oversight

Food-Related Services: Opportunities Exist to Recover Costs by Charging Beneficiaries

Published by the Government Accountability Office on 1997-03-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to Congressional Committees




March 1997
                 FOOD-RELATED
                 SERVICES
                 Opportunities Exist to
                 Recover Costs by
                 Charging Beneficiaries




GAO/RCED-97-57
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Resources, Community, and
                   Economic Development Division

                   B-275998

                   March 20, 1997

                   Congressional Committees

                   The federal government spent nearly $1.6 billion in fiscal year 1995 to
                   provide food-related services, such as inspecting, testing, grading, and
                   approving agricultural commodities and products. In some cases, the
                   individuals and companies benefiting from these services paid user fees
                   for all or part of the cost of providing the service. In other cases, no user
                   fees were charged. Consequently, in fiscal year 1995 the government
                   incurred about $1.2 billion in food-related service costs that were funded
                   through general fund appropriations.

                   Reducing the federal budget deficit has become a national priority. In this
                   context, we identified and evaluated opportunities to increase the share of
                   funding by beneficiaries for food-related services provided by the federal
                   government. Specifically, we identified (1) the types of food-related
                   services provided by federal agencies; (2) the extent to which beneficiaries
                   currently pay for such services through user fees; and (3) potential
                   opportunities for recovering more of the service costs through user fees,
                   as well as arguments for and against doing so.


                   Federal agencies provide individuals, firms, and industries such
Results in Brief   food-related services as (1) premarket reviews, including approving new
                   animal drugs and food additives for use and grading grain and other
                   commodities for quality, (2) compliance inspections of meat and poultry
                   and domestic foods and processing facilities to ensure adherence to safety
                   regulations, (3) import inspections and export certifications to ensure that
                   food products in international trade meet specified standards, and
                   (4) standard setting and other support services essential to these
                   functions.

                   About one-quarter of the $1.6 billion spent by the federal government in
                   fiscal year 1995 on food-related services was funded through user fees.
                   The premarket service of quality grading of grains and agricultural
                   commodities was the primary food-related service funded through user
                   fees. Nearly three-quarters of the cost of food-related services was funded
                   by general fund appropriations rather than user fees. Compliance
                   activities, such as the inspection of meat and poultry, were the primary
                   food-related activities funded through general fund appropriations.




                   Page 1                                       GAO/RCED-97-57 Food-Related Services
             B-275998




             On the basis of our review of selected food-related services, we
             determined that potentially about $723 million in additional user fees
             could have been charged for services provided in fiscal year 1995.
             According to the Office of Management and Budget’s (OMB) criteria,
             additional user fees could have been assessed in three principal areas.
             First, additional user fees could have been charged for some federal
             services by including the full costs of providing the service, such as the
             cost of setting standards, in the fee calculations. Second, user fees
             currently charged for certain food-related services, such as agricultural
             inspections at the nation’s borders and ports of entry, could have been
             consistently applied to similar types of services that are provided without
             charge. Finally, user fees could have been assessed on certain services,
             such as the inspection of meat and poultry, that are provided to
             identifiable beneficiaries without charge. Although the arguments for and
             against user fees vary with the agency and service in question, the
             arguments center on who benefits from the service—the general public or
             specific beneficiaries—and the impact the user fee would have on
             producers or consumers.


             User fees—charges individuals or firms pay for services they receive from
Background   the federal government—are not new but have begun to play an
             increasingly important role in financing federal programs, particularly
             since the Balanced Budget Act of 1985.1 Increases and extensions of user
             fees could be used to help meet the nation’s budget deficit reduction goals
             or increase the level of government services.

             User fees may be established in various ways. General user fee authority
             was established under title V of the Independent Offices Appropriation Act
             (IOAA) of 1952. The IOAA gave agencies broad authority to levy user charges
             on identifiable beneficiaries by administrative regulation. Before its
             enactment, an agency generally imposed fees only if it had specific
             congressional authorization to do so.2 User fee authority may also be
             granted through specific authorizing legislation. For example, the
             Congress mandated user fees in the authorizing legislation of a new
             program to certify agricultural products as organically grown. These fees

             1
              Absent authority to do otherwise, user fees are deposited in the U.S. Treasury’s general fund and are
             not credited to the agency or activities that generated the revenue. However, in many cases,
             particularly ones in which fees are charged for business-type activities, the Congress permanently
             authorizes that these fees be used by the agency or for a specific purpose.
             2
              The Congress has prohibited the Food and Drug Administration from imposing user fees based on the
             general authority of the IOAA, requiring the agency to seek authority to charge fees on a case-by-case
             basis.



             Page 2                                                     GAO/RCED-97-57 Food-Related Services
B-275998




will be used to fund administrative and review activities necessary to the
certification process. Agencies may also request approval to charge user
fees by including proposals to do so in their annual budget submissions to
the Congress.

The IOAA provides general guidance to agencies but is not specific enough
to conclusively determine the appropriateness or amount of a user fee in a
given situation. The federal Circuit Court of Appeals for the District of
Columbia has interpreted the IOAA to mean that if a government service
provides an “independent” public benefit, no user fee should be charged
for that portion of the benefit.3 Furthermore, according to the 1993 version
of Circular A-25, the latest guidance by OMB, if private individuals or firms
receive the primary benefits of the government service and public benefits
are “incidental,” then user fees could be charged for the full costs of
providing the service.

Because the IOAA and OMB’s guidance do not define “independent” or
“incidental” public benefits, interpretations of these criteria have changed
over time. For example, from the inception of the IOAA, the Food and Drug
Administration (FDA) maintained that the public was the primary
beneficiary of its services and that an independent public interest was
involved, which precluded a user fee. However, FDA has recently argued
that various identifiable private recipients are the primary beneficiaries of
some of its services, for example reviewing applications for new human
drugs, and that the existence of incidental public benefits does not
preclude charging a user fee.4

To assist the agencies in determining when user fees are appropriate, in
1959 the Bureau of the Budget (now OMB) issued Circular A-25, which
contained guidance for assessing user fees. The circular, last revised by
OMB in 1993, states that “a user charge will be assessed against each
identifiable recipient for special benefits derived from federal activities
beyond those received by the general public.” According to OMB, a special
benefit will be considered to accrue, and a user charge will be imposed
when the government service




3
  Central and Southern Motor Freight Tariff Association, Inc. v. United States, 777 F.2d 722 (D.C. Cir.
1985) and Engine Manufacturers Association v. Environmental Protection Agency, 20 F.3d 1177 (D.C.
Cir. 1994).
4
 Disputes regarding the existence of independent versus incidental benefits have generally been
resolved by the courts.



Page 3                                                     GAO/RCED-97-57 Food-Related Services
                            B-275998




                        •   enables the beneficiary to obtain more immediate or substantial gains or
                            values (which may or may not be measurable in monetary terms) than
                            those that accrue to the general public (e.g., receiving a patent, an
                            insurance or guarantee provision, or a license to carry on a specific
                            activity or business);

                        •   provides business stability or contributes to public confidence in the
                            business activity of the beneficiary; or

                        •   responds to the request of or is provided for the convenience of the
                            service recipient and is beyond the service regularly received by other
                            members of the same industry or by the general public (e.g., receiving a
                            passport, visa, or Custom’s inspection after regular duty hours).

                            In determining the user fee amount, the circular states that “full costs”
                            should be charged. Full costs include (1) direct and indirect personnel
                            costs, including salaries and expenses for fringe benefits such as medical
                            insurance and retirement; (2) physical overhead, consulting, and other
                            indirect costs, including costs for utilities, insurance, travel, and rents;
                            (3) management and supervisory costs; and (4) the costs of enforcement,
                            research, regulation, and the establishment of standards.

                            In some cases, the government supplies a service that provides a special
                            benefit to an identifiable recipient and also provides a benefit to the
                            general public. According to Circular A-25, when the public obtains
                            benefits as a necessary consequence of an agency’s provision of special
                            benefits to an identifiable recipient (i.e., the public benefits are not
                            independent of, but merely incidental to, the special benefits), an agency
                            need not allocate any costs to the public and should seek to recover from
                            the identifiable recipient the full costs of providing the service.


                            The federal government provides food-related services in four general
Food-Related Services       categories—premarket reviews, regulatory compliance, import or export
Provided by Federal         activities, and essential support. These services are provided to
Agencies                    individuals, firms, and industries by six federal agencies in three
                            departments. Both producers and consumers of agricultural products and
                            commodities, such as beef, seafood, grain, vegetables, food additives, and
                            animal drugs, benefit from these services.




                            Page 4                                      GAO/RCED-97-57 Food-Related Services
                             B-275998




Categories of Services       The food-related services provided by the federal government can be
                             grouped into four general categories.

                         •   Premarket reviews encompass a number of activities that take place
                             before a product or commodity can be sold to a wholesaler or consumer
                             and include (1) product approvals that allow companies to market specific
                             products, for example, animal drugs, after they have been determined to
                             be safe and effective; (2) quality grading to determine that certain
                             commodities such as grain, beef, and some fruits meet established
                             standards for quality and condition; and (3) permit issuance for activities
                             such as the use of experimental biotechnological techniques.

                         •   Compliance inspections are aimed at ensuring that regulated firms adhere
                             to all applicable laws and regulations regarding product safety. For
                             example, federal agencies need to periodically inspect manufacturing
                             facilities and procedures to ensure the safety of food-related products.

                         •   Import inspections and export certifications are made so that the
                             government can attest to the quality and safety of products in international
                             trade. For example, some countries to which the United States exports
                             seafood require that the product be accompanied with a health certificate.
                             Food-related products that are imported into the United States are
                             inspected to ensure that they are safe and free of agricultural diseases and
                             pests.

                         •   Essential support activities, such as standard setting and laboratory
                             analysis, support the government’s main inspection, grading, and
                             compliance programs. Without these support activities, the programs
                             could not fully operate. For example, to grade the quality of a food-related
                             product requires a set of standards specifying the desired characteristics
                             of the product. To analyze meat and poultry for the presence of pathogens
                             and other contaminants requires laboratory services.


Agencies Providing           Six federal agencies in three different departments provide food-related
Food-Related Services        services. These agencies are FDA in the Department of Health and Human
                             Services; the National Marine Fisheries Service (NMFS) in the Department
                             of Commerce; and the Food Safety and Inspection Service (FSIS),
                             Agricultural Marketing Service (AMS), Grain Inspection, Packers and
                             Stockyards Administration (GIPSA), and Animal and Plant Health
                             Inspection Service (APHIS) in the Department of Agriculture (USDA).




                             Page 5                                     GAO/RCED-97-57 Food-Related Services
    B-275998




•   FDA provides food-related services in two primary areas—premarket
    reviews and compliance inspections. The agency requires that new animal
    drugs are safe and effective for their intended use and that drug residues
    in animal tissue will not be harmful for human consumption. Food
    additives and colorings are reviewed primarily for safety. Before
    marketing a new animal drug, food additive,5 or color additive,6 sponsors
    are responsible for demonstrating the safety and, in the case of animal
    drugs, the effectiveness of their products by conducting studies and
    submitting data to FDA as part of a review process. FDA is responsible for
    reviewing these data and approving or denying the application. FDA also
    inspects domestic and imported food products (excluding meat, poultry,
    and some egg products) to ensure safety, wholesomeness, and accurate
    labeling.

    FDA  performs a wide variety of compliance inspection activities. Among
    these activities, FDA periodically inspects the manufacturers and importers
    of food products such as cheese, canned food, and seafood to ensure that
    they are not contaminated with pesticides, filth, or pathogens, such as
    salmonella. Scientists analyze samples in FDA field laboratories, and
    compliance officers and others conduct enforcement actions when
    necessary.

•   NMFS administers a voluntary seafood inspection and certification
    program. The purpose of the seafood inspection program is to facilitate
    consistent distribution of safe, wholesome, and properly labeled fishery
    products of designated quality. The inspection provides assurances of
    safety, wholesomeness, proper labeling, and quality of seafood to
    consumers and the seafood industry. NMFS conducts seafood inspection
    and grading activities for a wide variety of clients, including harvesters,
    processors, and retailers. Products inspected and certified by NMFS can
    bear one of several official marks, such as “U.S. Grade A.”

•   FSISensures that meat, poultry, and some egg products moving in
    interstate and foreign commerce are safe, wholesome, and correctly
    marked, labeled, and packaged. Meat and poultry slaughterhouses receive
    continuous carcass-by-carcass inspections, while processing plants are
    inspected daily. Egg products processing plants are also subject to


    5
     Food additives are substances that are added intentionally or incidentally to food or that otherwise
    affect the characteristics of food, such as its flavor, texture, or shelf life. The additives may also be
    used in food packaging or processing equipment in such a manner that they inevitably become
    components of food.
    6
     Color additives are substances that are added to foods, drugs, or cosmetics to impart color.



    Page 6                                                       GAO/RCED-97-57 Food-Related Services
                            B-275998




                            continuous federal inspection. Inspectors collect and send product
                            samples to FSIS laboratories that test the samples for the presence of
                            chemical residues or pathogens. The agency also inspects imported and
                            exported meat, poultry, and egg products to ensure that they meet U.S.
                            standards.

                        •   AMS  is responsible for inspecting and grading agricultural commodities and
                            products, such as fruits, vegetables, meat, and poultry, as an aid in
                            marketing these commodities. AMS also administers marketing agreements
                            and orders that are designed to stabilize market conditions for milk and
                            certain fruits and vegetables and improve producers’ revenues. In addition,
                            the agency promotes fair trading practices in the sale of fresh and frozen
                            fruits and vegetables.

                        •   GIPSA facilitates the marketing of grain, lentils, and related commodities by
                            ensuring uniform inspection and weighing, establishing descriptive
                            standards, and certifying quality. GIPSA also helps ensure fair business
                            practices in the livestock, meat, and poultry industries by guarding against
                            fraudulent practices and providing payment protection.7

                        •   APHIS has responsibility for inspecting plants and animals within the
                            country and those that are being imported to or exported from the United
                            States to ensure that they do not spread agricultural pests and animal
                            diseases. APHIS also regulates the development and use of genetically
                            modified organisms and veterinary biological products by issuing permits
                            and licenses for these activities. In addition, the agency is responsible for
                            controlling the damage caused by wildlife to agricultural interests, natural
                            resources, and human health, safety, and property.


                            Of the about $1.6 billion available to the six agencies in fiscal year 1995 for
One-Quarter of              food-related services, about $411 million was provided by user fees. The
Food-Related Services       other nearly $1.2 billion was provided through general fund
Are Funded Through          appropriations. The percentage of user fee funding varied by agency and
                            the type of service provided. Certain types of activities, for example
User Fees                   grading, were generally funded through user fees, whereas the costs of
                            other activities, such as compliance inspections, generally were funded
                            through general fund appropriations.




                            7
                             GIPSA’s payment protection provides for the livestock seller’s financial security by providing
                            protection against a buyer’s default on payment of a contract.



                            Page 7                                                     GAO/RCED-97-57 Food-Related Services
                                         B-275998




                                         The percentage of an agency’s food-related services funded through user
                                         charges, as shown in table 1, ranged from a high of 96 percent for NMFS to a
                                         low of 1 percent for FDA. Some agencies, such as NMFS, AMS, and GIPSA,
                                         received the majority of their funding from user fees while others, such as
                                         FDA and FSIS, did not. For example, in 1995 $116 million, or 67 percent, of
                                         AMS’ funding came from user fees, mostly for grading services, while FSIS
                                         received about $84 million, or 14 percent, of its funds through user fees,
                                         mostly charges for overtime incurred on inspections of meat, poultry, and
                                         egg products.

Table 1: Six Federal Agencies’ Funding
for Food-Related Services in Fiscal      Dollars in millions
Year 1995                                                                                                    Total
                                                                                 General fund            program        Percentage funded
                                         Agency                User fees        appropriations            funding           from user fees
                                         NMFS                       $13.6                    $0.6            $14.2a                          96
                                                                                                                   b
                                         AMS                        116.0                    57.3            173.3                           67
                                         GIPSA                        33.5                   22.7             56.2                           60
                                         APHIS                      160.6                   313.2            473.8                           34
                                         FSIS                         83.9                  531.0            614.9                           14
                                         FDA                           3.3                  258.0            261.3                            1
                                         Total                     $410.9               $1,182.8         $1,593.7                            26
                                         a
                                           NMFS also received $1.58 million in general fund appropriations for the National Seafood
                                         Inspection Laboratory; however, because the laboratory does not primarily provide services to the
                                         seafood inspection program, its funding is not included in the total.
                                         b
                                          Includes funds for some services that are primarily food-related but also support other
                                         agricultural products such as cotton and tobacco.

                                         Sources: Data from NMFS, AMS, GIPSA, APHIS, FSIS, and FDA.



                                         Certain types of food-related service costs are generally funded through
                                         user fees, other types of service costs are sometimes funded by fees, and
                                         still other services are generally provided without charge to the service
                                         recipient. The costs of the federal premarket service of grading are the
                                         ones that are most likely to be funded through user fees. Drawing on the
                                         authority provided in the laws establishing the programs, AMS and GIPSA
                                         charge fees for the direct grading services they provide. For new product
                                         reviews, another premarket activity, fees are charged for the review of
                                         some products but not for others. For example, FDA charges some user
                                         fees for new human drug and color additive reviews but does not charge
                                         for new animal drug or food additive reviews. In addition, APHIS charges




                                         Page 8                                                     GAO/RCED-97-57 Food-Related Services
                          B-275998




                          for the inspection of imported animal products, but FDA and FSIS do not
                          charge for their import inspections.

                          Mandatory compliance activities, conducted during regular duty hours,
                          were the primary food-related activities not funded by user fees at the six
                          agencies we reviewed. These activities include (1) inspecting the safety of
                          meat and poultry, (2) monitoring the conditions under which food is
                          manufactured, and (3) investigating violations of grain laws. (See app. I for
                          the food-related services provided by each agency we reviewed and their
                          funding sources during fiscal year 1995.)


                          Potentially about $723 million in additional user fees could have been
Opportunities Exist to    charged to program beneficiaries in fiscal year 1995, according to our
Increase the Share of     review of selected food-related services.8 Applying OMB’s criteria in
Funding by Program        Circular A-25, we determined that these user fees could have been
                          assessed in three areas. For agencies that collect partial user fees for
Beneficiaries             certain services, additional fees of about $22.5 million could have been
                          charged to cover the full costs of providing the service. About $49 million
                          could have been charged by assessing user fees consistently for similar
                          services, and $651.5 million could have been charged for certain other
                          services that are currently provided without charge.


Full Costs of Providing   For certain food-related services, the federal government charges user fees
Services Are Not Always   that are less than the full costs of providing the service. For example,
Recovered                 some user fees are based on calculations that exclude the cost of activities
                          essential to the service, such as the cost associated with developing
                          program standards. For the food-related services that we reviewed, basing
                          user fees on the full costs of providing the service would have allowed the
                          federal government to charge about $22.5 million more in fiscal year 1995.

                          Circular A-25 states that agencies charging user fees should recover the
                          government’s full costs of providing the service, including both direct and
                          indirect costs. According to the circular, indirect costs include among
                          other things, essential support expenses for such things as establishing
                          program standards. Establishing standards is essential to assessing the
                          quality of an agricultural product or commodity. For example, in grading
                          grain, GIPSA develops and maintains quality standards for water content,

                          8
                           Of the about $1.2 billion in food-related services that were not funded through user fees in fiscal year
                          1995, we identified about $723 million in additional user fees that could have been charged. However,
                          we did not review all of the food-related services at the six agencies where user fees may be
                          appropriate.



                          Page 9                                                      GAO/RCED-97-57 Food-Related Services
B-275998




hardness, protein content, and other factors that determine the value of
the grain on the market.

In a 1981 report,9 we stated that public funding for standard-setting
activities for grading services is appropriate as long as the standards
primarily benefit commodity marketing industries as a whole and not just
those requesting grading services. This view was based on OMB’s original
1959 version of Circular A-25, which stated that “no charge should be
made for services when the identification of the ultimate beneficiary is
obscure and the service can be primarily considered as benefitting broadly
the general public.” However, the guidance in the 1993 revision of the
circular allows agencies to charge service beneficiaries the full costs of
providing the service, even though the public receives incidental benefits.
For example, if the grain industry as a whole obtains benefits that are not
independent of, but rather incidental to the special benefits provided to
grading customers, under A-25’s guidance an agency should recover from
these customers the full costs of providing the benefits.

While GIPSA includes the costs of its direct grading activities in its user fee
calculations, it excludes the costs of developing and maintaining the
necessary standards—about $4.8 million in fiscal year 1995. Believing
that standard-setting costs should be included in its user fee calculations,
GIPSA requested congressional authority to charge for these activities in the
President’s fiscal year 1997 budget. However, the Congress did not
approve GIPSA’s request. GIPSA has again proposed charging user fees for
standard-setting activities in the fiscal year 1998 budget.

In opposition to GIPSA’s proposal, the National Grain and Feed Association10
said (1) standard-setting activities have broad societal benefits and
therefore should receive public funds, (2) new user fees are likely to fall
disproportionately on exporters and effectively become a tax on U.S.
agricultural exports, and (3) new user fees would weaken the official
inspection system because higher costs would drive some domestic grain
inspection customers away from the system. The last two concerns relate
to the fact that grain for export is required to be inspected by GIPSA’s
official grading system, but grain for the domestic market is not.




9
Department of Agriculture Should Have More Authority to Assess User Charges (GAO/CED-81-49,
Apr. 16, 1981).
10
 This trade association represents more than 1,000 grain, feed, and processing firms that process and
export more than two-thirds of all U.S. grains and oilseeds.



Page 10                                                   GAO/RCED-97-57 Food-Related Services
                            B-275998




                            GIPSA estimated that including standards development costs in its user fee
                            calculations for grading services would increase the fees by about
                            13 percent, for example, from $31.50 per hour to $35.60 per hour.
                            However, to lessen the burden on small firms, a fee schedule could be
                            developed that would vary, for example, on the basis of the volume of
                            grain inspected. According to a GIPSA official, for fiscal year 1995, including
                            the cost of standard setting in the user fee calculations would increase the
                            grain industry’s total cost by less than 1 percent.

                            (App. II contains additional examples of programs with user fees that do
                            not fully cover the costs of providing services.)


User Fees Are Not Applied   The federal user fee structure for food-related services is inconsistent
Consistently to Similar     among similar services. For example, user fees are charged for premarket
Services                    review of human drugs but not for animal drugs. Furthermore, while most
                            air passengers and commercial vehicles entering the United States are
                            charged a user fee to cover the government’s cost of agriculture
                            inspections at the nation’s borders, some are not. Eliminating disparities in
                            how user fees are charged for similar services would have allowed the
                            federal government to charge an additional $49 million in fees in fiscal
                            year 1995.

Animal Drug Reviews         To protect public health and the nation’s economic interests, federal
                            review and approval is required on certain products before they can be
                            marketed. FDA, for example, approves the efficacy and safety of human and
                            animal drugs. The agency charges some user fees for new human drug
                            reviews but does not charge for new animal drug reviews.

                            The general approaches used for reviewing and approving human and
                            animal drugs are very similar. Sponsors of both new human and animal
                            drugs are responsible for demonstrating the safety and effectiveness of
                            their products by conducting studies and submitting data to FDA as part of
                            the premarket review process. In animal drug studies, the sponsors are
                            required to demonstrate safety both to the animal and to humans
                            consuming edible tissue of the treated animal. FDA is then responsible for
                            reviewing the safety and effectiveness data and approving or denying the
                            application to market the new drugs. FDA reviews applications both for
                            animal drugs intended for use in food-producing animals as well as drugs
                            for pets and other non-food-producing animals.




                            Page 11                                      GAO/RCED-97-57 Food-Related Services
B-275998




In the Prescription Drug User Fee Act of 1992, the Congress approved
some user fees for human drug reviews, stipulating that the revenues
generated were to be used to help reduce the length of time needed to
review new drug applications. In fiscal year 1995, FDA charged about
$71 million in user fees for human drug reviews. However, no fees are
charged for the review and approval of animal drugs. In fiscal year 1995,
FDA received about $20.2 million in general fund appropriations to review
new animal drugs.

FDA’s review and approval of new animal drugs provides producers of
these drugs economic benefits by (1) allowing them to market approved
drugs and keeping unapproved animal drugs off the market, (2) increasing
public confidence in the efficacy and safety of approved drugs, and
(3) reducing the manufacturer’s exposure to liabilities associated with
unknown side effects.

By approving a firm’s new animal drug application, the government gives
the applicant in effect a “license” to sell its drug and potentially derive
substantial profits. The approval also provides the public with assurances
that the drug is safe and will not leave residues that are harmful to
humans. In a 1990 report, the Department of Health and Human Services’
Inspector General concluded that regulated industries, including the
animal drug industry, should contribute to the cost of ensuring the safety
and effectiveness of their products because they receive benefits from
FDA’s regulatory activities.11


In our 1992 report on the new animal drug review process,12 we concluded
that user fees could be charged for new animal drug reviews:

“In light of existing constraints on federal resources and the importance of regulating the
safety and efficacy of animal drugs, providing FDA with specific authority to charge user
fees for approving new animal drugs may be a viable alternative to appropriations for
funding this program.”


In a November 1994 study on the new animal drug review process, FDA
found that by collecting some user fees the agency could accelerate the
review process, which would result in speedier market entry and,
therefore, increased financial benefit to the sponsors of new animal


11
 Implementing User Fees in the Food and Drug Administration: A Case Study, Department of Health
and Human Services, Office of Inspector General (July 1990).
12
 Food Safety and Quality: FDA Needs Stronger Controls Over the Approval Process for New Animal
Drugs (GAO/RCED-92-63, Jan. 17, 1992).



Page 12                                                GAO/RCED-97-57 Food-Related Services
                     B-275998




                     drugs.13 The study estimated that the financial benefits to industry from an
                     improved animal drug review process would range from $16 million to
                     $55 million.

                     Since publishing its 1994 study, FDA has not proposed charging user fees
                     for animal drug reviews, and the Congress has taken no action on the
                     matter. According to FDA, some administrative and procedural changes are
                     being made to reduce the time required to review and approve new animal
                     drug applications. In addition, the animal health industry has come to
                     believe that many improvements to the review process can be made
                     without charging fees to hire additional reviewers. Finally, according to an
                     OMB official, currently the Congress and FDA may view other potential
                     candidates for user fees, such as medical device reviews, as a higher
                     priority.

                     The Animal Health Institute, which represents the interests of
                     manufacturers of animal health products, opposes user fees for the review
                     of new animal drugs. In case user fees are considered, according to the
                     Institute, the funds collected should be used only to meet specific goals for
                     improving the review process. The Congress stipulated that goals for
                     reducing review time should be established and met when it approved
                     some user fees for human drug reviews.

Border Inspections   In addition to inconsistencies in user fees for premarket reviews, user fees
                     are not charged consistently for agricultural inspection activities at the
                     nation’s borders and ports of entry. In 1991, APHIS began charging user fees
                     to fund the inspection of international air passengers and commercial
                     conveyances, such as aircraft, vessels, loaded railcars, and trucks, for the
                     presence of plant pests and animal diseases.14 All air passengers and
                     commercial vehicles entering the United States are charged a user
                     fee—except those originating in, and entering from, Canada. Because
                     Canadian agricultural products posed less risk to U.S. agriculture and thus
                     required less frequent inspections, air passengers and commercial vehicles
                     entering from Canada were excluded from the user fee charges.

                     After reviewing the situation, in 1996 APHIS considered charging user fees
                     for air passengers and commercial vehicles entering from Canada but did

                     13
                       User Fee Feasibility Study, FDA, Center for Veterinary Medicine (Nov. 1994).
                     14
                       Except for flights originating in Canada, air passengers pay $1.45 as part of their airfare, commercial
                     aircraft pay $53.00 for each U.S. landing until all of the aircraft’s cargo and passengers are off-loaded,
                     vessels pay $369.50 per arrival for the first 15 arrivals per year, rail operators pay $7.00 for each loaded
                     railcar crossing the Mexican border, and trucks pay $2.00 for each crossing of the Mexican border or
                     $140 per year for a decal that allows unlimited crossings.



                     Page 13                                                      GAO/RCED-97-57 Food-Related Services
                             B-275998




                             not go forward with such a proposal. According to APHIS officials, the
                             proposal was not made because (1) agricultural products from Canada still
                             constitute relatively little risk to U.S. agriculture, (2) the user fees would
                             generate little revenue, and (3) the user fees may induce Canada to
                             reciprocate by charging U.S. air passengers and commercial vehicles
                             crossing into Canada a similar fee.

                             While we do not know whether or not the Canadian government would
                             reciprocate, we noted in our review of APHIS’ budget documents that risks
                             to U.S. agriculture have increased and thus more inspections are required
                             of products entering the United States from Canada. According to APHIS’
                             explanatory notes for its fiscal year 1997 budget, “increased traffic of
                             untreated Asian and European agricultural products into the United States
                             through Canada has created the need for increased inspections to reduce
                             the risk of introducing exotic agricultural pests into this country.” Over the
                             past 3 years, the value of agricultural imports from Canada has increased
                             about 29 percent, from $5.2 billion to $6.7 billion.

                             We estimate that charging air passengers and commercial vehicles
                             entering from Canada the same fees charged for entries from all other
                             foreign countries would have generated approximately $15.1 million in
                             new revenues from the 1995 border crossings. The costs of collecting such
                             fees would be minimal because the collection mechanism is already in
                             place. However, some of the new revenues may be offset by additional
                             program costs related to increased inspections.

                             (App. III contains a discussion of other food-related services provided
                             without charge that are similar to federal services for which user fees are
                             charged.)


Some Services With           The federal government provides many food-related regulatory services at
Identifiable Beneficiaries   no cost to the beneficiaries. For example, FSIS does not charge user fees
Are Being Provided           for compliance inspections of meat and poultry slaughter and processing
                             plants conducted during regular duty hours. In addition, AMS does not
Without Charge               charge user fees to producers of specific commodities such as milk, fruit,
                             and vegetables for establishing and overseeing marketing agreements and
                             orders. Federal marketing agreements and marketing orders, established
                             at the request of producers, set parameters aimed at stabilizing market
                             conditions and improving producers’ revenues. Another $651.5 million in
                             user fees could have been assessed in fiscal year 1995 if identifiable




                             Page 14                                     GAO/RCED-97-57 Food-Related Services
                               B-275998




                               beneficiaries had been charged for food-related services that are currently
                               provided without charge.

Meat and Poultry Inspections   Federal agencies routinely inspect food firms to help ensure that foods
                               and food-related products are safe, wholesome, and properly labeled,
                               according to federal standards. In some cases, agencies base the frequency
                               and intensity of these inspections on their resources and assessments of
                               the public risk associated with the firm, process, or product. In others, the
                               inspection frequency is legally mandated. For example, current federal law
                               requires that federal inspectors (1) examine each meat and poultry carcass
                               slaughtered and (2) visit each meat and poultry processing plant at least
                               daily.

                               To meet these mandated inspection requirements in fiscal year 1995, FSIS
                               inspected about 6,400 meat and poultry plants at a cost of about
                               $523 million—the largest single federal food-related service cost.15
                               Currently, FSIS provides meat and poultry inspections at no cost during
                               regularly scheduled shifts, which at larger plants may mean two or three
                               shifts per day. For unapproved and unscheduled shifts, FSIS has the
                               authority to charge for overtime inspections. Under this authority, FSIS was
                               able to recover about $77 million of the $523 million it spent on mandatory
                               meat and poultry inspections in fiscal year 1995.

                               From 1986 to 1988, FSIS requested in its annual budget submissions the
                               authority to charge user fees for all of its meat and poultry inspections.
                               From 1994 to 1997, FSIS limited its request to the authority to charge user
                               fees for any inspections beyond a single scheduled and approved primary
                               shift. The Congress has not approved any of these requests. In its fiscal
                               year 1998 budget submission, FSIS expanded its user fee proposal to charge
                               for the salaries, benefits, and related costs associated with in-plant
                               inspections of meat and poultry at all establishments inspected by the
                               agency. FSIS estimated that it could charge about $381 million in fees for its
                               direct inspection services. The proposal does not include user fees for
                               indirect costs such as the agency’s administrative, supervisory, and other
                               overhead costs.

                               A variety of arguments have been raised in favor of charging user fees for
                               mandated meat and poultry inspections. Those in favor of charging user
                               fees argue that these inspections benefit industry by (1) providing
                               inspected firms an economic advantage, (2) helping ensure public

                               15
                                 FSIS provided an additional $40.6 million in fiscal year 1995 to 27 states to fund state-conducted
                               inspections of meat and poultry. No user fees were collected for these inspection activities.



                               Page 15                                                     GAO/RCED-97-57 Food-Related Services
B-275998




confidence in the safety and wholesomeness of the product,
(3) performing quality control activities that are generally thought of as a
plant’s responsibility, and (4) protecting against unfair competition from
firms that might not otherwise perform adequate safety inspections in an
attempt to lower their costs.

Meat and poultry firms are not charged for FSIS’ inspections but benefit
economically in several ways. First, firms must be federally inspected
before they can market their products in interstate and foreign commerce.
Second, firms marketing products that are not regulated by the meat and
poultry acts, such as buffalo, venison, rabbit, emu, ostrich, and quail, must
pay to receive an examination by FSIS and inspection stamp from USDA. (In
fiscal year 1995, FSIS charged $1.1 million for these requested inspections.)
Finally, FSIS officials believe that many people make their choice of meats
based on the presence of a USDA stamp of inspection.

In a 1981 report,16 we stated that “USDA’s inspections of meat and poultry
processing plant operations clearly provide broad public benefits;
therefore, appropriations funding is appropriate.” This view was based on
OMB’s original 1959 version of Circular A-25, which stated that “no charge
should be made for services when the identification of the ultimate
beneficiary is obscure and the service can be primarily considered as
benefitting broadly the general public.” However, the guidance in the 1993
revision of the circular allows agencies to charge service beneficiaries the
full costs of providing the service even though the public receives
incidental benefits. In the case of meat and poultry processors, the public
benefit of safer meat and poultry, some believe, is incidental to the special
economic benefits, such as increased marketability, that accrue to the
processors.

In a February 1996 letter to the Chairman and Ranking Minority Member
of the House Agriculture Committee, we noted that federal meat and
poultry inspections benefit industry by helping ensure public confidence in
the safety and wholesomeness of its products. For example, federal
inspections benefit industry by reducing the adverse publicity and
potential liability costs that accompany outbreaks of foodborne illness.17
In its April 1996 report on FSIS’ inspections,18 USDA’s Office of Inspector

16
   Department of Agriculture Should Have More Authority to Assess User Charges (GAO/CED-81-49,
Apr. 16, 1981).
17
  Analysis of HACCP Costs and Benefits (GAO/RCED-96-62R, Feb. 29, 1996).
18
  Food Safety and Inspection Service Meat and Poultry Inspection Program Phase II, USDA, Office of
Inspector General, Evaluation Report No. 24801-1-AT (Apr. 1996).



Page 16                                                 GAO/RCED-97-57 Food-Related Services
                           B-275998




                           General also concluded that industry derived special benefits, including
                           increased public confidence, from federal inspections of meat and poultry.
                           The report recommended that FSIS recover the cost of these inspections
                           through user fees.

                           Moreover, not charging for meat and poultry inspections also subsidizes
                           plants’ quality control activities. We and others have testified in
                           congressional hearings that industry should be more responsible for
                           ensuring the safety and quality of its products. In this regard, FSIS is now
                           considering a plan to allow plant employees to conduct some inspection
                           activities with FSIS’ oversight.

                           Historically, the Congress has believed that meat inspection costs, with the
                           exception of overtime costs and voluntary services, should be borne by
                           the federal government, because the public was considered the primary
                           beneficiary. In addition, the American Veterinary Medical Association and
                           the American Meat Institute oppose user fees for meat and poultry
                           inspection. Veterinary Association officials said that they believe the
                           public is the primary beneficiary of federal meat and poultry inspections
                           and therefore user fees for such services are not appropriate. A position
                           paper endorsed by a coalition of groups,19 including the Meat Institute,
                           states, among other things, that user fees would (1) erode consumer
                           confidence, (2) reduce the government’s incentive for improving the
                           efficiency of inspections, (3) place the meat and poultry industry at a
                           competitive disadvantage with foreign countries, and (4) place a serious
                           burden on small businesses.

                           However, other countries, including major meat producers and exporters
                           such as New Zealand and Australia, charge for government meat
                           inspection, and Canada plans to institute some user fees for meat and
                           poultry inspections in 1997. Moreover, according to FSIS, if industry passed
                           inspection costs along to consumers, the additional cost per pound would
                           be negligible. FSIS estimated that a user fee covering all its inspection costs
                           would increase consumer prices an average of 0.6 cents per pound. USDA’s
                           Inspector General reported in April 1996 that for the small plants it
                           reviewed, the cost of inspection services would be about 5 cents per
                           pound. However, according to FSIS officials, fee schedules could be
                           developed that would lessen the burden on small plants.

Marketing Agreements and   In addition to inspection activities at FSIS, the federal government provides
Orders                     a number of other food-related services without charge to identifiable

                           19
                             Inspection Fees for Meat and Poultry: The New Food Safety Tax (Mar. 1995).



                           Page 17                                                 GAO/RCED-97-57 Food-Related Services
B-275998




beneficiaries. One example is the marketing agreements and orders
program at AMS. Milk marketing agreements and orders stabilize market
conditions to ensure an adequate supply of milk by establishing the prices
handlers pay to dairy producers. Fruit and vegetable marketing orders
(1) promote adherence to quality and maturity standards, (2) establish
orderly marketing through controls on the amount of a commodity
available for sale, and (3) support appropriate research and development
projects.

When growers or handlers submit a proposal for a new marketing order to
USDA, AMS analyzes the proposal and, if it appears feasible, holds a public
hearing. On the basis of AMS’ analysis and the hearing evidence, USDA issues
a recommended decision along with the proposed order. After considering
any comments on the proposed order, USDA issues the final order. AMS then
holds a referendum among the producers, two-thirds of whom must
approve the order before it is put into effect. After marketing orders are
approved and put into effect, AMS monitors the operation of each order by,
among other things, processing formal and informal amendments to the
order and promoting compliance with it by taking legal sanctions against
violators. These activities were funded with $10 million in general fund
appropriations in fiscal year 1995.

The day-to-day administration of marketing agreements and orders is
conducted at the local level by boards, committees, and market
administration officers. The costs of local administration are paid for
through fees assessed on the producers and handlers covered under the
agreements and orders.

AMS  believes that marketing agreements and orders provide benefits to
producers, handlers, and consumers. These benefits include stable
markets, fair prices, and dependable supplies of milk and fruit.
Nevertheless, marketing orders are provided at the request of particular
groups of agricultural producers to benefit their members. According to
OMB’s Circular A-25, when a government service responds to the request of
or is provided for the convenience of the service recipient, a special
benefit will be considered to accrue and a user fee should be imposed.

AMS estimates that charging user fees for the approximately $10 million
obligated annually for this program would have no significant impact on
retail prices. While the user fees charged would vary among the numerous
commodities covered, the total charges would represent about
0.05 percent of the commodities’ sale value in 1995. For example, user fees



Page 18                                    GAO/RCED-97-57 Food-Related Services
              B-275998




              for milk marketing orders would amount to about 0.03 cents per gallon of
              milk.

              Neither the Congress nor the affected industries have supported user fees
              for marketing orders. The Congress has denied AMS’ request to charge user
              fees for these services for the last 14 years. Recently, AMS again requested
              user fee authority for these services in its fiscal year 1998 budget
              submission. The industry groups that we contacted either favored
              continued public funding or had no opinion on funding. For example, the
              National Milk Producers Federation, one of the many groups that
              represent growers and handlers covered by marketing agreements and
              orders, prefers public funding for the services. Only if user fees were
              necessary to continue the program, would the federation support them.
              The United Fresh Fruit and Vegetable Association had no position on who
              should pay for marketing agreements and orders.

              (App. IV contains a discussion of other food-related services that benefit
              specific firms or industries but are provided without charge.)


              Opportunities exist to charge additional user fees for some federal
Conclusions   food-related activities. Such fees would (1) provide new federal revenues
              that could be used to help reduce the federal deficit or increase program
              services and (2) eliminate inconsistencies that currently exist in charging
              for federally provided services. In our view, given the guidance provided
              by Circular A-25, the case for charging user fees is the strongest where the
              government does not charge the full costs of providing the service and
              where current user fees are applied inconsistently. However, charging user
              fees for regulatory compliance inspections from which firms and
              industries derive specific benefits, such as mandated meat and poultry
              inspections, would produce the most revenue.

              Concerns about the appropriateness of user fees for food-related services
              center on three primary issues. First, in addition to benefitting specific
              firms or industries, these services, for example, inspections of imported
              foods, often also benefit consumers. Second, increased user fees for
              certain food-related services could have an adverse economic impact on
              small producers. And third, some believe that the federal government
              should not charge for activities, such as meat and poultry inspections, that
              are required by law.




              Page 19                                    GAO/RCED-97-57 Food-Related Services
                     B-275998




                     We provided a draft of this report to NMFS, AMS, APHIS, FSIS, GIPSA, and FDA
Agency Comments      for review and comment. The Department of Commerce, commenting for
and Our Evaluation   NMFS, generally concurred with the accuracy of the report but indicated
                     that funding for the National Seafood Inspection Laboratory should not be
                     included in the seafood inspection program’s funding because the
                     laboratory is not an essential part of the inspection program (see app. V).
                     We concur and have deleted discussion of the laboratory from the final
                     report. We met with officials from AMS, APHIS, FSIS, and GIPSA to obtain their
                     comments. Agency officials providing comments included (1) AMS’
                     Assistant Deputy Administrator, Executive Resources Office, as well as
                     program officials responsible for fruit and vegetable, dairy, seed, and
                     compliance activities; (2) APHIS’ Deputy Administrator for Management and
                     Budget; (3) FSIS’ Associate Administrator for Field Operations and Director
                     of the Budget and Finance Division; and (4) GIPSA’s Administrator and
                     Deputy Administrators for grain inspection and packers and stockyards.
                     These officials generally agreed with the report’s findings and conclusions
                     and provided us with clarifying technical comments that we incorporated
                     into the report as appropriate. FDA had no comments other than technical
                     suggestions and clarifications that we also incorporated into the report as
                     appropriate.


                     To identify and evaluate opportunities to increase the share of funding
                     paid for by beneficiaries of food-related services, we reviewed various
                     studies and literature on user fees and interviewed (1) budget and program
                     officials at OMB and the six federal agencies that provide food-related
                     services and (2) representatives of industry groups that would be affected
                     by additional user fees. We also analyzed agencies’ user fee proposals and
                     budget requests, congressional reports on agency appropriations, and
                     industry position papers on user fees. We asked the agencies to provide
                     user fee and appropriations funding data for their food-related activities.
                     We did not verify the accuracy of these data. Our work was conducted
                     from April 1996 through January 1997 in accordance with generally
                     accepted government auditing standards. (See app. VI for a more detailed
                     explanation of our methodology.)




                     Page 20                                     GAO/RCED-97-57 Food-Related Services
B-275998




We are sending copies of this report to the Secretaries of Agriculture,
Commerce, and Health and Human Services. We will also make copies
available to others on request. Major contributors to this report are listed
in appendix VII.




Robert A. Robinson
Director, Food and Agriculture Issues




Page 21                                     GAO/RCED-97-57 Food-Related Services
B-275998




List of Recipients

The Honorable Richard G. Lugar
Chairman
The Honorable Tom Harkin
Ranking Minority Member
Committee on Agriculture, Nutrition, and Forestry
United States Senate

The Honorable Pete V. Domenici
Chairman
The Honorable Frank R. Lautenberg
Ranking Minority Member
Committee on the Budget
United States Senate

The Honorable John McCain
Chairman
The Honorable Ernest F. Hollings
Ranking Minority Member
Committee on Commerce, Science, and Transportation
United States Senate

The Honorable Thad Cochran
Chairman
The Honorable Dale Bumpers
Ranking Minority Member
Subcommittee on Agriculture,
  Rural Development, and Related Agencies
Committee on Appropriations
United States Senate

The Honorable Robert F. (Bob) Smith
Chairman
The Honorable Charles W. Stenholm
Ranking Minority Member
Committee on Agriculture
House of Representatives




Page 22                                  GAO/RCED-97-57 Food-Related Services
B-275998




The Honorable John R. Kasich
Chairman
The Honorable John M. Spratt, Jr.
Ranking Minority Member
Committee on the Budget
House of Representatives

The Honorable Thomas J. Bliley, Jr.
Chairman
The Honorable John D. Dingell
Ranking Minority Member
Committee on Commerce
House of Representatives

The Honorable Joe Skeen
Chairman
The Honorable Marcy Kaptur
Ranking Minority Member
Subcommittee on Agriculture, Rural Development,
  FDA, and Related Agencies
Committee on Appropriations
House of Representatives




Page 23                                GAO/RCED-97-57 Food-Related Services
Contents



Letter                                                                                             1


Appendix I                                                                                        28

Funding for
Food-Related Services
in Six Federal
Agencies
Appendix II                                                                                       33
                        GIPSA’s Methods Development and Compliance Activities                     34
Food-Related Services   NMFS’ Activities Essential to Inspection and Grading Services             36
for Which Current       FDA’s Export Certifications and Color Additive Reviews                    37
User Fees Do Not
Recover All Program
Costs
Appendix III                                                                                      41
                        FDA’s Food Additive Review Process                                        41
User Fees Are Not       APHIS’ Veterinary Biologics and Biotechnology Regulatory                  43
Applied Consistently      Activities
to Similar Services
Appendix IV                                                                                       46
                        Food Safety Inspection Service’s Regulatory Compliance                    47
Food-Related Services     Activities
That Are Provided       AMS’ Seed Regulatory Program                                              51
                        GIPSA’s Packers and Stockyards Activities                                 52
Without Charge to       FDA’s Compliance Activities                                               54
Identifiable
Beneficiaries
Appendix V                                                                                        58

Comments From the
Department of
Commerce



                        Page 24                                  GAO/RCED-97-57 Food-Related Services
                        Contents




Appendix VI                                                                                        62

Objectives, Scope,
and Methodology
Appendix VII                                                                                       64

Major Contributors to
This Report
Tables                  Table 1: Six Federal Agencies’ Funding for Food-Related Services            8
                          in Fiscal Year 1995
                        Table I.1: Agricultural Marketing Service Funding, Fiscal Year             28
                          1995
                        Table I.2: Animal and Plant Health Inspection Service Funding,             29
                          Fiscal Year 1995
                        Table I.3: Food and Drug Administration Funding, Fiscal Year               30
                          1995
                        Table I.4: Food Safety Inspection Service Funding, Fiscal Year             31
                          1995
                        Table I.5: Grain Inspection, Packers and Stockyards                        32
                          Administration Funding, Fiscal Year 1995
                        Table I.6: National Marine Fisheries Service Funding, Fiscal Year          32
                          1995
                        Table II.1: Food-Related Services Whose User Fees Are Not                  33
                          Calculated Based on Full Costs and Fiscal Year 1995 Funds
                          Appropriated
                        Table II.2: Cumulative Impact of Including Full Costs in GIPSA’s           36
                          User Fee Calculations
                        Table III.1: Food-Related Services Provided Without Charge That            41
                          Are Similar to Services for Which User Fees Were Charged and
                          Fiscal Year 1995 Funds Appropriated
                        Table IV.1: Food-Related Services Provided Without Charge to               46
                          Identifiable Beneficiaries and Fiscal Year 1995 Funds
                          Appropriated




                        Page 25                                   GAO/RCED-97-57 Food-Related Services
Contents




Abbreviations

APHIS      Animal and Plant Health Inspection Service
AMS        Agricultural Marketing Service
FDA        Food and Drug Administration
FSIS       Food Safety Inspection Service
GAO        General Accounting Office
GIPSA      Grain Inspection, Packers and Stockyards Administration
IOAA       Independent Offices Appropriation Act
NMFS       National Marine Fisheries Service
OMB        Office of Management and Budget
USDA       United States Department of Agriculture


Page 26                                 GAO/RCED-97-57 Food-Related Services
Page 27   GAO/RCED-97-57 Food-Related Services
Appendix I

Funding for Food-Related Services in Six
Federal Agencies

Table I.1: Agricultural Marketing
Service Funding, Fiscal Year 1995   Dollars in millions
                                    Food-related services                                                                      Fundinga
                                    User fees
                                    Processed fruit and vegetable grading                                                         $33.27
                                    Poultry and egg grading                                                                        22.68
                                    Meat grading                                                                                   19.29
                                    Fresh fruit and vegetable grading                                                              14.35
                                    Licensing/reparations (PACAb)                                                                       7.37
                                    Dairy products grading                                                                              5.89
                                    Laboratory testing                                                                                  5.13
                                    Standardization                                                                                     3.88
                                    Research and promotion                                                                              1.91
                                    Market news printed reports                                                                         1.24
                                    Plant variety inspection                                                                            0.85
                                    Seed testing                                                                                        0.09
                                    Cattle futures grading                                                                              0.04
                                    Total                                                                                       $115.99
                                    General fund appropriations
                                    Market news                                                                                   $19.35
                                    Pesticide data program                                                                         12.00
                                    Marketing agreements and orders                                                                     9.98
                                    Commodity purchase services                                                                         5.91
                                    Transportation services                                                                             2.56
                                    Wholesale market development                                                                        2.31
                                    Shell egg surveillance                                                                              2.00
                                    Pesticide record keeping program                                                                    1.50
                                    Federal seed regulatory program                                                                     1.17
                                    Organic certificationc                                                                              0.50
                                    Total                                                                                         $57.28
                                    a
                                     A small portion of the funding for some of these services supports non-food-related agricultural
                                    products such as cotton and tobacco.
                                    b
                                        Perishable Agricultural Commodities Act.
                                    c
                                      This is a new program. Once the program is fully operational, the agency will begin assessing
                                    user fees as authorized by legislation.

                                    Source: Data from the Agricultural Marketing Service.




                                    Page 28                                                   GAO/RCED-97-57 Food-Related Services
                                     Appendix I
                                     Funding for Food-Related Services in Six
                                     Federal Agencies




Table I.2: Animal and Plant Health
Inspection Service Funding, Fiscal   Dollars in millions
Year 1995                            Food-related services                                                              Funding
                                     User fees
                                     Agricultural quarantine inspection                                                  $105.85
                                     Import/export                                                                         13.59
                                     Animal damage control reimbursements                                                  20.40
                                     Veterinary diagnostics                                                                 1.49
                                     Reimbursable overtime                                                                 12.07
                                     Miscellaneous contributed funds                                                        7.18
                                     Total                                                                               $160.58
                                     General fund appropriations
                                     Agricultural quarantine inspection                                                   $24.97
                                     Import/export                                                                          7.72
                                     Other pest and disease exclusion programs                                             52.68
                                     Plant and animal health monitoring                                                    73.03
                                     Animal damage control operations                                                      20.80
                                     Other pest and disease management                                                     84.77
                                     Veterinary diagnostics                                                                15.76
                                     Veterinary biologics                                                                  10.50
                                     Biotechnology/environmental protection                                                 7.65
                                     Other scientific and technical services                                               15.33
                                     Total                                                                               $313.21
                                     Source: Data from the Animal and Plant Health Inspection Service.




                                     Page 29                                                 GAO/RCED-97-57 Food-Related Services
                                      Appendix I
                                      Funding for Food-Related Services in Six
                                      Federal Agencies




Table I.3: Food and Drug
Administration Funding, Fiscal Year   Dollars in millions
1995                                  Food-related services                                                                     Funding
                                      User fees
                                      Color additive certifications                                                                 $3.26
                                                                                                                                           a
                                      Color additive reviews
                                                                                                                                           b
                                      Export certificates
                                      Total                                                                                         $3.26
                                      General fund appropriationsc
                                      New animal drug reviews                                                                     $20.17
                                      Animal drug compliance inspections                                                            21.52
                                      Domestic food compliance inspections                                                          42.35
                                      Import food compliance inspections                                                            38.78
                                      Food additive reviews                                                                             7.34
                                      Color additive reviews                                                                        0 .64
                                      Food-related export certificates                                                              0 .09
                                      Other food-related services                                                                 127.11
                                      Total                                                                                      $258.00
                                      a
                                          Fees received from petitions for the review of new color additives totaled $12,000.
                                      b
                                       Fees received from export certificates totaled $3,650 and are not kept by the agency but go to
                                      the U.S. Treasury.
                                      c
                                        The agency does not receive individual appropriations for the services listed below. The
                                      amounts listed below represent the agency’s estimates of the unreimbursed costs of performing
                                      these services.

                                      Source: Data from the Food and Drug Administration.




                                      Page 30                                                      GAO/RCED-97-57 Food-Related Services
                                    Appendix I
                                    Funding for Food-Related Services in Six
                                    Federal Agencies




Table I.4: Food Safety Inspection
Service Funding, Fiscal Year 1995   Dollars in millions
                                    Food-related services                                                                      Funding
                                    User fees
                                    Reimbursable overtime—meat and poultry slaughter and
                                    processing inspection                                                                        $77.18
                                    Reimbursable overtime—laboratory services                                                         0.70
                                    Reimbursable overtime—import/export inspection                                                    0.81
                                    Reimbursable overtime—egg products                                                                0.52
                                    Reimbursable—other federal agencies                                                               1.67
                                    Voluntary meat and poultry slaughter and processing fees                                          1.09
                                    Voluntary laboratory service fees                                                                 0.05
                                    Voluntary import/export and laboratory services fees                                              1.68
                                    Voluntary egg products fees                                                                       0.19
                                    Total                                                                                        $83.89
                                    General fund appropriations
                                    Meat and poultry slaughter and processing inspection                                        $446.27
                                    Laboratory services                                                                              18.02
                                    Import/export inspection                                                                         12.44
                                                               a
                                    Egg products inspection                                                                           3.44
                                    Pathogen reduction                                                                               10.21
                                    Grants to states                                                                                 40.59
                                    Total                                                                                       $530.97
                                    a
                                      Responsibility for egg products inspections was transferred to the agency during 1995. Total
                                    federal annual egg products inspection funding for fiscal year 1995 was $10.86 million.

                                    Source: Data from the Food Safety Inspection Service.




                                    Page 31                                                  GAO/RCED-97-57 Food-Related Services
                                       Appendix I
                                       Funding for Food-Related Services in Six
                                       Federal Agencies




Table I.5: Grain Inspection, Packers
and Stockyards Administration          Dollars in millions
Funding, Fiscal Year 1995              Food-related services                                                                    Funding
                                       User fees
                                       Grain inspection and grading                                                                $23.40
                                       Miscellaneous commodities inspection                                                          4.00
                                       Rice inspection                                                                               4.00
                                       Supervision of states and agencies                                                            1.50
                                       Inspection of U.S. grain exported from Canada                                                 0.60
                                       Total                                                                                       $33.50
                                       General fund appropriations
                                       Packers and stockyards regulation                                                           $11.70
                                       Grain Standards Act standardization                                                           4.80
                                       Grain Standards Act compliance                                                                4.70
                                       Methods development                                                                           1.50
                                       Total                                                                                       $22.70
                                       Source: Grain Inspection, Packers and Stockyards Administration.



Table I.6: National Marine Fisheries
Service Funding, Fiscal Year 1995      Dollars in millions
                                       Food-related services                                                                    Funding
                                       User fees
                                       Seafood inspection and grading services                                                     $12.35
                                       National training branch                                                                      0 .87
                                       Document approval and supply services                                                         0 .33
                                       Other programs                                                                                0 .05
                                       Total                                                                                       $13.60
                                       General fund appropriationsa
                                       Standards and specifications/sensory evaluation                                               0.32
                                       Foreign requirements                                                                          0.30
                                       Total                                                                                        $0.62
                                       a
                                         The agency also received $1.58 million in general fund appropriations for the National Seafood
                                       Inspection Laboratory; however, because the laboratory does not primarily provide services to the
                                       seafood inspection program its funding is not included in the total.

                                       Source: National Marine Fisheries Service.




                                       Page 32                                                 GAO/RCED-97-57 Food-Related Services
Appendix II

Food-Related Services for Which Current
User Fees Do Not Recover All Program
Costs
                                      Federal agencies charge user fees for a number of food-related services,
                                      but the fee calculations for some of these services exclude the support
                                      costs that are essential to providing them. In addition to the grain
                                      standard-setting activities discussed in the body of this report, several
                                      other food-related services charge user fees that do not take all program
                                      costs into account.

                                      Specifically, user fees do not take into account the following costs: (1) the
                                      Grain Inspection, Packers and Stockyards Administration’s (GIPSA) costs
                                      for developing grain measurement methods and compliance activities;
                                      (2) the National Marine Fisheries Service’s (NMFS) costs for developing
                                      standards and conducting other essential activities related to its seafood
                                      inspection program; (3) the Food and Drug Administration’s (FDA) full
                                      costs for issuing food product export certificates and reviewing color
                                      additives for foods, drugs, cosmetics and medical devices; and (4) the
                                      Animal and Plant Health Inspection Service’s (APHIS) costs for controlling
                                      the damage that wild animals do to agricultural interests, natural
                                      resources, and human health, safety, and property.

                                      Table II.1 lists food-related services that we reviewed for which the user
                                      fees do not account for the full costs. This appendix provides a general
                                      description of these services, the level of federal funding they receive, and
                                      arguments for and against increasing user fees to account for the full
                                      costs.

Table II.1: Food-Related Services
Whose User Fees Are Not Calculated    Dollars in millions
Based on Full Costs and Fiscal Year   Food-related services                                                                    Funding
1995 Funds Appropriated                                           a
                                      GIPSA standardization                                                                        $4.80
                                      GIPSA methods development                                                                     1.50
                                      GIPSA compliance                                                                              4.70
                                      NMFS standards, sensory evaluation, and foreign
                                      requirements                                                                                  0.62
                                      FDA food-related export certificates                                                          0.09
                                      FDA color additive reviews                                                                    0.64
                                      APHIS animal damage control                                                                  10.10b
                                      Total                                                                                       $22.45
                                      a
                                          Discussed earlier on pp. 9-11.
                                      b
                                       This amount represents an estimate of the user fees that could have been charged for livestock
                                      protection activities in fiscal year 1995.

                                      Sources: Data from GIPSA, NMFS, FDA, and APHIS.




                                      Page 33                                                 GAO/RCED-97-57 Food-Related Services
                         Appendix II
                         Food-Related Services for Which Current
                         User Fees Do Not Recover All Program
                         Costs




                         GIPSA conducts a number of activities that are essential to its grain
GIPSA’s Methods          inspection and grading services. These activities include (1) developing
Development and          and implementing new methods for measuring grain quality and
Compliance Activities    (2) ensuring the quality of the program through regulatory compliance
                         activities. Currently, none of the costs of providing these services are
                         included in GIPSA’s user fee calculation for inspection and grading services.


GIPSA’s Methods          GIPSA’s grain inspection and grading program was established to facilitate
Development Activities   the marketing of U.S. grains, oilseeds, rice, and related commodities. GIPSA,
                         as required by the U.S. Grain Standards Act and the Agricultural Marketing
                         Act, inspects and weighs almost all exported grain shipments. While grain
                         for domestic use is not required to be inspected and weighed, GIPSA
                         provides these services on a voluntary basis.

                         GIPSA charges customers with contracts a user fee of $31.50 per hour for its
                         services. However, the user fee calculation was based only on direct
                         program activities, such as inspection and weighing, and did not include
                         the $1.5 million GIPSA received in 1995 to identify, evaluate, and implement
                         new or improved methods for measuring grain quality.

                         GIPSA’s methods development activities help ensure the continued integrity
                         of inspection certificates and, as such, are essential to its grain inspection
                         and grading program. According to the Office of Management and Budget’s
                         Circular A-25, user fees should recover the full costs of providing the
                         service, including all direct and indirect costs.

                         The National Grain and Feed Association1 opposes new user fees for
                         activities that support GIPSA’s grain grading services, arguing that
                         (1) appropriated funds are the only fair way to fund these activities
                         because of their broad societal benefits, (2) new user fees are likely to fall
                         disproportionately on exporters and effectively become a tax on U.S.
                         agricultural exports, and (3) new user fees would weaken the official
                         inspection system because higher costs would drive some domestic grain
                         inspection customers away from voluntary inspections.

                         The National Association of Wheat Growers2 voiced similar concerns. The
                         Association argued that new fees are likely to fall disproportionately on

                         1
                          The National Grain and Feed Association is a trade association representing more than 1,000 grain,
                         feed, and processing firms that process and export more than two-thirds of all U.S. grains and oilseeds.
                         2
                          The National Association of Wheat Growers is a federation of 22 state wheat growers associations,
                         representing wheat growers’ educational, legislative, and regulatory interests.



                         Page 34                                                    GAO/RCED-97-57 Food-Related Services
                     Appendix II
                     Food-Related Services for Which Current
                     User Fees Do Not Recover All Program
                     Costs




                     grain exporters. To compensate for the decrease in revenues associated
                     with reduced grain exports, GIPSA would then need to further increase fees
                     for its remaining customers to fund future operations.


GIPSA’s Compliance   GIPSA spends about $4.7 million annually ensuring the quality of its grading
Activities           program. GIPSA investigates violations of applicable grain laws, licenses
                     personnel to grade grain, and maintains an international monitoring
                     program that interacts with foreign governments and responds to
                     complaints concerning the quality and quantity of U.S. grain shipments.
                     GIPSA also performs management evaluations and procedural reviews of its
                     field offices and compliance reviews of the state and private agencies
                     designated to inspect grain.

                     In addition to the grain grading work of its own employees, GIPSA has
                     designated 17 state and 48 private agencies with authority to officially
                     inspect and weigh domestic grain. Eight of the 17 states, called delegated
                     states, also have the authority to inspect and weigh export grain. Criteria
                     for becoming a designated or delegated state or private agency for GIPSA
                     include (1) having licensed personnel, (2) providing training to maintain
                     skills, (3) using approved equipment, and (4) keeping proper records. State
                     and private agencies operate under a 3-year agreement that can be
                     renewed.

                     While GIPSA charges user fees for its direct grain grading activities, no fees
                     are charged for compliance activities such as (1) approving the states and
                     private companies who want to participate in the program, (2) licensing
                     grain inspectors and weighers, or (3) investigating violations of applicable
                     grain laws. The grain industry benefits from GIPSA’s compliance activities,
                     because they give grain purchasers confidence that the grain is inspected
                     and weighed properly, meets U.S. grain standards, and can be sold for
                     export. Thus, these activities are part of the full costs of grain inspection,
                     as defined by OMB Circular A-25.

                     Neither GIPSA nor the grain industry supports charging user fees for GIPSA’s
                     compliance activities. GIPSA officials said that the agency has not proposed
                     user fees for compliance activities because (1) it is difficult to identify
                     specific beneficiaries and (2) increased user fees could decrease the
                     number of voluntary inspections performed and thereby reduce agency
                     revenues. Just as they opposed user fees for standard setting and methods
                     development activities, industry groups also oppose user fees for GIPSA’s
                     compliance activities.



                     Page 35                                     GAO/RCED-97-57 Food-Related Services
                                       Appendix II
                                       Food-Related Services for Which Current
                                       User Fees Do Not Recover All Program
                                       Costs




Impact of Including Full               Table II.2 shows how grain inspection user fees would increase to cover
Costs in GIPSA User Fees               the full costs of the service, according to GIPSA. If all costs were included,
                                       fees would increase from $31.50 per hour to $40.96. Charging user fees to
                                       cover GIPSA’s full costs should have a minimal impact on the cost of grain.
                                       The total cost of grain grading user fees, including the cost of standard
                                       setting, methods development, and compliance activities, represented less
                                       than 0.3 percent of the value of grain exports in fiscal year 1995.

Table II.2: Cumulative Impact of
Including Full Costs in GIPSA’s User   Activity                    Percent increase       Hourly increase          Hourly rate
Fee Calculations                       Direct grain grading                         •                    •             $31.50
                                       Standard setting                            13                $4.10              35.60
                                       Methods development                          4                 1.26              36.86
                                       Compliance                                  13                $4.10             $40.96
                                       Source: GAO’s analysis based on data from GIPSA.




                                       NMFS’  seafood inspection program includes a number of activities essential
NMFS’ Activities                       to its voluntary seafood inspection and grading services. NMFS develops
Essential to                           and maintains processing, inspection, and grading standards. NMFS
Inspection and                         develops and supports a sensory science program that uses touch, sight,
                                       and smell to determine the wholesomeness and quality of fish and fish
Grading Services                       products. As part of this program, the agency develops standard
                                       definitions and terms of seafood freshness and decay and trains inspectors
                                       on how to consistently identify and describe these factors. NMFS also
                                       collects, translates, analyzes, codifies, and disseminates seafood import
                                       requirements of foreign governments and buyers and develops seafood
                                       export certificates that meet these requirements. NMFS received about
                                       $620,000 in general fund appropriations in fiscal year 1995 to perform
                                       these services. Currently, none of the costs of providing these essential
                                       support services are included in NMFS’ user fee calculations for inspection
                                       and grading services.

                                       Program standards and sensory evaluation techniques are essential
                                       elements of NMFS’ seafood inspection and grading services, because
                                       without them NMFS inspectors would not be able to attest to the quality and
                                       safety of the seafood they examine. Furthermore, NMFS’ foreign
                                       requirements work directly benefits seafood exporters. All of these costs
                                       fall under the Circular A-25 definition of full costs.




                                       Page 36                                            GAO/RCED-97-57 Food-Related Services
                     Appendix II
                     Food-Related Services for Which Current
                     User Fees Do Not Recover All Program
                     Costs




                     Under its original proposal to operate a stand-alone, self-supporting,
                     “performance-based” organization,3 NMFS included the cost of conducting
                     standard setting, sensory evaluation, and foreign requirements activities in
                     its user fee calculation. In November 1996, NMFS revised its proposal to
                     include only the costs of sensory evaluation in the user fee calculation.
                     The revised approach responded to customer arguments that the benefits
                     of standard-setting and foreign requirements activities did not accrue
                     solely to inspection customers but rather were broadly shared by the
                     seafood industry.

                     However, other agencies have concluded that essential support costs, such
                     as developing and maintaining standards, should be included in the user
                     fee calculation. The Agricultural Marketing Service includes the cost of
                     standardization activities in its user fee calculations, and GIPSA has
                     proposed including such costs in its user fee calculations.

                     Seafood inspection and grading service customers have been generally
                     supportive of NMFS’ efforts to create a performance-based organization.
                     However, because the program is voluntary, if customers find the fees too
                     high for the benefits received, they may choose not to participate. NMFS
                     officials said that including sensory evaluation costs in the user fee
                     calculation should not increase inspection and grading user fees, because
                     under their performance-based organization proposal some administrative
                     overhead costs would be eliminated.


                     Apart from omitting essential support costs, such as standard setting, from
FDA’s Export         user fee calculations, some federal agencies charge only a nominal fee that
Certifications and   bears little relation to the actual costs of providing the service. For
Color Additive       example, FDA does not cover the costs of providing export certifications or
                     reviewing color additives. FDA could obtain about $730,000 annually if it
Reviews              charged fees that were sufficient to cover the costs of providing these
                     services.


FDA’s Export         Some foreign countries require that food-related products exported to
Certifications       their countries be accompanied by a certificate from FDA. FDA’s certificates
                     of export generally indicate that the product can be freely sold in the
                     United States and that there are no known safety concerns about the
                     product or the company that manufactures it. FDA issues certificates after

                     3
                      A performance-based organization is designed to be more responsive to customer needs by
                     emphasizing business-like operations, improving efficiency, and meeting specific performance goals.



                     Page 37                                                  GAO/RCED-97-57 Food-Related Services
                      Appendix II
                      Food-Related Services for Which Current
                      User Fees Do Not Recover All Program
                      Costs




                      determining that the product, among other things, meets the specifications
                      of the foreign purchaser and is not in conflict with the laws of the country
                      to which it is intended for export. The certificate consist of three parts:
                      (1) a letter to the firm explaining FDA’s responsibilities concerning the
                      product, (2) a “to whom it may concern” letter that is intended for the
                      importing country, and (3) the certificate with the Department’s seal and
                      ribbon attesting to the facts in the “to whom it may concern” letter.

                      Currently, FDA charges a $10 fee for each export certificate it issues for
                      food products.4 Although FDA does not know exactly what it costs to issue
                      a food-related export certificate, it recently estimated that on average
                      agencywide, it costs about $250 to process an export certificate. Using this
                      figure, we estimate that in fiscal year 1995 FDA spent about $91,250
                      processing 365 export certificates, but it charged only $3,650 in fees.

                      In addition, FDA issues export health certificates for seafood being
                      exported to the European Union. These certificates state that the shipment
                      was produced in an establishment covered under a regulatory oversight
                      program equivalent to those in place in the European Union. FDA issued
                      8,884 seafood export health certificates in fiscal year 1996. FDA does not
                      have any estimate of the cost of processing these certificates. The agency
                      does not charge user fees for seafood export certificates although the
                      National Marine Fisheries Service’s seafood inspection program does.

                      OMB’s Circular A-25 states that agencies charging user fees should recover
                      from the service beneficiary the government’s full costs of providing the
                      service, including both direct and indirect costs. Export certificate
                      recipients benefit from FDA’s export certification, for example, by being
                      able to market their products in international commerce. The benefits
                      related to export certification have been recognized by NMFS, the Food
                      Safety and Inspection Service, and APHIS, which all charge user fees for
                      providing export certificates.


FDA’s Review of New   FDA is responsible for reviewing and approving new color additives used in
Color Additives       foods, drugs, cosmetics, and medical devices. The approval of a color
                      additive is initiated by a petition from the manufacturer to FDA. The
                      petition contains information on the intended use, chemical composition,
                      methods used to produce the colors, and the results of various tests. FDA
                      analyzes the petition and supporting data and determines if the color can

                      4
                       According to FDA, this is a Freedom of Information fee, and the money collected does not stay with
                      FDA but goes to the U.S. Treasury.



                      Page 38                                                  GAO/RCED-97-57 Food-Related Services
                       Appendix II
                       Food-Related Services for Which Current
                       User Fees Do Not Recover All Program
                       Costs




                       be approved. According to FDA, between 1986 and 1995 the agency
                       averaged fewer than five petitions for new color additives each year,
                       which includes amendments to already regulated color additives. Once a
                       color additive is approved and listed by FDA, it can be manufactured by
                       anyone.

                       FDA  charges a fee of $3,000 for petitions requesting the approval of a color
                       additive for use in or on foods only. The fee for this review was set at
                       $3,000 in 1963 and has not changed since. FDA does not know the exact
                       cost of reviewing color additive petitions but according to the agency, the
                       current fees do not cover the full costs of the review process. FDA
                       estimates spending about $163,000 per food and color additive petition
                       although this average is heavily weighted by food additive petitions.5 Using
                       this cost estimate, FDA spent about $652,000 in fiscal year 1995 reviewing
                       four petitions for color additives. FDA is now studying what the actual
                       review costs are for all food and color additive petitions.

                       OMB’s Circular A-25 states that agencies charging user fees should recover
                       from the service beneficiary the government’s full costs of providing the
                       service, including both direct and indirect costs. By approving a petition
                       for a new color additive, the government allows the color additive to be
                       marketed, which may result in a financial gain for the firm or industry
                       which submitted the petition.


APHIS’ Animal Damage   The purpose of the animal damage control program, as established under
Control                the Animal Damage Control Act of 1931, as amended, is to control damage
                       caused by wildlife to agricultural interests, natural resources, and human
                       health, safety, and property. Efforts to protect livestock from predators,
                       primarily coyotes, constitutes one of the major program activities.
                       Livestock protection activities are carried out primarily in the 18 western
                       states. Animal damage control operations were funded with $41.2 million
                       ($20.4 million in nonfederal funds and $20.8 in federal general fund
                       appropriations) in fiscal year 1995.

                       While program funding varies from state to state, the federal government
                       provided about 51 percent of the fiscal year 1995 funding. The remaining
                       program funds came from state and local governments and program
                       beneficiaries such as grazing boards. For example, funding for fiscal year
                       1995 program activities in the state of Nevada was 54 percent federal,

                       5
                        According to FDA, certain complex petitions will cost many times more to process while simple
                       applications may cost much less than the average amount.



                       Page 39                                                 GAO/RCED-97-57 Food-Related Services
Appendix II
Food-Related Services for Which Current
User Fees Do Not Recover All Program
Costs




39 percent state, 6 percent wool growers association and grazing boards,
and 1 percent local (cities and utilities).

The animal damage control program’s livestock protection activities in the
18 western states primarily benefit livestock producers and others who
own livestock herds. For example, in Nevada 90 percent of the program
consists of livestock protection. Ten sheep operators own about 90
percent of the sheep in Nevada, and in some cases, animal control
specialists work full time protecting one sheep company’s herd. As such,
proponents of charging user fees argue that the recipients of animal
damage control services receive “special benefits” as defined in OMB’s
Circular A-25 and should be charged the full costs of providing the service.
According to APHIS, fully funding livestock protection activities through
user fees could have resulted in about $10.1 million in additional revenue
in fiscal year 1995. However, in the past when federal funding for these
activities decreased, nonfederal contributions decreased as well.

Those opposed to increasing the share of program funding paid for by
service beneficiaries have raised several concerns. First, some believe that
controlling damage caused by wildlife is inherently a government
responsibility because wildlife is a publicly owned resource of the United
States.6 Second, instead of paying for APHIS animal damage control
services, some ranchers may try to save money by controlling predators
with illegal poisons thereby creating human health or environmental safety
hazards. Finally, predators cross property boundaries so that if one
rancher pays for federal animal damage control services, a neighbor who
does not may still benefit.

APHIS has not studied what the impact on ranchers would be of charging
user fees for the full costs of providing animal damage control services.
Assessing the overall impact on ranchers would be difficult, according to
an APHIS official, because each state operates and funds its program
differently.




6
 The federal government has statutory supremacy for managing threatened and endangered species,
such as wolves and eagles, and migratory birds such as ducks and geese.



Page 40                                                GAO/RCED-97-57 Food-Related Services
Appendix III

User Fees Are Not Applied Consistently to
Similar Services

                                     The federal government does not consistently charge user fees for similar
                                     food-related services. In addition to the premarket review of new animal
                                     drugs and border inspections of agricultural products discussed in the
                                     body of this report, FDA’s review of new food additives and APHIS’ issuance
                                     of licenses and permits for veterinary biologics and biotechnology
                                     activities bear no user fees. In contrast, user fees are charged for similar
                                     licensing and approval activities, such as FDA’s color additive reviews.

                                     Table III.1 lists the food-related services that we reviewed for which no
                                     user fees are charged, even though fees are charged for similar services.
                                     This appendix provides a general description of these services, the level of
                                     federal funding they receive, and arguments for and against recovering
                                     their full costs through user fees.

Table III.1: Food-Related Services
Provided Without Charge That Are     Dollars in millions
Similar to Services for Which User   Food-related services                                                                         Funding
Fees Were Charged and Fiscal Year
                                     FDA new animal drug reviewsa                                                                   $20.17
1995 Funds Appropriated
                                     FDA food additive reviews                                                                        7.34
                                     APHIS Canadian border inspectionsb                                                              15.05c
                                     APHIS veterinary biologics                                                                       3.50c
                                     APHIS biotechnology                                                                              3.30c
                                     Total                                                                                          $49.36
                                     a
                                         Discussed earlier on pp. 11-13.
                                     b
                                         Discussed earlier on pp. 13-14.
                                     c
                                       This amount represents an estimate of the user fees that could have been charged for this
                                     activity in fiscal year 1995.

                                     Sources: Data from FDA and APHIS.




                                     In addition to reviewing and approving new animal drugs, FDA is also
FDA’s Food Additive                  responsible under section 409 of the Federal Food, Drug, and Cosmetic
Review Process                       Act, for approving new food additives, such as artificial sweeteners.
                                     Sponsors of new food additives must conduct scientific studies to
                                     establish the safety of their products. FDA then evaluates the scientific data
                                     submitted in support of a petition to approve a new food additive to
                                     ensure that it is safe for its intended use.

                                     Between 1986 and 1995, FDA received an annual average of 55 petitions for
                                     food additive approvals. FDA estimates that it spent about $7.34 million in



                                     Page 41                                                  GAO/RCED-97-57 Food-Related Services
Appendix III
User Fees Are Not Applied Consistently to
Similar Services




fiscal year 1995 reviewing and approving food additive petitions.1
However, according to FDA, the food additive program is being redesigned,
and a study is being conducted to more accurately estimate the cost of
food additive reviews. FDA believes that a more timely, predictable process
would likely cost more than an average of $163,000 per petition.

FDA charges no user fees for reviewing petitions for new food additives. In
contrast, FDA charges fees for reviewing petitions for new food and drug
colors and applications for human drugs. (Discussed previously on pp.
38-39 and p. 12.)

Those who support charging user fees for food additive reviews argue that
industry receives special benefits as a result of these reviews. OMB’s
Circular A-25 states that a special benefit exists if a government service
“enables the beneficiary to obtain more immediate or substantial gains or
values than those that accrue to the general public.” By approving a
petition for a new food additive, the government allows the food additive
to be marketed, which may result in a substantial financial gain for the
firm or industry that submitted the petition.

According to an FDA official, the primary incentive a company has for
applying for a food additive approval is to “get a corner on the market.”
Once the petition has been approved, the company will be able to use the
additive before anyone else. That timing gives the company an advantage
over its competitors. In addition, FDA’s approval validates the firm’s efforts
to produce a safe and effective product and contributes to public
confidence in the firm and its products. In a 1987 report,2 the Department
of Health and Human Services’ Inspector General identified FDA’s review
and approval of food additive petitions as an activity that had the potential
for charging user fees.

The Grocery Manufacturers of America, a trade association representing
the food industry, is opposed to user fees because food additive approvals
are not proprietary and thus do not provide the economic rewards that
drug approvals do. The grocery manufacturers favor an alternative system
of nongovernmental, third-party reviews of food additive petitions that
would be paid for by the applicant.

1
 This amount is based on the 45 petitions FDA received in fiscal year 1995 and its estimated average
cost of $163,000 per petition. According to FDA, certain complex petitions will cost many times more
to process, while simple petitions may cost much less than the average.
2
 Analysis of Costs Included in Current Food and Drug Administration User Fees and the Potential for
Additional User Fees, Department of Health and Human Services, Office of Inspector General
(Dec. 1987).



Page 42                                                  GAO/RCED-97-57 Food-Related Services
                        Appendix III
                        User Fees Are Not Applied Consistently to
                        Similar Services




                        APHIS regulates the development and use of veterinary biological products
APHIS’ Veterinary       and genetically modified organisms to help prevent the use of ineffective
Biologics and           or unsafe products. As part of this regulation, APHIS issues licenses and
Biotechnology           permits to the producers of veterinary biological and biotechnology
                        products. APHIS does not charge user fees for providing these services.
Regulatory Activities
Veterinary Biologics    To prevent the importation, production, and distribution of impure,
                        ineffective, unsafe, or impotent veterinary medicines and to regulate
                        veterinary medicine manufacturing, APHIS licenses drug companies that
                        produce veterinary biologics and issues permits for the manufacture and
                        sale of each approved biologic. Veterinary biologics are medicines for the
                        diagnosis, prevention, and treatment of diseases in animals. A small
                        portion of these medicines are made using biotechnology. Veterinary
                        biologics are different from animal drugs in that they generally attack the
                        animal’s immune system, causing the body to react to the medicine.
                        Animal drugs, on the other hand, attack the disease itself and are regulated
                        by FDA.

                        In both its fiscal year 1996 and 1997 budget requests, APHIS proposed
                        charging user fees for licensing, inspecting, and testing veterinary
                        biologics. Specifically, APHIS proposed a general license fee for approving
                        establishments to manufacture approved biologics products, a permit fee
                        to manufacture each specific product, and a transit permit fee for the
                        movement of biologics for research and evaluation and for the distribution
                        and sale of biologics. APHIS estimated that it could charge user fees of
                        about $3.5 million for its services.

                        Firms that manufacture, sell, transport, research, and evaluate veterinary
                        biologics derive some specific identifiable benefits from APHIS services.
                        Without an APHIS license or permit, veterinary biologics cannot be
                        field-tested or produced, imported, transported interstate, or sold on
                        either the domestic or international markets. An APHIS license or permit
                        also enhances public confidence that the veterinary biologic will not harm
                        public health or the environment. In addition, APHIS licenses and permits
                        help protect the livestock and pet industries from unfair competition by
                        excluding firms that might manufacture unsafe or impure products. Thus,
                        these services qualify for user fees under OMB’s Circular A-25. In addition,
                        courts have ruled that when a license is a prerequisite to operating in a
                        given industry, obtaining a license provides a special benefit that justifies a
                        user fee.3

                        3
                          Federal User Fees: A Legal and Economic Analysis, Boston University Law Review, vol. 67, No. 5
                        (Nov. 1987).



                        Page 43                                                  GAO/RCED-97-57 Food-Related Services
                           Appendix III
                           User Fees Are Not Applied Consistently to
                           Similar Services




                           Other agencies that issue licenses or permits charge user fees. For
                           example, the Nuclear Regulatory Commission charges a user fee for
                           licensing firms to operate nuclear power plants.

                           To date, the Congress has not approved APHIS’ veterinary biologics user fee
                           proposals. We did not find any public record of the Congress’ reasons for
                           not approving them. APHIS has again proposed user fees for its veterinary
                           biologics licensing, inspection, and testing activities in its fiscal year 1998
                           budget.

                           The animal drug industry has also not supported APHIS’ user fee proposals.
                           The Animal Health Institute, which represents the animal drug industry,
                           believes that the assessment of any fees on veterinary biologics would be
                           detrimental to small firms, possibly forcing them to abandon needed
                           products. In addition, the Institute believes that the biologics program
                           benefits the U.S. population as a whole.


Biotechnology Regulatory   The goal of APHIS’ biotechnology program is to approve innovative
Activities                 biotechnology techniques and processes that benefit the agricultural
                           industry while protecting the environment. Biotechnology involves
                           developing products that make use of genetically engineered organisms.
                           New biotechnology techniques or processes are primarily used for
                           improving agricultural crops. For example, a company may develop a new
                           kind of soybean by genetically combining two different kinds of soybeans.
                           The new soybean may grow faster, be more resistant to weather, or
                           contain more vitamins and minerals than any other kind of soybean on the
                           market.

                           In order to market products that are manufactured or produced through
                           new biotechnology, a company must obtain a permit from APHIS. APHIS
                           issues three types of permits: (1) an import permit, (2) a transit permit for
                           interstate movement, and (3) a permit to release the product to the
                           environment, for example, disposing of product waste in a landfill.

                           Before issuing a permit for field testing biotechnology products, APHIS
                           reviews plans for field testing and the results of any preliminary tests.
                           APHIS also analyzes the products’ environmental impact to ensure
                           compliance with environmental laws and regulations.

                           In both its fiscal years 1996 and 1997 budget requests, APHIS proposed
                           charging user fees of about $1 million for its biotechnology services. The



                           Page 44                                      GAO/RCED-97-57 Food-Related Services
Appendix III
User Fees Are Not Applied Consistently to
Similar Services




proposed fees would cover the direct cost of investigating and issuing
notifications, petitions, and permits to use genetically engineered
products. If indirect costs were included in the user fee, permit applicants
would be charged an additional $2.3 million in fees.

Without a permit from APHIS, a biotechnologically derived product cannot
be field-tested or produced, imported, transported interstate, or sold on
either the domestic or international markets. In addition, federal approval
of the product fosters public confidence that the technology and resulting
products will not harm public health or the environment. Thus, APHIS’
permit reviews qualify for user fees under Circular A-25 and legal
precedent.

APHIS has been unsuccessful in obtaining congressional approval for these
user fees. We did not find any public record of the Congress’ reasons for
not approving the proposals. APHIS has again proposed user fees for the
issuance of biotechnology certificates in the agency’s fiscal year 1998
budget submission.

The biotechnology industry in general opposes APHIS’ proposed user fees.
If user fees were too high, the industry argues that companies might be
forced to do their work in Europe. In addition, some argue that since this
program also benefits the public by ensuring that genetically engineered or
modified plants or organisms do not put livestock or crops at risk, user
fees should not be charged.

We estimate that a user fee covering all the agency’s costs of issuing
biotechnology permits, notifications, and petitions would run from about
$400 per permit and notification, the most common types, to $3,680 per
petition, which requires an APHIS environmental study. Biotechnology
customers are generally large corporations such as Upjohn, Calgene, and
Monsanto.




Page 45                                     GAO/RCED-97-57 Food-Related Services
Appendix IV

Food-Related Services That Are Provided
Without Charge to Identifiable Beneficiaries

                                        The federal government provides a number of food-related services for
                                        which no user fees are charged. In addition to meat and poultry inspection
                                        and marketing agreements and orders discussed in the body of this report,
                                        other federal services provided without charge that benefit specific
                                        individuals or industries include (1) the Food Safety Inspection Service’s
                                        (FSIS) egg product inspections, laboratory services, pathogen reduction
                                        activities, and import inspections; (2) the Agricultural Marketing Service’s
                                        (AMS) seed regulatory activities; (3) the Grain Inspection, Packers and
                                        Stockyards Administration’s (GIPSA) regulatory oversight of packers and
                                        stockyards; and (4) Food and Drug Administration’s (FDA) domestic and
                                        import compliance inspections.

                                        Table IV.1 lists the food-related services we reviewed that are provided
                                        without charge to identifiable beneficiaries. This appendix provides a
                                        general description of these services, their fiscal year 1995 funding, and
                                        arguments for and against charging user fees.

Table IV.1: Food-Related Services
Provided Without Charge to              Dollars in millions
Identifiable Beneficiaries and Fiscal   Food-related services                                                                     Funding
Year 1995 Funds Appropriated                                                                              a
                                        FSIS meat and poultry slaughter and processing inspection                                  $486.86b
                                        FSIS egg products inspection                                                                     10.86c
                                        FSIS laboratory services                                                                         18.02
                                        FSIS pathogen reduction                                                                          10.21
                                                                                    d
                                        AMS marketing agreements and orders                                                               9.98
                                        AMS federal seed regulatory program                                                               1.17
                                        GIPSA packers and stockyards regulation                                                          11.70
                                        FDA domestic food and animal drug compliance
                                        inspections                                                                                      63.87
                                        FDA import food compliance inspections                                                           38.78
                                        Total                                                                                      $651.45
                                        a
                                            Discussed earlier on pp. 15-17.
                                        b
                                            Includes grants to states.
                                        c
                                          Responsibility for egg products inspections was transferred to FSIS during 1995. This amount
                                        represents the total annual federal funding for egg products inspections.
                                        d
                                            Discussed earlier on pp. 17-19.

                                        Sources: Data from FSIS, AMS, GIPSA, and FDA.




                                        Page 46                                                  GAO/RCED-97-57 Food-Related Services
                           Appendix IV
                           Food-Related Services That Are Provided
                           Without Charge to Identifiable Beneficiaries




                           In addition to inspecting domestic meat and poultry, FSIS (1) inspects
Food Safety                domestic egg products and imported meat, poultry, and egg products and
Inspection Service’s       (2) provides laboratory analysis and pathogen reduction services to
Regulatory                 support its inspection program. No user fees are charged for these
                           services.
Compliance Activities
Egg Products Inspections   The Egg Products Inspection Act of 1970, as amended, mandated that the
                           federal government inspect egg processing plants to ensure that egg
                           products are safe, wholesome, and properly labeled. An egg products plant
                           inspection includes, among other things, a preoperations sanitary
                           inspection, a rodent control program, and testing for the presence of
                           pathogens such as salmonella. A federal inspector must be present at all
                           times for an egg products plant to operate. FSIS inspects egg products
                           without charge during regularly scheduled shifts, which may include
                           several shifts daily, but charges user fees for overtime, or unscheduled
                           shift inspections. In fiscal year 1995, FSIS obtained from user fees about
                           $710,000 of the $11.57 million funding for egg product inspections.

                           In fiscal years 1996 and 1997, FSIS proposed charging user fees for egg
                           product inspections conducted during nonprimary shifts. In its fiscal year
                           1998 budget request, FSIS proposed user fees for the salaries, benefits, and
                           related costs associated with in-plant inspections of egg products at all
                           establishments inspected by the agency. Such user fees, according to USDA
                           estimates, would generate about an additional $9 million in revenues.

                           A variety of arguments have been made in favor of user fees for FSIS
                           inspection activities. In a recent report,1 USDA’s Inspector General
                           concluded that federal inspections of egg products provided special
                           benefits to industry, the costs of which should be funded through user
                           fees. These special benefits include (1) helping assure public confidence in
                           the safety and wholesomeness of the product, (2) permitting a plant to sell
                           its products interstate and overseas, and (3) allowing FSIS’ stamp of
                           inspection to be used as a marketing tool to promote the product’s
                           superior quality.

                           The Congress did not approve FSIS’ fiscal year 1997 request to charge user
                           fees for egg products inspections because it viewed the public as the
                           primary beneficiary of such inspections. The Congress has generally taken
                           the position that the costs of mandated inspections, with the exception of


                           1
                             Food Safety and Inspection Service Meat and Poultry Inspection Program Phase II, United States
                           Department of Agriculture, Office of Inspector General, Evaluation Report No. 24801-1-AT (Apr. 1996).



                           Page 47                                                  GAO/RCED-97-57 Food-Related Services
                           Appendix IV
                           Food-Related Services That Are Provided
                           Without Charge to Identifiable Beneficiaries




                           overtime and voluntary services, should be borne by the federal
                           government.

                           The United Egg Association, an industry trade association, opposed user
                           fees for egg inspections, stating “these federally mandated programs were
                           created solely to provide for the health and safety of the American
                           people.” Furthermore, according to the Association, “the integrity of the
                           food inspection programs and the need to ensure public confidence in the
                           safety of food products has been part of the historical basis for public
                           funding of mandatory food inspection programs.”

                           Neither FSIS nor AMS, which administered the program before FSIS, have
                           estimated the cost impact of charging a user fee for the inspections of egg
                           products. However, based on USDA’s fiscal year 1995 funding for egg
                           products inspection services, user fees would likely increase the cost to
                           egg products producers by less than a half-cent per pound.


FSIS Laboratory Services   The FSIS laboratory services and pathogen reduction programs support
and Pathogen Reduction     meat, poultry, and egg product inspections through the scientific
Activities                 examination of these products for disease, contamination, or other forms
                           of adulteration. FSIS operates three multidisciplinary laboratories and also
                           accredits about 200 private laboratories to carry out food safety and
                           composition tests. FSIS and accredited laboratories test for antibiotic
                           residues, chemical residues, microbiological contamination, pathology,
                           and serology. Testing is also done for processed product composition and
                           economic adulteration, such as testing for moisture, fat, protein, or salt
                           content in ham or poultry.

                           Laboratory samples come from two sources—FSIS inspectors and plants.
                           As part of the meat, poultry, and egg inspection programs, FSIS laboratories
                           analyze, without charge, inspector-collected samples. The FSIS laboratories
                           also analyze plant-supplied samples, but charge the plant for the services
                           provided. In fiscal year 1995, the laboratory services program received
                           about $19.24 million in funding. About $1.22 million came from user fees
                           for overtime, laboratory accreditation, and analysis of plant-supplied
                           samples.

                           Similar to the laboratory services program, the pathogen reduction
                           program provides essential support to the meat, poultry and egg
                           inspection programs. The program’s goal is to control microbial
                           contamination of meat and poultry products from farm to table, and work



                           Page 48                                        GAO/RCED-97-57 Food-Related Services
Appendix IV
Food-Related Services That Are Provided
Without Charge to Identifiable Beneficiaries




is performed at all three FSIS laboratories. In fiscal year 1995, FSIS’
pathogen reduction program received about $10.2 million in general fund
appropriations; no user fees were charged.

FSIS laboratory services and pathogen reduction programs are essential
support elements of the meat, poultry, and egg inspection services.
Laboratory services and pathogen reduction were a single budget account
until 1994, when for visibility purposes, FSIS separated them into two
different accounts. Nonetheless, these programs would most likely not
exist or at least be much smaller if it were not for the meat, poultry, and
egg products inspection programs.

If user fees were charged to cover FSIS meat, poultry, and egg inspection
costs, the fee calculation, according to OMB’s criteria, should include the
costs associated with the laboratory analysis and pathogen reduction
activities. OMB Circular A-25 states user fees should cover the
government’s full costs, including essential support costs, such as
laboratory analysis.

USDA’s Inspector General recently recommended that FSIS either seek
statutory authority to assess, collect, and retain user fees for its laboratory
services or require the plants to assume financial responsibility for
laboratory testing costs by having them send FSIS inspector-selected
samples to accredited laboratories, with the plant paying directly for
testing costs. The Inspector General also recommended that FSIS seek user
fees for its pathogen reduction services, because they help ensure product
quality and add to public confidence.

Historically, the Congress has believed that meat inspection costs,
including laboratory testing, should be borne by the federal government,
because the public was the primary beneficiary. Others opposed to the
fees argue that if laboratory analysis were entirely paid for by industry, the
results of the laboratory analysis would lose some credibility.

If industry passed the costs of FSIS laboratory analysis, pathogen reduction,
and meat and poultry inspection services along to consumers, the
additional cost per pound would be negligible. For example, FSIS estimates
that a user fee covering all of these inspection-related costs would
increase consumer prices for meat and poultry an average of about
one-half cent per pound.




Page 49                                        GAO/RCED-97-57 Food-Related Services
                          Appendix IV
                          Food-Related Services That Are Provided
                          Without Charge to Identifiable Beneficiaries




FSIS Import Inspections   Federal meat, poultry, and egg products inspection laws require that
                          countries exporting these foods to the United States impose inspection
                          requirements at least equal to U.S. requirements. An inspection document
                          certifying that the products meet U.S. standards and issued by the
                          responsible official of the exporting country must accompany each
                          shipment offered for entry into the United States. FSIS spent about
                          $11 million inspecting 2.6 billion pounds of imported meat, poultry, and
                          egg products in fiscal year 1995.

                          FSISinspections of imported meat, poultry, and egg products consist of
                          checking (1) the exporting country’s certifications and manifests to ensure
                          that the number of packages in the lot agree with what is on the manifest
                          and that no damage has occurred in transit, (2) the labels for truthfulness,
                          and (3) the product for wholesomeness using organoleptic (sight, smell,
                          and touch) techniques. Import inspectors also routinely pull import
                          product samples for laboratory analysis.

                          Those in favor of charging user fees for FSIS import activities argue that
                          importers receive a special benefit as a result of this federal service.
                          Without the USDA inspection mark, importers cannot market their products
                          in the United States. Federal inspection also adds to public confidence in
                          the safety and wholesomeness of the product.

                          A 1996 report by USDA’s Inspector General recommended that FSIS seek
                          user fee authority for import inspections because they benefit specific
                          identifiable individuals or firms by allowing entry to the U.S. market and
                          enhancing public confidence through USDA’s stamp of inspection.2 In
                          addition, charging user fees for FSIS inspection activities would reduce the
                          inequities and inconsistencies that currently exist in charging for import
                          activities. While FSIS does not charge for import inspections, APHIS charges
                          a $27.50 fee per shipment to cover the cost of inspecting and issuing
                          import permits for animal products such as horns, skins, and animal
                          trophies.

                          The arguments raised against user fees for import activities at FSIS are
                          similar to those raised regarding inspection. Some argue that if industry
                          paid for import inspections, the public might doubt the credibility of the
                          inspections or believe inspectors faced a conflict of interest between
                          facilitating an import entry and protecting public health. In addition, small
                          brokers and import dealers may be economically hurt by new user fees

                          2
                            Food Safety and Inspection Service Meat and Poultry Inspection Program Phase II, United States
                          Department of Agriculture, Office of Inspector General, Evaluation Report No. 24801-1-AT (Apr. 1996).



                          Page 50                                                  GAO/RCED-97-57 Food-Related Services
                       Appendix IV
                       Food-Related Services That Are Provided
                       Without Charge to Identifiable Beneficiaries




                       and foreign countries may take reciprocal actions on U.S. imports or may
                       view fees as a trade barrier.

                       To be in compliance with the General Agreement on Tariffs and Trade, the
                       United States could not charge for import inspections without charging for
                       similar domestic inspections. Currently, domestic inspections are provided
                       without charge.

                       An import user fee, when prorated across all imported meat and poultry
                       products, would not have a significant impact on consumers. For example,
                       if a user fee had been charged for the 2.6 billion pounds of imported meat,
                       poultry, and egg products FSIS reviewed in 1995 and the cost passed on to
                       the consumer, prices would increase an average of about one-half cent per
                       pound.


                       In accordance with the Federal Seed Act of 1939, AMS conducts an
AMS’ Seed Regulatory   enforcement program to ensure truthful labeling and fair competition in
Program                the seed industry. AMS conducts the program in cooperation with the
                       states, each of which has a state seed law with jurisdiction over sellers
                       within that state. To enforce the interstate provisions of the act, AMS has
                       cooperative agreements with the states. About 500 state inspectors are
                       authorized to inspect seeds subject to the act. Seed samples are routinely
                       drawn by state inspectors to monitor seeds sold commercially. AMS
                       received $1.17 million in fiscal year 1995 general fund appropriations for
                       the federal seed program. No user fees were charged.

                       States refer apparent infractions of the act to AMS for verification and
                       action. Based on the results of tests and investigations, AMS attempts to
                       resolve each case administratively by issuing “warning notices” or
                       assessing penalties. For cases that cannot be resolved administratively,
                       AMS will take appropriate legal action.


                       In 1987, AMS proposed charging user fees to fund the cost associated with
                       its seed program. AMS proposed charging each of the approximately 3,000
                       interstate seed shippers a license fee. The fee would be based on the dollar
                       value of seed sold. Currently, 37 states charge user fees for their intrastate
                       seed inspections.

                       Those in favor of user fees for the federal seed program argue that AMS
                       seed inspection activities benefit those involved in the interstate seed
                       business by ensuring fair competition and increasing the confidence of



                       Page 51                                        GAO/RCED-97-57 Food-Related Services
                        Appendix IV
                        Food-Related Services That Are Provided
                        Without Charge to Identifiable Beneficiaries




                        buyers in the quality of the product. Seed sellers also benefit from the
                        increased confidence that buyers have that the seeds they purchase are
                        properly labeled.

                        Those opposed to user fees for the program argue that seed inspections do
                        not provide a special benefit to industry that would justify a user fee. The
                        seed industry opposed the 1987 AMS user fee proposal, saying that the
                        public benefited from the program, not just the industry. The industry
                        continues to oppose user fees for this program because it believes that
                        user fees are not appropriate for a mandatory regulatory program.

                        A user fee to cover AMS’ fiscal year 1995 seed program funding of
                        $1.17 million would have equated to about $423 per seed shipper. If the
                        user fees were based on the dollar value of seed sold, the amount charged
                        smaller dealers would be less than the average, while the amount charged
                        larger dealers would be somewhat greater than the average.


                        GIPSAis responsible for administering the provisions of the Packers and
GIPSA’s Packers and     Stockyards Act of 1921. The act is aimed at ensuring fair business
Stockyards Activities   practices and competitive markets for livestock, meat, and poultry.

                        In fiscal year 1995, GIPSA spent about $11.7 million without reimbursement
                        on activities aimed at fostering fair and open competition, guarding against
                        deceptive and fraudulent practices, and providing payment protection in
                        the marketing of livestock, meat, and poultry. To accomplish these aims,
                        GIPSA investigates fraudulent practices in livestock marketing, such as false
                        weighing, manipulating weights and prices, switching of livestock, and
                        misrepresenting the source, origin, and health of livestock. GIPSA also
                        checks the accuracy of scales used for weighing livestock, meat, and
                        poultry and monitors the operation of scales to ensure that weighing is
                        done correctly. GIPSA’s payment protection provides for the livestock
                        seller’s financial security by providing protection against a buyer’s default
                        on payment of a contract.

                        Since fiscal year 1995, GIPSA has proposed license fees to fund the cost of
                        the Packers and Stockyards Administration. Under its proposal, all 24,125
                        packers, live poultry dealers, stockyard owners, market agencies and
                        dealers registered with GIPSA would be charged a license fee. Currently, the
                        Packers and Stockyards Act requires that (1) market agencies and dealers
                        register with GIPSA and (2) slaughterhouses, processing packers, and




                        Page 52                                        GAO/RCED-97-57 Food-Related Services
Appendix IV
Food-Related Services That Are Provided
Without Charge to Identifiable Beneficiaries




poultry operations doing over $500,000 worth of business a year file an
annual report with GIPSA.

Packers, stockyard owners, and others who are subject to GIPSA’s
regulation derive benefits because they are protected against deceptive
and fraudulent practices in the marketing of livestock, meat, and poultry.
In addition, livestock and poultry producers receive payment protection.
Thus, according to Circular A-25, a user fee would be justified.

AMS  charges a similar fee for its activities under the Perishable Agricultural
Commodities Act (PACA) of 1930.3 PACA promotes fair trading practices
in the marketing of fresh and frozen fruits and vegetables. The act
prohibits unfair and fraudulent practices in the industry and provides for
dispute resolution outside the civil court system. Sellers must provide the
quality and quantity of products specified in contracts, while buyers must
accept and promptly pay for products received in accordance with the
contract terms. The PACA program is funded primarily from license fees
paid annually by approximately 15,000 buyers and sellers, including
dealers, retailers, processors, and truckers. The amount each licensee pays
is based on the number of branches and business facilities owned. Fees
range from about $300 to $4,000.

The National Cattlemen’s Association, an industry association that
represents approximately 230,000 cattlemen, breeders, producers, and
feeders, opposes the imposition of license fees to cover the costs of
administering the Packers and Stockyards Act. The Association believes
that the companies that would be responsible for paying these fees accrue
no benefit from the program. Therefore, the Association argues that GIPSA’s
licensing activities should be publicly funded.

GIPSA has estimated that the annual licensing fees for a single business
operation subject to regulation under the Packers and Stockyards Act
would range from about $600 to $7,500. The amount of the fee would vary
based on the size of the firm. If license fees were passed on to the farmer,
rancher, or the consumer, the impact on meat and poultry prices would be
negligible, according to a GIPSA official.




3
USDA License Fees: Analysis of the Solvency and Users of the Perishable Agricultural Commodities
Act Program (GAO/T-RCED-95-135, Mar. 16, 1995).



Page 53                                                GAO/RCED-97-57 Food-Related Services
                         Appendix IV
                         Food-Related Services That Are Provided
                         Without Charge to Identifiable Beneficiaries




                         FDA is responsible for, among other things, the safety of the nation’s
FDA’s Compliance         domestically produced foods and animal drugs. The agency is also
Activities               responsible for ensuring that foods imported into this country meet the
                         same standards as domestic products. To carry out these responsibilities,
                         FDA conducts inspections at domestic food and animal drug plants and at
                         ports of entry. No user fees are charged for these services.


FDA’s Domestic           FDA is responsible for ensuring the safety of all foods sold in interstate
Compliance Inspections   commerce—except meat, poultry, and eggs, which are regulated by USDA.
                         FDA conducts a variety of regulatory compliance activities, including
                         (1) monitoring the conditions under which food is manufactured,
                         processed, packed, and stored by inspecting food establishments and
                         products; (2) collecting and conducting laboratory analysis of food
                         samples; and (3) investigating violations and initiating enforcement
                         actions when appropriate. FDA also investigates USDA referrals of illegal
                         drug residues found on meat and poultry and ensures that animal drugs
                         are manufactured in accordance with established procedures.

                         Domestic food-related compliance inspections were funded at about
                         $42.35 million in fiscal year 1995, and domestic animal drug compliance
                         activities received another $21.52 million; no user fees were charged. In a
                         recent report,4 we found that based on its 1994 operating plan, FDA
                         inspected food processing plants about once every 8 years. FDA inspects
                         animal drug facilities about once every 2 years.

                         Those favoring user fees for FDA’s regulatory oversight of food and animal
                         drugs argue that these activities benefit firms in these industries (1) by
                         ensuring the safety and effectiveness of their products, (2) increasing
                         consumer confidence in their products, (3) reducing their exposure to
                         liability, and (4) protecting them from unfair competition. A 1990 report by
                         the Department of Health and Human Services’ Inspector General stated,
                         “... user fees in the Food and Drug Administration, properly instituted,
                         represent a legitimate method to recover regulatory costs. Such fees
                         would be consistent with fee systems in other federal regulatory
                         environments.”5 In a 1991 report, the Inspector General recommended that




                         4
                         Food Safety: New Initiatives Would Fundamentally Alter the Existing System (GAO/RCED-96-81,
                         Mar. 27, 1996).
                         5
                          Implementing User Fees in the Food and Drug Administration: A Case Study, Department of Health
                         and Human Services, Office of Inspector General (July 1990).



                         Page 54                                                GAO/RCED-97-57 Food-Related Services
Appendix IV
Food-Related Services That Are Provided
Without Charge to Identifiable Beneficiaries




FDA collect an inspection user fee from all food firms, in part so that the
frequency of inspections could be increased.6

On the other hand, those opposed to user fees for FDA’s food-related
compliance activities argue that these activities do not provide specific
benefits to industry but protect the public and, therefore, are not
appropriate for user fees. In March 1995, an official representing the
Grocery Manufacturers of America, a trade association whose
membership comprises many of the largest food companies in America,
testified before the Subcommittee on Agriculture, House Committee on
Appropriations, that FDA inspection programs should continue to be
funded through appropriations, not user fees. Specifically, according to
the official, to require the food industry to pay for any form of government
regulation intended strictly to benefit the public is tantamount to a food
tax.

The Animal Health Institute, which represents animal drug manufacturers,
opposes user fees for FDA’s compliance activities related to animal drugs.
According to an Institute official, the Institute does not support user fees
for animal drug reviews, and any discussion of user fees for animal drugs
must begin with improving the review and approval process before
considering fees for other FDA activities related to animal drugs.

Arguably, any benefits that industry may derive from FDA compliance
inspections of food and animal drug firms are minimized by their
infrequency. Furthermore, it is difficult to justify charging a user fee for
infrequent FDA compliance inspections, so long as the meat, poultry, and
egg industries receive continuous or daily FSIS inspections without charge.

About 48,000 food firms are in FDA’s official inventory. To fully fund
domestic food compliance inspections in fiscal year 1995, each firm in the
official inventory would have had to pay, on average, a $900 annual fee. To
lessen the burden on smaller firms, a fee schedule could be developed that
would vary based on the size or economic value of the firm’s products.

There are about 4,700 animal drug firms in FDA’s official establishment
inventory. To fully fund animal drug compliance inspections in fiscal year
1995, each firm in the official inventory would have had to pay, on average,
a $4,600 annual fee. To lessen the burden on smaller firms, a fee schedule



6
 FDA Food Safety Inspection, Department of Health and Human Services, Office of Inspector General
(1991).



Page 55                                                GAO/RCED-97-57 Food-Related Services
                           Appendix IV
                           Food-Related Services That Are Provided
                           Without Charge to Identifiable Beneficiaries




                           could be developed that would vary based on the size or economic value
                           of the firm’s products.


FDA’s Import Inspections   All food products that are imported into the United States must meet the
                           same standards as domestic products. For example, foods must be safe to
                           eat and produced under sanitary conditions. However, rather than inspect
                           each shipment of imported food, FDA chooses samples to inspect. Most
                           food products are admitted into the United States without sampling. In
                           fiscal year 1995, FDA spent about $38.78 million inspecting imported foods.
                           No user fees were charged.

                           In its fiscal year 1993 budget, FDA proposed charging about $60 million in
                           user fees to fund inspections of imported products, including foods, drugs
                           and medical devices. In justifying its user fee proposal, FDA argued that
                           importers benefit from FDA’s activities through increased consumer
                           confidence in their products. In fiscal years 1996 and 1997 FDA again
                           proposed charging user fees to increase the effectiveness and efficiency of
                           its regulatory compliance program for imported products. Approximately
                           $15 million in user fees were proposed to be charged and used to help pay
                           for a computer system which would improve the processing and
                           monitoring of import entries. FDA argued that importers and brokers would
                           benefit from the new system through faster turnaround times, elimination
                           of large volumes of paperwork, and reduced costs of doing business.

                           Neither of these proposals for import user fees were approved by the
                           Congress. In rejecting the 1993 proposal, the Congress was concerned,
                           among other things, about the impact on FDA’s operations if the expected
                           user fee revenues did not materialize. In addition, opponents argue that
                           user fees on imports could (1) add to the cost of food for consumers,
                           (2) hinder food imports, which make up an increasing proportion of the
                           U.S. food supply, (3) pose an unfair burden on small businesses, which
                           import small lots of foods, and (4) be unfair if only those firms whose
                           products are sampled by FDA had to pay a user fee. The Association of
                           Food Industries, which represents nearly 200 companies in the food
                           import business, is opposed to user fees for FDA’s import inspection
                           activities because they are concerned that (1) fee revenues would not be
                           spent exclusively on improving the computer system that supports import
                           entries, (2) fees would rise each year and may continue indefinitely.

                           Finally, as we mentioned earlier, to be in compliance with the General
                           Agreement on Tariffs and Trade, the United States could not charge for the



                           Page 56                                        GAO/RCED-97-57 Food-Related Services
Appendix IV
Food-Related Services That Are Provided
Without Charge to Identifiable Beneficiaries




inspection of imported foods and food-related products without charging
for similar domestic inspections. Currently, domestic inspections are
provided without charge.

FDA has stated that charging an import fee would be relatively simple.
According to FDA, all entries would be charged, regardless of whether they
were sampled, and a schedule could be established to take into account
the range of values and size of the import lots. Charging user fees for FDA’s
food import inspections should have a minimal impact on the cost of
imported foods. FDA’s funding for food import inspections represented less
than 0.2 percent of the value of food-related imports in fiscal year 1995.




Page 57                                        GAO/RCED-97-57 Food-Related Services
Appendix V

Comments From the Department of
Commerce




             Page 58        GAO/RCED-97-57 Food-Related Services
Appendix V
Comments From the Department of
Commerce




Page 59                           GAO/RCED-97-57 Food-Related Services
Appendix V
Comments From the Department of
Commerce




Page 60                           GAO/RCED-97-57 Food-Related Services
Appendix V
Comments From the Department of
Commerce




Page 61                           GAO/RCED-97-57 Food-Related Services
Appendix VI

Objectives, Scope, and Methodology


              To identify and evaluate opportunities for increasing the share of program
              funding paid for by beneficiaries of food-related services, we identified
              (1) the types of food-related services provided by federal agencies, (2) the
              extent to which beneficiaries currently pay for such services through user
              fees, and (3) potential opportunities for recovering more of the service
              costs through user fees, as well as arguments for and against doing so.

              To identify the types of food-related services provided by federal agencies,
              we identified the principal federal agencies—Agricultural Marketing
              Service; Animal and Plant Health Inspection Service; Food and Drug
              Administration; Food Safety and Inspection Service; Grain Inspection,
              Packers and Stockyards Administration; and National Marine Fisheries
              Service—that provide food-related services. Some other agencies may also
              provide limited amounts of food-related services but we excluded them
              from our review. From each agency, we obtained and reviewed
              programmatic and budget information on the food-related services they
              provide. In addition, we met with agency officials to discuss the type of
              food-related services they provide and the beneficiaries of these services.
              We also reviewed information on food-related services from our previous
              reports and those of inspectors general.

              To identify the extent to which beneficiaries pay for food-related services
              through user fees we asked the agencies to provide user fee and
              appropriations funding data for their food-related activities. We did not
              verify the accuracy of these data. In addition, we obtained and reviewed
              the agencies’ budget documents and met with agency officials to discuss
              the degree to which program activities were funded through user fees.

              To identify potential opportunities for recovering more of the service costs
              through user fees, as well as arguments for and against doing so, we began
              by examining the programs that either charged partial user fees or no user
              fees. We then judgmentally selected those programs where there
              appeared, in comparison to other programs, to be inconsistencies in user
              charges or where there appeared to be private beneficiaries of the
              services. We did not review all of the food-related services at the six
              agencies for which user fees may be appropriate.

              We met with Office of Management and Budget and agency officials to
              discuss the agencies’ annual budget submissions and identify services that
              have been proposed as appropriate for user fees in the past. We also
              discussed with OMB officials their Circular A-25, which provided the
              principal criteria for identifying opportunities for charging user fees to



              Page 62                                    GAO/RCED-97-57 Food-Related Services
Appendix VI
Objectives, Scope, and Methodology




beneficiaries of federal services. To identify the arguments in favor of and
opposed to user fees, we met with agency officials and representatives of
industry groups that would be affected by additional user fees. We also
reviewed agency user fees proposals, congressional reports on agency
appropriations, and industry position papers on user fees.

Our work was conducted between April 1996 and January 1997 in
accordance with generally accepted government auditing standards.




Page 63                                    GAO/RCED-97-57 Food-Related Services
Appendix VII

Major Contributors to This Report


               Keith W. Oleson, Assistant Director
               Stephen D. Secrist, Project Leader
               Denis P. Dunphy
               LaSonya R. Roberts
               Jay L. Scott
               Jonathan M. Silverman
               Oliver H. Easterwood




(150917)       Page 64                               GAO/RCED-97-57 Food-Related Services
Ordering Information

The first copy of each GAO report and testimony is free.
Additional copies are $2 each. Orders should be sent to the
following address, accompanied by a check or money order
made out to the Superintendent of Documents, when
necessary. VISA and MasterCard credit cards are accepted, also.
Orders for 100 or more copies to be mailed to a single address
are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office
P.O. Box 6015
Gaithersburg, MD 20884-6015

or visit:

Room 1100
700 4th St. NW (corner of 4th and G Sts. NW)
U.S. General Accounting Office
Washington, DC

Orders may also be placed by calling (202) 512-6000
or by using fax number (301) 258-4066, or TDD (301) 413-0006.

Each day, GAO issues a list of newly available reports and
testimony. To receive facsimile copies of the daily list or any
list from the past 30 days, please call (202) 512-6000 using a
touchtone phone. A recorded menu will provide information on
how to obtain these lists.

For information on how to access GAO reports on the INTERNET,
send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov




PRINTED ON    RECYCLED PAPER
United States                       Bulk Rate
General Accounting Office      Postage & Fees Paid
Washington, D.C. 20548-0001           GAO
                                 Permit No. G100
Official Business
Penalty for Private Use $300

Address Correction Requested