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106th Congress                                            Rept. 106-300
                        HOUSE OF REPRESENTATIVES
 1st Session                                                     Part 2




 September 22, 1999.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed


Mr. Combest, from the Committee on Agriculture, submitted the following

                          SUPPLEMENTAL REPORT

                        [To accompany H.R. 2559]

    This supplemental report shows the cost estimate of the 
Congressional Budget Office with respect to the bill (H.R. 
2559), as reported, which was not included in the report 
submitted by the Committee on Agriculture on August 25, 1999 
(H. Rept. 106-300).
    This supplemental report is submitted in accordance with 
clause 3(a)(2) of Rule XIII of the Rules of the House of 
    This supplemental report also contains additional report 
language to section 303 of the Section-by-Section Analysis to 
part 1 of the report.

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, August 9, 1999.
Hon. Larry Combest,
Chairman, Committee on Agriculture,
U.S. House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 2559, the 
Agricultural Risk Protection Act of 1999.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Craig Jagger.
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).

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

    Summary: H.R. 2559 would amend the Federal Crop Insurance 
Act in a number of significant ways. First, it would increase 
premium subsidies to reduce the cost to producers of purchasing 
crop insurance. The bill also would encourage development of 
and provide subsidies for privately developed crop insurance 
products. It would make adjustments in how producers' expected 
yields are calculated for purposes of determining crop 
insurance liability and premium costs. In addition, H.R. 2559 
would make a number of other changes in crop insurance designed 
to improve the program's integrity and would change the 
administrative structure of the Department of Agriculture's 
Risk Management Agency (RMA), which oversees the program.
    CBO estimates that enactment of H.R. 2559 would increase 
direct spending for federal crop insurance by $6.1 billion over 
the 2000-2004 period. Because the bill would affect direct 
spending, pay-as-you-go procedures would apply. H.R. 2559 
contains no intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act (UMRA) and would 
impose no costs on state, local, or tribal governments.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of H.R. 2559 is summarized in Table 1. The 
costs of this legislation fall within budget function 350 

                                                                      By fiscal year, in millions of dollars
                                                                   1999    2000    2001    2002    2003    2004
                         DIRECT SPENDING

Crop Insurance Spending Under Current Law:
    Estimated Budget Authority..................................   1,699   1,565   1,522   1,580   1,647   1,725
    Estimated Outlays...........................................   1,667   1,618   1,558   1,551   1,612   1,685
Proposed Changes:
    Estimated Budget Authority..................................       0   1,080   1,366   1,435   1,512   1,684
    Estimated Outlays...........................................       0     471   1,191   1,394   1,467   1,583
Crop Insurance Spending Under H.R. 2559:
    Estimated Budget Authority..................................   1,699   2,645   2,888   3,015   3,159   3,409
    Estimated Outlays...........................................   1,667   2,089   2,749   2,945   3,079   3,268

                           basis of estimate

    The Federal Crop Insurance Corporation (FCIC) subsidizes 
the cost of federal crop insurance, which makes indemnity 
payments to insured producers who suffer yield or revenue 
losses. Producers receive premium subsidies that reduce their 
costs of purchasing such insurance. Private insurance companies 
receive payments as compensation for their costs of selling and 
servicing crop insurance policies for FCIC. These payments are 
based on the premiums charged for the policies they sell. 
Private insurance companies also share with FCIC the risk of 
gain and loss on the policies they underwrite. Because these 
risks are not shared proportionally, private companies, in 
aggregate, earn underwriting gains in most years.

Premium subsidies

    Much of the bill's impact on direct spending would come 
from increases in premium subsidies. FCIC estimates a total 
premium cost for each crop insurance policy based on expected 
losses in a given year for that policy. The total premium cost 
for a policy depends on a number of factors, including the 
level of crop insurance coverage chosen by the producer. 
Generally, crop insurance coverage is the percent of expected 
crop production or value insured. For example, if a producer 
buys a yield loss insurance policy at the 65 percent coverage 
level, then 65 percent of expected production (as determined by 
FCIC) is insured. If actual production is less than 65 percent 
of expected production, the producer receives an indemnity 
payment. Other things being equal, the total premium cost is 
higher at higher coverage levels because losses occur more 
often at those levels.
    With FCIC's premium subsidies, a producer pays only part of 
the total premium cost and the government pays the rest. Under 
both current law and H.R. 2559, the premium subsidy rate (the 
percent of the total premium that is paid by the government) is 
higher at lower insurance coverage levels and lower at higher 
insurance coverage levels. For example, the premium subsidy at 
the 50-percent coverage level is 55 percent of the premium 
under current law; it would rise to 67 percent of the premium 
under H.R. 2559. At the 65-percent coverage level, the premium 
subsidy is 41.7 percent of the total premium under current law; 
it would be 59 percent under H.R. 2559.
    The outlay impact of higher premium subsidies depends on 
what producers do with the extra subsidy dollars that they 
receive from the government. Producers could simply maintain 
the same level of crop insurance protection (which would be 
cheaper to purchase under H.R. 2559) and use the extra subsidy 
dollars for other business or personal purposes. In that case, 
the only extra cost for federal crop insurance would be the 
higher premium subsidies on existing coverage.
    Alternatively, producers could choose to buy more federal 
crop insurance because not only would their current coverage be 
cheaper under H.R. 2559, but additional crop insurance 
protection would be cheaper as well. They could buy more crop 
insurance protection on the same acres or buy insurance for 
crops or acres that they currently do not insure. Because the 
government's costs are based on the amount of crop insurance 
sold, if producers buy more crop insurance, government costs 
will show further increases beyond those directly caused by the 
higher premium subsidies.
    Taking into account projected increases in insurance 
coverage, CBO estimates that the changes in premium subsidy 
rates specified in H.R. 2559 would cost $345 million in fiscal 
year 2000, $4.2 billion over the 2000-2004 period, and $10.9 
billion over the 2000-2009 period, as shown in Table 2.

                            TABLE 2.--COMPONENTS OF THE ESTIMATED COSTS OF H.R. 2559
                                                                  By fiscal year, in millions of dollars
                                                                                                  2000-   2000-
                                                          2000    2001    2002    2003    2004    2004     2009
Change in Budget Authority.............................   1,080   1,366   1,435   1,512   1,684   7,077   17,014
Change in Outlays:
    Increase premium subsidy rates for all buy-up plans     345     835     960   1,004   1,082   4,226   10,873
    Adjust yields used for crop insurance calculations.      97     205     215     221     231     969    2,285
    Additional changes to 508(h) current revenue             25      87      98     103     107     420    1,044
     products--Pay full premium subsidy and reduce
     delivery expense costs............................
    Pay full premium subsidy on other 508(h) products..      17      45      60      68      79     269      865
    Expand RMA authority for pilot programs............       2       4       5       5       6      22       57
    Establish livestock insurance pilot program........       0       9      25      35      47     116      391
    Allow Coop CAT purchases and association licensing       10      20      20      20      20      90      205
    Make prevented planting an option and equalize            1       2       2       2       2       9       20
     across crops......................................
    Change income limits for the Non-Insured Assistance       0       2       3       3       3      11       26
    Change double-cropping rules.......................      -9     -19     -20     -21     -23     -92     -221
    Promote new policies and research and development..       0      20      45      48      51     164      437
    Reduce delivery expense and loss adjustment costs..     -17     -19     -19     -21     -22     -98     -223
        Total Change in Outlays........................     471   1,191   1,394   1,467   1,583   6,106   15,759

Yield adjustments

    The dollar amount of crop insurance that a producer is 
eligible to buy depends in part on the expected yield for the 
producer's farm. Generally, FCIC considers the expected yield 
for a producer's farm to be the average of actual yields in 
previous years. An actual yield that is very low can 
significantly lower the average yield, thus reducing the amount 
of insurance that a producer can buy. In addition, if a 
producer's average yield is sufficiently below the county 
average, the premium necessary to provide a given level of 
insurance is higher.
    H.R. 2559 would set a minimum yield for each year for each 
crop. In years when the actual yield is below the minimum 
yield, the minimum yield would be used to determine the average 
yield for crop insurance calculations. Because this new yield 
would be higher than FCIC's expected yield, a producer could 
buy a higher dollar amount of crop insurance, and FCIC would 
expect to pay more indemnities. As a result, FCIC would need to 
set higher premiums, but because of the premium subsidies, the 
government would bear much of the cost. Because other crop 
insurance costs, such as reimbursements to private companies, 
are based on the amount of premiums charged, these costs would 
increase too. CBO estimates that adopting the yield adjustment 
provisions of H.R. 2559 would cost $97 million in fiscal year 
2000, $969 million over the 2000-2004 period, and $2.3 billion 
over the 2000-2009 period.

Privately developed crop insurance products

    Some of FCIC's crop insurance products are developed by 
FCIC while others are developed by private insurance companies 
under section 508(h) of the Federal Crop Insurance Act. 
Currently, revenue insurance products developed by private 
insurance companies receive premium subsidies that are lower 
than FCIC's standard yield insurance policies. H.R. 2559 would 
allow these revenue products to receive the same premium 
subsidy. To partly offset the cost, H.R. 2559 would reduce the 
payment made to private companies for selling and servicing 
these revenue insurance products. Other privately developed 
insurance products are not eligible for premium subsidies from 
FCIC and have been sold by private companies without any 
subsidies. H.R. 2559 would allow these policies to receive 
subsidies from FCIC. CBO estimates that adopting these 
provisions would cost $42 million in fiscal year 2000, $689 
million over the 2000-2004 period, and $1.9 billion over the 
2000-2009 period.

Other provisions

    The provisions discussed above account for about 95 percent 
of the estimated costs of H.R. 2559. The bill would make a 
number of other changes in crop insurance. Such changes include 
provisions that would implement a limited livestock insurance 
program, change rules as to when and how producers can plant a 
second crop after a first crop either could not be planted or 
was planted and failed, fund research on new crop policies and 
risk management products, allow cooperatives to pay the 
insurance fee for basic insurance coverage, and reduce the 
rates at which crop insurance companies are paid to sell and 
service insurance policies. CBO estimates that these additional 
provisions would save $13 million in 2000, but would cost $222 
million over the 2000-2004 period and $692 million over the 
2000-2009 period.
    Pay-as-you-go-considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. The net 
changes in outlays that are subject to pay-as-you-go procedures 
are shown in the following table. For the purposes of enforcing 
pay-as-you-go procedures, only the effects in the current year, 
the budget year, and the succeeding four years are counted.

                                                                                           By fiscal year, in millions of dollars
                                                                     1999   2000   2001    2002    2003    2004    2005    2006    2007    2008    2009
Changes in outlays................................................      0    471   1,191   1,394   1,467   1,583   1,722   1,830   1,938   2,037   2,126
Changes in receipts...............................................                                      Not applicable

    Intergovernmental and private-sector impact: H.R. 2559 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would impose no costs on state, local, or 
tribal governments.
    Estimate prepared by: Craig Jagger.
    Estimate approved by: Robert A. Sunshine, Deputy Assistant 
Director for Budget Analysis.

               additional report language to section 303

Sec. 303. Research and development, including contracts regarding 
        underserved commodities

    In contracting for the research and development of new 
policies, plans of insurance, and materials under this section 
the Committee intends for the Corporation to prescribe its own 
procedures governing contracting without regard to federal 
acquisition regulations. The Committee expects the procedures 
established will ensure contracts are entered into and 
completed so the policy, plan of insurance, or material can be 
offered to producers in the next reinsurance year or in a 
timely manner. Furthermore, the Committee expects the 
Corporation to consult with beneficiaries of the policy, plan 
of insurance, or material to ensure that any research and 
development is carried out by an entity with expertise in the 
area. Finally, the Committee expects that procedures 
established maximize the amount of funding actually available 
for research and development and minimize any overhead involved 
in complying with such procedures.