NSAC's Blog

Final Budget Deal Raises Spending Caps and Reforms Crop Insurance: Will Reforms Stand?

October 30, 2015

Shortly after 3am on Friday, October 30, the Senate passed a final budget deal for fiscal years (FY) 2016 and 2017, which the House passed on Wednesday. The President is expected to sign the bill shortly.

The agreement suspends the U.S. borrowing cap (also known as the debt limit) until March 15, 2017. The borrowing cap would kick in early next month, if Congress were to fail to pass the agreed upon budget deal, putting the nation in default on paying its debt for past spending decisions.

In addition to suspending the debt limit, the budget agreement raises overall spending caps for both domestic discretionary spending and defense discretionary spending. For domestic (non-defense) discretionary spending, caps would increase by $25 billion in FY 2016 and $15 billion in FY 2017. By comparison, the deal increases defense spending by $41 billion in FY 2016 and $31 billion in FY 2017, including funding for what is known as the Overseas Contingency Operation (OCO) account that functions as an off-budget “emergency” mechanism to pay for war-related spending.

For detailed information about the offsets used to pay for the increased spending caps, visit our earlier post.

Will Congress Reverse the Budget Deal in Appropriations?

As we explained in our previous post, the budget deal passed by both the House and the Senate made changes to the crop insurance program to offset some of the increased discretionary spending.

The first change waives a provision of the 2014 Farm Bill inserted in the dark of night that prevents USDA from obtaining any savings from a renegotiation of the Standard Reinsurance Agreement (SRA) and requires USDA to renegotiate the SRA by the end of 2016. The SRA governs all aspects of the relationship between the federal government and the crop insurance companies that administer the policies. That 2014 Farm Bill provision locked in the status quo target rate of return for crop insurance companies and allowed them to pocket any savings obtained through increased efficiencies in the crop insurance delivery system rather than sharing them with the taxpayers that subsidize their businesses.

The other provision lowers the target rate of return for crop insurance companies under the SRA from 14 percent to 8.9 percent. President Obama proposed a smaller cut from 14 percent to 12 percent as part of several past budgets.

These two changes generate over $3 billion in savings, savings that Congress would need to find elsewhere if it were to reverse the reforms agreed to in budget deal. The leaders of the House and Senate Agriculture Committees have called for the agreement to be torpedoed in upcoming appropriations legislation, which Congress must pass before December 11 to avoid a government shutdown.

If the final government funding bill to be completed in December includes budget savings from the farm bill, NSAC supports the notion, put forth by the Republican and Democratic leadership that produced the new budget deal, that the savings should come from the crop insurance subsidy program. If the $3 billion in savings can be drawn from a non-farm bill funding source, great. If the $3 billion can simply be ignored and not offset, fine. But if the $3 billion cut needs to happen now that the budget deal is being signed into law, and if it needs to come from farm bill spending, crop insurance subsidies are the right choice.

Why?, despite all the noise that the insurance industry is making over the reduction in the target rate of return for crop insurance companies, the rate of return has only an indirect bearing on how much money crop insurance companies make. First, it is important to clarify that the target rate of return is just that, a target; it is not a cap. In 2009, for example, the reasonable rate of return was 10.7 percent – but actual rate of return for crop insurance companies was 26.4 percent. In 2007, the reasonable rate was 11.7 percent, but the companies return rate was 26.3 percent and in 2010, the actual rate of return was 32 percent! See this chart for a comparison of the target rate of return to the actual rate of return between 1990 and 2009.

In 2012, with a 14 percent target rate of return, the insurance companies lost money due to severe drought and big payouts. In short, the target rate is important as a guide, and, for better or for worse, is important for budgetary scoring reasons, but has little impact on how much money the insurance companies actually make. That being said, there are nonetheless other ways of improving the crop insurance system at lower cost than a sole focus on target rates of return.

Additionally, all the major spending titles of the farm bill took major cuts in the writing of the 2014 Farm Bill with the sole exception of the crop insurance title, which actually received a nearly $6 billion increase. The bill as a whole, counting annual automatic budget cuts known as sequestration (which affect all other farm bill agricultural titles but have no effect at all on crop insurance subsidies), saved a net $23 billion, meaning the other titles had to cover not only that $23 billion but also the $6 billion increase for crop insurance subsidies. With crop insurance subsidies now accounting for nearly half of total farm bill agriculture spending, it by necessity if nothing else needs to be part of the answer.

The Road Ahead

Reversing the reforms agreed to in the budget deal would cost slightly over $3 billion. If the reforms are to be reversed in an omnibus appropriations package later this year, Congress will need to come up with a $3 billion offset. If they can do that through tax expenditure or direct spending reductions outside of the farm bill, more power to them. If not, our view is clear: there are positive reforms that can be made in the crop insurance subsidy arena that will benefit family farms and the environment that should be pursued if in the final analysis agriculture must pay for the cut. Equally clear, NSAC and our partners across the country will vigorously oppose any attempt to target SNAP, conservation, renewable energy, or specialty crops to foot the bill for nullifying the crop insurance reforms agreed to by the House and Senate this week in the budget deal.


Categories: Budget and Appropriations, Commodity, Crop Insurance & Credit Programs

One response to “Final Budget Deal Raises Spending Caps and Reforms Crop Insurance: Will Reforms Stand?”

  1. HERB PUTZ says:

    Thks for your information on the ROI of the insurance providers. It is unbelievable that the insurance provider are granted by USDA RMA such great return on investment when the financial industry has only an average ROI of 6% . Are these RMA people incompetent to grant these types of return? We farmers have regrettable an ROI of MINUS 14 to 20%. and we do all the work and take all the risks (weather related growing risk, financial risk) Thanks