Farm Programs: Direct Payments Should Be Reconsidered
Published: 2012-07-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Through one facet of the farm safety net, USDA provides farmers and other producers with fixed annual payments, called direct payments, based on their farms historical crop production. Direct payments do not vary with crop prices or crop yields. In March 2011, GAO reported on observations and options regarding direct payments and suggested to Congress that they be eliminated or reduced. GAO was asked (1) to provide information regarding the geographic distribution and ownership characteristics of payment recipients, as well as the dollar amount of direct payments made for farms with acreage that qualified, and the amount and types of crops grown on such acreage for years 2003 to 2011, and (2) to examine whether direct payments are aligned with principles significant to integrity, effectiveness, and efficiency in farm bill programs. To conduct this work, GAO analyzed USDA data and interviewed agency officials.
section_title: What GAO Found
paragraphs: From 2003 through 2011, the U.S. Department of Agriculture (USDA) made more than $46 billion in direct payments to farmers and other producers. These producers planted varying percentages of acres that qualified for payments based on their historical planting yields and designated payment rates (qualifying acres). Cumulatively, USDA paid $10.6 billionalmost one-fourth of total direct payments made from 2003 through 2011to producers who did not, in a given year, grow the crop associated with their qualifying acres, which they are allowed to do. About 2,300 farms (0.15 percent of farms receiving direct payments) reported all their land as fallow, and producers did not plant any crops on this land for each year for the last 5 years, from 2007 through 2011; in 2011, these producers received almost $3 million in direct payments.
Direct payments generally do not align with the principles significant to integrity, effectiveness, and efficiency in farm bill programs that GAO identified in an April 2012 report. These payments align with the principle of being distinctive, in that they do not overlap or duplicate other farm programs. However, direct payments do not align with five other principles. Specifically, they do not align with the following principles:
Relevance : When the precursors to direct payments were first authorized in 1996 legislation, they were expected to be transitional, but subsequent legislation passed in 2002 and 2008 has continued these payments as direct payments. However, in April 2012, draft legislation for reauthorizing agricultural programs through 2017 proposed eliminating direct payments.
Targeting : Direct payments do not appropriately distribute benefits consistent with contemporary assessments of need. For example, they are concentrated among the largest recipients based on farm size and income; in 2011, the top 25 percent of payment recipients received 73 percent of direct payments.
Affordability : Direct payments may no longer be affordable given the United States current deficit and debt levels.
Effectiveness : Direct payments may have unintended consequences. Direct payments may have less potential than other farm programs to distort prices and production, but economic distortions can result from these payments. For example, GAO identified cases where direct payments support recipients who USDA officials said own farmland that is not economically viable in the absence of these payments.
Oversight : Oversight of direct payments is weak. With regard to oversight, USDA has not systematically reported on land that may no longer be eligible for direct payments because it has been converted to nonfarm uses, as required for annual reporting to Congress. In addition, GAO identified weaknesses in USDAs end-of-year compliance review process. For example, USDA conducts relatively few reviews and generally does not complete these reviews within expected time frames.
Continuing to provide payments that generally do not align with principles significant to integrity, effectiveness, and efficiency in farm bill programs raises questions about the purpose and need for direct payments.
section_title: What GAO Recommends
paragraphs: Congress should consider eliminating or reducing direct payments. GAO also recommends that USDA take four actions to improve its oversight of direct payments including developing a systematic process to report on land that may no longer be usable for agriculture, and considering ways to increase the number of cases selected for end-of-year reviews and completing these reviews in a timely manner. USDA generally agreed with two of GAOs recommendations and disagreed with two others, stating that it believes its current processes or practices are adequate. GAO continues to believe that it is important for USDA to take the recommended actions.

section_title: Letter
paragraphs: From 2006 through 2010, the U.S. Department of Agriculture (USDA)  spent about $13 billion annually on federal programs to support farm  income, assist farmers after disasters, and conserve natural resources.  Through one facet of this farm safety net, USDA provides farmers and  other producers with fixed annual payments—called direct payments— based on their farms’ historical crop production. USDA makes these  payments regardless of whether these producers grow crops, as long as  they and their farms meet certain eligibility criteria. Amounting to nearly  $5 billion annually since 2002, direct payments do not vary with crop  prices, crop yields, or producers’ incomes. Unlike other major farm  programs, which compensate farmers for declines in price or for lost  crops, direct payments go to farmers regardless of risk factors. Direct  payments were most recently authorized in the Food, Conservation, and  Energy Act of 2008 (2008 Farm Bill), and without future action, will expire  in September 2012. USDA’s Farm Service Agency (FSA) is responsible  for administering direct payments and for ensuring that recipients of such  payments meet eligibility criteria, and that payment limitations and other  applicable provisions are applied.
Office of Management and Budget, Fiscal Year 2013 Budget: Cutting Waste, Reducing  the Deficit, and Asking All To Pay Their Fair Share (Washington, D.C.: Feb. 13, 2012). still the second highest level on record. Moreover, according to USDA,  the top 5 earnings years for the past 3 decades have occurred since  2004, attesting to the recent profitability of farming. Furthermore, farmland  values, another measure of farm prosperity, increased by 85 percent from  2003 through 2011. Since August 2011, the trade associations of five  major crops for which the bulk of direct payments are made—corn,  cotton, wheat, rice, and soybeans—have stated that direct payments may  need to be eliminated in favor of other elements of the government- subsidized farm safety net. In addition, in our March 2011 report on  overlap and duplication in federal programs, we made several  observations regarding direct payments, and we noted that GAO and  others have proposed options to reduce or eliminate direct payments.
In April 2012, we identified certain principles as applicable to Congress’s  deliberations for the 2012 farm bill and significant to the integrity,  effectiveness, and efficiency of farm bill programs, such as direct  payments. program purpose, (2) distinctiveness, (3) targeting benefits, (4)  affordability, (5) effectiveness, and (6) oversight. See appendix II for the  list of principles and associated key questions.
GAO, Farm Bill: Issues to Consider for Reauthorization, GAO-12-338SP (Washington,  D.C.: Apr. 24, 2012). USDA’s Office of Inspector General issued a companion report using  these principles. See U.S. Department of Agriculture, Office of Inspector General, Farm  Bill: Issues to Consider for Reauthorization, 50099-0001-10 (Washington D.C.:   April 2012). to more than 170,000 deceased individuals. According to USDA officials,  since 2007, they have begun taking additional steps to verify that  payment recipients are alive, and if the payment is determined  inappropriate, recover it. We also reported, in April 2004, that USDA was  not effectively overseeing its farm program payments, including direct  payments. In particular, we reported that FSA did not review a valid  sample of producers’ farm operating plans to ensure compliance with  eligibility requirements and thus did not ensure that only eligible recipients  received payments. Moreover, we found that FSA’s reviews of these  plans were often completed late.management controls in response to our recommendations.
USDA has since implemented some  Because the expected reauthorization of the farm bill this year provides  an opportunity to reexamine direct payments, you asked us to review  them. In this context, this report (1) provides information on the  geographic distribution and ownership characteristics of payment  recipients, the dollar amounts of direct payments made for farms with  acreage that qualifies for such payments, and the amount and types of  crops grown on such acreage from 2003 through 2011 and (2) examines  whether direct payments are aligned with principles significant to integrity,  effectiveness, and efficiency in farm bill programs.
To conduct this work, we analyzed USDA data, interviewed agency  officials, and reviewed and updated our past work. Specifically, to provide  information about the ownership characteristics and geographic distribution  of payment recipients and determine the dollar amount of direct payments  made for farms with qualifying acreage, we obtained USDA data indicating  the number, amount, and recipient for direct payments made from program  years 2003 through 2011—that is, from the program’s first full year of  operation through the most recent year for which complete program data  are available. We also obtained and analyzed data detailing the acreage  of qualifying farms and the planting history for each farm for which direct  payments were made and other records pertaining to the share of  payments received by various individuals and entities. In particular, we  obtained data from USDA’s compliance share file that indicates how a  producer—whether an individual or an entity—is involved and whether they  own a particular farm field or area of land for which direct payments were  made. Producers report they either (1) own and operate the farm (“owner- operators”), (2) operate but do not own the farm (“tenants”), or (3) are an  owner of the farm (“other owners”). To assess the reliability of USDA’s  data, we (1) performed electronic testing of required data elements, (2)  reviewed existing information about the data and the system that produced  them, and (3) interviewed agency officials knowledgeable about the data.  We found these data to be sufficiently reliable for the purposes of this  report. To examine whether direct payments are aligned with principles  significant to integrity, effectiveness, and efficiency in farm bill programs,  we reviewed our previous work in the area—in particular our March 2011  report on overlap and duplication of federal programs, which discussed  observations regarding direct payments. We also reviewed our April 2012  report, which reviewed our recent work on farm bill programs and identified  the principles and associated key questions. These principles may not  represent all potential principles that could be considered. We collected  additional data where possible to determine how circumstances regarding  direct payments may have changed more recently and evaluated direct  payments according to the principles identified in our earlier work. We  spoke with officials in FSA headquarters, state, and county offices who are  responsible for ensuring that direct payment recipients meet requirements  for such payments. We also visited five selected FSA county offices located  in Arizona and Louisiana. We selected these county offices because FSA  data showed a relatively high number of end-of-year reviews of farming  operations in these counties. In addition, some of these counties had  experienced high levels of residential growth in recent years. During our  visits, we reviewed case files, including those of farming operations that  had undergone or were undergoing end-of-year reviews, and observed  some of these farms. Appendix I describes our objectives, scope, and  methodology in more detail.
We conducted this performance audit from August 2011 to June 2012 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Federal law mandates support for farmers through various programs,  including direct payments. USDA, through its Commodity Credit  Corporation (CCC), calculates direct payments using a formula that  factors in “base acres,” a measure of a farm’s crop production history  based on the number of acres planted on the farm during certain past  years. The term base acres refers to a farm’s average planted acreage of  specific crops during those years; the term does not refer to specific  physical acres on that farm. The direct payment formula uses a fixed  percentage of the average number of acres planted on the farm from  1998 through 2001 and multiplies that number by the farm’s historical  crop yield and a statutorily fixed payment rate. The percentage and  payment rates for each crop are specified in legislation, commonly  referred to as farm bills, passed by Congress roughly every 5 years. For  2009 through 2011, this percentage was set at 83 percent; for 2012, it  was set at 85 percent. Figure 1 illustrates the process for calculating a  producer’s direct payment.
Through this system, a producer’s direct payments are based on the  historical production of a particular crop. Moreover, producers have  almost complete flexibility in deciding which crops to plant, and they  receive payments as long as they meet eligibility criteria, even if they  decide to plant different crops or not plant crops at all. In years in which  they do not plant, however, the farm bill requires that the relevant land be  maintained in accordance with sound agricultural practices. For example,  producers must take steps to minimize the growth of weeds on the land.  Producers also are required to report planting information each year on  forms called acreage reports. The United States has classified direct  payments as meeting World Trade Organization rules for nontrade  distorting payments; direct payments are not tied to specific production or  prices, and they are generally deemed not to distort international  agricultural markets.
After learning of instances where farm payments were made to  individuals not involved in farming, Congress enacted the Agricultural  Reconciliation Act of 1987, commonly referred to as the Farm Program  Payments Integrity Act. The act, among other measures, sets eligibility  criteria to ensure that only individuals and entities “actively engaged in  farming” receive certain farm program payments. Specifically, according  to the 2008 Farm Bill, direct payments, Average Crop Revenue Election  (ACRE), and counter-cyclical payment recipients are required to be  actively engaged in farming. FSA is responsible for ensuring that direct  payment recipients meet program eligibility criteria. FSA carries out this  responsibility through its headquarters office, 50 state offices, and  approximately 2,200 county offices. Producers file with their local FSA  county office a farm operating plan in which they document the number of  recipients qualifying for payments, the name of each payment recipient,  and each recipient’s role in the farming operation and share of profits and  losses. Producers must update this plan when a change in their operation  occurs, such as a change in the farm’s ownership.
FSA reviews these plans to determine, among other things, the number of  recipients who qualify for payments and whether they are actively engaged  in farming. To be considered actively engaged in farming, an individual  recipient must make significant contributions to the farming operation in two  areas: (1) capital, land, or equipment and (2) personal labor or active  personal management. An entity, such as a corporation, limited  partnership, or trust is generally considered actively engaged in farming if  the entity separately makes a significant contribution of capital, land, or  equipment, and its members collectively make a significant contribution of  personal labor or active personal management to a farming operation. In  2010, FSA issued a rule stating that members of a legal entity are excepted  from the requirement to make contributions of active personal labor or  active person management if (1) at least 50 percent of the interest is held  by members that are providing active personal labor or active personal  management and (2) total payments, including direct payments, counter- cyclical payments, and ACRE payments are less than or equal to one  “payment limitation”—a statutorily set limit on the value of the payment  made to the producer(s). FSA’s regulations define active personal  management to include such tasks as arranging financing for the operation,  supervising the planting and harvesting of crops, and marketing crops. For  both individuals and entities, their contributions to the farming operation  must also be commensurate with their share of the farming operation’s  profits or losses.
To help oversee direct payments, FSA monitors farm operations’ land  usage through producers’ acreage reports, and at the end of the year it  conducts a detailed review of a sample of farm operating plans.  Specifically, FSA field offices compare selected plans against supporting  documentation to help monitor whether farming operations were  conducted in accordance with their plans. These end-of-year reviews  include an assessment of whether payment recipients met program  requirements. FSA selects its sample of farming operations for these  reviews on the basis of, among other criteria, the restructuring or  formation of a farming operation in the past year and the number of  farming operations in which an individual or legal entity is involved.  According to FSA officials, the selection process emphasizes farm  operations involving six or more producers.
section_title: Varied Producers, Who Are Geographically Concentrated, Received More Than $46 Billion in Direct Payments from 2003 through 2011
paragraphs: From 2003 through 2011, USDA made more than $46 billion in direct  payments, which was concentrated among certain counties, among  recipients located within 100 miles of farms qualifying for payments, and  among certain types of producers. We also found that producers of  different qualifying crops planted varying percentages of their base acres  in those crops. Cumulatively, almost one-fourth of the total value of direct  payments made during this period went to producers who did not, in a  given year, grow any of the crop associated with their base acres—as  they are allowed to do.
subsections: section_title: Payments Were Concentrated among Certain Counties, Recipients Located within 100 Miles of the Farm, and Certain Types of Producers
paragraphs: According to our analysis of USDA data, more than $46 billion in direct  payments were made from 2003 through 2011, with counties in the  Midwest and Mississippi River Basin accounting for a large share of the  value of payments made and smaller amounts distributed among other  counties throughout the United States. In addition, our analysis showed  that total payments varied widely by county: in 2011, about 9 percent of  counties received less than $250,000 in payments countywide, and about  8 percent of counties received at least $5 million countywide. Figure 2  shows the distribution of direct payments in 2011, the most recent year  for which data are available.
With regard to the geographic distribution of payment recipients,  according to our analysis of USDA data, from 2008 through 2011, about  97 percent of the value of payments, or about $18.8 billion, went to  recipients located within 100 miles of the farm on which their direct  payments were based. In addition, for that period, about 1.4 percent of  the value, or about $269 million, went to recipients located 300 miles or  more from the farm. Furthermore, our analysis shows that cumulatively  from 2008 through 2011, 0.56 percent of direct payments, or $109 million,  was made to recipients located 800 or more miles from the farm. For the  complete results of our analysis on ownership characteristics of land for  which direct payments were made, see appendix III.
With regard to the ownership characteristics of farms, direct payments  may be made to producers with varying degrees of involvement in the  farming operation, including individuals or entities that either (1) own and  operate the farm (owner-operators), (2) operate but do not own the farm   According to (tenants), or (3) are an owner of the farm (other owners). our analysis of USDA data from 2003 through 2011, 86 to 88 percent of  acreage for direct-payment eligible crops was operated by producers who  were listed as owner-operators or tenants, while 12 to 14 percent of  acreage was operated by producers who were listed as other owners— but not necessarily operators. In addition, we found that from 2003  through 2011, the share of acreage operated by owner-operators  decreased and the share operated by tenants increased, while the share  operated by other owners was relatively consistent. Specifically, from  2003 to 2011, the percentage of acreage, including acreage qualifying for  direct payments, which was operated by owner-operators decreased from  77 million acres in 2003 (30 percent of all eligible acreage) to 67 million  acres (26 percent) in 2011. Acreage operated by tenants increased from  145 million acres in 2003 (56 percent of eligible acreage) to 159 million  acres (62 percent) in 2011. Meanwhile, the acreage operated by other  owners decreased slightly, from 35 million acres in 2003 (14 percent of  eligible acreage) to 30 million acres (12 percent) in 2011.
In addition, our analysis identified variation in the ownership  characteristics of farms receiving direct payments, depending on crops  grown. For example, owner-operators operated 12 percent of acreage,  including base acreage, for cotton in 2011 and 44 percent of acreage for  oats that year. Also in 2011, tenants operated 78 percent of the acreage  for rice and 58 percent of wheat acreage. Other owners operated 5  percent of the acreage for oats, and 10 percent of corn acreage that year.  For crop-specific analyses for corn, cotton, rice, soybeans, and wheat,  see appendix III.
section_title: Producers Planted Varying Percentages of Base Acres
paragraphs: Since direct payments allow producers almost complete flexibility in which  crops to plant, we analyzed USDA data to determine the type and  quantity of crops that producers who received direct payments chose to  grow. According to our analysis, from 2003 through 2011, producers  planted from 2 to 126 percent of their base acres with the crop associated  with their base acres. For example, over the period, producers with cotton  base acres planted 59 percent of their base acres with cotton, whereas  producers with soybean base acres planted soybeans on all of their base  acres for soybeans, as well as on additional acres on their farms; in other  words, they planted an area equivalent to 126 percent of their base acres  with soybeans. Specifically, our analysis showed that from 2003 through  2011, producers with cotton base acres cumulatively planted 100 million  acres of their 169 million base acres with cotton, whereas producers with  soybean base acres cumulatively planted 593 million acres, including 472  million base acres, with soybeans.
For the complete results of our  analysis of the type and quantity of crops that producers who received  direct payments chose to grow, averaged for years 2003 through 2011, of  all crops and by crop type, see appendix IV.
section_title: More Than $10 Billion in Payments Was Made for Base Acres That Did Not Grow the Base Acre Crop in a Given Year
paragraphs: In addition, we analyzed USDA data to determine the extent to which  producers did not grow any of the crop for which their base acres were  allocated—something they are allowed to do. Cumulatively, USDA paid  $10.6 billion—almost one-fourth of total direct payments from 2003  through 2011—to producers who did not, in a given year, plant any of the  crop for which they had base acres. Specifically, during this period,  producers cumulatively did not plant more than 633 million acres with the  crops associated with their base acres in a given year. This amounted to  an average of 70 million acres each year, or 26 percent of the 268 million  base acres on average that are annually eligible for direct payments. For  the complete results of our analysis on the extent to which producers did  not grow any of a crop for which they had base acreage in a given year,  by crop, see appendix V.
section_title: About 2,300 Farms for Which Direct Payments Were Made Did Not Plant Any Crop of Any Type Each Year From 2007 through 2011
paragraphs: Also according to our analysis of USDA data, about 2,300 farms, or about  0.15 percent of the 1.6 million farms receiving direct payments in 2011,  reported all their land as “fallow,” that is, producers did not plant any  crops of any type on this land, for each year of the last 5 years (i.e., 2007  through 2011), as allowed under the farm bill. These producers received  a total of about $2.9 million in direct payments in 2011. Our analysis of  USDA data showed that these approximately 2,300 farms, comprising in  total about 132,000 acres, were distributed among 402 counties in  40 states. In addition, according to our analysis, one county in Louisiana  had the most farms (190) with all their acreage reported fallow from 2007  through 2011; producers on these farms received a total of about  $203,000 in direct payments in 2011 for this land. For the results of our  analysis, by state, of the number of fallow farms from 2007 through 2011  and the value of direct payments made for such farms in each state, see  appendix VI. Figure 3 shows the geographic distribution of the farms that  our analysis indicated had all their acreage as fallow each year from 2007  through 2011.
In addition, according to our analysis of USDA data, 622 farms reported  all of their farm’s acreage as fallow for each of the previous 10 years,  from 2002 through 2011. Those farms were distributed among  178 counties in 28 states.
section_title: Direct Payments Do Not Align with Certain Principles
paragraphs: Direct payments generally do not align with the principles significant to  integrity, effectiveness, and efficiency in farm bill programs, identified in  our April 2012 report, which could be used to guide implementation of the  2012 Farm Bill. These payments align with the principle of being  “distinctive,” in that they do not overlap or duplicate other farm programs.  However, they do not align with the five other principles. Specifically,  (1) direct payments may no longer be relevant, (2) they do not  appropriately target benefits, (3) they may no longer be affordable,  (4) they may have unintended consequences, and (5) oversight of direct  payments is weak.
subsections: section_title: Direct Payments May No Longer Be Relevant
paragraphs: Direct payments were expected to be transitional when first authorized  and may no longer be relevant. According to the conference report  accompanying the 1996 Farm Bill,payments—the precursors to direct payments, which were similar in  design—were established to help farmers make a transition to basing  their planting decisions on market signals rather than on government  programs. Accordingly, production flexibility contract payments were  scheduled to decrease over time and expire in 2002. Subsequent farm  bills, however, including those passed in 2002 and 2008, have continued  these payments as “direct payments.” In a press statement released in  February 2012, the Chairwoman of the U.S. Senate Committee on  Agriculture, Nutrition and Forestry, referred to direct payments as “an  indefensible program of the past.” In April 2012, this committee’s website  posted draft legislation on the reauthorization of agricultural programs  through 2017 that proposed eliminating direct payments.
In addition, direct payments may no longer be needed to comply with  certain aspects of international trade agreements. Proponents of direct  payments say that such payments help the United States meet certain  commitments under international trade agreements, which set ceilings on  government payments classified as trade distorting. Unlike other farm  program payments, direct payments do not depend on current market  prices or production, so the World Trade Organization generally considers  them to be nontrade-distorting, and the United States does not count  them against these payment ceilings. In recent years of high crop prices,  the United States has not been in danger of meeting or exceeding its  limits for trade-distorting payments. For example, in 2009—the most  recent year for which the United States notified the World Trade  Organization of its use of subsidies—the United States used about  $4.3 billion of its $19.1 billion authorized allocation of trade-distorting  subsidies.
section_title: Direct Payments Do Not Appropriately Target Benefits
paragraphs: Direct payments do not appropriately target benefits (i.e., distribute  benefits consistently with contemporary assessments of need) in three  key ways. First, farmers receive direct payments even in years of record  farm income. Production flexibility contract payments, the precursors to  direct payments, were established after a period in the early 1990s of  relatively low farm income. In August 2011, however, USDA reported that  all three measures of farm-sector earnings—net farm income, net cash  income, and the value of the farm sector’s production of goods and  services from farming versus its outlays to nonfarm sectors (i.e., “net  value added”) were forecast to rise more than 20 percent in 2011 over  recent historical highs or near-highs. Second, according to USDA, the  average income for farm households is higher than that of the average for  U.S. households. For example, in 2010, average farm household income  was 25 percent higher than that of the average U.S. household.  Moreover, in 2008, we reported that individuals who receive farm program  payments, including direct payments, were more than twice as likely as  other tax filers to have higher incomes. Third, direct payments are  concentrated among the largest recipients—based on farm size and  income—because the payments are tied to land and paid on a per-acre  basis. According to our review of FSA direct payment data, in 2011, the  top 10 percent of payment recipients received 51 percent of direct  payments, and the top 25 percent of payment recipients received  73 percent of direct payments. In addition, according to USDA, larger  farms, including those receiving direct payments, have higher operating  profit margins. Specifically, in 2010, farms with $1 million or more in sales  had a 24 percent operating profit margin, on average, whereas farms of  any size had an 8.8 percent operating profit margin, on average.
Furthermore, according to USDA data, larger farms, including those  receiving larger direct payments, are generally financially better able to  cover their debt than smaller-sized farms. For example, according to  USDA’s Agricultural Resource Management Survey data for 2010, farms  with sales of $1 million dollars or more were more highly leveraged (i.e.,  they had higher debt-to-asset ratios), but they had higher debt-coverage  ratios (i.e., they had more financial capacity to cover interest and principal  payments on debt) than “all farms” or farms in smaller economic size  classes. Yet, as discussed, it is these larger farms that are receiving the  preponderance of direct payments.
section_title: Direct Payments May No Longer Be Affordable
paragraphs: When direct payments were first authorized in 2002, the nation’s annual  deficit equaled 1.5 percent of gross domestic product (GDP), and debt  was 59 percent of GDP, according to the Office of Management and  Budget. In 2011, the deficit was projected to be 10.9 percent, and debt  was projected to be 103 percent of GDP, respectively. In July 2003, we  testified before the House Committee on Ways and Means about the  need to improve the economy, efficiency, and effectiveness of  government programs, policies, and activities and to undertake a  fundamental reassessment of what government does and how it does it.We stated that this undertaking would require looking at current federal  programs in terms of their goals and results and determining whether  (1) other approaches might succeed in achieving the goal, (2) taxpayers  are getting a good “return on investment” from the program, and (3) the  program’s priority is higher or lower today given the nation’s evolving  challenges and fiscal constraints. In light of the nation’s difficult fiscal  situation and pressure to reduce government spending, the President’s  fiscal year 2013 budget proposes eliminating direct payments. In addition,  USDA’s Acting Undersecretary for Farm and Foreign Agricultural  Services testified before the Senate Committee on Agriculture, Nutrition,  and Forestry in March 2012 that eliminating direct payments could save  $31.1 billion, over 10 years, while maintaining other farm programs that  target assistance when and where it is most needed. In addition, in April  2012, the Congressional Budget Office estimated that repealing direct  payments would save about $24.8 billion from fiscal year 2014 through  fiscal year 2018.
section_title: Direct Payments May Have Unintended Consequences
paragraphs: Studies by USDA have found that direct payments result in higher prices  to buy or rent land because in some cases the payments go directly to  landowners—raising land values—and in other cases the payments go to  tenants, prompting landlords to increase cash rental rates. For example,  in June 2009, USDA’s Economic Research Service reported that the  primary economic effects of direct payments are increases in producers’  incomes and land values. In this way, direct payments may compound  challenges for beginning farmers. We reported in September 2007 that  beginning farmers face multiple challenges, including a need for funds to  purchase farmland. In this regard, an increase in the price of land as a  result of direct payments—or other farm program subsidies—may  potentially raise the amount of debt beginning farmers need to incur to  buy their own farm or additional farmland.
During the course of our work, we identified cases where direct payments  support recipients who FSA officials said own farmland that would not be  economically viable in the absence of these payments. For example, in 1  county, 190 farms were fallow—they did not grow any crop of any type— for 5 consecutive years, and producers claimed payments for these  farms. According to FSA county officials, these recipients are unable to  profitably farm their land or lease it to other producers because the land is  of poor quality and lacks access to irrigation. Another FSA county official  from another state said that the producers associated with the 32 farms in  that county that were fallow for 5 consecutive years were generally  unable to obtain financing for their farming operations and could not  profitably farm their land. Nevertheless, these landowners remain eligible  for direct payments under a provision of the 2008 Farm Bill known as the  “landowner exemption.” Under this exemption, landowners can remain eligible for direct payments as long as the landowners’ interest in their  acreage depends directly on the output of that acreage. In practice,  therefore, landowners can remain eligible if they (1) operate the land  themselves, (2) lease the land for a rent that depends on the production  of a crop, or (3) do not lease or operate the land and therefore receive no  production-related revenue from it. In practice, however, it appears the  landowner exemption allows landowners to receive payments for land  that is no longer economically viable for farming. Direct payments may  have less potential than other farm programs to distort prices and  production, but economic distortions can nonetheless result from these  payments. Furthermore, a trade-off exists between being less market  distorting—as direct payments are considered to be—and targeting  benefits to adjust to need.
section_title: Oversight of Direct Payments Is Weak
paragraphs: During the course of our work, we identified several concerns with regard  to FSA’s oversight of direct payments: FSA has not developed a  systematic process to report on acreage that may no longer be usable for  agriculture and therefore ineligible for direct payments; FSA conducts  relatively few end-of-year reviews and generally does not complete these  reviews within expected time frames; and FSA has not kept data on  enforcement.
FSA has not systematically reported or corroborated the extent to which  land may no longer be eligible for direct payments because it has been  converted to nonfarm uses. The 2008 Farm Bill instructed the Secretary  of Agriculture to establish procedures to identify such land and each year,  to “ensure, to the maximum extent practicable, that payments are  received only by producers,” submit to Congress a report describing the  results of USDA’s actions to identify and reduce base acres for land that  has been subdivided and developed for nonfarm use. The 2008 Farm Bill  uses base acres to determine direct payments, Average Crop Revenue  Election (ACRE) payments, and counter-cyclical payments. FSA issued  its first report in response to this mandate in September 2011, covering  2009 and 2010. According to this report, about 190,000 acres—about  129,000 in 2009 and 61,000 in 2010—were converted to nonfarm use  during this period. However, the report noted that these estimates were  likely low, stating that USDA’s periodic Natural Resources Inventory  estimated that an average of 440,000 cropland acres were converted to  nonfarm uses annually from 1982 through 2007.
FSA’s report had several methodological limitations that we identified. For  example, FSA relied exclusively on surveying the 50 FSA state offices for  information on such conversions. It did not use or corroborate the state  offices’ results with other possible sources of information, including  geospatial information on land use gathered by USDA’s National  Agriculture Imagery Program, which provides geospatial imagery data to  support FSA compliance activities. FSA also did not provide its state  offices with guidance for collecting information on such conversions. As a  result, these offices, and their associated county offices, used a variety of  methods to collect this information. For example, FSA officials in one  county office said they identified base acreage reductions by consulting   In another case, FSA county  records of County Committee meetings. office officials said they used Base Acreage Yield Adjustment reports to  identify base acreage that was already permanently reduced, and Out of  Balance Tracts reports to identify other base acreage that may signal the  need for a base acreage reduction.and consequently unsystematic process, FSA may have  underrepresented the extent to which land may no longer be eligible for  direct payments because it has been converted to nonfarm uses in its  required report to Congress.
As a result of these varying methods  FSA headquarters officials said that, because in the past they were not  required to report land converted from agriculture to residential or other  nonfarm use, they had not systematically tried to track such land. They  also stated that because producers, including direct payment recipients,  are required to report planting information each year and certify the  accuracy of this information, FSA has been able to identify land subject to  base acre reductions manually through such reports. These officials  stated that FSA relied on such manual records to report on land that was  converted to nonfarm uses in its September 2011 mandated report, and it  has begun compiling data for the next report, covering 2011, using the  same methodology. However, these officials noted that in October 2011  FSA updated its data collection systems to compile the mandated report  covering 2012 base acre reductions through a computerized tracking  system. This system includes a reporting code to identify whether the  base acre reduction was made because land was converted to nonfarm  uses, including residential or commercial uses.
All of the FSA county officials we spoke with said that geospatial imagery  was very helpful in identifying land that may no longer be usable for  agriculture, and some noted this was particularly so as budget constraints  have precluded more frequent on-site farm inspections. For example,  some of these officials spoke of instances where they knew from  geospatial imagery that land had been converted from agricultural use,  and the producer had not informed FSA. Nevertheless, officials said, the  National Agriculture Imagery Program did not provide such imagery  regularly and they received updated imagery only every few years,  limiting their ability to identify land that may no longer be usable for  agriculture—and therefore ineligible for direct payments. An imagery  program official stated that the program had received inconsistent funding  since its establishment in 2002. As a result, this official said, in 2008 the  office began collecting imagery data in 3-year cycles rather than annually,  as would meet program needs. The official stated that three USDA  agencies and the Department of the Interior are funding the  approximately $40-million-per-year effort. The official added that the  imagery program’s own requirements and FSA’s needs continue to call  for collecting and reporting data annually, but funding constraints  preclude the program from doing so.
FSA’s detailed end-of-year reviews, in which FSA officials assess  whether direct payment recipients met program requirements, such as  being actively engaged in farming, have key weaknesses. Specifically,  FSA conducts relatively few end-of-year reviews, and generally does not  complete these reviews within expected time frames.
FSA guidance states that the purpose of end-of-year reviews is to  maintain the integrity of payment limitation and payment eligibility  provisions by verifying that farming operations were carried out as  producers reported on their farm operating plans. One such provision for  direct payments is that all payment recipients be actively engaged in  farming, which, according to the 2008 Farm Bill, generally includes  making a “significant contribution” that is at risk and commensurate with  the recipient’s share of profits and losses from the farming operation.  Recipients of payments under ACRE and counter-cyclical payment  programs also are required to be “actively engaged” in farming. According  to FSA officials, to verify the extent to which producers’ contributions  meet these, as well as other, eligibility requirements, FSA selects a  judgmental sample of farming operations for review on the basis of,  among other criteria, (1) whether the operation has undergone an  organizational change in the past year by, for example, adding another  entity or partner to the operation and (2) whether the operation receives  payments above a certain threshold. FSA officials said that their selection  process for end-of-year reviews is designed to direct limited resources  toward categories of recipients among whom officials most expect to find  wrongdoing such as fraud or other deliberate misrepresentation of a  farming operation. These officials explained that the recipient categories  emphasized for review include joint operations, particularly those  comprising three or more entities, because such operations offer more  potential and incentive for partners to exaggerate their contributions.
Producers in farming operations selected for end-of-year review must  provide documentation to verify that the information they report on their  farm operating plan, including their contributions of land, capital,  equipment, labor, and management, is accurate. By reviewing such  documentation, FSA officials can determine whether the contributions, in  terms of risk and share of profits and losses, made by each participant in  a farming operation match the contributions reported for that participant  on the farm operating plan. FSA officials said that end-of-year reviews are  a key means of identifying potentially improper payments. In addition,  some FSA county officials said end-of-year reviews were useful in  identifying irregularities and fraud and cited cases in their experience  where producers returned direct payments determined to have been  erroneously disbursed. Nonetheless, we identified two key weaknesses in  FSA’s end-of-year review process.
First, FSA selects relatively few cases for annual end-of-year review. Our  analysis of FSA data showed that in 2008 and 2009, FSA selected for  review 0.04 percent of farming operations receiving direct payments. By  comparison, for fiscal year 2010, the Internal Revenue Service selected  at least 0.7 percent of taxpayers, from every income level—an average of  1.1 percent of all taxpayers—for examination. According to FSA  headquarters officials, they would like to select additional cases for  review, but the selection rate is relatively small because the reviews are  resource intensive. Increasing budget constraints and USDA’s  announced plans to close some of FSA’s 2,200 county offices and reduce  field staffing may further limit the number of cases for review the agency  can select in the future. These officials said that, because of resource  constraints, they select the sample according to categories of recipients  where they most expect to find wrongdoing, and waive categories of  recipients, such as landowners and spouses among whom they least  expect to find misrepresentation. However, we found that when FSA  waives reviews for some of the cases selected, the agency does not  replace them with reviews of other cases, as we recommended in April  2004. At the time, we reported that FSA was not reviewing a valid  sample of farm operating plans to reasonably assess the overall level of  compliance because its selection methodology did not replace waived  cases, resulting in a smaller sample size that might have affected the  validity of the sample results. In response to our recommendation, FSA  reduced the number of compliance reviews it waived each year but did  not act to replace reviews that were waived with new cases. FSA  continues to select a small sample of cases for review: in 2008 and 2009,  respectively, 23 and 154, or just under 6 and 13 percent, of selected  cases were waived, further decreasing the number of farming operations  reviewed.
Second, FSA often completes end-of-year reviews late with respect to its  own expected time frames. According to an FSA official in charge of  selecting cases and monitoring the end-of-year review process, FSA  headquarters generally selects cases for review within the first 6 months  of the following year and generally expects county office staff to perform  their assigned reviews within a year of receiving the cases selected. As  of September 2011, however, 271 of 380 pending reviews for 2008  (71 percent) were more than 6 months past the expected 18-month  completion time frame, which includes the selection, assignment, and  conducting of these reviews. In May 2012, FSA reported that as of  February 2012, nearly 24 percent of pending reviews for 2008 were still  incomplete. Table 1 summarizes the status of end-of-year reviews for  2008 and 2009, as of September 2011 and February 2012.
In addition, in February 2012 FSA reported that county offices in three  states—California, Louisiana, and Mississippi—had not completed some  of their 2006 or 2007 end-of-year reviews. FSA officials said they do not  regularly collect data on the number of end-of-year reviews completed  and pending. FSA officials also said that taking corrective action against  payment recipients becomes more difficult as reviews are delayed. For  example, with the passage of time, it is more difficult for FSA to collect  evidence of potential misrepresentation or fraud, as well as for producers  to provide the requested documentation. Furthermore, according to FSA  officials, completed end-of-year reviews are needed for USDA’s Office of  Inspector General (OIG) to investigate cases of potential fraud or other  illegal activity.
Federal internal control standards call for agencies to obtain, maintain,  and use relevant, reliable, and timely information for program oversight  and decision making, as well as for measuring progress toward meeting  agency performance goals. In addition, the Office of Management and  Budget directs agency managers to take timely and effective action to  correct internal control deficiencies. Furthermore, FSA’s handbook on  determining eligibility for farm program payments states that “etecting  schemes, fraudulent representations, and other equally serious actions of  persons and legal entities to circumvent payment eligibility and payment  limitation provisions is essential for producer compliance.” The issues  we identified in FSA’s end-of-year compliance review process leave the  agency with a less effective management oversight tool. For example, in  light of these problems, FSA is less able to identify potential fraud, waste,  and abuse; avert potentially improper payments; and enforce farm bill  provisions and related implementing regulations.
USDA does not have data to demonstrate that it is using available  enforcement mechanisms against payment recipients found to have  misrepresented their farming operation so as to increase their direct  payments improperly, and the agency generally has not centrally tracked  data on such cases of misrepresentation. Specifically, when asked, FSA  officials were unable to provide the number of direct payment cases FSA  has referred to OIG for further investigation and potential prosecution by  U.S. Attorneys’ Offices, but according to FSA officials, the number of such  cases has been small. For example, regarding potential fraud, FSA  officials cited only one case that was currently under active litigation. FSA  state offices are required to report any known or suspected violations of  criminal statutes to OIG for investigation, but according to OIG officials,  their investigators will pursue cases of potential fraud only if they  anticipate a “good outcome,” that is, a successful prosecution. The  potential amount of funds to be recovered is another consideration.  According to FSA officials, the number of cases accepted for investigation  varies by region. For example, according to these officials, in regions with  significant drug crime, such as southern Texas, U.S. Attorneys give  priority to drug cases and accept virtually no farm program cases. This  situation notwithstanding, OIG and FSA officials said that FSA offices in  Texas refer very few compliance and payment limitation cases to OIG.  According to OIG officials, depending on the circumstances, FSA may be  able to take administrative action against a producer in an attempt to  recover inappropriately disbursed funds even if the producer is not  prosecuted by state or federal authorities for violations of law, by following  its own procedures or consulting with the Office of General Counsel.  However, both OIG and FSA officials said that, in cases of alleged fraud,  the payment recipient may not be subject to additional enforcement  mechanisms unless prosecuted and convicted. FSA regulations provide  that any producer found to have committed fraud may be debarred from  receiving further payments for up to 5 years.provide that any producer found to have engaged in misrepresentation  may be debarred from receiving further payments for up to 2 years.  However, if FSA does not maintain comprehensive data on payment  recipients that may have misrepresented their farming operation,  including by name of producers, it is unclear how it can consistently  pursue and recover improper payments.
FSA headquarters officials stated that most payment recipients are  honest and comply with direct payment eligibility requirements, and that  the level of enforcement is appropriate. However, the officials could not  provide data on compliance. Some FSA county officials expressed  concerns about discouraging producers from farming, should the  producer be debarred from receiving further payments. They also said  that they can and do recover improper payments from producers without  pursuing potential prosecution. However, FSA’s reluctance to pursue  these cases and enforcement mechanisms could encourage some  producers to engage in and profit from submitting false information with  little fear of being caught or punished.
Moreover, FSA officials acknowledged that the agency lacks  comprehensive data on its enforcement actions. Specifically, FSA officials  said that the agency does not keep a centralized, national database or list  of direct payment recipients found to be at fault for misrepresentation,  including recipients convicted of fraud, debarred from future payments,  referred to OIG for investigation, or found by county or state FSA offices  to have received improper payments by misrepresenting their farming  operation—including in cases in which these payments were later  recouped. FSA does, however, maintain data at the national level on  payments it reduced because it determined a certain producer was  ineligible before making the payment. According to these data, in 2011  FSA reduced payments to certain direct payment recipients by almost  $20 million for not being actively engaged in farming; by more than  $89 million for exceeding payment limitations; by over $37 million for  exceeding income limitations; and by $3,393 for fraud. Table 2  summarizes the amount of these reduced payments for 2010 and 2011.
Under the Improper Payments Information Act of 2002, as amended,  federal agencies are required to estimate the level of improper payments  in their programs. In November 2011 USDA reported that its error rate  for making direct and counter-cyclical payments was 0.05 percent, which  was below its 2010 error rate of 0.96 percent and below its target of 0.40  percent. However, because USDA does not keep comprehensive data  on its enforcement actions or the amount of money it recovers after  improper disbursements are made, the level of improper payments  reported by FSA for the direct payments program may be understated.
section_title: Conclusions
paragraphs: Direct payments allow producers flexibility in the type and amount of  crops to plant by making payments based on historical production trends,  rather than current production. However, the fiscal health of our nation,  recent and expected high national budget deficits, and pressures to  reduce federal spending mean that every federal dollar should be  scrutinized to ensure it is spent efficiently and for the most worthwhile  purposes. Maintaining a safety net for farmers is worthwhile, but during  times of record-high crop prices and farm incomes, providing payments  that do not align with principles significant to integrity, effectiveness, and  efficiency in farm bill programs raises questions about the continued need  for direct payments. In a March 2011 report, we and others proposed  options to reduce or eliminate direct payments.
FSA monitors land usage and conducts a detailed review of a sample of  farm operating plans at the end of the year to help oversee direct  payments and other farm programs, including ACRE and counter-cyclical  payments, which require payment recipients to be actively engaged in  farming. There have been proposals to eliminate direct payments, but as  long as they remain in effect, it is worth noting several weaknesses  concerning FSA’s oversight of these programs that our work identified.  First, because FSA does not have a systematic process to identify land  that may no longer be usable for agriculture and therefore eligible for  direct payments—or ACRE or counter-cyclical payments—FSA’s reports  to Congress may underreport the extent to which land may no longer be  eligible for these payments. Second, because FSA does not regularly  update the geospatial imagery FSA county offices use to corroborate that  direct payments are made only for lands usable for agriculture, FSA could  potentially be making payments to individuals and entities that should not  be receiving them. Third, because FSA’s process for selecting and  performing end-of-year reviews has key weaknesses, FSA is less able to  identify potential fraud, waste, and abuse; avert potentially improper  payments; and enforce farm bill provisions and related implementing  regulations. We acknowledge the budget constraints that, according to  FSA officials, make the case for a judgmental sample and limit the  number of end-of-year reviews FSA conducts. However, similarly to what  we reported in April 2004—that FSA was not reviewing a valid sample of  farm operating plans to reasonably assess the overall level of  compliance—FSA continues to select a small sample of cases to review  and does not complete reviews in a timely manner, exposing the agency  and taxpayers to potential waste, fraud, and abuse of taxpayer dollars.
While FSA officials state that most producers are honest and comply with  eligibility requirements, it is in the interest of all producers, as well as  taxpayers, to maintain the integrity of direct payments and other farm  program payments. FSA regulations provide enforcement mechanisms  for producers found to have engaged in misrepresentation or to have  committed fraud, but FSA does not maintain comprehensive data on  payment recipients that have misrepresented their farming operation,  including data by producer name. As a result, it is unclear how  consistently FSA has pursued and recovered improper payments. In sum,  as a result of FSA’s decision to not pursue a more comprehensive  oversight process—including maintaining comprehensive data on  misrepresentation and tracking the referral of cases for enforcement—the  number and value of improper payments and program fraud may be  underrepresented.
section_title: Matter for Congressional Consideration
paragraphs: In light of the need to identify potential savings in the federal budget and  questions about the continued need for direct payments, Congress should  consider eliminating or reducing these payments.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that direct payments, while they remain in effect, and  other farm programs, including ACRE and counter-cyclical payments, are  made in a manner consistent with farm bill provisions and related  implementing regulations, and to minimize the potential for improper  payments, we recommend that the Secretary of Agriculture direct the  Administrator of the Farm Service Agency to take the following four  actions:
Develop and implement a systematic process to report on land that  may no longer be usable for agriculture, as required for annual  reporting to Congress.
Ensure the more timely and consistent regular collection and  distribution of geospatial imagery needed to corroborate that  payments are only made for lands usable for agriculture.
Consider options within given budget constraints to improve FSA’s  end-of-year reviews by selecting a larger sample of cases to review  and ensuring that these reviews are completed in a timely manner.
Maintain comprehensive data on misrepresentation and enforcement  actions taken nationwide, as needed for management oversight and  reporting purposes.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to USDA for review and comment. In  written comments, which are reproduced in appendix VII, USDA generally  agreed with two of our recommendations and disagreed with two others.  USDA also noted our Matter for Congressional Consideration to eliminate  or reduce direct payments, stating that the President’s financial year 2013  budget recommended eliminating direct payments while maintaining a  strong safety net for farmers.
Regarding our first recommendation that USDA develop and implement a  systematic process to report on land that may no longer be usable for  agriculture, as required for annual reporting to Congress, USDA  disagreed, stating that it considers its current process to be adequate.  Among other points, USDA noted that it already selects a statistical  sample of producers for spot checking to determine that all land reported  as cropland remained in cropland status for the year the spot check was  conducted. Nevertheless, as discussed in this report, only about 2,000  producers─and potentially 0.13 percent of the approximately 1.6 million  producers receiving direct payments─could be selected for annual spot  checks. Further, in a September 2011 report in response to a  congressional mandate USDA stated that its estimates of base acres  converted to nonfarm uses in 2009 and 2010 were likely understated. We  also note, as discussed in the report, that USDA’s current procedures to  collect these data are subject to methodological limitations and  inconsistencies in how its field offices collect these data. For example,  USDA relied exclusively on surveying the 50 FSA state offices for  information on such conversions, and did not use or corroborate the state  offices’ results with other possible sources of information, such as  geospatial imagery. USDA also did not provide its state offices with  guidance for collecting information on such conversions. As a result,  these offices, and their associated county offices, used a variety of  methods to collect this information. Given this very small sample and the  department’s likely underestimation of the extent of conversions to  nonfarm uses, we maintain that development of an improved process is  needed for identifying land that may no longer be usable for agriculture.  For added clarity, we revised the report to make clear that USDA uses a  statistical sample and that its field offices may spot-check other producers  if there are concerns. In addition, USDA noted that the 2008 Farm Bill,  among other sources requires producers to file acreage reports on all  cropland on the farm. In response to USDA’s comment, we added  clarifying language to the report to identify the sources that USDA cites as  requiring such reporting.
Regarding the second recommendation that USDA ensure the more  timely and consistent collection and distribution of geospatial imagery  needed to corroborate that payments are only made for lands usable for  agriculture, USDA stated that it agrees that geospatial imagery is a useful  tool to identify land use changes. It also said, however, that its ability to  update this imagery more frequently would require increased funding from  Congress. As discussed in the report, USDA already leverages resources  from other agencies, such as the Department of the Interior, to help cover  the costs of collecting this imagery. Further opportunities may exist to do  so. In addition, USDA could consider options to reallocate more funding  to geospatial imagery within its existing budget resources.
Regarding the third recommendation that USDA consider options within  given budget constraints to improve FSA’s end-of-year reviews by selecting  a larger sample of cases to review and ensuring that these reviews are  completed in a timely manner, USDA disagreed. USDA stated that it  concurs that timely, high-quality end-of-year reviews are important;  however, it also stated that its current practices already meet this standard.  According to USDA, in the early 1990’s its Office of Inspector General  determined that a judgmental sample completed in USDA headquarters  was the most consistent and beneficial in terms of detecting problematic  issues and potential compliance problems. In addition, USDA said that, in  consideration of efficiency, FSA has made a targeted selection and  devoted its limited resources to identifying farming operations considered  most likely to have potential payment eligibility and payment limitation  compliance issues. However, as discussed in our report, USDA selects  very few cases for end-of-year reviews. For example, in 2008 and 2009,  only 0.04 percent of operations receiving direct payments were selected. In  addition, as noted in the report, these reviews were often not done in a  timely fashion as measured by USDA’s own time frames. For example, as  of September 2011, 271, or 71 percent, of 380 pending reviews for 2008  were more than 6 months past USDA’s expected completion date. Given  this very small sample and the lack of timeliness associated with many of  these reviews, we continue to believe that USDA should consider options  to increase the number and improve the timeliness of these reviews. To  eliminate potential confusion about FSA’s use of a judgmental sample, we  revised our third recommendation by removing the words “the quantity and  quality” from an earlier draft to clarify our emphasis on improving the scope  and timeliness of these reviews.
Regarding the fourth recommendation that USDA maintain  comprehensive data on misrepresentation and enforcement actions taken  nationwide as needed for management oversight and reporting purposes,  USDA agreed and stated there is value in maintaining data on  misrepresentation and enforcement actions. It stated that the  development of such a capability has been planned for a number of years  but that other projects, such as the implementation of the 2008 Farm Bill  and the development and implementation of a robust process for verifying  producer compliance with adjusted gross income limits have taken  precedence. We understand that USDA has many competing priorities,  but its decision to not pursue a more comprehensive oversight process— including maintaining comprehensive data on misrepresentation and  tracking the referral of cases for enforcement—means the number and  value of improper payments and program fraud may be  underrepresented.
We are sending copies of this report to the Secretary of Agriculture,  appropriate congressional committees, and other interested parties. The  report also is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or shamesl@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix VIII.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of our review were to: (1) provide information regarding  the geographic distribution and ownership characteristics of payment  recipients, as well as the dollar amount of direct payments made for land  with qualifying acreage and amount and types of crops grown on  qualifying acreage from 2003 through 2011 and (2) examine whether  direct payments are aligned with principles significant to integrity,  effectiveness, and efficiency in farm bill programs.
To conduct this work, we analyzed U.S. Department of Agriculture  (USDA) data, interviewed agency officials, reviewed applicable laws,  regulations, and guidance, and reviewed and updated past GAO work.  Specifically, to provide information about the geographic distribution and  ownership characteristics of payment recipients and to determine the  dollar amount of direct payments made for land with qualifying acreage,  we obtained disaggregated data from USDA’s Farm Service Agency  (FSA) indicating the number, amount, and payee for direct payments  made from program years 2003 through 2011—that is, from the  program’s first full year of operation through the most recent year for  which complete program data are available. In particular, we reviewed  the Food, Conservation, and Energy Act of 2008 (2008 Farm Bill) to  determine which crops are eligible for direct payments and determined  that we would include barley, canola, corn, cotton (upland), crambe, flax,  mustard, oats, peanuts, rapeseed, rice, safflower, sesame, sorghum,  soybeans, sunflower, and wheat in our analysis. Further, we reviewed  and evaluated USDA documents for collecting data from direct payment  recipients regarding land usage, in particular the Farm Operating Plan for  Payment Eligibility Review for individuals and entities, to identify  appropriate data elements for use in our analyses. In particular, we  obtained data from USDA’s compliance share file that indicates how  producers—whether individuals or entities—are involved and whether  they own a particular farm field or area of land for which direct payments  were made. Producers report they either (1) own and operate the farm  (“owner-operators”), (2) operate but do not own the farm (“tenants”), or (3)  are an owner of the farm (“other owners”). We also obtained  disaggregated USDA data indicating the number of base acres and  planting history for each farm for which direct payments were made.  When analyzing direct payments spending, we assigned a payment  according to its program year; that is, the year in which the payment was  associated with since it is possible for payments to be made after the end  of the program year for which they are made.
USDA does not collect the zip codes of farms with which direct payment  are associated. We therefore obtained data for the centroid point—the  geometric center—of the county in which the farm resides and calculated  the distance from it to the centroid point of the payment recipient’s zip  code. In addition, USDA provided reliable address files for payees from  2008 through 2011. USDA data do not differentiate between the  program’s base acres and a farm’s other acres, and producers report one  aggregated number of acres for each crop planted. To determine the  relative percentage of base acres planted with the base acre crops, we  compared the acreage of a farm planted in a particular crop with its base  acres of that crop. Because a producer may plant 100 percent of the  farm’s base acres in any crop, plus a portion of additional acres on the  farm that exceeds the base acre amount, more than 100 percent of base  acres may be planted in a certain crop. We assessed the reliability of  USDA’s data by (1) performing electronic testing of required data  elements, (2) reviewing existing information about the data and the  system that produced them, and (3) interviewing agency officials  knowledgeable about the data. We determined that the data were  sufficiently reliable for the purposes of this report. We used geographic  information system (“GIS”) software to map selected results of our  quantitative analyses. We also interviewed FSA officials regarding the  results of our data analysis; these officials indicated that they generally  found these results to be credible.
To examine whether direct payments are aligned with principles  significant to integrity, effectiveness, and efficiency in farm bill programs,  we reviewed our past work, particularly more recent work that identifies  relevant principles to consider for farm bill reauthorization. These  principles are relevance, distinctiveness, targeting, affordability,  effectiveness, and oversight. The resulting principles and associated key  questions may not represent all potential principles that could be  considered. We collected additional data where possible to determine  how circumstances regarding direct payments may have changed more  recently and evaluated direct payments according to the principles  identified for in our earlier work. We also reviewed our March 2011 report,  which discussed observations regarding direct payments. In applying the  identified principles to direct payments, we considered information on the  program’s original purpose; its potential, if any, to duplicate payments  under other programs; who benefits from the program; the nation’s deficit  and debt challenges; the program’s potential, if any, to have unintended  consequences; and program oversight measures taken by FSA.  However, based on our past work, we believe these principles to be  significant to integrity, effectiveness, and efficiency in farm bill programs  since 2003, when much of the 2002 Farm Bill was implemented. Further,  USDA’s Office of Inspector General shares this point of view and issued a  companion report to our report using the same principles and based on its  own past work for this time frame.
In Arizona, we visited FSA county offices in Maricopa, Pima, and Pinal counties. In  Louisiana, we visited FSA county offices in Madison, Morehouse, and Richland parishes. planted with crops in recent years, and/or (3) the county is experiencing  rapid urban development. The information gathered at these locations  cannot be generalized to the experience of all FSA county offices.
We conducted this performance audit from August 2011 to June 2012 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Principles Significant to the Integrity, Effectiveness, and Efficiency of Farm Bill Programs
paragraphs: In April 2012 we identified certain principles as applicable to Congress’s  deliberations for the 2012 Farm Bill and significant to the integrity,  effectiveness, and efficiency in farm bill programs, such as direct  payments. Specifically, we identified these principles to be relevance,  distinctiveness, targeting, affordability, effectiveness, and oversight. Key  questions associated with these principles are shown below. Our list of  principles may not represent all potential principles that could be  considered.  1.  Relevance: Does the program concern an issue of national interest?
Is the program consistent with current statutes and international  agreements? Have the domestic and international food and  agriculture sectors changed significantly, or are they expected to  change, in ways that affect the program’s purpose?  2.  Distinctiveness: Is the program unique and free from overlap or  duplication with other programs? Is it well coordinated with similar  programs?  3.  Targeting: Is the program’s distribution of benefits consistent with  contemporary assessments of need?  4.  Affordability: Is the program affordable, given the nation’s severe  budgetary constraints? Is it using the most efficient, cost-effective  approaches?  5.  Effectiveness: Are program goals clear, with a direct connection to  policies, resource allocations, and actions? Does the program  demonstrate measurable progress toward its goals? Is it generally  free of unintended consequences, including ecological, social or  economic effects? Does the program allow for adjustments to  changes in markets?  6.  Oversight: Does the program have mechanisms, such as internal  controls, to monitor compliance and help minimize fraud, waste, and  abuse in areas where these are most likely to occur?
section_title: Appendix III: Ownership Characteristics of Land for Which Direct Payments Were Made
paragraphs: Data from USDA’s compliance share file indicate how producers— whether individuals or entities—are involved and whether they own a  particular farm field or area of land for which direct payments were made.  Producers report they either (1) own and operate the farm (“owner- operator”), (2) operate but do not own the farm (“tenants”), or (3) are an  owner of the farm (“other owners”). Our analysis of USDA data found that  ownership characteristics of land for which direct payments were made  have changed from 2003 through 2011, as shown in table 3.
Moreover, we found that the ownership characteristics regarding the  operation of land for which direct payments were made varied according  to which crops were grown. Table 4 shows these variations by crop, for all  covered crops, corn, cotton, oats, rice, soybeans, and wheat in 2011.
section_title: Appendix IV: Analysis of Direct Payment Crops Grown Compared with Base Acreage Allocations
paragraphs: Our analysis of USDA data found variation in the extent to which  producers grew the crop associated with their base acres. Table 5 depicts  the results for each crop eligible for direct payments, as well as the totals  for all eligible crops, from 2003 through 2011.
section_title: Appendix V: Analysis of Extent to Which Producers Did Not Grow Any of the Crop Associated with Their Base Acres in a Given Year
paragraphs: Our analysis of USDA data found that some producers chose to not grow  any of the crop associated with their base acres in a given year—as they  are allowed to do. Table 6 depicts our results of this analysis, by crop,  and the corresponding value of direct payments made for each crop.
section_title: Appendix VI: Analysis, by State, of the Number of Farms Fallow from 2007 through 2011 and the Value of Direct Payments Made to Producers for These Farms in 2011
paragraphs: According to our analysis of USDA data, 2,327 farms, or about  0.15 percent of the 1.6 million farms receiving direct payments in 2011,  reported all their land as “fallow” from 2007 through 2011. That is,  producers did not plant any crops of any type on this land in any year  during this 5-year period, as they are allowed to do in accordance with  planting flexibility rules. Table 7 presents the results of our analysis, by  state, of the number of such fallow farms in each state, including the  direct payments received by producers on these farms in 2011.
section_title: Appendix VII: Comments from the U.S. Department of Agriculture
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, James R. Jones, Jr. (Assistant  Director); Alisa Beyninson; Ellen W. Chu; Michael Kendix; and Michelle  Munn made key contributions to this report. Important contributions were  also made by Benjamin Bolitzer, Kevin Bray, Tom Cook, Melinda  Cordero, Greg Dybalski, Barbara El Osta, Rebecca Makar, John Mingus,  Susan Offutt, Anne Rhodes-Kline, Ardith A. Spence, Kiki  Theodoropoulous, and Michelle K. Treistman.
section_title: Related GAO Products
paragraphs: Farm Bill: Issues to Consider for Its Reauthorization, GAO-12-338SP.  April 24, 2012.
Crop Insurance: Savings Would Result from Program Changes and  Greater Use of Data Mining, GAO-12-256. Washington, D.C.:   March 13, 2012.
Follow-up on 2011 Report: Status of Actions Taken to Reduce  Duplication, Overlap, and Fragmentation, Save Tax Dollars, and Enhance  Revenue, GAO-12-453SP. Washington, D.C.: February 28, 2012.
Opportunities to Reduce Potential Duplication in Government Programs,  Save Tax Dollars, and Enhance Revenue  GAO-11-318SP. Washington,  D.C.: March 1, 2011.  2012 Annual Report: Opportunities to Reduce Duplication, Overlap and  Fragmentation, Achieve Savings, and Enhance Revenue,   GAO-12-342SP. Washington, D.C.: February 28, 2012.
USDA Crop Disaster Programs: Lessons Learned Can Improve  Implementation of New Crop Assistance Program, GAO-10-548.  Washington, D.C.: June 4, 2010.
Crop Insurance: Opportunities Exist to Reduce the Costs of Administering  the Program, GAO-09-445. Washington, D.C.: April 29, 2009.
Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent  Payments to Individuals Who Exceed Income Eligibility Limits,   GAO-09-67. Washington, D.C.: October 24, 2008.
Agricultural Conservation: Farm Program Payments Are an Important  Factor in Landowners’ Decisions to Convert Grassland to Cropland.  GAO-07-1054. Washington, D.C.: September 18, 2007.
Beginning Farmers: Additional Steps Needed to Demonstrate the  Effectiveness of USDA Assistance, GAO-07-1130. Washington, D.C.:  September 10, 2007.
USDA Needs to Strengthen Management Controls to Prevent Improper  Payments to Estates and Deceased Individuals. GAO-07-1137T.  Washington, D.C.: July 24, 2007.
Federal Farm Programs: USDA Needs to Strengthen Controls to Prevent  Improper Payments to Estates and Deceased Individuals, GAO-07-818.  Washington, D.C.: July 9, 2007.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable, GAO-07-944T.  Washington, D.C.: June 7, 2007.
Crop Insurance: Continuing Efforts Are Needed to Improve Program  Integrity and Ensure Program Costs Are Reasonable, GAO-07-819T.  Washington, D.C.: May 3, 2007.
Crop Insurance: More Needs to Be Done to Reduce Program’s  Vulnerability to Fraud, Waste, and Abuse, GAO-06-878T. Washington,  D.C.: June 15, 2006.
Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to  Fraud, Waste, and Abuse, GAO-05-528. Washington, D.C.: September  30, 2005.
Farm Program Payments: USDA Should Correct Weaknesses in  Regulations and Oversight to Better Ensure Recipients Do Not  Circumvent Payment Limitations, GAO-04-861T. Washington, D.C.: June  16, 2004.
Crop Insurance: USDA Needs to Improve Oversight of Insurance  Companies and Develop a Policy to Address Any Future Insolvencies,.  GAO-04-517. Washington, D.C.: June 1, 2004.
Farm Program Payments: USDA Needs to Strengthen Regulations and  Oversight to Better Ensure Recipients Do Not Circumvent Payment  Limitations, GAO-04-407. Washington, D.C.: April 30, 2004.
Federal Budget: Opportunities for Oversight and Improved Use of  Taxpayer Funds, GAO-03-1030T. Washington, D.C.: July 17, 2003.