59–616

106TH CONGRESS REPT. 106–300 " ! HOUSE OF REPRESENTATIVES 1st Session Part 2

AGRICULTURAL RISK PROTECTION ACT OF 1999

SEPTEMBER 22, 1999.—Committed to the Committee of the Whole House on the

State of the Union and ordered to be printed

Mr. COMBEST, from the Committee on Agriculture,

submitted the following

SUPPLEMENTAL REPORT

[To accompany H.R. 2559]

This supplemental report shows the cost estimate of the Congressional Budget Office with respect to the bill (H.R. 2559), as reported, which was not included in the report submitted by the

Committee on Agriculture on August 25, 1999 (H. Rept. 106–300).

This supplemental report is submitted in accordance with clause

3(a)(2) of Rule XIII of the Rules of the House of Representatives.

This supplemental report also contains additional report language to section 303 of the Section-by-Section Analysis to part 1 of

the report.

U.S. CONGRESS,

CONGRESSIONAL BUDGET OFFICE,

Washington, DC, August 9, 1999.

Hon. LARRY COMBEST,

Chairman, Committee on Agriculture,

U.S. House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 2559, the Agricultural

Risk Protection Act of 1999.

If you wish further details on this estimate, we will be pleased

to provide them. The CBO staff contact is Craig Jagger.

Sincerely,

BARRY B. ANDERSON

(For Dan L. Crippen, Director).

Enclosure.
2

H.R. 2559—Agricultural Risk Protection Act of 1999

Summary: H.R. 2559 would amend the Federal Crop Insurance

Act in a number of significant ways. First, it would increase premium subsidies to reduce the cost to producers of purchasing crop

insurance. The bill also would encourage development of and provide subsidies for privately developed crop insurance products. It

would make adjustments in how producers’ expected yields are calculated for purposes of determining crop insurance liability and

premium costs. In addition, H.R. 2559 would make a number of

other changes in crop insurance designed to improve the program’s

integrity and would change the administrative structure of the Department of Agriculture’s Risk Management Agency (RMA), which

oversees the program.

CBO estimates that enactment of H.R. 2559 would increase direct spending for federal crop insurance by $6.1 billion over the

2000–2004 period. Because the bill would affect direct spending,

pay-as-you-go procedures would apply. H.R. 2559 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would impose no costs

on state, local, or tribal governments.

Estimated cost to the Federal Government: The estimated budgetary impact of H.R. 2559 is summarized in Table 1. The costs of

this legislation fall within budget function 350 (agriculture).

TABLE 1.—ESTIMATED BUDGETARY IMPACT OF H.R. 2559, THE AGRICULTURAL RISK PROTECTION

ACT OF 1999

By fiscal year, in millions of dollars

1999 2000 2001 2002 2003 2004

DIRECT SPENDING

Crop Insurance Spending Under Current Law:

Estimated Budget Authority ............................................................ 1,699 1,565 1,522 1,580 1,647 1,725

Estimated Outlays ........................................................................... 1,667 1,618 1,558 1,551 1,612 1,685

Proposed Changes:

Estimated Budget Authority ............................................................ 0 1,080 1,366 1,435 1,512 1,684

Estimated Outlays ........................................................................... 0 471 1,191 1,394 1,467 1,583

Crop Insurance Spending Under H.R. 2559:

Estimated Budget Authority ............................................................ 1,699 2,645 2,888 3,015 3,159 3,409

Estimated Outlays ........................................................................... 1,667 2,089 2,749 2,945 3,079 3,268

BASIS OF ESTIMATE

The Federal Crop Insurance Corporation (FCIC) subsidizes the

cost of federal crop insurance, which makes indemnity payments to

insured producers who suffer yield or revenue losses. Producers receive premium subsidies that reduce their costs of purchasing such

insurance. Private insurance companies receive payments as compensation for their costs of selling and servicing crop insurance

policies for FCIC. These payments are based on the premiums

charged for the policies they sell. Private insurance companies also

share with FCIC the risk of gain and loss on the policies they underwrite. Because these risks are not shared proportionally, private

companies, in aggregate, earn underwriting gains in most years.
3

Premium subsidies

Much of the bill’s impact on direct spending would come from increases in premium subsidies. FCIC estimates a total premium cost

for each crop insurance policy based on expected losses in a given

year for that policy. The total premium cost for a policy depends

on a number of factors, including the level of crop insurance coverage chosen by the producer. Generally, crop insurance coverage

is the percent of expected crop production or value insured. For example, if a producer buys a yield loss insurance policy at the 65

percent coverage level, then 65 percent of expected production (as

determined by FCIC) is insured. If actual production is less than

65 percent of expected production, the producer receives an indemnity payment. Other things being equal, the total premium cost is

higher at higher coverage levels because losses occur more often at

those levels.

With FCIC’s premium subsidies, a producer pays only part of the

total premium cost and the government pays the rest. Under both

current law and H.R. 2559, the premium subsidy rate (the percent

of the total premium that is paid by the government) is higher at

lower insurance coverage levels and lower at higher insurance coverage levels. For example, the premium subsidy at the 50-percent

coverage level is 55 percent of the premium under current law; it

would rise to 67 percent of the premium under H.R. 2559. At the

65-percent coverage level, the premium subsidy is 41.7 percent of

the total premium under current law; it would be 59 percent under

H.R. 2559.

The outlay impact of higher premium subsidies depends on what

producers do with the extra subsidy dollars that they receive from

the government. Producers could simply maintain the same level of

crop insurance protection (which would be cheaper to purchase

under H.R. 2559) and use the extra subsidy dollars for other business or personal purposes. In that case, the only extra cost for federal crop insurance would be the higher premium subsidies on existing coverage.

Alternatively, producers could choose to buy more federal crop insurance because not only would their current coverage be cheaper

under H.R. 2559, but additional crop insurance protection would be

cheaper as well. They could buy more crop insurance protection on

the same acres or buy insurance for crops or acres that they currently do not insure. Because the government’s costs are based on

the amount of crop insurance sold, if producers buy more crop insurance, government costs will show further increases beyond those

directly caused by the higher premium subsidies.

Taking into account projected increases in insurance coverage,

CBO estimates that the changes in premium subsidy rates specified in H.R. 2559 would cost $345 million in fiscal year 2000, $4.2

billion over the 2000–2004 period, and $10.9 billion over the 2000–

2009 period, as shown in Table 2.
4

TABLE 2.—COMPONENTS OF THE ESTIMATED COSTS OF H.R. 2559

By fiscal year, in millions of dollars

2000 2001 2002 2003 2004 2000–

2004

2000–

2009

Change in Budget Authority ................................................................ 1,080 1,366 1,435 1,512 1,684 7,077 17,014

Change in Outlays:

Increase premium subsidy rates for all buy-up plans .............. 345 835 960 1,004 1,082 4,226 10,873

Adjust yields used for crop insurance calculations ................... 97 205 215 221 231 969 2,285

Additional changes to 508(h) current revenue products—Pay

full premium subsidy and reduce delivery expense costs .... 25 87 98 103 107 420 1,044

Pay full premium subsidy on other 508(h) products ................. 17 45 60 68 79 269 865

Expand RMA authority for pilot programs .................................. 2 4 5 5 6 22 57

Establish livestock insurance pilot program .............................. 0 9 25 35 47 116 391

Allow Coop CAT purchases and association licensing fees ...... 10 20 20 20 20 90 205

Make prevented planting an option and equalize across crops 1 2 2 2 2 9 20

Change income limits for the Non-Insured Assistance Program 0 2 3 3 3 11 26

Change double-cropping rules .................................................... ¥9 ¥19 ¥20 ¥21 ¥23 ¥92 ¥221

Promote new policies and research and development .............. 0 20 45 48 51 164 437

Reduce delivery expense and loss adjustment costs ................ ¥17 ¥19 ¥19 ¥21 ¥22 ¥98 ¥223

Total Change in Outlays .................................................... 471 1,191 1,394 1,467 1,583 6,106 15,759

Yield adjustments

The dollar amount of crop insurance that a producer is eligible

to buy depends in part on the expected yield for the producer’s

farm. Generally, FCIC considers the expected yield for a producer’s

farm to be the average of actual yields in previous years. An actual

yield that is very low can significantly lower the average yield,

thus reducing the amount of insurance that a producer can buy. In

addition, if a producer’s average yield is sufficiently below the

county average, the premium necessary to provide a given level of

insurance is higher.

H.R. 2559 would set a minimum yield for each year for each crop.

In years when the actual yield is below the minimum yield, the

minimum yield would be used to determine the average yield for

crop insurance calculations. Because this new yield would be higher than FCIC’s expected yield, a producer could buy a higher dollar

amount of crop insurance, and FCIC would expect to pay more indemnities. As a result, FCIC would need to set higher premiums,

but because of the premium subsidies, the government would bear

much of the cost. Because other crop insurance costs, such as reimbursements to private companies, are based on the amount of premiums charged, these costs would increase too. CBO estimates that

adopting the yield adjustment provisions of H.R. 2559 would cost

$97 million in fiscal year 2000, $969 million over the 2000–2004

period, and $2.3 billion over the 2000–2009 period.

Privately developed crop insurance products

Some of FCIC’s crop insurance products are developed by FCIC

while others are developed by private insurance companies under

section 508(h) of the Federal Crop Insurance Act. Currently, revenue insurance products developed by private insurance companies

receive premium subsidies that are lower than FCIC’s standard

yield insurance policies. H.R. 2559 would allow these revenue

products to receive the same premium subsidy. To partly offset the
5

cost, H.R. 2559 would reduce the payment made to private companies for selling and servicing these revenue insurance products.

Other privately developed insurance products are not eligible for

premium subsidies from FCIC and have been sold by private companies without any subsidies. H.R. 2559 would allow these policies

to receive subsidies from FCIC. CBO estimates that adopting these

provisions would cost $42 million in fiscal year 2000, $689 million

over the 2000–2004 period, and $1.9 billion over the 2000–2009 period.

Other provisions

The provisions discussed above account for about 95 percent of

the estimated costs of H.R. 2559. The bill would make a number

of other changes in crop insurance. Such changes include provisions

that would implement a limited livestock insurance program,

change rules as to when and how producers can plant a second

crop after a first crop either could not be planted or was planted

and failed, fund research on new crop policies and risk management products, allow cooperatives to pay the insurance fee for basic

insurance coverage, and reduce the rates at which crop insurance

companies are paid to sell and service insurance policies. CBO estimates that these additional provisions would save $13 million in

2000, but would cost $222 million over the 2000–2004 period and

$692 million over the 2000–2009 period.

Pay-as-you-go-considerations: The Balanced Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. The net changes in

outlays that are subject to pay-as-you-go procedures are shown in

the following table. For the purposes of enforcing pay-as-you-go

procedures, only the effects in the current year, the budget year,

and the succeeding four years are counted.

By fiscal year, in millions of dollars

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Changes in outlays ................................ 0 471 1,191 1,394 1,467 1,583 1,722 1,830 1,938 2,037 2,126

Changes in receipts ............................... Not applicable

Intergovernmental and private-sector impact: H.R. 2559 contains

no intergovernmental or private-sector mandates as defined in

UMRA and would impose no costs on state, local, or tribal governments.

Estimate prepared by: Craig Jagger.

Estimate approved by: Robert A. Sunshine, Deputy Assistant Director for Budget Analysis.

ADDITIONAL REPORT LANGUAGE TO SECTION 303

Sec. 303. Research and development, including contracts regarding

underserved commodities

In contracting for the research and development of new policies,

plans of insurance, and materials under this section the Committee

intends for the Corporation to prescribe its own procedures governing contracting without regard to federal acquisition regula-
6

tions. The Committee expects the procedures established will ensure contracts are entered into and completed so the policy, plan

of insurance, or material can be offered to producers in the next reinsurance year or in a timely manner. Furthermore, the Committee

expects the Corporation to consult with beneficiaries of the policy,

plan of insurance, or material to ensure that any research and development is carried out by an entity with expertise in the area.

Finally, the Committee expects that procedures established maximize the amount of funding actually available for research and development and minimize any overhead involved in complying with

such procedures.

Æ