize potential additional savings. This is largely because of competing compliance review priorities, according to GAO’s analysis. USDA’s Risk Management Agency (RMA), which is responsible for overseeing the integrity of the crop insurance program, has used data mining to identify farmers who received claim payments that are higher or more frequent than others in the same area. USDA informs these farmers that at least one of their fields will be inspected during the coming growing season. RMA officials told GAO that this action has substantially reduced total claims. The value of identifying these farmers may be reduced, however, by the fact that USDA’s Farm Service Agency (FSA)—which conducts field inspections for RMA—does not complete all such inspections, and neither FSA nor RMA has a process to ensure that the results of all inspections are accurately reported. For example, RMA did not obtain field inspection results for about 20 percent and 28 percent of these farmers, respectively, in 2009 and 2010. As a result, not all of the farmers RMA identified were subject to a review, increasing the likelihood that fraud, waste, or abuse occurred without detection. Field inspections were not completed, in part because FSA state offices are not required to monitor the completion of such inspections. In addition, RMA generally does not provide insurance companies with FSA inspection results when crops are found to be in good condition, although USDA’s Inspector General has reported this information may be important for followup. Past cases have revealed that some farmers may harvest a high-yielding crop, hide its sale, and report a loss to receive an insurance payment. Furthermore, RMA has not directed insurance companies to review the results of all completed FSA field inspections before paying claims that are filed after inspections show a crop is in good condition. As a result, insurance companies may not have information that could help them identify claims that should be denied.

Payment Limitation

One might think that with the likely demise of direct payments, the idea of payment limitations would recede into the background.  But Chris Clayton at DTN  reports Sen. Grassley and others are pushing revisions:

The legislation would have a $250,000 cap for married couples and maintains a hard cap on marketing-loan gains. Under a shallow-loss program, it would set a $100,000 cap for a couple under that program. It would also tighten language defining "actively engaged" to collect payments. Grassley said there are too many people claiming they are actively engaged because they participate in a phone call or two each year about the farm.

Crop insurance would not be covered.

"Actively Engaged" in Farming

From EWG's blog:

The highlight of the Senate Agriculture committee’s hearing on farm subsidies and crop insurance was when Sen. Chuck Grassley (R-Iowa) asked  Michael Scuse, the Acting Undersecretary For Farm and Foreign Agricultural Services at the U.S. Department of Agriculture whether he considered people who participate in only two farming-related conference calls per year to be actively-engaged farmers. EWG research has uncovered millions of federal agricultural subsidies going to well- off landlords and investors living in every major American city.

 

A Puzzle: Crop Insurance and Big Farms

An excerpt from the executive summary of analysis of the changing farm structure recently completed by ERS:

A long-term shift in production to larger farms has contributed to a shift in the distribution of commodity-related Government program payments and Federal crop insurance indemnity payments toward larger farms, most of which are family farms. Since operators of larger farms tend to earn higher household incomes, this shift has in turn led to a shift in the distribution of commodity-related Government payments toward higher income farm households. Most commodity-related program payments now go to farms operated by households with annual incomes over $89,000—significantly higher incomes than the typical U.S. household. Federal crop insurance indemnity payments have also shifted toward farms operated by higher income households, although not as much as commodity related program payments.

 The last sentence puzzles me, because I would have expected the exact opposite.  Maybe I'm living in a dream world but I do expect the payment limitation provisions FSA administers to have some effect.  And since crop insurance doesn't have such limitations, I'd expect the indemnities be more correlated to farm size.

Not sure I have an explanation, which is why it's a puzzle.  Perhaps, just perhaps, the larger operations are able to self-insure? Or maybe the definition of "operation" varies across the agencies?  Who knows?

Usefulness of EWG's Database Impaired

A time or two I've noted that using crop insurance instead of direct payments has the effect of hiding the increases in governmental liability (assuming prices and/or yields rise over time) and getting around the payment limitation provisions.  Another side effect is noted in this language in a Grist post:

EWG's Cook is concerned about another potential problem with the proposed new subsidy. With the current set of farm payments, groups can track exactly how much government support individual farmers receive (as EWG does with its Farm Subsidy Database). But with the "shallow loss" plan, says Cook, "the subsidy lobby" is creating a new "income-guarantee entitlement aimed at the biggest commercial operations" that will likely be "totally opaque to the public." Which means no more tracking who gets how much.

I assume there will be no tears shed in the farming community over this.

Will 2012 Farm Bill Do Away With Payment Limits?

Chris Clayton is finding support for keeping/improving crop insurance, even if that means losing some programs like direct payments and SURE.  And the support is not simply northern Plains and Midwest, but in OK and TX. 

One effect of this is to end the limitation on payments for much of the money the taxpayer spends on farm programs.  As commodity prices rise, the cost of insurance coverage goes up and the government exposure and subsidy grows.  I suspect most of the non-rural supporters of payment limitations, and even people like Sen. Grassley who've supported limitations in the past, will not question this.  My prediction is it will take the food movement a couple years after the 2012 farm bill is passed to begin to make this an issue.

2010 Payments in EWG Database

EWG has updated their database with 2010 payments. As they note, they aren't getting the data they used to, because Congress changed a "shall" to "may" and USDA knows enough to follow the wink.  As I think I've said before [in the comments on the post], the $6.7 million estimate of the cost strikes me as bogus.  The only justification I could think of would be if KCMO has redone the file structures on the mainframes to accommodate the changes in the payment limitation provisions in the 2008 Farm Bill (attributing payments to members).  If the mainframe files changed, that would require changing the programs you run against them. 

To my mind, the EWG database should be a USDA database.

Conservation Versus Direct Payments

Article in the Post today on the challenges conservation programs are facing, as opposed to direct payments.

One quote puzzles me:

“There is a growing feeling that [Congress] must find a way to make sure that the cuts affect everyone,” said Ferd Hoefner, policy director for the National Sustainable Agriculture Coalition, “to make sure the mega-producers are not the ones let off the hook this time around. “
To get around cuts in the past, corporate farms would add a partner or two that could then apply for separate subsidies, thereby restoring the overall take to prior levels."

My impression was that attribution of payments was going to mostly take care of that problem, but apparently not to the satisfaction of NSAC.  Come to think of it, I haven't seen any analysis of how well or poorly that change in the 2008 law is working.

Because my blogging has been slow because of plumbing problems, I'll throw in here a renewal of my proposal: instead of trying to apply a cap on payments, apply a factored reduction, increasing as the total amount of payments rises.  (Think income tax in reverse.)

Republicans in the House and Agriculture

President Obama proposed, again, some cuts to farm programs by reducing figures in the payment limitation figures.  One would figure those stern, tight-lipped budget cutters in the House would be glad to agree to his proposal.  Politically it would seem wise to say: we'll pocket all your cuts and we'll cut some more.  (I'd put this into poker terms, but my mother thought poker was a tool of the devil.)  But not so, as Sallie James observes at Cato.  Bottom line: political principles are remarkably flexible, much like cooked spaghetti.