hen a group of agricultural lobbyists put on an inaugural party known as the "farm prom" Jan. 20, the most popular man in the ballroom seemed to be Kenneth D. Ackerman, President Clinton's appointee as administrator of the Agriculture Department's Risk Management Agency.
But this being Washington, Ackerman's flesh was pressed not by women asking him to dance, but by lobbyists, members of Congress, Hill aides and ag journalists all trying to find out his plans for reshaping crop insurance programs. So many people wanted his ear, Ackerman says, that he and his wife, Karen, almost wished they had gone somewhere alone where they could have spent more time dancing.
The fact that Ackerman, an attorney with the Senate Agriculture Committee and the Commodity Futures Trading Commssion before he was appointed to run the Agriculture Department's crop insurance programs, was encircled at a black-tie Washington event would no doubt amaze his predecessors. Running crop insurance programs has been considered one of the most boring, backwater political appointments in government, though the government has provided or subsidized crop insurance for farmers since the 1930s.
The status of the crop insurance job changed in 1994 when Congress decided ad hoc disaster bills to bail out farmers had become too frequent and too expensive. That year, as part of an Agriculture Department reorganization, Congress required most farmers to have crop insurance before they could get farm subsidies, created the Risk Management Agency (RMA) as a division of the new Farm Service Agency, and authorized experiments to see whether crop insurance could protect farmers from price declines as well as weather risks.
In less than two years, the number of acres insured doubled to 204 million. By fiscal 1996, outlays for the Risk Management Agency reached a record $1.76 billion, triple the average annual spending on crop insurance in the 1980s. But since Congress reformed the federal crop insurance program and stopped passing disaster aid programs for crop producers in 1994, the average annual cost of aiding crop farmers who experience disaster has dropped from $2.34 billion to $1.59 billion, a savings of $748 million per year. The 1997 disaster aid bill that helped 35 states, including the Dakotas and Minnesota, provided aid for cities and for livestock producers (there is no equivalent of crop insurance for animals), but only some minor loan programs for crop producers.
The 1996 farm bill made RMA even more powerful. The first Republican-controlled Congress since 1954 replaced New Deal farm programs, which made higher payments when prices were low, with fixed payments under the Freedom to Farm plan. Republicans also made RMA independent of the Farm Service Agency and ordered it to expand experiments authorized in 1994 to develop a new safety net for farmers in times of poor prices and weather.
Ackerman is a rare bird in the Washington of the 1990s: the head of a new agency with an expanded mission. RMA, which has 580 employees, asked Congress for a $4.5 million budget increase for fiscal 1998 and to increase the staff by about 40 people.
Agency heads struggling with budget cuts and watching Congress whittle away the services they provide may envy Ackerman's opportunity to create something new in government. But his experiences this year have proved working by the rules of the '90s isn't easy. Congress didn't tell Ackerman to develop a new government program and run it. Instead, the lawmakers told him to use government money to work with private companies to develop the new products to help farmers reduce risk. At the same time, legislators expect Ackerman to protect taxpayers from outrageous costs and program failures.
Ackerman has helped forge a public-private partnership in which the federal government partially obligates itself to pay most of the losses for farmers' crops after weather disasters but leaves the management and some of the financial risk to private insurers. But risk management is risky. As a former colleague of Ackerman's on Capitol Hill puts it: "Ken is getting hammered from every side." Farmers' organizations want him to develop a new safety net for farmers. Crop insurers want their own subsidies to continue at current levels, and they want quick approval for new types of policies. Officials of the Chicago Board of Trade, other commodity exchanges and country grain elevators fear the new insurance policies will be so popular that farmers won't buy futures and options. Lawmakers tug him in different directions depending on the interests of their states and districts.
For all of Congress' emphasis on innovation, Ackerman's No. 1 responsibility still is the traditional program under which private companies write subsidized multiple-peril crop insurance policies against a range of weather-related risks. The government subsidizes the premiums for those policies, reinsures the policies to guarantee benefits will be paid, and reimburses the insurance companies for part of their administrative expenses on the theory that the policies are more complicated to administer than typical household or business insurance.
Senate Agriculture Committee Chairman Richard Lugar, R-Ind., called an April 17 hearing because he was concerned the cost of crop insurance was growing and Ackerman was exceeding his authority in expanding the program. At Lugar's request, the General Accounting Office investigated the crop insurance industry and presented a report contending crop insurance companies had justified charging the government 31 percent of premium cost as an administrative expense by including costs related to buying other businesses, profit sharing, sky box rentals, country club fees and lobbying expenses in their calculations of the cost of doing business with farmers. GAO said about $43 million of the $580 million paid to nine insurance companies examined in 1994 and 1995 was not "reasonably associated" with insurance delivery and concluded that "opportunities exist to reduce government costs for private-sector delivery."
Ackerman testified that insurers had broken no laws because the standard reinsurance agreement between RMA and the companies was written on a flat-fee basis and the fee had already been reduced to 28 percent of premium cost. However, Ackerman said he considered the GAO study "a strong basis" for renegotiating the agreement, proposed a 24.5 percent fee and began a political battle.
As soon as Ackerman finished his testimony, several senators rose to defend insurance agents, saying they don't use farmers' crop insurance to join country clubs or get rich off farmers' policies. Sen. Pat Roberts, R-Kan., noted that more than 30 agents had visited his office to protest the cut. "Our agents do a superb job," Sen. Kent Conrad, D-N.D., told the GAO officials. "I don't see many of the abuses you've outlined. We've got to be seriously concerned about the treatment of these agents." Then, Conrad and another committee member, Sen. Tim Johnson, D-S.D., asked Ackerman how his agency would respond to farmers' needs in the areas of the Dakotas and Minnesota that had been ravaged by winter weather and flooding.
Ackerman told the Dakota senators he already had visited both states and reassured farmers the government would stand behind its promise to pay 50 percent of the value of a normal crop to those prevented from planting because of the weather. "Each one of these fields supports a family," Ackerman said, adding that he would also consider rewriting a crop insurance regulation so that midwestern farmers, who have had several years of extreme weather, won't see insurance rates skyrocket. The nonstandard classification regulation, a result of the 1994 crop insurance reform act, was written to discourage farming in areas prone to bad weather. "Clearly the reform needs to be reformed," Ackerman said, because it was never intended to encompass a region as large as the Red River Valley of North Dakota and Minnesota.
Although the Senate hearing demonstrated that Congress expects crop insurance to save money and aid farmers simultaneously, managing the traditional crop insurance program seems simple in comparison with developing the new risk management products. In December 1995, Ackerman and the board of the Federal Crop Insurance Corporation (FCIC), the USDA entity that reinsures the policies, approved the sale of crop revenue coverage (CRC) in Iowa and Nebraska. American Agrisurance of Council Bluffs, Iowa, developed the policy to protect corn and soybean farmers from losses due to fluctuations in market prices during the growing season, yield fluctuations, or a combination. CRC uses commodity exchange prices at planting and harvest to set prices covered by the policy. The policy proved popular and FCIC expanded it to other states and added wheat coverage in 1997. Ackerman and the FCIC board also have approved the Iowa Farm Bureau's revenue assurance policy, which has the same goals but uses a different calculation and another income protection plan RMA developed with assistance from Montana State University.
CRC appears to be just what farmers want and what the 1996 farm bill demanded, but Republican staffers on the Senate Agriculture Committee have been scrutinizing its development. While the government subsidy for the CRC premium isn't any higher than for regular multiple-peril policies, the government guarantees the entire policy, thus exposing the taxpayer to added payments if crops fail when grain prices are high. An analysis by the University of Missouri Food and Agricultural Policy Research Institute for the Senate Agriculture Committee showed that if grain prices were as high as they were in 1996 and a drought occurred, a single year's outlay for corn, wheat and soybeans could be as high as $2.14 billion. In a letter to Lugar, however, Agriculture Secretary Dan Glickman disputed the economic assumptions.
Because insurance companies are among their clients, the commodity exchanges initially made little public comment when insurers began negotiating with the government about offering price protection to farmers. But in private exchanges with Capitol Hill staffers and reporters, exchange officials said they feared CRC and other income protection policies could hurt their business because farmers would buy the subsidized policies instead of futures or options. Grain elevator operators said they feared income protection policies would dissuade farmers from entering forward contracts to supply grain at a set price at a future date. Expanding CRC could lead the futures exchanges and the grain handling industry to press for subsidies of their own "to restore a level playing field," predicted a Senate Agriculture Committee staff member in a Nov. 6, 1996, internal committee document.
Ackerman disagrees with the idea that grain exchanges and elevators will lose business. He says crop revenue coverage may encourage farmers to use marketing tools such as futures, options and forward contracts that require delivery of grain because CRC gives farmers the assurance that, in the case of crop failure, they will get payments to replace their crops. But, Ackerman adds, crop revenue coverage and other income insurance policies offer a combination of yield and weather-risk protection that farmers can't replicate on the grain exchanges without going through "an extremely complicated set of options."
Despite the contentiousness, USDA's risk management program is moving forward. USDA announced May 30 it will expand wheat crop revenue coverage to 25 states beginning this fall and begin pilot income protection programs for almonds, pecans and sweet potatoes in the 1998 season.
But this public-private partnership faces technical and political challenges. Ackerman wants to offer a combination of price and weather risk for as many crops as possible. But the smaller and more specialized the crop-as with almonds and sweet potatoes-the more difficult it is to establish a price basis for policies and spread the risk.
Ackerman's relations with the insurance industry have become strained under pressure to protect the taxpayer. Rick Gibson, president of American Agrisurance, says he understands that Ackerman has to assure sound policies have been developed in good faith. But, Gibson says, some other insurers have told him they're "not inclined to submit new policies because of the process we've had to go through."
Ackerman's decision to renegotiate the standard reinsurance agreement has angered insurance companies. Gibson said Ackerman had broken faith with the industry by failing to stick with the 1994 crop insurance act, which called for a rate of 28 percent in fiscal 1998 and 27.5 percent in fiscal 1999. But Ackerman said those rates were caps and that other federal program deliverers have had to accept cuts. Mike McLeod, a Washington attorney who lobbies on behalf of the insurance agents, said RMA was supposed to cut agents' paperwork burden but hasn't. Ackerman said the agency is working closely with the industry and making progress.
For risk management to replace farm programs as a safety net, all parties agree farmers must become more sophisticated consumers of futures, options and insurance. Rep. Tom Ewing, D-Ill., chairman of the House subcommittee overseeing risk management, told Ackerman at an oversight hearing that he finds his own constituents' knowledge of risk management "extremely elementary." Ackerman has budgeted $5 million for an education program over the next five years, but insurers, the futures and options industry and the county extension service are fighting over how education programs should be structured.
Congress' treatment of the program and the agency are still uncertain. Because any farmer has the right to take out policies that are offered on crops he grows, crop insurance is an entitlement, and the premium subsidies are considered mandatory spending, the same as food stamps, Social Security payments and Freedom to Farm payments. In a budgetary quirk, the 1994 crop insurance act made the administrative fee USDA pays to insurance agents discretionary spending and subject to annual political battles.
Rep. Charles Stenholm, D-Texas, the highest ranking Democrat on the House Agriculture Committee, said the conflicts over the program demonstrate that Congress should not have separated the Risk Management Agency from the Farm Service Agency. FSA had kept farmers' yield records, the basis for insurance calculations, Stenholm says. Now RMA is asking insurance agents to do that job because they need the information to write the policies. FSA is a better place to keep the records, Stenholm says, because no one has figured out what would happen to them if an insurance company goes out of business.
Stenholm's concerns reveal a larger debate about moving the reorganized Agriculture Department away from regulating and protecting farmers from market forces and toward helping them succeed in the global market. The change has caused tension between insurance officials and RMA employees. Ruth Gurtis, a Nebraska agent for American Agrisurance, says some RMA employees who remain attached to the era when the government sold crop insurance slowed the approval process for crop
revenue insurance. Agency insiders say some bureaucrats are upset that the crop insurance industry's underwriting profit was $200 million in 1996 and believe the government is providing too high a subsidy.
Ackerman continues to win plaudits for his commitment to risk management and his relations with Congress, but has been criticized for lacking insurance, farm or management experience. Critics also say he fails to communicate with insurance agents and farmers. Ackerman acknowledges that managing the relationship between the public and private players is "difficult at times. There are several sets of customers we have to look to. The farmer is the ultimate customer, the taxpayer is the other ultimate customer. The program was created by a national congress in the national interest. To be functional, companies have to have adequate investment."
Ackerman adds that a number of checks on the system keep it from disappointing farmers or taxpayers. Risk management remains popular with the Office of Management Budget and on Capitol Hill, he notes, because farmers and insurance companies share the risk and costs have gone down.
If Ackerman succeeds, USDA's new risk management tools could be models for other agencies to work with the private sector to provide government services. But the risks for both farmers and taxpayers are still great. Whether farmers and federal budget officials will be satisfied with revenue insurance as a replacement for programs that paid farmers more in years of low prices, Ackerman says, will be known only when prices and weather are volatile.
Jerry Hagstrom is a contributing editor to National Journal.