Archive for Thursday, April 22, 1999

CROP INSURANCE FIRMS UNDER FIRE

April 22, 1999

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Tough-talking Republicans portrayed last fall's authorization of $3.9 billion in "disaster relief" to uninsured farmers as the end of expensive farm handouts.

Now, citing plunging crop prices and widespread crop failures, the House Agriculture Committee is earmarking nearly $6 billion for what it promises will be "permanent changes" in the very same program.

The talks come on the heels of a highly critical report by the Agriculture Department's inspector general that concluded that the insurance system is plagued by abuse and conflicts of interest.

A major problem, auditors noted, is that taxpayers -- not insurers -- have ultimate liability for losses. Aside from assuming much of the liability, the Department of Agriculture subsidizes the farmers' premiums and pays insurers a generous "administrative expense reimbursement." All told, the program costs about $1.5 billion a year.

The crop insurance industry responded by saying the inspectors were "rehashing a bunch of old" allegations.

Over the last four years, insurers have made more than $2.8 billion in profits from the program, leaving us to wonder why a government infusion of $6 billion is now needed.

Crop insurers first came under fire in the mid-90s, when the General Accounting Office found the industry had been improperly reimbursed for a host of expenses: $418,400 for lobbying expenses, $46,850 for a company retreat, $44,000 for a fishing trip to Canada, $18,000 to rent and furnish a skybox at a baseball stadium and $17,514 to purchase chocolates.

"What we've tried to do is recognize where the flaws are in the crop insurance program while maintaining the integrity of the system," said Ken Ackerman, who heads USDA's crop insurance program. "The ultimate goal is to help farmers. Everyone recognizes the losses farmers are suffering. The question is how best to do that."

But if the Emergency Supplemental Appropriation currently being considered is any indicator, pork-barrel spending may chip away much of the $6 billion meant for crop insurance reform.

Sen. John McCain, R-Ariz., has so far labeled $85.5 million as pork-barrel spending, including

  • $2,000,000 for the Borough of Ketchikan to participate in a study of the feasibility and dynamics of manufacturing veneer products in southeast Alaska;
  • $3,800,000 for additional research, management and enforcement activities in the Northeast Multispecies fishery and the acquisition of shoreline data for nautical charts;
  • $2,200,000 for sewer infrastructure associated with Salt Lake City's 2002 Olympic games.

MARKET WATCH -- Don't panic yet, but there are signs that the decade-long economic boom might be petering out.

A recently released analysis by Standard & Poor's shows that corporate default rates more than tripled in 1998, compared with the previous years. The data show that 48 companies holding $10.86 billion in debt failed to make one or more payments on their debts. This compares to just 17 firms with debts totaling $4.35 billion in 1997.

Why should Americans -- fat and prosperous after years of double-digit annual increases in the Dow -- give a hoot about some ripples in the bond market?

And should it matter to the average person that "junk bonds," those symbols of 1980s-style financial excess, are once again the preferred corporate method of borrowing quick cash?

Default rates still only equal less than 2 percent of all corporate debt. But, says S&P's Leo Brand, the situation is "very worrisome."

"If the economy takes a downturn, default rates will increase substantially," Brand said.

Of course, some analysts have been warning for years -- without affirmation -- that the booming business cycle is about to go bust. But financial downturns, like Asian countries learned in 1997, can come quickly and with little warning. That's why many analysts worry about numbers that show junk bonds being issued 20 times more frequently in 1998 than the year before.

"We've had a period in which corporate borrowing has risen, profits have plateaued, and investment needs have continued to balloon," said Robert DiClemente, a managing director in U.S. Economic Research for Salomon Smith Barney. "This is the cycle."

What does this mean to Washington? Plenty. Administration officials are fighting with Congress over how to spend the projected federal budget surplus. But an economic downturn -- combined with an expensive war in Yugoslavia -- could plunge the federal government back into red ink overnight.

Already there's talk behind closed doors of busting the tight spending caps that helped produce the surplus to begin with. Interest groups that give money to politicians can't understand why they have to make do with less in an era when Washington is taking in more money than it spends.

Right now it's only a ripple -- but don't be surprised if the rumblings on Wall Street turn into a full-blown budgetary storm on Capitol Hill.

-- Jack Anderson and Jan Moller are columnists for United Feature Syndicate.

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