Order Code RS22086 Updated May 4, 2005 CRS Report for Congress Received through the CRS Web Agriculture and FY2006 Budget Reconciliation Ralph M. Chite Specialist in Agricultural Policy Resources, Science, and Industry Division Summary On April 29, 2005, Congress completed action on the FY2006 budget resolution (H.Con.Res. 95, H.Rept. 109-62). This measure contains reconciliation instructions that require authorizing committees to report legislation to reduce spending on mandatory programs within each committee’s jurisdiction. To reduce spending in mandatory U.S. Department of Agriculture (USDA) programs, conferees instructed the House and Senate Agriculture Committees to reduce mandatory spending by $173 million in FY2006 and $3.0 billion over five years (FY2006-FY2010). The Bush Administration earlier proposed changes to several mandatory USDA programs, which it said would save $5.7 billion over five years (and which the Congressional Budget Office (CBO) subsequently scored at $9.4 billion in reductions). The agriculture committees must determine how to divide the cuts among the various programs under their jurisdiction by September 16, 2005. This report will be updated. What Is Budget Reconciliation? The annual congressional budget resolution provides a blueprint for all federal revenues and spending over a multi-year period. Although it does not require the President’s approval, the budget resolution does establish limits for all discretionary and mandatory spending for the coming fiscal year. Once approved, the discretionary spending total is allocated to the appropriations committees, where it is subdivided among their various subcommittees. The resolution also might require reductions in mandatory spending, particularly in years when the federal deficit is expected to be large. When this occurs, the resolution issues reconciliation instructions to various authorizing committees requiring them to report changes to legislation to reduce spending on mandatory programs under the committees’ jurisdiction. The reported language from each committee is then sent to its respective budget committee by a date specified in the resolution, where it is packaged with language from other committees into an omnibus reconciliation bill, which is taken to each chamber’s floor for consideration. Each chamber’s approved reconciliation bill is then sent to a conference committee, and a final conference measure must be approved by both chambers and signed by the President before it becomes law. Congressional Research Service { The Library of Congress CRS-2 (For more on budget reconciliation procedure, see CRS Report 98-814, Budget Reconciliation Legislation: Development and Consideration, and CRS Report RL30458, The Budget Reconciliation Process: Timing of Legislative Action.) USDA Mandatory Spending Defined Approximately three-fourths of total spending within USDA is classified as mandatory, which by definition occurs outside the control of the annual appropriations process. Currently accounting for the vast majority of USDA mandatory spending are the farm commodity price and income support programs, the food stamp program and most child nutrition programs, the federal crop insurance program, and various agricultural conservation and trade programs. Legislative authority for these programs is under the jurisdiction of the House and Senate Agriculture Committees.1 Hence, any reconciliation instructions that are delivered to the agriculture committees could potentially impact spending for any or all of these programs. All of the farm commodity support programs and mandatory conservation and trade programs are funded through the borrowing authority of USDA’s Commodity Credit Corporation (CCC), not by an appropriation to the programs.2 The CCC has a $30 billion line of credit with the U.S. Treasury that it taps to provide the annual required funding of these programs, as well as for other purposes. Because the CCC typically spends more than it takes in, its losses must be replenished annually through a congressional appropriation so that its $30 billion borrowing authority is not depleted. Administration and congressional budget forecasters estimate each year the projected cost of the commodity support programs. However, because farm crop prices are highly variable and difficult to estimate, these programs ultimately receive “such sums as necessary” under their farm bill authorization, regardless of budget estimates. The mandatory conservation programs for the most part have a fixed authorization level each year (stated either in dollars or enrolled acreage) as mandated by the 2002 farm bill, with funding from the CCC, not from an appropriation. Like the commodity support programs, crop insurance also receives such sums as necessary regardless of budget estimates. Its funding comes through an indefinite appropriation to the Federal Crop Insurance Fund, a fund separate from the CCC. The mandatory USDA food and nutrition programs (food stamps and child nutrition programs) receive an annual appropriation, but funding levels ultimately are determined by the eligibility rules established in current food and nutrition laws. 1 The one exception is the child nutrition programs, which are under the jurisdiction of the Committee on Education and the Workforce in the House, and the Agriculture Committee in the Senate. 2 The major mandatory farm commodity price and income support programs include those for wheat, feed grains, oilseeds, cotton, rice, peanuts, sugar, and dairy. The largest mandatory conservation programs include the Conservation Reserve Program, the Environmental Quality Incentives Program, the Conservation Security Program, and the Wetlands Reserve Program. CRS-3 CBO’s Baseline Budget for USDA Each year, the Congressional Budget Office issues a baseline budget for all federal spending under current law over a 10-year period. Projected spending in the baseline budget represents CBO’s estimate at a particular point in time of what federal spending and revenues will likely be under current law if no policy changes were made over the projected period. The CBO baseline serves as a benchmark or starting point for future budget analyses. For example, whenever any new legislation is introduced that affects federal mandatory spending, its impact is measured by CBO as a difference from the baseline. Table 1 below represents CBO’s most recent baseline (March 2005) estimate for the major mandatory USDA programs. It represents CBO’s estimates under current law (e.g., the 2002 farm bill for the commodity support and conservation programs) given current CBO projections for economic and market conditions for the next five years. Budget reconciliation instructions that are given to the agriculture committees are measured against the CBO baseline. This means that any legislation that the committees are required to report will be scored by CBO against the baseline to determine whether the committee is in compliance with the reconciliation instructions. Table 1. CBO’s March 2005 Baseline Budget Estimates for Selected Mandatory USDA Programs ($ million) FY2006 FY2007 FY2008 FY2009 FY2010 5-Yr. Total FY2006FY2010 18,099 15,765 13,826 14,059 13,733 75,482 230 264 266 300 325 1,385 Conservation 4,343 4,620 4,591 5,344 5,167 24,065 Crop Insurance 3,702 3,839 3,918 3,986 4,066 19,511 Food Stamps 33,445 33,035 33,287 33,911 34,673 168,351 Child Nutrition 12,577 13,140 13,734 14,336 15,036 68,823 Farm Commodity Support Export Programs Source: Congressional Budget Office. FY2006 Congressional Reconciliation Action The House and the Senate approved the conference report (H.Rept. 109-62) on the FY2006 budget resolution (H.Con.Res. 95) on April 28 and April 29, 2005, respectively. The approved resolution contains reconciliation instructions that now require the House and Senate Agriculture Committees to report legislation reducing spending on mandatory USDA programs by $173 million over a one-year period (FY2006) and by $3.0 billion over a five-year period (FY2006-FY2010). The resolution does not mandate how the agriculture committees are to achieve the required spending reductions; instead, those decisions are left to the committees. It does require that each committee submit its CRS-4 recommendations to its respective budget committee no later than September 16, 2005, to be included in the reconciliation measure that each chamber subsequently considers. The spending reduction instructions to the agriculture committees found in the final budget resolution are much closer to the Senate-passed levels than to those approved by the House (see Table 2). The House on March 17, 2005, passed H.Con.Res. 95, requiring the House Agriculture Committee to reduce spending on programs under its jurisdiction by $797 million in FY2006, and $5.278 billion over five years (FY2006-FY2010). The Senate on April 4, 2005, approved its resolution (S.Con.Res. 18) to require the Senate Agriculture Committee to reduce mandatory USDA spending by a lesser amount: $171 million in FY2006 and $2.814 billion over the same five-year period. S.Con.Res. 18 contained a non-binding sense of the Senate amendment (Section 509) stating that any mandatory agricultural savings should be achieved primarily through reductions in farm commodity program payment limits. The committee adopted this provision on a 15-7 vote during markup on March 10; however, conferees dropped the provision from the final agreement. (For more on payment limits, see CRS Report RS21493, Payment Limits for Farm Commodity Programs: Issues and Proposals). When the Senate resolution was debated on the floor, an amendment offered by farm state Democratic Senators on March 17 to delete the agriculture reconciliation instructions was defeated by a 46-54 vote. The approved reconciliation instructions in the conference agreement are below the level of cuts requested by the Bush Administration for mandatory USDA spending — $1.258 billion in FY2006 and $5.708 billion over five years, as estimated by the Administration. (See “Administration Proposals,” below, for more information.) Table 2. FY2006 Budget Resolution Reconciliation Instructions to Agriculture Committees ($ million) FY2006 (1-yr.) Reduction FY2006-FY2010 (5-yr.) Reduction House-Passed Budget Resolution 797 5,278 Senate-Passed Budget Resolution 171 2,814 Final Conference Agreement 173 3,000 Administration Proposals for FY2006 Agriculture Reconciliation On February 7, 2005, the Bush Administration released its budget request for FY2006, which contained numerous government-wide proposals for reducing mandatory agricultural spending over a multi-year period. With respect to USDA mandatory spending, these proposals would affect spending on the farm commodity price and income support programs, and crop insurance and food stamps, and would require legislation to make these changes. CRS-5 Among the Administration’s proposals affecting USDA programs are (1) a 5% across-the-board cut in all payments received by farmers under the commodity support programs; (2) a tightening of payment limits for these programs from the current level of $360,000 per person to $250,000, which would also apply to certain benefits not included under the current payment limit; (3) a requirement that certain commodity payments be based on historical crop production rather than current production; (4) an assessment that would be paid by sugar processors on all marketed sugar; (5) greater flexibility for USDA to adjust government purchase prices for surplus dairy products, in order to minimize government costs of the dairy price support program; (6) a reduction in subsidies to the federal crop insurance program; and (7) the termination of a practice under which some households with relatively high income/assets can qualify for food assistance because they receive other public assistance. According to Administration estimates, these proposals in total (if enacted) would reduce baseline spending for mandatory USDA programs by $1.26 billion in FY2006, and $5.7 billion over five years (FY2006-FY2010). The Administration also recommends a two-year legislative extension of the Milk Income Loss Contract (MILC) program, which would cost an estimated $1.2 billion and would reduce the total five-year savings from $5.7 billion to $4.5 billion, according to Administration estimates. The Congressional Budget Office independently estimated the Administration’s request for USDA mandatory program reductions at $9.4 billion over five years, before taking into account the proposed extension of the MILC program, which according to CBO estimates would reduce the net savings to $8.1 billion over five years. The CBO estimate does not include an estimate of the payment limit proposal. For more on the Administration’s FY2006 budget request, see CRS Report RS22071, The FY2006 Budget Request for the U.S. Department of Agriculture (USDA). Issues for Congress Now that Congress has approved a budget resolution specifying by how much spending must be cut for programs under the jurisdiction of the agriculture committees, attention now turns to what programs and in what form these cuts should be made. Agriculture committee leaders in both chambers have stated that all relevant program areas will be considered. Farm groups have been stating that farm commodity support programs have already contributed their share to deficit reduction since the enactment of the 2002 farm bill. They contend that actual spending for farm commodity support the last three years has been some $15 billion below the CBO estimate for farm support program spending at the time of enactment, and that this should be captured as savings and credited as their contribution to reducing the deficit. However, budget rules do not recognize this as savings, in the same way they do not hold the programs accountable when actual spending is above budget estimates. Supporters of the programs further argue that the 2002 farm bill should not be reopened, and that program authority should be left intact until 2007, when the current farm bill expires. The Administration proposal to achieve savings through the reduction in farm program payment limits has generated significant debate, with the strongest opposition emanating from cotton and rice growers in the South, who receive the largest average payments under the programs, but have the largest production costs. The committees also will be faced with the question of whether to reauthorize the Milk Income Loss Contract CRS-6 (MILC) program, which provides direct payments to dairy farmers when farm milk prices are low. The MILC program, which expires September 30, 2005, is supported primarily by small dairy producers. However, a proposed two-year reauthorization would cost an estimated $1.3 billion, which would have to be offset by other spending reductions. Extending the MILC program at a time when other commodity payment programs are reduced has become a source of controversy. (For more on these issues, see CRS Report RS21493, Payment Limits for Farm Commodity Programs: Issues and Proposals; and CRS Issue Brief IB97011, Dairy Policy Issues.)