Farm Programs: Finality Rule Should Be Eliminated (Letter Report,
03/07/97, GAO/RCED-97-46).

GAO reviewed the impact of the congressionally mandated finality rule,
focusing on the: (1) number and dollar amount of overpayments not repaid
by farmers under the rule since its inception in November 1990 and the
characteristics of individual overpayments; and (2) actions the Farm
Service Agency (FSA) has taken to reduce the number of finality-rule
cases and associated dollar amounts.

GAO noted that: (1) from November 1990 through September 1996, FSA
applied the finality rule to 10,694 cases in which overpayment errors
were not discovered within 90 days of the date of payment or the filing
of a program application; (2) the rule allowed farmers to keep about
$4.2 million in overpayments, an average of $395 per case; (3) almost 90
percent of the overpayments involved payments made under the disaster
assistance and acreage reduction programs; (4) although the finality
rule sought to protect farmers from the hardship of repaying large sums
long after payments were made, most of the overpayments to which the
finality rule was applied in fiscal years (FY) 1995 and 1996 involved
small amounts of money, represented only a small percentage of the
correct payments, and were discovered within a relatively short time, 9
months or less; (5) during these 2 fiscal years, about 86 percent of the
finality-rule cases involved $500 or less, 59 percent had overpayments
amounting to 10 percent or less of the correct payment amounts, and 67
percent were discovered within 9 months of the date of payment or the
filing of a program application; (6) while most overpayments were small,
a few large payments accounted for most of the total dollar value of
overpayments; (7) in recent years, several actions by the FSA and
Congress have reduced the number of finality-rule cases and associated
overpayments; (8) for example, FSA has taken action to improve the
accuracy of disaster assistance information before payments are made by
including district directors and county office review staff in the
review of the applications and by targeting for closer review
applications for disaster assistance from farms that might have had
questionable activity in the past; (9) in addition, the Federal Crop
Insurance Reform and Department of Agriculture Reorganization Act of
1994 reduced the potential for disaster assistance payments by requiring
farmers to rely primarily on crop insurance for certain crops rather
than disaster assistance; and (10) the 1996 farm bill ended the acreage
reduction program, thereby eliminating potential overpayments under this
program.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-97-46
     TITLE:  Farm Programs: Finality Rule Should Be Eliminated
      DATE:  03/07/97
   SUBJECT:  Farm income stabilization programs
             Disaster relief aid
             Overpayments
             Refunds to government
             Insurance
             Waivers
             Proposed legislation
             Agricultural programs
IDENTIFIER:  Federal Disaster Assistance Program
             USDA Acreage Reduction Program
             Food Stamp Program
             
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Cover
================================================================ COVER


Report to the Secretary of Agriculture

March 1997

FARM PROGRAMS - FINALITY RULE
SHOULD BE ELIMINATED

GAO/RCED-97-46

Finality Rule

(150716)


Abbreviations
=============================================================== ABBREV

  FSA - Farm Service Agency
  GAO - General Accounting Office
  USDA - U.S.  Department of Agriculture

Letter
=============================================================== LETTER


B-275791

March 7, 1997

The Honorable Dan Glickman
The Secretary of Agriculture

Dear Mr.  Secretary: 

The U.S.  Department of Agriculture's (USDA) Farm Service Agency
(FSA) pays billions of dollars annually to farmers for programs such
as disaster assistance and agricultural conservation.  Occasionally,
because of errors, FSA pays farmers too much.  In November 1990, as
part of the 1990 farm bill, the Congress enacted the "90-day rule,"
known alternatively as the "finality rule." According to this rule, a
farmer does not have to repay an overpayment unless (1) it is
discovered within 90 days of the date of the payment or the
application for program benefits, (2) fraud on the part of the farmer
is involved, or (3) the farmer was aware that an error had
occurred.\1 According to its legislative history, the rule was
designed to protect farmers from the hardship of repaying large sums
of money long after payments were made. 

To assess the impact of the finality rule, we reviewed the (1) number
and dollar amount of overpayments not repaid by farmers under the
rule since its inception in November 1990 and the characteristics of
individual overpayments and (2) actions FSA has taken to reduce the
number of finality-rule cases and associated dollar amounts. 


--------------------
\1 Prior to October 1994, FSA used the date of payment as the
starting date of the 90-day period. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

From November 1990 through September 1996, FSA applied the finality
rule to 10,694 cases in which overpayment errors were not discovered
within 90 days of the date of payment or the filing of a program
application.  The rule allowed farmers to keep about $4.2 million in
overpayments--an average of $395 per case.  Almost 90 percent of the
overpayments involved payments made under the disaster assistance and
acreage reduction programs.  Although the finality rule sought to
protect farmers from the hardship of repaying large sums long after
payments were made, most of the overpayments to which the finality
rule was applied in fiscal years 1995 and 1996 involved small amounts
of money, represented only a small percentage of the correct
payments, and were discovered within a relatively short time--9
months or less.\2 During these 2 fiscal years, about (1) 86 percent
of the finality-rule cases involved $500 or less, (2) 59 percent had
overpayments amounting to 10 percent or less of the correct payment
amounts, and (3) 67 percent were discovered within 9 months of the
date of payment or the filing of a program application.  While most
overpayments were small, a few large payments accounted for most of
the total dollar value of overpayments. 

In recent years, several actions by the FSA and the Congress have
reduced the number of finality-rule cases and associated
overpayments.  For example, the agency has taken action to improve
the accuracy of disaster assistance information before payments are
made by including district directors and county office review staff
in the review of the applications and by targeting for closer review
applications for disaster assistance from farms that might have had
questionable activity in the past.  In addition, the Federal Crop
Insurance Reform and Department of Agriculture Reorganization Act of
1994 reduced the potential for disaster assistance payments by
requiring farmers to rely primarily on crop insurance for certain
crops rather than disaster assistance, and the 1996 farm bill ended
the acreage reduction program, thereby eliminating potential
overpayments under this program. 


--------------------
\2 Detailed information on individual finality-rule cases is
available from headquarters beginning on October 1, 1994.  For the
period November 28, 1990, through September 30, 1994, FSA
headquarters has only summary information. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Food, Agriculture, Conservation, and Trade Act of 1990 (the 1990
farm bill) established the finality rule.  According to this act, the
decisions of FSA's state and county committees, or employees of the
committees, that were made in good faith in the absence of
misrepresentation, false statement, fraud, or willful misconduct by
the farmer are final within 90 days, and no action should be taken to
recover an erroneous overpayment unless the farmer had reason to
believe that the payment was in error.  According to its legislative
history, this provision was intended to protect a farmer from the
hardship of having to repay large amounts of money long after the
payments were received.  Prior to the 1990 farm bill, the Secretary
of Agriculture had historically forgiven, on an individual basis, an
overpayment to a farmer if the Secretary had determined that a
hardship existed.  The Federal Crop Insurance Reform and Department
of Agriculture Reorganization Act of 1994 made changes to the
finality rule, including establishing the start of the 90-day period
as the date the farmer files an application for benefits.  The
finality rule applies to all FSA and Commodity Credit Corporation
programs that provide payments to farmers. 


   DOLLAR AMOUNT AND
   CHARACTERISTICS OF ERRONEOUS
   OVERPAYMENTS
------------------------------------------------------------ Letter :3

From November 1990 through September 1996, the finality rule was
applied to 10,694 cases, thereby allowing farmers to keep about $4.2
million in overpayments by FSA--an average of $395 per case.  Most of
these overpayments occurred under the disaster assistance and acreage
reduction programs.  Additionally, although the finality rule sought
to protect farmers from the hardship of repaying large sums long
after payments were made, most overpayments in fiscal years 1995 and
1996--the period for which detailed information on individual
overpayments was available--generally involved (1) small amounts of
money, (2) represented only a small percentage of the correct payment
amounts, and (3) were discovered within a relatively short time. 


      MOST OVERPAYMENTS FELL UNDER
      THE DISASTER ASSISTANCE AND
      ACREAGE REDUCTION PROGRAMS
---------------------------------------------------------- Letter :3.1

The disaster assistance and acreage reduction programs accounted for
most of the finality-rule cases.  As figure 1 shows, from November
1990 through September 1996, the disaster assistance program had
about 56 percent of the cases (6,038) and about 53 percent of the
overpayment amounts ($2,227,625).  The acreage reduction program had
the next highest number of cases (3,934) and overpayment amounts
($1,394,847).  The acreage reduction program accounted for about 37
percent of the finality-rule cases and about 33 percent of the dollar
amounts.  (See app.  I for more detailed information.)

   Figure 1:  Percent of
   Finality-Rule Cases and Dollars
   Involved by Program, November
   1990 Through September 1996

   (See figure in printed
   edition.)

Source:  GAO's analysis of FSA's data. 


      MOST OVERPAYMENTS WERE SMALL
---------------------------------------------------------- Letter :3.2

We found that most finality-rule cases involved small amounts of
money, as figure 2 shows.  For fiscal years 1995 and 1996, there were
a total of 1,259 finality-rule cases involving a total of $612,671. 
During this period, about 86 percent of the cases involved
overpayments of $500 or less.  On the other hand, 7 percent of the
cases involved overpayments of $1,001 or more and made up most of the
total overpayment amount.  More specifically, the 85 cases involving
payments exceeding $1,000 accounted for 70 percent of the total
overpayment amount.  (See app.  II for more detailed information.)

   Figure 2:  Number and Amount of
   Finality-Rule Cases, Fiscal
   Years 1995 and 1996

   (See figure in printed
   edition.)

Notes:  Total number of cases for the period was 1,259.  Total does
not equal 100 percent because of rounding. 

Source:  GAO's analysis of FSA's data. 

In addition to involving relatively small overpayment amounts, most
finality-rule cases involved overpayment amounts that were only a
small percentage of the correct payment amounts.  As figure 3 shows,
during fiscal years 1995 and 1996, about (1) 59 percent of the total
finality-rule cases had overpayments amounting to 10 percent or less
of the correct payments, (2) 18 percent had overpayments amounting to
11 to 25 percent of the correct payments, (3) 8 percent had
overpayments amounting to 26 to 50 percent of the correct payments,
and (4) 15 percent had overpayments amounting to 51 percent or more
of the correct payments.  While most of the overpayment amounts were
small, a few large overpayments represented the bulk of the total
dollar value of overpayments.  (See app.  III for more detailed
information.)

   Figure 3:  Finality-Rule Cases
   by Percent of Overpayment,
   Fiscal Years 1995 and 1996

   (See figure in printed
   edition.)

Source:  GAO's analysis of FSA's data. 


      MOST OVERPAYMENTS WERE
      DISCOVERED WITHIN 9 MONTHS
      OF PAYMENT OR FILING OF
      APPLICATION
---------------------------------------------------------- Letter :3.3

Most finality-rule cases were identified within a relatively short
time.  Specifically, about 67 percent of the finality-rule cases
identified during fiscal years 1995 and 1996 were discovered within 9
months (270 days) of the date of payment or the date the program
application was filed.  Figure 4 shows the percentage of
finality-rule cases discovered for different periods from the date of
payment or filing of a program application:  About (1) 44 percent of
the total number of finality-rule cases were discovered between 91
and 180 days; (2) 23 percent, between 181 and 270 days; (3) 9
percent, between 271 and 365 days; and (4) 24 percent, more than 365
days.  (See app.  IV for more detailed information.)

   Figure 4:  Percent of
   Finality-Rule Cases Discovered
   Within Various Time Periods
   After the Date of Payment or
   Filing of Application, Fiscal
   Years 1995 and 1996

   (See figure in printed
   edition.)

Source:  GAO's analysis of FSA's data. 

Most overpayments were discovered after 90 days primarily because
most of FSA's internal reviews and USDA's Office of Inspector General
audits were not performed within the 90-day limit.  Thus, errors
discovered by internal reviews and audits were generally discovered
too late for overpayments to be collected. 

If the time limit for the finality rule were extended to 270 days, 67
percent of the known overpayments discovered during fiscal years 1995
and 1996 for which FSA cannot now seek repayment could be pursued for
collection.  These overpayment cases involved 44 percent of the
overpayment amounts.  (See app.  V for other time periods.) According
to officials in USDA's Office of General Counsel, there is no
clear-cut rationale for 90 days as the cutoff point for overpayment
collections.  USDA did not conduct a study to support using 90 days
as the appropriate time period for the rule. 

While all of FSA's programs that provide payments operate under the
finality rule, most other USDA programs require program participants
to repay any overpayments they receive.  For example, the Food Stamp
Program requires the state agencies administering the program at the
local level to establish an administrative error claim against any
household that has received more food stamp benefits than it is
entitled to receive as a result of a state agency's action or failure
to take action.  According to the time criteria for establishing an
administrative claim, (1) at a minimum, the state agency is to take
action on those claims for which 12 months or less has elapsed
between the month an overissuance occurred and the month the state
agency discovered the overissuance, (2) states may choose to take
action on those claims for which more than 12 months has elapsed, and
(3) state agencies shall not take action on claims for which more
than 6 years has elapsed.  To settle claims, program participants can
repay overpayments of food stamps they received either through cash
payments or a reduction in their monthly food stamp allotments. 


   ACTIONS TAKEN TO REDUCE
   OVERPAYMENTS UNDER THE FINALITY
   RULE
------------------------------------------------------------ Letter :4

In recent years, FSA has taken various actions to reduce the number
of cases and associated overpayments under the finality rule.  For
example, the agency has taken action to improve the accuracy of
disaster assistance information before payments are made.  FSA has
performed national assessments of disaster program payments for the
1990 through 1993 crop years to collect historical payment data on
individual farms.  FSA used these data to identify areas of concern
or discrepancies, such as unusual increases in the acreage planted or
payment amounts or farmers who continually file for disaster
benefits.  FSA also used these data to review applications for the
1994 crop year disaster assistance before it made payments.  In
addition, FSA has included district directors and county office
review staff in the application review process for disaster payments
to ensure that disaster payments are properly distributed. 

Furthermore, recent legislation has resulted in fewer finality-rule
cases in fiscal years 1995 and 1996 than in previous years.  For
example, the Federal Crop Insurance Reform and Department of
Agriculture Reorganization Act of 1994 reduced the potential for
disaster assistance payments by requiring farmers to rely primarily
on crop insurance for certain crops rather than disaster assistance. 
In addition, the 1996 farm bill ended the acreage reduction program
and thus eliminated potential overpayments under this program. 

Finally, FSA has attempted to get the finality rule repealed or
revised.  In April 1995, in response to an audit report by USDA's
Office of Inspector General, FSA recommended to the Under Secretary
for Farm and Foreign Agricultural Services that the administration's
proposals for the new farm bill include a proposal to eliminate the
finality rule or, at a minimum, restrict its application to those
situations for which relief is justified because of the meritorious
circumstances of the case.  However, the provision was not included
in the administration's proposed farm bill. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

While the finality rule was designed to protect farmers from having
to repay large overpayments discovered long after they were made, we
found that most finality-rule cases generally involved relatively
small amounts of money, represented only a small percent of the
correct payment amounts, and were discovered within a relatively
short time.  On the basis of these findings, we believe that the
finality rule could be eliminated.  Such an action would make the
treatment of overpayments to farmers more consistent with all other
USDA programs, which generally require program participants to repay
overpayments made to them regardless of whether the overpayments were
made in error or the repayment would cause them a hardship. 


   RECOMMENDATION TO THE SECRETARY
   OF AGRICULTURE
------------------------------------------------------------ Letter :6

To reduce the overpayments by the federal government associated with
the finality rule, we recommend that you submit a legislative
proposal to the Congress to eliminate the finality rule. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

We provided a draft of this report to USDA for its review and
comment.  The Department agreed with the report's findings and
conclusions and part of our original recommendation to eliminate the
finality rule.  However, the Department disagreed with the part of
our recommendation to continue the finality rule's application in
hardship cases.  The Department believed that continuing the rule in
hardship cases would duplicate procedures already in place.  We agree
and have revised our original recommendation to eliminate the portion
relating to limiting the finality rule to hardship cases.  USDA's
written comments are included as appendix VI. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To determine the number, dollar amount, and characteristics of
overpayments covered by the finality rule since its inception in
November 1990, we reviewed finality-rule data compiled by USDA's
Kansas City Management Office.  We also reviewed the legislative
history of the rule and discussed its origin with officials in USDA's
FSA and its Office of General Counsel.  To determine the actions FSA
has taken to minimize overpayments under the rule, we reviewed FSA's
policies and procedures on the rule and discussed the matter with FSA
headquarters officials. 

We conducted our review from August 1996 through February 1997 in
accordance with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :8.1

This report contains a recommendation to you.  As you know, the head
of a federal agency is required by 31 U.S.C.  720 to submit a written
statement of the actions taken on our recommendations to the Senate
Committee on Governmental Affairs and the House Committee on
Government Reform and Operations not later than 60 days after the
date of this letter and to the House and Senate Committees on
Appropriations with the agency's first request for appropriations
made more than 60 days after the date of this letter. 

We are sending copies of this report to the congressional committees
with responsibility for appropriations and legislative matters for
USDA and to the Administrator of FSA.  We will also make copies
available to others on request. 

Please contact me at (202) 512-5138 if you or your staff have any
questions.  Major contributors to this report are listed in appendix
VII. 

Sincerely yours,

Robert A.  Robinson
Director, Food and
 Agriculture Issues


NUMBER OF CASES AND DOLLARS
INVOLVED BY PROGRAM FOR
FINALITY-RULE CASES IDENTIFIED
FROM NOVEMBER 1990 THROUGH
SEPTEMBER 1996
=========================================================== Appendix I

Program                            Number of cases       Dollar amount
------------------------------  ------------------  ------------------
Acreage Reduction                            3,934          $1,394,847
Agricultural Conservation                      163              90,228
Compliance                                       9               2,045
Conservation Reserve                           117              33,120
Dairy Refund Payment                             8               2,851
Disaster Assistance                          6,038           2,227,625
Emergency Conservation                          32              36,415
Emergency Feed                                   1                 167
Forest Incentive                                23              22,735
Integrated Farm Management                       1                 244
Livestock Feed                                 193             111,961
Payment Limitation                              23             159,845
Price Support                                  120             127,669
Sugar                                            1               5,144
Tree Assistance                                  2               3,832
Water Bank                                       7               5,341
Wetland Conservation                             5               3,577
Wool and Mohair                                 17               2,264
======================================================================
Total                                       10,694          $4,229,909
----------------------------------------------------------------------
Source:  GAO's analysis of FSA's data. 


NUMBER OF CASES AND DOLLARS
INVOLVED FOR FINALITY-RULE CASES
IDENTIFIED FOR FISCAL YEARS 1995
AND 1996
========================================================== Appendix II

                           Cumulative    Cumulative              Cumulative    Cumulative
Range in      Number of     number of    percent of      Dollar      dollar    percent of
dollars           cases         cases         cases      amount      amount       dollars
-----------  ----------  ------------  ------------  ----------  ----------  ------------
$100 or             704           704            56     $27,665     $27,665             5
 less
101 to 250          221           925            73      35,102      62,727            10
251 to 500          154         1,079            86      53,909     116,676            19
501 to               95         1,174            93      65,361     182,037            30
 1,000
$1,001 and           85         1,259           100     430,634    $612,671           100
 over
=========================================================================================
Total             1,259                                $612,671
-----------------------------------------------------------------------------------------
Source:  GAO's analysis of FSA's data. 


FINALITY-RULE OVERPAYMENTS AS A
PERCENT OF THE CORRECT PAYMENT
AMOUNT, FISCAL YEARS 1995 AND 1996
========================================================= Appendix III

Percent of                 Cumulative    Cumulative                Cumulative  Cumulative
correct       Number of     number of    percent of      Dollar        dollar  percent of
amount            cases         cases         cases      amount        amount     dollars
-----------  ----------  ------------  ------------  ----------  ------------  ----------
1 or less           207           207            16      $8,288        $8,288           1
2 to 10             537           744            59      86,669        94,958          15
11 to 25            228           972            77      80,144       175,101          29
26 to 50             96         1,068            85      68,263       243,364          40
51 or more          191         1,259           100     369,307      $612,671         100
Total             1,259                                $612,671
-----------------------------------------------------------------------------------------
Source:  GAO's analysis of FSA's data. 


NUMBER OF FINALITY-RULE CASES AND
DOLLARS DISCOVERED WITHIN VARIOUS
TIME PERIODS AFTER THE DATE OF
PAYMENT OR FILING OF APPLICATION,
FISCAL YEARS 1995 AND 1996
========================================================== Appendix IV

Days after                 Cumulative    Cumulative              Cumulative    Cumulative
application   Number of     number of    percent of      Dollar      dollar    percent of
\a                cases         cases         cases      amount      amount       dollars
-----------  ----------  ------------  ------------  ----------  ----------  ------------
91 to 180           548           548            44    $194,708    $194,708            32
181 to 270          288           836            67      72,214     266,921            44
271 to 365          117           953            76      44,010     310,931            51
More than           301         1,254           100     300,376    $611,307           100
 365
=========================================================================================
Total             1,254                                $611,307
-----------------------------------------------------------------------------------------
\a Includes some cases in which the date of the government payment
was the starting date for the 90-day time limit. 

Note:  Table does not include five cases with overpayments of $1,364. 
These cases erroneously showed less than 91 days between the date of
payment or filing of application and the date FSA discovered the
error. 

Source:  GAO's analysis of FSA's data. 


ANALYSIS OF FISCAL YEAR 1995 AND
1996 FINALITY-RULE CASES UNDER
ALTERNATIVE TIME PERIODS
=========================================================== Appendix V

                        Cumulative              Cumulative
Various time periods     number of  Cumulative      dollar  Cumulative
under a revised              cases  percent of      amount  percent of
finality rule           eliminated       cases  eliminated     dollars
----------------------  ----------  ----------  ----------  ----------
180 days                       548          44    $194,708          32
270 days                       836          67     266,921          44
365 days                       953          76     310,931          51
Over 365 days                1,254         100    $611,307         100
----------------------------------------------------------------------
Note:  Table does not include five cases with overpayments of $1,364. 
These cases erroneously showed less than 91 days between the date of
payment or filing of application and the date FSA discovered the
error. 

Source:  GAO's analysis of FSA's data. 




(See figure in printed edition.)Appendix VI
COMMENTS FROM THE U.S.  DEPARTMENT
OF AGRICULTURE
=========================================================== Appendix V


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION

Ronnie E.  Wood, Assistant Director
Richard B.  Shargots, Evaluator-in-Charge
Michelle Knox Zaloom, Evaluator


*** End of document. ***