TENNESSEE COMMODITY PRODUCER INDEMNITY BOARDTENNESSEE GRAIN INDEMNITY FUND

AUGUST 1996

Arthur A. Hayes, Jr., CPADirector

Deborah V. Loveless, CPAAssistant Director

Barbara H. Cobb Benjamin BellAudit Manager In-Charge Auditor

Jane RussEditor

August 1, 1996

The Honorable John S. Wilder Speaker of the SenateThe Honorable Jimmy Naifeh Speaker of the House of RepresentativesThe Honorable Joe Haynes, Chair Senate Committee on Government OperationsThe Honorable Mike Kernell, Chair House Committee on Government Operations

andMembers of the General AssemblyState CapitolNashville, Tennessee 37243

Ladies and Gentlemen:

Transmitted herewith is the performance audit of the Tennessee Commodity ProducerIndemnity Board and the Tennessee Grain Indemnity Fund. This audit was conducted pursuant tothe requirements of Section 4-29-111, Tennessee Code Annotated, the Tennessee Governmen-talEntity Review Law.

This report is intended to aid the Joint Government Operations Committee in its review todetermine whether the fund and the board should be continued, abolished, or restructured.

Very truly yours,

W. R. SnodgrassComptroller of the Treasury

WRS/tp96-028

State of Tennessee

A u d i t H i g h l i g h t sComptroller of the Treasury Division of State Audit

Performance AuditTennessee Commodity Producer Indemnity Board

Tennessee Grain Indemnity FundAugust 1996_________

AUDIT OBJECTIVES

Grain producers of the state were authorized by Chapter 232 of the 1989 Public Acts to levy anassessment on themselves and establish a fund to protect grain producers in the event of thefinancial failure of a commodity dealer or warehouseman. The Tennessee Commodity ProducerIndemnity Corporation was created after a statewide referendum of producers, and assessmentsbegan in September 1990. The funds balance in March 1996 was $2.5 million.

The objectives of the audit were to review the legislative mandate of the board and the Depart-ment of Agriculture concerning the indemnity fund, evaluate the extent to which the board anddepartment have fulfilled their mandated responsibilities efficiently and effectively and compliedwith applicable laws and regulations, and make recommendations that might result in moreefficient and more effective operation of the board and the fund.

FINDINGS

Indemnity Fund Unsuccessful in Recovering Funds for Claims PaidThe indemnity fund has paid 71 claims for a total of $442,230 but has recovered only $60,000(for one surety bond) of that amount. Bond amounts may be too low; producer claims from eachof the three failed warehouses exceeded the $100,000 maximum bond authorized by departmentrule, which is inconsistent with the statutory maximum of $500,000. In addition, the fund has theposition of unsecured creditor and, as a result, has been unable to recover any money in thebankruptcy proceedings of the three failed warehouses (page 5).

Administrative Costs Not Charged to the Fund*The Department of Agriculture has absorbed the costs of administering the indemnity fund,although statute allows these costs to be charged to the fund. Administrative costs directlyrelated to the fund include the auditing of dealers financial records and the receipt, recording,

* This issue was also discussed in the 1991 Sunrise review of the fund and board.

and refund of assessments. Because the fund was established to benefit grain producers, it seemsreasonable that the fund should cover not only the claims but also the cost of administration (page8).

Inefficient Process for Refunding AssessmentsAlthough grain producers who receive a refund forfeit the protection of the fund for any futuresales, they must request a refund of assessments after each grain sale. Review of a sample ofmonthly refund reports showed that many refunds were small (some less than $10) and that someproducers received several refunds in a month. This process is inconvenient for the pro-ducersand generates significant paperwork for department staff; a less frequent refund schedule couldimprove efficiency (page 9).

No Written Procedures for Fund OperationsThe board has not adopted bylaws or procedures to govern the operations of the board and thefund and has not met in more than two years. In addition, the Commissioner of Agriculture hasnot promulgated rules or formalized procedures for administering the fund. Draft procedureswere discussed after a Department of Finance and Administration review in 1991 but have notbeen finalized. The board did not meet in 1992, 1994, or 1995, although statute requires allnonprofit corporations to meet at least once a year (page 11).

ISSUES FOR LEGISLATIVE CONSIDERATION

The General Assembly may wish to consider amending Tennessee Code Annotated to create astatutory lien for the indemnity fund in bankruptcy proceedings, allow less frequent refunds ofassessments, provide a process for producers to terminate the fund if they wish, and require theboard to meet at least annually (page 14).

Audit Highlights is a summary of the audit report. To obtain the complete audit report which contains all findings,recommendations, and management comments, please contact

Comptroller of the Treasury, Division of State Audit1500 James K. Polk Building, Nashville, TN 37243-0264

(615) 741-3697

PERFORMANCE AUDITTENNESSEE COMMODITY PRODUCER INDEMNITY BOARD

TENNESSEE GRAIN INDEMNITY FUND

TABLE OF CONTENTS

INTRODUCTION Page

Purpose and Authority for the Audit 1Objectives of the Audit 1Scope and Methodology of the Audit 1Organization and Responsibilities 2Process, Revenues, and Expenditures 3

FINDINGS AND RECOMMENDATIONS 5 1. Indemnity fund was unsuccessful in recovering funds for claims paid 5 2. Administrative costs are not charged to the fund 8 3. Refunding assessments after each grain sale is inefficient 9 4. No procedures have been adopted for operation of the fund 11

RECOMMENDATIONS 14

Legislative 14Administrative 14

1

PERFORMANCE AUDITTENNESSEE COMMODITY PRODUCER INDEMNITY BOARD

TENNESSEE GRAIN INDEMNITY FUND

INTRODUCTION

PURPOSE AND AUTHORITY FOR THE AUDIT

This performance audit of the Tennessee Commodity Producer Indemnity Board and theTennessee Grain Indemnity Fund, which the board administers, was conducted pursuant to theTennessee Government Entity Review Law, Tennessee Code Annotated, Title 4, Chapter 29.Under Section 4-29-218, the board is scheduled to terminate June 30, 1997. The Comptroller ofthe Treasury is authorized under Section 4-29-111 to conduct a limited program review audit ofthe board and to report to the Joint Government Operations Committee of the General Assembly.The audit is intended to aid the committee in determining whether the board and the fund shouldbe abolished, continued, or restructured.

OBJECTIVES OF THE AUDIT

The objectives of the audit were

1. to determine the authority and responsibility mandated to the board and theDepartment of Agriculture;

2. to evaluate the extent to which these responsibilities have been performed; and

3. to develop recommendations, as needed, for administrative or legislative actionwhich might result in more efficient and/or more effective operation of the boardand the fund.

SCOPE AND METHODOLOGY OF THE AUDIT

The operations and activities of the Tennessee Commodity Producer Indemnity Board andthe Tennessee Grain Indemnity Fund were reviewed for the year ended June 30, 1995, andupdated to May 1996. The audit was conducted in accordance with generally accepted govern-ment auditing standards and included

review of applicable legislation and rules and regulations; interviews with members of the board, staff of the Department of Agriculture, and

staff of the Office of the Attorney General; and

2

examination of board meeting minutes and an analysis of assessments, refunds, andclaim payouts.

ORGANIZATION AND RESPONSIBILITIES

The Tennessee Grain Indemnity Fund was authorized by Chapter 232 of the Public Acts of1989, codified as Section 43-32-101 et seq., Tennessee Code Annotated, to promote the stateswelfare by improving the economic stability of agriculture. Producers of grain were permitted tolevy an assessment upon themselves and establish a fund to protect grain producers in the event ofthe financial failure of a commodity dealer or warehouseman. [Grain is defined in Section 43-32-102(11) as corn, wheat, oats, rye, soybeans, rape seed, canola and grain sor-ghums.] Before anassessment could be levied, it had to be approved by a majority vote of grain producers on astatewide referendum under procedures outlined in Section 43-32-203. The TennesseeCommodity Producer Indemnity Corporation was created upon passage of this refer-endum inJuly 1990. Assessments began September 15, 1990.

The governing powers of the indemnity corporation are vested in the board of directorscomposed of the Commissioner of Agriculture, who serves as the president; the chief fiscal officerof the Department of Agriculture, who serves as the secretary; the Commissioner of Commerceand Insurance; the State Treasurer or the Treasurers designee; and the Comptroller of theTreasury or the Comptrollers designee. Under Section 43-32-204, the board has the authority to

adopt, alter, and repeal bylaws for regulation and conduct of its affairs and business; receive assessments collected by the Department of Agriculture; administer the indemnity fund by investing the funds not needed for its corporate pur-

poses; and make payment from the indemnity fund to the department when payment is needed to

compensate claimants.

Under Section 43-32-2