1994 Report of the Auditor General of Canada
Chapter 14—Agriculture and Agri-Food Canada—Farm Income Protection
Assistant Auditor General: Don Young
Responsible Auditor: Douglas Timmins
14.1 A wide range of federal farm income protection programs spanning many decades and Acts of Parliament has been designed and implemented in response to regional or commodity agricultural crises. These programs have involved federal contributions of some $4.5 billion since 1991.
14.2 The 1991 Farm Income Protection Act was intended to provide consistent and predictable safety nets, yet the current programs differ considerably from year to year and by commodity and region. This has created geographical "balkanization" and a fragmented approach within the industry.
14.3 We are concerned that the Department of Agriculture and Agri-Food continues to operate programs without a clear consensus on what they are expected to achieve. Since program objectives are not commonly understood and performance is not measured against them, it is difficult for the Department to determine whether or not existing programs are adhering to the social, environmental, production neutrality and equity principles set out in the Farm Income Protection Act.
14.4 The Crop Insurance Program is provincially delivered and is required to be self-sustaining. In Saskatchewan, this program has received funding from federal and provincial reinsurance programs to cover a cumulative negative fund balance of $536 million up to 31 March 1994. Since 1991, there has been a 58 percent increase in premiums in an effort to address this problem, while at the same time 20 percent of the producers in the program have withdrawn. Consequently, it is difficult to see how the Saskatchewan program will ever become self-sustaining.
14.5 To finance deficits under the provincial crop insurance programs, the federal government provides advances, as needed, to the provinces participating in the federal Crop Reinsurance Program. The federal Crop Reinsurance Program is also required to be self-sustaining, but in order to achieve this, the terms and conditions of the program would have to be amended. Based on the present contribution rate, it would take about
45 to 50 years for the current Saskatchewan deficit of $346 million to be recovered by the federal government.
14.6 For several years, our audits have reported deficiencies in the Department's financial management and control of these programs. While the Department has responded to many of our observations, deficiencies continue to arise whenever new programs or changes are introduced. For example, when the Net Income Stabilization Account was introduced, deficiencies arose with respect to payment verification.
14.7 Further, as a result of delays in preparing financial statements, annual reports and program evaluations, Parliament has not received all relevant information on these programs on a timely basis.Exhibit 14.1 ). These are:
- Crop Insurance Program - continued as a means of minimizing the economic effects of crop losses caused by uncontrollable natural hazards;
- Revenue Insurance Program - as a means of protecting producers from declines in prices of agricultural commodities;
- Gross Revenue Insurance Program - as a means of minimizing the economic effects resulting from variability in both yield and prices;
- Net Income Stabilization Account - as a means of providing income stabilization by allowing producers to accumulate funds in good years to be used in bad years; and
- Special Measures (e.g., Farm Support and Adjustment Measures programs) - as a means of meeting any unforeseen emergency situations that cannot be adequately covered by the other four programs.
14.10 These insurance programs and the Net Income Stabilization Account program are tripartite in nature, and as a result, premiums or contributions are cost-shared by the federal government, the provincial governments and the producers. In addition, deficit financing of the Crop Insurance Program is federally administered through a Crop Reinsurance Program into which the provinces of Saskatchewan, Manitoba, Alberta, New Brunswick and Nova Scotia pay premiums.
14.11 In 1991, we carried out an audit of the farm safety net programs that were in effect before the enactment of the Farm Income Protection Act . The goal for the audit was to determine whether management had satisfactory procedures for: a) measuring and reporting on the effectiveness of the existing safety net programs and b) offering reasonable assurance that the programs were subject to proper financial management and control.
14.12 We identified several problems and made a number of recommendations, focussing on "lessons learned" from existing programs that would assist the Department in implementing its new farm safety net structure. The Department agreed with our findings and made a commitment to the Public Accounts Committee for prompt action.
14.13 Normally, we follow up and report on the status of the Department's progress two years after an audit. However, the breadth of changes to the farm safety net structure since 1991 dictated that the follow-up be combined with an audit of the new programs.
Audit Scope and Objectives14.14 This audit was carried out in the context of:
- the continual creation, extension and dissolution since the 1930s of various programs designed to respond to regional or commodity agricultural crises, and
- questions raised in our 1991 audit about the adequacy of the effectiveness measurement and financial management and control of farm safety net programs.
14.16 Exhibit 14.3 shows the ongoing farm income protection programs for 1993-94. These involve federal contributions of some $831 million, bringing the government's support for these programs to a total of some $4.5 billion since our last audit of them in 1991.
14.17 Our audit focusses on current programs for farm income support delivered by the Department under the authority of the Farm Income Protection Act, as well as the two ad hoc programs, Farm Support and Adjustment Measures I and II. We have excluded from the scope of this audit the dairy subsidy and other minor non-recurring programs under this Act.
14.18 The objectives of our audit were to assess and report the extent to which management has:
- designed programs with clear, consistent and commonly understood objectives to address identified farm income priorities;
- established systems to measure and report on the effectiveness of these programs;
- obtained reasonable assurance that the programs are subject to proper financial management and control; and
- taken corrective action in response to our 1991 farm safety net observations and recommendations.
Evolution of Farm Income Protection Programs14.19 The range of federal yield and revenue income protection programs available to Canadian farmers spans several decades and many Acts of Parliament (shown in Exhibit 14.4 ).
14.20 Crop insurance. A series of crop losses in Western Canada prompted the 1939 enactment of the Prairie Farm Assistance Act . The Act, since repealed, provided for the creation of a fund to compensate for crop losses through a percentage levy on grain sales. Indemnity payments were issued to all farmers in a given township on the basis of the average grain yield.
14.21 The Crop Insurance Act was introduced in 1959 to address the demands of farmers for individual crop protection. This Act was repealed in 1991, and its provisions were incorporated into the Farm Income Protection Act introduced at that time. The crop insurance programs are provincially delivered and are required to be self-sustaining. The federal Crop Reinsurance Program is also required to be self-sustaining.
14.22 Revenue insurance. The Agricultural Prices Support Act was enacted in 1944 as a temporary and transitional vehicle for post-war commodity stability. In the latter part of the 1950s, downward pressures on prices spurred the emergence of permanent safety net programs in agriculture. The Agricultural Prices Support Act was replaced in 1958 by the Agricultural Stabilization Act , which reflected a desire for a more precise statutory commitment.
14.23 The high inflation during the 1970s led to the amendment in 1975 of the payment formula in the Agricultural Stabilization Act to include coverage for current cash costs of production. In the following year, 1976, the Western Grain Stabilization Act was introduced to protect Western grain farmers against falling prices and rising costs.
14.24 By the mid-1980s, the globalization of markets and changing trade rules had forced a recognition that truly national solutions were needed. In 1986, in an attempt to limit competition among provinces in the provision of support to agriculture, the National Tripartite Stabilization Program was created.
14.25 In the late 1980s, the Department admitted that there were problems associated with the Agricultural Stabilization Act and the Western Grain Stabilization Act and stated that the programs under these Acts lacked predictability for farmers to make good management decisions and did not allow the public purse to target individual needs. The Agri-Food Policy Review in 1989 resulted in proposals for comprehensive and predictable federal-provincial farm safety net programs.
14.26 New legislation was written, and the Farm Income Protection Act passed into law in April 1991. Under the Act, a provincially administered Gross Revenue Insurance Program was implemented to supplement the existing commodity price and yield programs - the Crop Insurance Program and the Revenue Insurance Program. This combined program incorporates the protection of crop insurance and revenue insurance. Only the Maritimes have adopted the combined program. In the other provinces, producers are able to enrol in either the Revenue Insurance Program or the Crop Insurance Program, or in both. Only if they enrol in both do they have the coverage equivalent to the Gross Revenue Insurance Program. In addition, a federally administered Net Income Stabilization Account was established to allow farmers to accumulate funds for the bad years.
Audit Observations and Recommendations
Continuing Change in the Stabilization Programs14.27 Subsequent to a major policy review and the enactment of the Farm Income Protection Act , we would have expected the ongoing farm income stabilization programs to provide a stability and predictability that would allow for long-range planning by the farmers and the Department.
14.28 In 1989, the Department identified inequities between commodities and regions as one of the key problems with the safety net programs. Support levels, program financing, eligibility and risk coverage varied from one region to another and from one commodity to another.
14.29 This fragmented commodity approach stemmed from the fact that safety nets were created originally as temporary measures dealing only with the commodity or region in difficulty at the time. As later crises and emergencies arose, some of these measures became permanent.
14.30 Commodity interest groups and the provinces have historically had a basket of program options from which to select. In an attempt to minimize this variation, section 4 (2) (b) was incorporated into the Farm Income Protection Act . It states that consideration shall be given to the following:
"The level of protection to be provided by, and the relative share of governmental contributions to be provided to, the program in relation to particular agricultural products or classes of products should be equitable and reasonably consistent with all other agreements, taking into account regional diversity."14.31 While the conceptual thrust of the Farm Income Protection Act is to provide consistent and predictable safety nets, the components of current programs continue to vary from year to year and by commodity and region.
14.32 As its title indicates, the Gross Revenue Insurance Program was initially intended to provide full revenue protection by combining the yield protection of crop insurance with price protection. The shift to the Gross Revenue Insurance Program was meant to be a move away from separate commodity plan administration and central federal accounting to a national agreement with provincially administered accounts. This objective has been accomplished. The provinces now administer the revenue insurance component of the Gross Revenue Insurance Program.
14.33 The method of calculating Gross Revenue Insurance Program payments varies across the country, such that identical situations in bordering provinces can result in completely different stabilization payments, depending on coverage levels, ways of offsetting losses, yield adjustments, limits on acreage coverage and whether protection is determined on an area basis or an individual basis. Moreover, not all crops grown in a province are eligible for protection.
14.34 One of the concepts of the Gross Revenue Insurance Program was that offsets would be put in place to ensure that there was no overlapping of the benefits from crop insurance. As a transitional measure for 1991-92, the Gross Revenue Insurance Program agreement provided for partial relief from this requirement. We found however, that only the Maritime provinces have instituted full offsets. As a result, producers in most provinces are in a position to receive benefits greater than originally intended.
14.35 Moreover, the program design changed during the process leading up to and following the enactment of the Farm Income Protection Act . As early as 1990, the Department had recognized that an independent Revenue Insurance Program was less acceptable to international trading partners than a combined Gross Revenue Insurance Program. However, the concept of combining yield and price protection into one holistic approach exists today only in the Maritime provinces. An integrated Gross Revenue Insurance Program does not exist in the other provinces. As a result, the separation of yield and price into two separate programs parallels the situation that existed under the Agricultural Stabilization Act and the Crop Insurance Act .
14.36 The Department continues to have to negotiate, design and alter programs in response to a wide range of expectations and pressures from individuals, commodity organizations and provincial authorities, some of whom are partners in the programs. The federal-provincial sharing of agricultural jurisdiction and administrative responsibilities and the involvement of about 300 other organizations, many of which are large and influential and have conflicting demands, place additional pressures on program management.
14.37 For instance, most of the National Tripartite Stabilization Program commodity plans are being terminated and replaced with transitional programs, or commodities are becoming immediately eligible under the Net Income Stabilization Account Program and/or the Gross Revenue Insurance Program. As shown in Exhibit 14.5 , the number of plans has dropped from 69 to 9, but a provincial and commodity patchwork of the National Tripartite Stabilization Program will continue in 1995.
14.38 While the Farm Income Protection Act is national, the differences in provincial application and the continuation of distinct commodity programs have resulted in "balkanization" geographically and by producer groups within the industry. The Net Income Stabilization Account program is a move to a more national approach; however, not all commodities are eligible. As a result, the "nationality" of these programs is drawn into question.
Program Objectives Still Need to Be Commonly Understood and Accepted by All Parties14.39 Program objectives that allow for different interpretations may have been necessary initially to encourage cost sharing and facilitate producer enrolment. However, in order to achieve their vision of federal-provincial whole-farm programs that meet the needs of the industry and individual producers, the Department, the provinces and the producers must develop common concepts and translate their shared understanding into clear, consistent and measurable program objectives and a joint action plan. When formulating these objectives, stakeholders need to consider the increased administrative complexity, compliance procedures and costs associated with managing programs that target individuals.
14.40 The Department agreed with, but only partially acted upon, our 1991 recommendation that the socio-economic performance objectives for the individual safety net programs be defined in operational terms. This is not an easy task, as evident in the case of the federal-provincial Crop Reinsurance Program, where, despite efforts, no consensus on program objectives has been reached. Nevertheless, we are concerned that programs costing hundreds of millions of dollars each year continue to operate with no definitive or accepted statement of what they are expected to achieve.
14.41 The recent General Agreement on Tariffs and Trade more clearly establishes the rules of international commodity marketing. The agreement has reduced external constraints on the Department, provinces and producers that were hindering the development of a comprehensive vision for farm income protection programs.
14.42 The Department should take the lead role in clearly defining farm income protection program objectives that are commonly understood and accepted by the provinces and industry. A joint action plan to achieve these objectives should be developed.
Department's response: The Department has already taken the lead and has been working with the provinces and the industry to develop farm income protection program objectives and the action plans to achieve these objectives. The National Safety Nets Consultation Committee is currently working on objectives, principles and alternatives for the future. This is a long-term process that will evolve with continued discussions and negotiation with sector representatives and will be supported by the continued development of measures on the performance of safety net programs.
Ongoing Effectiveness Information Not Available14.43 In addition to translating the broad financial and socio-economic objectives of each program into clear, consistent and measurable statements, the five broad principles of the Farm Income Protection Act need to be expressed in operational terms.
14.44 The principles stated in the Act are as follows:
- All programs should be production- and market-neutral so that farmers will adjust to market signals.
- The level of protection under each agreement should be consistent among all agreements, and the treatment of all classes of products should be equitable.
- Programs should encourage the long-term social and economic stability of farm families and communities.
- Programs should recognize the need for future changes that may emanate from Canada's evolving international obligations under the General Agreement on Tariffs and Trade, the North American Free Trade Agreement or other similar trade agreements, and should remain compatible with these obligations.
- In their design and operation, programs should reflect Canada's commitment to environmental sustainability. Programs should also reflect economic sustainability aims by promoting initiatives that are efficient, self-sustaining over time and conducive to the agricultural sector's long-term development.
14.46 Some financial self-sustainability and economic performance targets have been established for the farm income protection programs, including the following:
- Income of insured producers is to be greater than non-insured producers over time.
- Program insurance contracts are to be accepted as security by financial institutions.
- Trends in farm income over time are to show a decline in special assistance payments.
- Program revenue is to match program expenditure over time (i.e., program is to be self-sustainable).
14.48 Objectives based on economic principles can often be achieved only at the expense of social concerns. One of the challenges in managing these programs is to balance the five stated principles, which sometimes compete against each other. The establishment of specific sub-objectives and targets is vital, not only to provide a basis for program design and accountability, but also so that appropriate data can be collected cost-effectively and made available for ongoing management decision making and trade negotiations. This data will be essential for the report on the programs, which must, under the Farm Income Protection Act , be tabled in the House of Commons by 1 April 1996.
14.49 In 1991, Treasury Board approved 27 additional person-years to collect and analyze farm-level data to determine the financial and management impact of government programs. In 1994, three years later, in spite of the fact that farm-level profiles have been published, the Department still has more to do to implement all the necessary systems to gather and analyze information on income protection program results. For instance, at the time of our audit, the Department had not yet collected the farm income data on an insured producer versus non-insured producer basis or confirmed financial institutions' acceptance of government insurance contracts as security.
14.50 Since program objectives are not commonly applied and performance is not measured against them, it is difficult for the Department to determine whether existing programs are actually adhering to the broad principles set out in the Farm Income Protection Act .
14.51 The Department should prepare a comprehensive list of performance indicators for all the principles established under the Farm Income Protection Act . It should measure and report the achievement of results to Parliament and to other interested parties.
Department's response: The Department has constructed a major farm level data base, which has been a valuable tool in: providing analysis of the potential impacts on farm income and industry competitiveness; providing analysis of proposed policy changes; considering new proposals for farm income protection; assessing the effectiveness of current programs; and working towards a consensus on program objectives. The Department will continue to utilize and develop this data base to analyze trend lines and measure the performance of programs to develop a consensus on program objectives.
Financial Self-sustainability Issues Persist14.52 The Gross Revenue Insurance Program, the Crop Insurance Program and the Revenue Insurance Program are required to be self-sustaining. Setting this financial objective implies that, over time, premiums and government contributions together should match the amount paid to farmers. However, at any time, a provincial account may be in a cumulative surplus or deficit situation. A surplus indicates the existence of a reserve to address the risk of major losses in future years; a deficit indicates that cumulative indemnities have exceeded cumulative premiums.
14.53 The Department forecasts a cumulative surplus of over $530 million in the Saskatchewan Gross Revenue Insurance Program account for the end of 1994-95. Saskatchewan has given notice that it plans to terminate its participation in the Gross Revenue Insurance Program after the 1994 crop year and distribute the surplus among the federal and provincial governments and producers. The province has established a committee to develop and review alternatives for establishing a new program starting with a zero balance.
14.54 Saskatchewan has indicated that it wishes to remain in the Crop Insurance Program, where it had an estimated cumulative negative fund balance of $536 million up to 31 March 1994.
14.55 The present Saskatchewan Crop Insurance deficit began accumulating in 1988 at the time of drought conditions that resulted in very severe and widespread crop losses in Western Canada. Absorption by the federal government of any portion of the deficit that farmers are unlikely ever to repay would be inconsistent with the requirement of the Farm Income Protection Act that premiums be sufficient to allow the program to be self-sustaining.
14.56 Exhibits 14.6 and 14.7 show some cumulative deficit and surplus figures by province for the Gross Revenue Insurance Program and the Crop Insurance Program. These figures provide some indication of the extent to which they are self-sustainable.
14.57 Crop Insurance Program. The Farm Income Protection Regulations respecting the Crop Insurance Program require that each provincially administered program provide, no later than 1 April 1993 and every five years thereafter, signed actuarial certificates attesting to the fact that each plan is actuarially sound. Further, the program is required to be financially self-sustaining at the provincial level.
14.58 The Department obtained the services of an actuarial firm to provide advice on premium rate methodology and to provide definitions of the terms "self-sustaining" and "actuarially sound". In August 1992, the firm's reports were provided as guidelines to all provinces to incorporate into their premium rate methodology.
14.59 In response to our 1991 recommendation that the term "self-sustaining" be defined, the following parameters were established to ensure that self-sustainability is measured in a consistent and professional way.
- As a general rule, 10 to 20 years is an acceptable range for obtaining the target reserve level.
- The actuarial analysis should have a confidence level of 90-95 percent that actual experience would not deviate significantly from expected loss or gain.
- The time period for determining actuarially sound premium rates is 20 years or more of historical experience.
14.61 According to the Department, up to 31 March 1994, the Saskatchewan Crop Insurance Program had received funding from federal and provincial reinsurance programs for most of the $536 million cumulative deficiency in revenue compared to indemnities paid out, and had a cumulative loss ratio of 1.20. This ratio indicates that cumulative loss payouts have exceeded cumulative premiums and government contributions by 20 percent and that the provincial program has accumulated a deficiency of $200,000 for every $1 million in premiums that it collected.
14.62 The Saskatchewan actuarial report indicates that an increase in the existing annual premium is required for the program to become self-sustainable according to the departmental definition. The report recognized that raising premiums 10 to 15 percent to meet this requirement would result in excess surpluses over the long term, and therefore recommended an increase of 8 percent of the existing annual premium as being sufficient.
14.63 Due to several factors, the insurance premium in Saskatchewan rose from an average of $6.17 per acre in 1991 to $9.79 per acre in 1993. This helped to reduce the cumulative loss ratio from 1.28 to 1.20. However, during the same period, approximately 20 percent or 10,000 of the farmers in Saskatchewan withdrew over 4 million insured acres from the Crop Insurance Program. If farmers continue to withdraw at this rate, it is difficult to see how the Saskatchewan program will become self-sustaining. According to the Department, there is no evidence or agreement with the province that the reduction in participation is due to the increase in premiums. Furthermore, there is limited analysis of the causes of the problem. Nevertheless, premiums have been increased in an attempt to save the program. It is recognized that the current requirement for programs under the Farm Income Protection Act to be self-sustaining limits the options that management has to deal with the current deficit situation.
14.64 A significant number of Saskatchewan farmers may now be assuming an increased financial risk by not insuring in the hope that the federal government would provide funding if an extreme crop loss situation were to arise.
14.65 The Department, in conjunction with the Province of Saskatchewan, should determine the causes for the withdrawal of such a large number of Saskatchewan farmers from the Crop Insurance Program and take action to correct the problem.
Department's response: The Department agrees with the recommendation. A Federal/Provincial Steering Committee and Working Group have been set up to carry out the required work.
Participation stabilized in 1994, and it should be noted that the participation level in Saskatchewan currently is equivalent to participation in the neighbouring Prairie provinces.
14.66 Crop Reinsurance Program. The five provinces participating in the Crop Reinsurance Program may draw advances when they do not have sufficient cash to meet the payments to farmers under the provincially delivered Crop Insurance Program. Under the reinsurance agreement, an annual maximum of 15 percent of total crop insurance premiums in each province is contributed to the federal reinsurance fund. If provincial insurance premium reserves are insufficient to pay all indemnities, federal reinsurance makes up a portion of the shortfall.
14.67 As at 31 March 1994, the Saskatchewan Crop Reinsurance Fund deficit was forecasted to be $346 million or 91 percent of the total federal Crop Reinsurance Program deficit and represents most of the deficit under this province's Crop Insurance Program (see Exhibit 14.8 ).
14.68 In 1993, the Department of Agriculture and Agri-Food initiated a review of the federal Crop Reinsurance Program. All provinces were invited to participate in the review; seven did so. According to the Department, three provinces did not participate because of the failure to reach a federal-provincial consensus on what the objectives of the program should be. The provinces that did participate believed that the program should be continued as a strictly federal-provincial financing arrangement or modified to a repayment arrangement that considers risk.
14.69 The actuarial report estimated that in the case of Saskatchewan, it would take about 45 to 50 years for the federal government to recover the amounts advanced to cover the deficit. This assumes that the required rate increases could be passed on without losing a large proportion of the insured population. This report concluded that the federal-provincial reinsurance provisions do not meet the Department's minimum guidelines for self-sustainability.
14.70 The maximum contribution limit of 15 percent of total provincial premiums coupled with provincial program deficits indicates that there is a need to amend the Crop Reinsurance Program terms and conditions.
14.71 The Department should renegotiate and amend the terms and conditions governing the Crop Reinsurance Program to ensure that the premiums levied are sufficient to allow the program to be self-sustaining.
Department's response: The Department agrees with the recommendation and in fact had contracted an independent consulting actuary in 1993 to review reinsurance and to recommend changes if required. The Department is currently reviewing the actuary's report to formulate its position on his recommendations. The Department will be developing a workplan for federal/provincial consultation aimed at negotiating changes to reinsurance.
Some Financial Management and Control Deficiencies Have Been Addressed While Others Continue14.72 The passage of the Farm Income Protection Act was the result of a period of intense restructuring of federal-provincial farm safety net programs. As we noted in 1991, this effort of negotiation and mediation was at the cost of efficient program administration.
14.73 Our agricultural audits from 1986 to the present have reported numerous deficiencies in the Department's financial management and control over programs. In our 1991 audit report and subsequent management letter, we reiterated the urgent need for the Department to deal with this area. We also expected the Department to address these previously reported deficiencies in the development of new programs. While the Department has responded to many of our previous observations, as new programs or changes to programs are introduced, financial management and control deficiencies continue to arise.
Two ad hoc programs provided financial incentives during the transition period14.74 Even under the best of circumstances, implementation of new agricultural programs would have been difficult, costly and time-consuming. Yet, in the midst of this change, two additional ad hoc programs had to be dealt with. These temporary programs were to provide financial aid until the new programs under the Act were fully in effect.
14.75 The Department states that to help farmers make the transition to the new Gross Revenue Insurance Program and the Net Income Stabilization Account, Farm Support and Adjustment Measures I, the first of the two ad hoc programs, was announced in April of 1991. Approximately $631 million was expended, with $293 million directed towards encouraging participation in the Net Income Stabilization Account. The Account is effectively a fund established for financially difficult years, with withdrawals triggered by a formula. During the first year, the Net Income Stabilization Account transitional provisions waived the established payment trigger requirements and allowed producers to determine how much to withdraw. In the second year, producers could make this same choice for Farm Support and Adjustment Measures money only.
14.76 In October of 1991, the government announced a second program, Farm Support and Adjustment Measures II, to further supplement farmers' income. Budgeted at $800 million, the second Farm Support and Adjustment Measure expended $775 million. Some of the money paid was based upon the Net Income Stabilization Account data for administrative convenience, but it was not intended to encourage participation in the regular Net Income Stabilization Account program.
Administration deficiencies hampered implementation of the Net Income Stabilization Account14.77 The intent of the Net Income Stabilization Account program established in 1991 was to set up a fund that farmers could put money into in prosperous years for use in financially difficult years. An annual contribution of two percent of eligible net sales up to $250,000 is permitted. The federal and provincial governments together match this contribution and provide interest.
14.78 When the Department originally sought approval of funding for the Net Income Stabilization Account, Treasury Board authorized 70 full-time equivalent positions for the program, with annual operating and capital budgets totalling $12 million. However, the program employed 353 full-time equivalents in 1993-94 and had expenses of $24.5 million, which included $5.8 million relating to a new informatics system.
14.79 Producers pay a $40 administrative fee to cover part of the cost of administering their accounts. In 1993-94, the revenue collected by the Net Income Stabilization Account amounted to $8.9 million, resulting in net administration costs to the Department of $15.6 million.
14.80 With the passage of the Farm Income Protection Act in April 1991, the Department was required to quickly develop and administer the new Net Income Stabilization Account program. The program was implemented retroactive to the 1990 taxation year, but the national agreement for the Net Income Stabilization Account was signed only in October 1991. Processing of forms could not be carried out with certainty before this time.
14.81 Because the Net Income Stabilization Account implementation began before the program design was finalized and because of the large volume of producer applications, problems were encountered in delivering the program. A total of 270,000 application forms was sent to producers at the inception of the program. However, sixteen policy changes were negotiated within the first nine months of the Net Income Stabilization Account implementation; consequently, an additional 170,000 forms had to be sent to producers to amend original applications. (see photograph)
14.82 The old forms - some being 27 pages in length with several additional pages of schedules - were seen by many farmers as being too long and complicated, particularly in light of the small amounts of money involved. The farmer's average net deposit in 1992 was $1,531, while the average net withdrawal was $1,443. We found that 75 percent of the Net Income Stabilization Account forms were completed by accounting firms in 1991, the only year this statistic was recorded. The Department has since recognized the problems with the forms and has simplified them by reducing them to four pages.
14.83 Presently, the average active account balance for producers is $2,682. Our review of unaudited 1992 data on the Net Income Stabilization Account found that 51,109 producers or 39 percent of participants who received payments have no balance in their account. The Department is aware of many of the reasons for these withdrawals. However, further analysis is needed to assess the extent to which withdrawals have been triggered by market conditions that are viewed as temporary. This analysis may identify producer groups who are not able to put money aside now to protect themselves against future financial difficulties, as intended by the program.
14.84 The Net Income Stabilization Account also faced numerous difficulties with its original computer system. Now obsolete, this system cost $8 million to develop. The system difficulties have contributed to the inability to produce, as yet, financial statements for the first three years of operations. An estimated $10 million is being spent on developing a new accounting, processing and management information system. We did not test this system, as it was not fully operational at the time of our audit. The Department feels that this new system will result in positive changes. Nevertheless, it is still uncertain when the first set of audited financial statements of the Account will be issued, since data are still being reconciled from the first Net Income Stabilization Account system to the departmental financial systems.
14.85 The extent of problems with the Net Income Stabilization Account prompted the Department to conduct an internal audit to provide an evaluation of its control techniques and to assess the accuracy of payments to a very limited sample of producers for the 1990 taxation year. This internal audit concluded that major deficiencies existed even in the fundamental financial management controls. For example, there was no verification of the accuracy and validity of data provided by producers, and there was an almost complete lack of payment verification. Subsequent work by the Net Income Stabilization Account staff on an extensive sample of large claims revealed that 10 percent of the files reviewed for 1990 were in error and had resulted in net underpayments of $500,000. The Department is of the opinion that the data base is relatively accurate, and no material discrepancies have been found.
14.86 Some of the control weaknesses noted in the report have been addressed in the design of the new computer system. Features in the new system to enhance control include: improved password security, automated interest calculations, exception reports, annual producer statements and confirmations, and cross-referencing of partnership accounts. The effectiveness of these procedures could not be verified at the time of our audit. With the implementation of the new system, the Department believes that improvements in both operations and service to clients will be achieved.
14.87 The internal audit also recommended that desk audits and on-farm inspections be carried out. A desk-audit function was established in December 1993. An accounting firm conducted 200 field audits, and 300 more are planned for the coming year. The Department is also completing negotiations to have Revenue Canada conduct field audits on its behalf at the same time as tax audits are carried out.
14.88 Another intent of the program was to ensure accuracy of claims by matching them with taxation records. For this reason, the Farm Income Protection Act required participants in the Net Income Stabilization Account to provide their social insurance number. Indeed, the forms issued for use by producers require that information filed with Revenue Canada be entered, adjusted and reconciled for Net Income Stabilization Account purposes. In the current year, the Department of Agriculture and Agri-Food received information from Revenue Canada on participants who have not filed for tax purposes or who have reported higher sales to Agriculture and Agri-Food than to Revenue Canada. Both bodies are working toward a more efficient method of data transfer and workload identification, which may involve producers filing with Revenue Canada in order to input Net Income Stabilization Account data through the tax system.
14.89 The Department of Agriculture and Agri-Food prepared and issued tax information slips (AGR-1) to producers for farm support payments for the first time in 1993. The Department subsequently determined that, in some cases, these tax slips showed widespread discrepancies between the Net Income Stabilization Account records and the producer records. The Department indicated that the discrepancies were a result of the producers' lack of understanding of the tax treatment resulting from the practice of "deeming of deposits" and programming errors in preparing the tax slips. Deeming of deposits is used for administrative efficiency. This means that rather than receiving a cheque from a producer for deposit and then issuing a cheque to the producer for withdrawal, a cheque for the net amount is issued to the producers. The gross amount is reportable for tax purposes and is required to be included on tax information slips.
14.90 To minimize incorrect tax filing by producers, the Department advised producers in March 1994 to use either the tax information slip or their own records, whichever they felt was correct for tax purposes. The Department also advised producers that the new system would rectify these problems for future years. In order to determine the extent of the problem, the Department indicated that it is performing a reconciliation of information with the objective of issuing detailed producer statements starting from the 1991 tax year.
14.91 The Department should ensure that, for the Net Income Stabilization Account:
- payments made to producers are verified for accuracy, and action is taken to correct errors found;
- recently introduced desk audits and on-site inspections using established procedures are conducted on an ongoing basis;
- information submitted by producers is subject to reconciliation and matching to Revenue Canada records;
- the reasons for withdrawals are analyzed to determine the extent to which long-term benefits are being achieved; and
- financial statements for all prior years are prepared and audited as soon as possible.
- The new NISA accounting, processing and management information system has enhanced procedures, edits and verification to ensure the accuracy of payments made and the correction of any errors identified;
- Five hundred desk audits and three hundred on-site inspections, using established procedures, are scheduled for completion during 1994-95;
- Processes are currently in place to regularly reconcile and match information submitted by producers with Revenue Canada records and to follow up on any material variances identified;
- Withdrawal information will be compiled and presented in the NISA annual report together with audited financial statements. This information will be used to determine program effectiveness in the five-year review of the program.
Monitoring of provincial administration and payment authorization is in place14.92 In 1991, we noted that the Department was unaware of serious administrative and compliance problems in the provincial administration of programs. We also observed that officials in the Department approved federal contributions to the Crop Insurance Program and the National Tripartite Stabilization Program without sufficient and appropriate evidence that the provinces had complied with the terms and conditions of the respective agreements.
14.93 The Department responded by staffing and integrating into program operations a separate audit unit, a senior comptrollership position, an assistant comptroller and four financial officers. Their activities include:
- issuing accounting policies and disclosure requirements for financial statements issued by the provinces;
- processing claims, and analyzing and monitoring provincial financial activities;
- developing and implementing standard procedures for reviewing and processing provincial claims; and
- auditing all provincial Gross Revenue Insurance and Crop Insurance administrations and selected National Tripartite Stabilization Program plans in every province, and following up on audit results.
Vague agreements have been partially corrected14.95 Dissolution of program agreements and settlement of accounts. Over the next few years, the Department will be faced with the withdrawal of provinces from programs as well as the termination of many of the National Tripartite Stabilization Program plans. For instance, most of the twelve Program plans and the Saskatchewan Gross Revenue Insurance Program have been terminated, are in the process of being terminated or are slated for termination.
14.96 National Tripartite Stabilization Program plans for two commodities - white pea beans and sugar beets - were terminated respectively in July 1992 and August 1993, since they were considered no longer financially self-sustaining. These plans terminated with respective deficits of $44.5 million and $8.4 million and cumulative loss ratios of 2.45 and 1.21. The plan for lambs also terminated in February 1994 with a deficit of $3.7 million and a cumulative loss ratio of 1.56.
14.97 Large surpluses exist in most other plans, and overall the plans had a surplus of almost $103 million as of 31 March 1994, but the deficits in individual plans cannot be offset against surpluses in other plans. This is due in part to the fact that each plan maintains its own account, most plans involve different producers and each plan is directed by its own committee, comprised of federal-provincial representatives and producers.
14.98 The relative split of deficits and surpluses among the three partners - federal and provincial governments and producers - is spelled out in the agreements. In the case of a National Tripartite Stabilization Program plan terminating in a deficit position, the federal and provincial governments are jointly responsible for the total amount.
14.99 The fund is split equally among the federal-provincial-producer partners on termination of a plan with a surplus. However, individual producer entitlement rights are not spelled out with respect to inactive participants at the time of termination of the plan. As each plan is managed separately, individual management committees of each National Tripartite Stabilization Program plan develop their own criteria for the distribution of surplus funds. Compounding this variation, as a province withdraws, it applies its own interpretation to determine who should receive benefits. A similar situation is occurring with respect to Saskatchewan's withdrawal from the Gross Revenue Insurance Program. Consequently, individual entitlements vary by plan and by province.
14.100 The Department, in consultation with the provinces and producers, should agree to standard procedures to be employed when provinces withdraw or when plans/agreements are terminated in surplus and deficit situations. These procedures should be an integral part of each federal-provincial agreement.
Department's response: At the earliest opportunity, the Department will review the wording of the various safety net program agreements to ensure that procedures are clear as to the treatment of surpluses and deficits. Given the diversity of the existing and possibly future safety net programs, it is not clear whether it would be advantageous to have a standard set of procedures applicable to all programs. However, the procedures outlined in agreements themselves should be clearer to avoid any misunderstanding on termination.
14.101 Federal-provincial administrative agreement. In 1991, we observed that the draft administrative Gross Revenue Insurance Program and Crop Insurance Program agreements providing the terms and conditions under which the federal government would pay 50 percent of the provincial program operating costs were so vague that wide variations in interpretation - with potentially significant financial effects - were possible. Departmental officials stated that they shared our concern and worked to redraft these documents more precisely.
14.102 The federal 50 percent share of the provincial administrative costs for both Crop Insurance and Gross Revenue Insurance was approximately $54 million and $47 million for 1991-92 and 1992-93 respectively.
14.103 The signed federal-provincial administrative agreement is clearer than the draft agreement. However, the agreement allows individual provinces to determine program resourcing and levels of service to be provided. As a result, there are large differences among provincial administrative costs. For example, in 1993-94, the federal 50 percent contribution to provincial administration costs for the Gross Revenue Insurance Program and the Crop Insurance Program varied across nine of the provinces from less than one percent to more than four percent of every dollar of insurance coverage and from approximately $300 to $1,700 per farm (see Exhibit 14.9 ). This variation in administrative costs is impacted by the number of producers enrolled in the smaller provincial programs.
14.104 The Department has conducted audits of the provincial administrations, focussing on what it believes to be the high-risk areas, such as accuracy of accounts and verification of yields. It is reasonable to expect some variation across the provinces due to economies of scale. To ensure that the provinces are effectively administering the programs, guidelines need to be developed to deal with the high-risk areas. Where the provincial administrative procedures do not meet the guidelines, federal contributions could be reduced.
14.105 Other administrative arrangements are not clearly spelled out. For instance, the agreement with the provinces stipulates that the federal government may have access to provincial information. Nevertheless, the provinces have flexibility as to the quantity, quality or capability of informatics purchasing and development decisions. Consequently, data obtained from the provinces by the federal government are not always provided in a standard format and, as a result, have to be re-keyed in certain cases.
14.106 The Department, in conjunction with the provinces, should consider establishing guidelines for provincial program management and level of service for future agreements.
Department's response: The insurance program administration can vary by region and province due to the coverage area and the diversity in agriculture across the country. These variations impact on administration costs, since it is necessary to adapt to the specifics of each provincial program. Thus far the Department has focussed on the areas that are more significant and risky and has already taken or will take the following action:
- development of producer yield verification procedures and objectives;
- development of an automated management reporting information system for the Crop Insurance and Gross Revenue Insurance programs; and
- development of a list with provinces of "best practices" in key areas to improve the efficiency and effectiveness of these programs.
Timely Reporting Still Not Achieved14.107 No annual reports have been issued to Parliament respecting the operations or payments made under the federal-provincial agreements as required by Section 21 of the Farm Income Protection Act . The Department argues that it provides sufficient information on the operations of programs in its Part III of the Estimates. Notwithstanding this, the 1994-95 Part III does not provide statements on program results as related to the principles of the Farm Income Protection Act , cumulative Gross Revenue Insurance Program balances, or complete and audited information on the Net Income Stabilization Account. Furthermore, information is dispersed throughout the Part IIIs of the Estimates, whereas an annual report would consolidate program information in one document.
14.108 The Department indicated that it may use section 157 of the Financial Administration Act to obtain authority to supply information to Parliament only through its Part III of the Estimates instead of having to table an annual report, but Governor-in-Council approval has not yet been requested.
14.109 Previously, we found significant deficiencies in the National Tripartite Stabilization Program accounting system for the preparation of timely and accurate financial information. The Department has responded positively to our 1991 recommendation regarding the completeness and accuracy of financial information by installing a new accounting system and adding more senior financial resources. These changes have allowed the Department to provide plan administrators, in particular the national committees of the Program, with more credible and meaningful information for decision-making purposes.
14.110 Further, over the past two years, the Department has completed or substantially completed annual reports for National Tripartite Stabilization Program plans that include audited financial statements for 32 year-ends. Although there are still delays being encountered in issuing the annual reports, the Department has indicated that it expects to have the Program's financial statement audits current by 1995.
14.111 At the 14 October 1992 Public Accounts Committee hearing, the Department tabled a schedule for the completion of program evaluations for the farm income protection programs. Despite the timetable commitment to the Public Accounts Committee, the evaluations for the National Tripartite Stabilization Program and the Farm Support and Adjustment Measures that were to have been completed in 1992-93 had yet to be completed at the time of our audit. The remaining farm income protection program evaluations are not scheduled for completion until 1995 and 1996.
14.112 Some information on these programs is included in Part III of the Estimates and the Public Accounts of Canada. Nevertheless, as a result of the delays in producing financial statements, annual reports and program evaluations, Parliament has not received, on a timely basis, all relevant information on these programs, which have cost approximately $4.5 billion since their inception three years ago.
14.113 The Department should ensure the timely preparation of financial statements, annual reports and program evaluations. The costs, payments and progress towards meeting program objectives outlined in the Farm Income Protection Act should be disclosed to Parliament, provinces and the producers.
Department's response: The Department is committed to the timely preparation of financial statements, annual reports and program evaluations. In addition to the program evaluation currently under way for Crop Insurance, a program evaluation of Gross Revenue Insurance is scheduled for 1994/95. Other program evaluations will be completed by April 1996 as required by the Farm Income Protection Act .