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GAO Report: Reforms Needed to Prevent Farm Program Waste and Abuse

October 8, 2013

Today, Senator Chuck Grassley (R-IA) released a Government Accountability Office (GAO) report that highlights the ongoing, serious problems that exist in USDA’s implementation and enforcement of the farm bill’s payment limits for commodity production subsidies.  The report reaffirms earlier GAO findings that USDA lacks a measurable standard for determining eligibility criteria, and these loopholes allow individuals and entities with little to no involvement in a farming operation to receive payments.  This lax oversight results in an abuse of farm programs and a waste of taxpayer dollars.

As discussed below, the abuse highlighted by the GAO is remedied in the pending House and Senate farm bills under provisions championed by Senators Grassley and Tim Johnson (D-SD) and Representative Jeff Fortenberry (R-NE).

In order to be eligible for farm program payments, an individual or entity must be “actively engaged in farming.”  Under current rules, “actively engaged” means that the entity or individual provides the farming operation with significant input contributions of capital, land, or equipment, as well as a significant contribution of services of personal labor, active personal management, or a combination of the two.

The greatest difficulties arise when USDA’s Farm Service Agency (FSA) conducts compliance reviews and must determine whether an individual or entity is providing a “significant contribution” of “active personal management” because, as the report notes, the greatest abuses occur when entities or individuals claim contributions in active personal management only, and not farm labor.

What Constitutes Active Personal Management?

The definition of “active personal management” is over-broad and easily satisfied. This makes it possible for a single farming operation to claim eligibility for multiple individuals that are only minimally involved in the farming operation and may even live hundreds of miles away.

Unsurprisingly, general partnerships, which can receive a payment amount up to the limit for each eligible member, have the highest percentage of members that receive payments for “active personal management” only and received almost half of all farm program payments made to business entities in 2012.

In Indiana, for example, a general partnership with 11 members (comprised of 7 corporations and 4 individuals) received $376,610 in payments in 2012 without a single member claiming a significant contribution of personal labor.  The same was true of an operation in Louisiana that received $651,910 in 2012 based solely on 16 limited liability corporations being declared eligible based on management alone, with no one qualifying as a working farmer.

What Constitutes a Significant Contribution?

There is no objective or measurable standard to determine whether a contribution of active personal management is “significant.”  As a result, compliance reviewers use subjective criteria and enforcement is lax to non-existent.

Another example in the report pointed to a farming operation in the Midwest that received $400,000 in payments in 2012.  Organized as a general partnership, it included as members 6 corporations and 11 family members, one of whom had been receiving payments since the age of 16.

Not only is it difficult for FSA to consistently apply such subjective criteria, but FSA compliance review determinations are subject to appeal.  FSA compliance reviews consist of a document audit and then an interview with the members, who provide FSA with a narrative or characterization of their management contribution.  According to the report, FSA has found a claimant’s characterization of their contribution in interviews and statements to change over time, and these changes have led the USDA National Appeals Division to overturn FSA’s initial determination that a contribution is not significant.

Reforms Needed

As the report states:

Without modification of the definition of management contributions to qualify for being actively engaged in farming, the reliability and integrity of FSA’s compliance reviews will continue to be uncertain, and the federal government risks distribution millions of dollars to individuals who may have little actual involvement in farming operations at a time of fiscal constraints. (emphasis added)

Despite the well-documented failings in oversight, and the fact that USDA does not require new legislation to modify its regulatory definitions, USDA has made it clear it has no intention of doing so without direction from Congress.  In the 2008 Farm Bill, Congress directed USDA to review, revise, and re-issue its actively engaged in farming rules, which it did, but without any real reform.

Farm Bill Solutions

Fortunately, and as the GAO report notes, both the House and Senate versions of the farm bill would make these needed reforms by closing the loopholes in the current regulatory scheme.  The Farm Program Integrity Act, originally introduced by Senators Grassley, Johnson, Enzi (R-WY), and Brown (D-OH) and by Representative Jeff Fortenberry (R-NE) and now included in both versions of the farm bill, would remove “active personal management” as a way to satisfy the “actively engaged in farming” eligibility criteria.  Instead, the new farm bill language would require each member of a farming operation to make a significant contribution of personal labor, with the exception of one farm manager per operation.

In a press release today, NSAC Policy Director Ferd Hoefner made the following statement:

Both the House and Senate have now spoken. In identical provisions, the pending House and Senate five-year farm bills at long last put an end to the management loophole that has made a mockery of the payment limit law and the important public policy goals Congress had in creating the limits.  We urge Congress to complete the job of passing the farm bill, incorporating the historic reform in commodity program payment limits, and urge USDA to write implementing rules that this time prevent rather than invite waste, fraud, and abuse.

The report is still pending official public release, but a copy is available here.

NSAC’s press release is available here.





Categories: Commodity, Crop Insurance & Credit Programs, Farm Bill

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