oversight

Roles, Cost, and Criteria for Assessing Agriculture Disaster Assistance Programs Between 1980 and 1988

Published by the Government Accountability Office on 1990-03-06.

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

                   United   States General       Accounting   Office
                   Testimony
GAO

For Release         Roles, Cost, and Criteria   for Assessing Agriculture
Expected at         Disaster Assistance  Programs Between 1980 and 1988
2 P-m. EST
March 6, 1990




                     Statement of
                     John W. Harman, Director, Food and
                       Agriculture Issues
                     Resources, Ccmnunity, and lkoncnnic
                       Development Division

                     Before the
                     Subconxnittee on Agricultural        Production
                       and Stabilization        of Prices
                     Senate Ccmnittee on
                       Agriculture,     Nutrition     and Forestry
                     United States Senate




                   <,:+I --pQQ   i    *.   ‘-’
GAO/T-RCED-90-37
                                                                       GAO Form 160 (12/87)
Mr. Chairman            and Members of the                   Subcommittee:


          We are pleased              to be here            today       to discuss            the      federal
government's            responses          to natural             disasters         affecting            American
agriculture           during     the       1980s.          Our testimony               will       address          (1)      the
Department          of Agriculture's                 (USDA) role            in providing                agricultural
disaster       assistance             since       1980,      including          the      cost        of providing
this      assistance,          and (2)          criteria          for     assessing           the      federal           role     in
providing        disaster            assistance            to farmers          and how well                  current
programs       meet these             criteria.             My statement            today           is primarily
based on a GAO report                     issued       in September             1989.1


          In summary,          USDA has provided                    disaster          assistance              to   farmers
through       direct       cash payments,                  subsidized          emergency             loans,        and a
crop      insurance        program.             Between        fiscal       years        1980 and 1988,                   the
federal       government             has incurred            costs        of approximately                    $17.6
billion       in support             of these        programs:             $6.9       billion          for     direct           cash
payments,           $6.4   billion         for     disaster             emergency        loans,         and $4.3
billion       for      crop    insurance.


          In developing              criteria        for     determining              the       best    way to provide
disaster        assistance,             we relied           on two basic            principles--equity                          and
efficiency.             Under        an equitable            program,          disaster             victims        should         be
treated       consistently              over      time.        With       an efficient               program,            costs


'Disaster           Assistance:            Crop Insurance Can Provide                               Assistance            More
Effectively           Than Other           Programs (GAO/RCED-89-211,                               Sept. 20,            1989).
                                                              1
should         be    minimized.                On this            basis,       we identified               eight       criteria
that     should          be considered                 in devising              an effective               disaster
assistance              program.


         Application              of our         criteria              to the          three     existing          programs
shows that              crop     insurance             satisfies             more criteria               than       the direct
payments            or emergency               loan         programs.            Specifically,               we found         that
crop     insurance              would      satisfy                3 of the       criteria,           while      direct
payments            would       satisfy         1,     and emergency                   loans     none.        We also         found
that     if      some     program          characteristics                     were changed,               crop      insurance
could         satisfy          7 of our criteria,                      and the direct                payments          and
emergency            loan       programs         4.


         In concluding                  that     crop             insurance        is a better             way of providing
disaster            assistance            than        either          the     direct       payment         or emergency
loan     programs,              we believe                 that     the real           effectiveness             of the
program          cannot         be fully         determined                 as long          as it    has the
disadvantage                of competing                   with     the other           disaster         assistance
programs.               Consequently,                 if      the Congress              chooses       to rely          on crop
insurance            as the primary                   method          of providing              disaster           assistance,
it     should        prevent        other        disaster                 assistance           programs         from     competing
with     it.




                                                                      2
FEDERAL ROLE AND COSTS IN PROVIDING AGRICULTURE
DISASTER ASSISTANCE BETWEEN 1980                              AND 1988


         Let    me now briefly                discuss        the     federal        role      and costs           in
providing         agriculture           disaster         assistance             since        1980.


         Throughout            the    198Os,      USDA has been                responsible           for
administering             three       types     of disaster               assistance          programs--direct
cash payments,              subsidized          loans,        and subsidized                 insurance.            Each of
these     programs          helps      farmers        deal        with     a loss       of    income       if     their
crops     are damaged or destroyed                       by natural             causes.



         Before         1980,     USDA provided              disaster          assistance           mainly        through
direct         cash payments           and loans.             New legislation                 was enacted               in
1980     that     greatly         expanded        the    scope           and availability             of crop
insurance.2              At the       time,     the     Congress           believed          that    an expanded
crop     insurance          program       covering           more crops            and a larger            part         of the
country         would     alleviate           the need for               expensive,          ad hoc disaster
assistance         programs.


         Despite         the     expanded       scope        and availability                 of crop
insurance,         the Congress               has continued               to provide          disaster
assistance         to farmers            through        direct           payment      and emergency               loan
programs         during         the   1980s because                crop     insurance         participation


2The Federal             Crop Insurance            Act       of     1980 (P-L.          96-365,        Sept.           26,
1980).

                                                             3
rates      have remained               relatively             low.3          Low participation                          rates,        in
turn,      have encouraged                the Congress                   to establish                 ad hoc disaster
assistance          programs,           which         further            undermined              crop       insurance
participation.                This      cycle         of initially                 low participation                          rates
leading          to competing           programs,             which        further              discouraged               farmers
from purchasing               crop       insurance,             limited            the program's                      effectiveness
and led          us to today's            dilemma            of providing                 competing              disaster
assistance           programs.


          From 1980         through           1988,      USDA spent                approximately                      $17.6      billion
to support           the    direct        payment,            emergency                loan,         and crop            insurance
programs.            As indicated               in chart            1,    total         costs         for       all      three
programs          have increased               every         year        since         1984.          Chart           2 shows the
costs      for     each of the            three         programs           for         fiscal         years           1980     through
1988.



          Direct      payments           have cost            a total             of    $6.9         billion,            reaching
peaks      of $1.4         billion        in     1981        and $4 billion                     in     1988       as a result               of
especially           severe          droughts         in those            years.            The costs                 of the
Disaster          Assistance           Act      of    1988,4          which        include             1989       outlays,            are
included           in chart          2 under         costs      for       fiscal          year         1988.


3Since 1980, the amount of eligible            acres enrolled    in the program
has risen from 9.6 percent       in 1980 to 24.5 percent         in 1988, well
below the SO-percent   target      established      for the program in 1980.
In response to the severity        of the 1988 drought        and crop insurance
purchase requirements,    participation         rates rose to about 40 percent
in 1989.

4P.L.      100-387,         Aug.        11,     1988.

                                                                4
        USDA's emergency                  loan      program           costs      were $6.4          billion        from
1980    through          1988 and have been increasing                              steadily          throughout           the
decade.         Specifically,                emergency           loan      program         costs     have risen            from
$245 million             in     1980 to over            $1.6         billion       in    1988.       Although         most
of the       total       costs      have been due to                    interest         subsidies,           an
increasing            part     of the        rise     in costs            has been due to rapidly
increasing            loan     defaults          leading          to debt        write-offs.


        The federal              share       of crop         insurance           costs      since       1980 is       about
$4.3    billion.              As was the            case for          other      forms      of disaster
assistance,            the      federal       costs        for       supporting          crop      insurance        also
increased            during      the decade.               Total        government          contributions             for
the    crop         insurance       program          increased            from     $28 million           in    1980       to
$1.2      billion        in     1988.



CRITERIA            FOR ASSESSING CURRENT
DISASTER ASSISTANCE PROGRAMS


          Now, I shall             briefly          discuss          our criteria           for     assessing
federal        disaster          assistance           programs            to     farmers        and how well
current        programs          meet these           criteria.


          In developing             these        criteria,             we have taken              the position            that
the policy            principles          of equity              and efficiency             are essential
elements            of any desirable                disaster           assistance          program.           These

                                                                 5
principles             suggest         that       an equitable            disaster         assistance         policy
ensures         that      aid       is provided           consistently             to victims           suffering             from
similar         losses         over       time.       An efficient            disaster           assistance         policy
ensures         that      benefits            are provided             at the      lowest        possible         cost        to
government             and to society                as a whole.             In our opinion,                 an
equitable           and efficient                 disaster           assistance      policy        should


          (1)     determine            compensation              by the      amount of a farmer's                   loss,
          not by the             severity           of the       disaster,


          (2) provide               similar         amounts       of assistance             to    farmers         suffering
          similar            amounts       of losses,


          (3)     not     provide          farmers        more        assistance       than       the    amount of
          their        disaster           losses,


          (4)     not        create       incentives          to encourage            farming        practices            that
          increase            the     likelihood          and extent          of losses,


          (5)     make the programs                    consistently             available         over      time     to
          allow        for      long-range           planning,


          (6)     help        farmers         withstand          and recover          from       the effects             of
          natural            disasters,


          (7)     provide           predictable           annual         costs,      and

                                                                 6
         (8)     meet         their       objectives               at the     lowest      possible            cost.


         Our analysis                 of how well             each of the             current        programs
satisfies          these         8 criteria             shows that            the     crop        insurance          program
satisfies          3, the         disaster         payments               program       satisfies            1, and the
emergency          loan        program        satisfies              none.          (See app.         I.)      If      some

program         characteristics                were changed,                  these      programs            could      satisfy
7, 4, and 4 criteria,                        respectively.


         Our first             criterion          is        that     the     amount      of disaster                assistance
provided          should         be    determined              by    the     amount      of a farmer's                 loss,       not
by the         severity          of the       disaster.                  Crop insurance             meets      this
criterion.              The direct            payment              and emergency             loan     programs              do not.
Ad hoc approaches                     to disaster              assistance            policy,         in which          disaster
relief         programs          or program             terms           are established              after      the major
disaster          has occurred,               can result                 in different             treatment           for
similarly          affected            disaster             victims.          In contrast,              the     terms         of
compensation              under        crop     insurance                are determined             before          a disaster
occurs         and,     therefore,            crop          insurance         provides            farmers      equitable
assistance            more consistently.


         Our      second         criterion             is    that        disaster       assistance            programs
should         provide          similar       amounts              of assistance             to     farmers         suffering
from     similar          amounts           of loss.               None of the programs                     meet this
criterion.              All      three       programs              provide      some      disaster           benefits

                                                                    7
indirectly           through         the     tax      code,      primarily            as deductions             to      income.
Because       the value           of these            deductions         is higher             for      taxpayers          in
higher       tax     brackets          than     for     taxpayers             in lower         tax      brackets,
similarly           affected         disaster          victims        may obtain              different         levels          of
total       assistance          from        a given         program      if     they      are        in different             tax
brackets.            Because         emergency          loan       recipients           can deduct             their
entire       disaster          loss,        and direct           payment        and insurance                 recipients
cannot,       tax      benefits           under       the emergency             loan      program            may be more
substantial            than      under        the other          two programs.


         Our third            criterion            is that       disaster         assistance              programs
should       not provide              farmers         more assistance                 than     the      amount         of their
disaster           losses.        None of the programs                        meet this          criterion,             but
they     could       with      program         changes.5            Farmers           in all         three     programs
may receive            disaster            assistance          on the         basis     of county             average
production           data,       which        can be higher             than      their         actual        production
histories.             Therefore,             under      some circumstances,                     farmers         can be
compensated            for     more than            their      losses         under     all      three        programs.


         Criter       ion four         is that         disaster         assistance             programs          should          not
create       incentives              to encourage             farming         practices          that        increase           the
likelihood            and extent            of losses.             None of these               programs          meet this
criterion,           but      they     could        come closer          to meeting              the      criterion
with     program        changes.              Subsidized           disaster           assistance             programs

51n the following                 discussion,               program changes needed for                           programs
to meet criteria                 are identified                as footnotes in appendix                          I.

                                                               8
discourage              farmers          from          taking       risk-reducing                measures          because,            with
subsidies,               farmers         may be able                to obtain            disaster          assistance             that
provides              nearly         complete           protection               at a cost         lower      than
prevention.                   Generally,               the more a program                      is subsidized,              the        less
likely          it     is     that      farmers           will      try        to reduce         risks.        To the            extent
that      all         three      programs              are subsidized,                  they     do not meet this
criterion.


          Criterion              five      is      that        disaster             assistance        programs            should         be
consistently                  available            over          time     to allow         for     long-range             planning.
Crop insurance                   meets          this      criterion.                 The direct           payment         and
emergency              loan      programs              do not.            As other         business         managers,
farmers              must make decisions                         about       risk     and the extent               of protection
their        enterprise                requires           from          events       beyond       their     control.              For
example,              the     availability                of direct              payment         and emergency                 loan
programs              has varied           significantly                     over     time,       making      it     difficult
for      farmers            to develop             risk          management           plans.         In contrast,                crop
insurance              has provided                disaster              assistance            more reliably.                   Once a
crop      insurance              program           has been established                          in a county,             it     has
remained              available           for      farmers              in that       county       year     after         year.


          Criterion              six      is     that         disaster           assistance          programs          should          help
farmers              withstand          and recover                 from       the    effects        of natural
disasters.                  Crop insurance                    and the disaster                   payment      program            meet
this      criterion.                   The emergency                    loan     program         does not meet this
criterion,               but     it     could          with       program           changes.         Simply        put,         disaster

                                                                         9
assistance           experience              in the           1980s indicates                       that         cash assistance,
in the        form     of direct             payments              or insurance                    indemnity         payments,
helps       farmers         recover          better           from        natural             disasters            than     assistance
in the        form     of loans.                 Loan programs                   do not provide                    farmers            any of
their       expected         income          (unless              the     loan         is     forgiven)            and increase
farmers'        debt        burdens,             which       makes it              difficult               for     some farmers             to
obtain        financing            for      normal          operations                 and to recover                    from     future
disasters.


         Criterion           seven          is      that      disaster                assistance            programs             should
have predictable                   annual           costs.              Crop insurance                    does not meet this
criterion,            but    it     could           with      program            changes.                 The direct             payment
and emergency               loan         programs           cannot          meet this               criterion.              costs
could       be made more predictable                               if     the         programs            were managed in a
way in which            program             costs          are determined                     in anticipation                    of
catastrophic            events.              Neither              the direct                 assistance            nor emergency
loan     programs           have predictable                       costs.              And although                crop         insurance
was established                   to operate               this         way,     it     also        does not have
predictable            costs        because              in only           about        one-half            of the         current
program        do policy            premiums               reflect          the        true        risk     of written
policies.


         Our last           criterion               is     that         disaster             assistance            programs            should
meet their            objectives              at the          lowest           possible             cost.          None of the
three        programs        meet this               criterion,                but          they    could         with     program
changes.             As noted            earlier,            disaster            assistance                programs             can meet

                                                                     10
their       objectives          at lower              costs        by incorporating               incentives         to
reduce       risky       farm practices.                      However,          subsidized         disaster
assistance           programs           discourage                farmers       from    taking       risk-reducing
measures.            Therefore,            none of the                  three    programs         fully     meet this
criterion         because         all         are subsidized.


         In addition,             offering              farmers           more than       one form         of disaster
assistance,             as in     1986 and 1988,                    increases          the probability              that
USDA would           spend more for                   disaster            assistance        than     if    only     one form
of assistance              were available                   to a farmer.               For example,            more could
be spent         when ad hoc direct                       payment          programs       provide         crop
insurance         policy        holders          additional                benefits       so they         are not
penalized         for      purchasing                insurance.


OBSERVATIONS


         In concluding              that        crop        insurance           meets more of these                 criteria
than     other       forms      of assistance,                     we recognize           that      the    crop
insurance         program         has had a history                        of management            problems        that,      in
the     short     term,      makes it                difficult            to justify        the     current        crop
insurance         program         as the sole                    source     of disaster            assistance        to
farmers.          Consequently,                 if      the Congress              chooses        to rely         on the     crop
insurance         program         exclusively                    to provide        crop     disaster          assistance,
a transition             period         for     strengthening                   the program         probably        would      be
necessary.



                                                                   11
          Another        critical             problem          that      the     crop     insurance              program         faces
is that        it     has had to compete                       throughout          the      1980s         with     direct
assistance            and loan              programs,          which      have received              larger          amounts            of
federal        funds          and have had more attractive                               terms      for      farmers.
Consequently,                 its     participation               rates        have remained               low,      and it           has
never      developed                an actuarially              sound program.                We believe               a
restructuring              of the            agriculture              disaster          assistance           programs            that
removes        this      disadvantage                  could      help     determine             how effective                  the
crop      insurance            system         can be.


          We also         recognize             that     crop         insurance          is only          appropriate             for
compensating              victims            who lost          crops      owing         to a disaster.                 Other
forms      of assistance,                    including          alternative              insurance           programs,
would      be more suitable                     for     disaster-caused                  damages to              farming         and
ranching            infrastructure,                   such as the destruction                       of a barn,              to help
restore        the productive                   capacity          of a producer's                 enterprise.


          As you know,                Mr.      Chairman,          the Administration,                      in its          1990

Farm Bill            proposals,              recommends           replacing             the 'crop         insurance
program        with       a legislated                 disaster          assistance          program             similar         to
the     1988        and 1989          disaster          payment          programs.           The new program                     would
provide        direct          payments           for     individual             losses      whenever             county-wide
harvested            yields          fell      below      65    percent          of normal          yields         on a crop-
by-crop        basis.               We have not           studied         the Administration's                       proposal
in detail.              However,             because       the Administration's                      proposal              is
similar        to previous                  disaster       payment          programs,            we believe            crop

                                                                  12
insurance,     as we stated       earlier,      would     be      a more equitable     and
efficient     way to provide       disaster         assistance.


        Mr . Chairman,   this     concludes         my prepared       statement.      My
colleagues     and I will       be happy      to answer        any questions       you may
have.




                                               13
    chart      1:         Government     Costs   for   Agriculture   Disaster   Assistance
    Programs              (FY 1980-88)




                    7J     Dokh-                                                     .
                    bJ
                    b.0
                    II
                    Lo
                    41
                    49
                    +I
                    ¶J
                    ?J
                Lo
                11
                IJ
                01




.




                                                           14
    .
.




.




        chart     2:    Government     Costs  for Direct    Payment,   Emergency   Loan,   and
        Crcp    Insurance      Froarams    (FY 1980-88L




                                                       15
APPENDIXI                                                                          APPENDIXI


                        CHARTSHOWINGHBJWEU DIFFERENTFKIRMS
                       OFDISASTERASSISTANCEMEETTHE CRITERIA
                                     Crop             Disaster     mrgency
     Criteria                        Insurance        Payments     LOXIS


1. The munt of disaster                  Yes                No             No
   assistance provided should be
   determined by the amount of a
   farmer's loss, not by the
   severity of the disaster.
2.   Disaster assistance programs          No               No             No
     should provide similar
     amounts of assistance to
     farmers suffering similar
     amounts of losses.
3.   Disaster assistance programs    Depend+          Depend+      Dependsa
     should not provide farmers
     more assistance than the
     amOunt of their disaster
     losses.
4.   Disaster assistance programs    Depend           Dependsc     Depend
     should not create incentives
     to encourage farming
     practices that increase the
     likelihood and extent of
     losses.

%culd meet criterion    if actual prcduction    histories   were used exclusively.
bWculd meet criterion to the extent that programs were not subsidized.    For crap
insurance, incentives would be reduced to the extent that premiums reflected
actual risks and that subsidization of high-risk participants by low-risk
participants was minimized.
cWculd meet criterion to the extent that losses are only partially              vnsated
and that compensation for risky farming practices was prohibited.




                                           16
APPENDIXI                                                                            APPENDIXI


                                     Crop          Disaster           Rnergency
     Criteria                        Insurance     Payments           Loans
5.   Disaster assistance programs          Yes               NOa             No
     should be consistently
     available over time to allow
     for long-range planning.
6.   Disaster assistance programs,         Yes          Yes           Depend&
     in the way they prwide
     financial assistance, should
     help farmers withstand and
     recwer frc3n the effects of
     natural disasters.
7.   Disaster assistance programs    Dependsc                No              No
     should have predictable
     annual costs.
8.   Disaster assistance programs     DependSd     DepelXM            Dependsd
     should meet their objectives
     at the lowest possible cost.

qhe Emergency Feed Program and the Emergency Feed Assistance Programare
consistently available to prcducers to help them with long-range planning.
4leets criterion   only to the extent that loan principal         is forgiven.
CMeets criterion   to the extent that the program is run on an actuarially              sa2ti
basis.

(%culd meet criterion    to the extent that programs were not subsidized.    For crcp
insurance, incentives would be reduced to the extent that premiums reflected
actual   risks and that subsidization of high-risk participants  by low-risk
participants   was minimized.
eWculd meet criterion to the extent that losses are only partially                canpensated
and that compensation for risky farming practices was prohibited.




                                             17