1986 AAEA Meetings Symposium "Perspectives on State Initiatives for Dealing with Farm Finance Problems"

The State Role in Addressing Farm Financial Problems

Richard L. Gardner Division of Financial Management Office of the Governor L") State of Idaho Economists agree that there is little that state governments can do to j address the root causes of current farm problems. States do not control macroeconomic policy, nor do they have the authority or resources to raise farm income. Yet states do have at their disposal a number of policy options which can affect the number of family farms that survive, the ease with which displaced farmers build a new life, the economic health of rural areas, and the future competitiveness of the state's farmers. The range of available policies include services such as referral hotlines, financial, legal, and stress counseling, job search and retraining assistance, and farm management training. In the farm finance area, states can offer rate buy-downs, interest deferrals, low interest , guarantees, tax-exempt financing, secondary markets like linked deposit ‘#- programs, and foreclosure review, mediation, or moratoria. Adjustments can .‘„ also be made in state banking regulations, tax codes, and in homestead exemptions for and deficiency judgments. In addition, state departments of agriculture are becoming more aware of the need to better market their state's commodities and to diversify and tailor their state's agriculture to fill more. specialized niches. Increased rural development efforts are a rising priority to deal with the secondary impacts which threaten the integrity of rural communities. Tables 1 and 2 enumerate state-level farm assistance programs across the nation. Twenty-six states have installed hotlines as an inexpensive first step. Agricultural loan programs using tax-free revenue bonds exist in 17 states (and their authority will likely be preserved in the tax reform bill). The low • #. interest loan programs in eleven states are mostly vestiges of FmliA's old Rural Rehabilitation program. Ten states allow their treasurers to loan money to banks at favorable rates for making farm loans under linked deposit programs. I would like to focus here on two policy areas in some detail and finish with comments on the political dimension of state assistance programs, using Idaho as a case study.

Farm Counselor Networks One effective idea is setting up a system of local contacts to provide counseling services to distressed farmers and ranchers. There are many possible variations on this theme, and these people are called farm counselors in South Dakota and Kansas, counselors in North Dakota, peer counselors in Montana, farm advocates in Minnesota, farm credit advisors in Wisconsin, or farmer extension associates in Iowa. The salient point is that they fill a vacancy between centralized farm hotline referral services and the Cooperative Extension Service. In most states, extension does not have the funding to provide one-on-one farm management advice to all who request it or in sufficient detail for enlightened decisionmaking. Having a system of farm counselors means that hotline callers can be referred to a resource person in their area, generally a peer with whom farmers can identify. This person can spend the time with an individual farmer to prepare farm financial statements, preferably on uniform statewide forms. restructuring alternatives can be examined. The farm counselor can accompany the farmer to meetings with lenders and help negotiate the loan application process. He can alert the farmer to any state programs for which he may qualify, such as interest buy-downs or foreclosure mediation. While offering financial management assistance, the farm counselor may also listen to the farmer's personal problems and offer

2 advice on stress management. Should the situation appear hopeless, this rapport and peer status would put the farm counselor in the best position to suggest seeing a lawyer and considering leaving agriculture. Ideally, farm counselors should have considerable experience and some -• • arm management. Iowa emphasizes farmers with ag econ degrees. Retired farmers, extension agents, and bankers or vocational-agriculture teachers would also be appropriate. Holding training sessions on farm records, lending practices, legal procedures, stress management, and mediation skills is essential to establish some uniformity in the advice given to the state's farmers. Montana is developing a system of volunteer peer counselors who develop basic financial statements and can refer the case to paid financial consultants who analyze restructuring options in more detail. While a system of farm counselors could be run on a voluntary basis with only reimbursement of travel expenses, states have generally chosen to offer some compensation, as budgets allow. Thus, North Dakota has some 60 fulltime farm credit counselors. Montana uses volunteers, but pays its financial and mediation specialists, and Iowa offers a nominal hourly wage. Kansas and Minnesota appear to rely more heavily on their extension personnel.

Encouraging Equity in Farm Asset Transfers There are several tools available to states to seek order and equity in the process of transferring ownership of farm assets. A policy continuum appears to exist in the degree of forebearance urged or demanded of the state's agricultural lenders. At one end lies old-fashioned political jawboning, which is not entirely without merit. Inequities in particular cases may be rectified, and the psychology of farm asset markets may be affected. This latter point is particularly important if one subscribes to the possibility of overshooting equilibrium farmland prices in the current decline. Next on the scale is a voluntary foreclosure review board such as Idaho maintains. It issues nonbinding recommendations upon consent to review by both parties. Such a board is capable of assuring farmers of fair treatment through a third party review and the powers of the press. However, the Idaho board has not received many applicants for review despite an increasing frequency of foreclosure. It does appear to be functioning in a deterrent capacity by encouraging lenders to avoid formal review through further negotiations with their customers. States such as Minnesota and Montana have used voluntary foreclosure mediation by individuals, rather than a board. The credit review board of North Dakota takes an advocacy position. It requires only the request of a farmer to negotiate with the lender on the farmer's behalf. The presence of fulltime credit counselors and the possibility of securing low interest loans of up to $50,000 to keep a farmer's home quarter also accounts for increased use. However, it seems more appropriate for a state to foster evenhanded mediation than to exaccerbate adversary positions, and bank support may be key to passing legislation. Mandatory mediation is the next rung on the policy ladder. Both Iowa and Minnesota currently require mandatory mediation prior to farm foreclosures. This is a way to require farmers and lenders to talk with each other, but it can be an expensive and time-consuming process, paricularly in the case of multiple lenders. Both voluntary and mandatory mediation do fit well with voluntary and the use of various state and federal programs. Finally, there are the different shades of foreclosure moratoria. To date • only four state have gone this route, though 28 states passed moratorium legislation in the 1930s. Although the dangers of disrupting credit markets are often cited, these adverse effects can be ameliorated to some degree in the design of the legislation. For example, Governor Evans of Idaho proposed legislation to allow him to declare an emergency initiating a selective moratorium. The courts could forestall the foreclosure of a certain farm for up to a year with a possible one year extension. However, conditions could be imposed on a foreclosure delay, including submission to the farm foreclosure review board, maintainance of interest payments (required of Iowa's moratorium), and/or being current on taxes. In addition, the proposed moratorium would not have applied to new loans issued after the date of enactment, reducing the incentive to cut off agricultural credit. As a farmer and rural banker, Governor Evans was very aware of the potential adverse impact on farm credit, but he wanted to encourage the expansion of the review board concept in parallel legislation, and he wanted a deterrent to foreclosures. Most of all, he was simply frustrated by the deteriorating conditions in Idaho agriculture, the hardships imposed on many farmers he knew to be good operators, and the limitations on state government's ability to respond effectively to this crisis.

Political Realities: The Idaho Example It may be instructive to expand on the Idaho example of the politics of state farm initiatives. While economics is the study of how resources are allocated, politics allocates public resources. To begin, the West had the benefit of watching agricultural problems worsen more quickly in the Midwest. Our farmland prices had not increased to the same degree; we did not suffer the drought of 1984; and states like Idaho have a much more diverse agriculture than the Corn Belt. Western states had early warning and were able to observe the success of policy responses in other states. Although Table 2 does not show the chronology, Iowa, Minnesota, Illinois and Wisconsin were among the first states to

5 • respond to farm difficulties, with the Dakotas, Kansas, and Montana following. The agricultural depression was generally apparent in Idaho in late 1984. Governor Evans convened roundtable meetings with bankers and farmers and commissioned a farm finance survey .in the winter of 1985. When the results revealed a significant problem, a hotline and farm foreclosure review board were established by executive order. The Planned Response. A five-point plan was conceived for the next legislative session that leaned on successful precedents from the Midwest. It included a farm counselor system with legal advice and professional mediators established under the farm foreclosure review board, an buy-down program that could piggyback on the federal version, a beginning farmer loan program, expanded adult farm management training, and an increased homestead exemption. Unfortunately, the fate of the plan was sealed by the fact that Governor Evans is a Democrat in a very conservative state dominated by the *Republican Party. Republicans have two-thirds majorities in both houses of the Idaho legislature. The 1986 legislative session began in an election year in which Governor Evans intended to run for the U.S. Senate. The Backlash. In this setting the results were predictable, except for the degree of the reaction. All five points of the Democrat-sponsored plan were soundly defeated, even by Republican farm legislators who 'privately recognized the need and the merits of the bills. Only the interest buy-down and beginning farmer loan bills received minimal consideration, despite avid farmer support in committee hearings. The Department of Agriculture received no funds to operate emergency programs. Instead, a hastily-conceived bill sponsored by this fall's Republican candidate for governor was passed resoundingly. It gave an income tax exemption on interest earnings from agricultural operating loans to all )enders, using a supply-side rationale of expanding credit availability and hoping lower interest rates would trickle down to farmers in need. There was no requirement that any of the estimated $2.3 million in savings be passed on to farmers, nor was there any targeting of eligible loans. To my knowledge, it is the only program of its kind in the nation. Because of election year politics, a very real problem that will adversely affect thousands of Idaho farmers was basically ignored. In retrospect, it it apparent that efforts should have begun earlier to build a bipartisan ooncensus to avoid the political stalemate which prevented adoptions of effective state policy. Doing Something With Nothing. What can a state do to respond to the problems of distressed farmers when few resources are available and the legislature refuses to cooperate? In Idaho, we are discouraged, but not beaten. The farm finance survey was repeated this spring with the help of a donation from the Wheat Commission. It documented worsening conditions. Donations from Farm Aid and others have kept the hotline open. Idaho 'agribusiness has supported the establishment of an agricultural leadership training program. We are seeking federal grants for employment training for displaced farmers, for a volunteer farm counselor network, and to improve state agricultural marketing efforts. A newspaper was also published that described all the programs and services currently available to Idaho farmers, a surprising potpourri. By publishing it through the Idaho Farmer-Stockman, this resource booklet was distributed to most of the state's farmers at low cost. In addition to informing farmers and ranchers, the special insert caused state agencies to be better coordinated and forged closer ties between state government and the university.

7 Conslusion A state's policy reactions depend on the attitudes of its people in general and the current political climate in particular. Even the best-intentioned plans can go awry. The West is known for the rugged individualism of its people and their laissez fake attitude toward government. The "pick yourself up by your bootstraps" philosophy is not conducive to farmer assistance programs, even though agriculture has been the tail wagged by the .dog of macroeconomic policy. In Idaho agriculture, this attitude is compounded by cattle, potato, and seed crop operators, who feel they are are independent of federal commodity programs. In contrast, more midwesterners are comfortable with the idea that government has a social responsibility to respond to economic disruptions. As economists, we need to remember that there is a political side to any policy picture. John Stuart Mill said, "The habit of analysis wears away feelings." It is easy to focus on the current agricultural problem in terms of numbers and to forget the accompanying human tragedies and social *upheaval. Despite their hard work, farm families are being threatened with the end of a way of life they love. And the billions of dollars of farm asset value declines will become somebody's loss. The emotions generated by these events will cause a political response, and the most rational and efficient policy options may be cast aside for perceived equity improvements, quick-acting solutions, or political pointmaking. Table 1. Frequency of Farm Assistance Programs

PROGRAM . NUMBER OF STATES

Hotlines 26

Farm Counselors

Foreclosure Mediation

Foreclosure Moratoria 4

Tax—Exempt Financing 17 (Beginning Farmer Loans)

Low Interest Loans 10

Interest Buy—Down

Interest Deferral

Loan Guarantees

Linked Deposit 10

a

9 Table 2.. State Farm Assistance Programs

• STATE PROGRAM AMOUNTS & COMMENTS

Alabama IDB—based Loans 43 loans $6M

Alaska Low Interest Loans 791 loans, $51M Foreclosure Moratorium state land contracts

Colorado IDB—based Loans 31 loans, $5.4M Hotline legal, financial, counseling Homestead Exemption increased

Georgia IDB—based Loans 128 loans, $14.811 Hotline counseling, referral

Hawaii Low Interest Loans 866 loans, $1611 Loan Guarantees 221 loans, $905K

Idaho Foreclosure Review Bd. Voluntary mediation Hotlines referral, counseling Low Interest Loans 45 loans, $566K Farm Lender Tax Deduct. op. loan interest deductible

Illinois Interest Deferral 480 loans, $1.2511 Linked Deposit/Buy—Down 9940 loans , $177M in 1985 $21511 authorized for 1986 IDB—based Loans 1904 loans, $12211 Hotlines legal, financial, counseling Loan Guarantee up to 85%, $10011 authorized

Indiana Linked Deposit 1007 loans,$34t1 in 1985 1371 loans, $5011 in 1986 Beginning Farmer Loans 149 loans, $17.211 Hotline counseling, referral

Iowa Beginning Farmer Loans 609 loans, $54.311 Operating Loan Guarantee 8 loans, $1681: in 1985 Farmer Extension Assoc. 25 part—time, farm mgt.help Foreclosure Moratorium when current on interest Hotlines legal, financial, counseling Interest Buy—Down $5M, up to 3% subsidy

10 Forecloure Mediation Mandatory

Kansas Linked Deposit 365 loans, $15M Legal Assistance Extension gives finance advice Hotlines counseling, referral, fin, legal Interest Buy—Down 1-3%, $1211 cost over 5 years Exempt Capital Gains on farm foreclosures Foreclosure Moratorium with revised payment schedule Farm Counselors 7 for financial advice

Kentucky 1DB—based Loans 6 loans, $624K Hotline financial, referral Linked Deposit Proposed

Louisiana IDB—based Loans 198 loans, $113.811 Hotline financial, legal, referral

Maine Operating Loan Guarantee

Michigan Linked Deposit 2911 loans, $131.811 Beginning Farmer Loans 79 loans, $6.811 Hotline financial, legal, referral

Minnesota Interest Deferral 355, $227K on $3M principal interest Buy—down 1735 loans, $2.01 state cost $511 authorized for 1986 Farm Advocates Financial advice, $300K in 1985 Foreclosure Moratorium + extended redemption period Beginning Farmer Loans 395 loans

.• Hotlines fin.,legal,counsel,referral Legal Assistance $650K in 1986 Farmer/Lender Mediation Voluntary_ $350K Mandatory for foreclosures Debt Restructuring $5011 deferral/forgiveness

Mississippi Hotline counseling, referral

Missouri Linked Deposit $47.511 , $150M for 1986 IDB—based Loans 24 loans, $17.211 Hotlines financial,counseling,referral

Montana IDB—based Loans 5 loans, $500K interest Buydown $250K, 1%, operating loans

11 Hotline counseling, advocacy, referral Peer Counselors 30 volunteers + 10 paid financial consultants Foreclosure Mediation Voluntary, 20 paid mediators Linked Deposit $50M authorized for 1986

Nebraska IDB—based Loans 546 loans, $50.1M Hotline counseling, referral FmHA Assistance $140K, speed loan processing Secondary Market

New Jersey Low Interest Loans Loan Guarantees

New Mexico Low Interest Loans long—term

New York Hotline financial, legal, counseling

North Carolina Hotlines finance, advocacy, referral

North Dakota Interest Deferral $2M authorized Interest Deferral 207 loans, $300K state cost Foreclosure Review Bd. with 60 Credit Counselors Beginning Farmer Loans 237 loans, $8.0M Hotlines finance, legal, counsel , refer Ag Debt Restructuring Comprehensive, up to $100M deferral/forgiveness

Ohio Linked Deposit 1575 loans, $10011 in 1985 IDB—based Loans 32 loans, $4.9M Hotline finance,legal , counsel , refer

Oklahoma Hotline financial,legal,counseling

Pennsylvania Loan Guarantee & Interest Deferral $10M available

South Carolina IDB—based Loans 31 loans, $4.2M Hotlines fin., counsel, adcocacy, refer

South Dakota Hotline financial, counseling Taxable Authority Farm Counselors referred from hotline Linked Deposit new

12 Tennessee Hotline financial counseling

Texas • Beginning Farmer Loans Hotline referral

Utah Low interest Loans $1.3M

Vermont • Low interest Loans

Washington Low interest Loans 50 loans, $800K

West Virginia Low interest Loans 6 loans $5131(

Wisconsin interest Buy—down $2011 authorized Loan Guarantees 849 loans, $11.4M in 1985 1110 loans, $14.4M in 1986 FmHA Staff Assistance $300K, speed loan processing Hotlines financial ,counsel, referral Farm Credit Advisors 40-50 volunteers

Wyoming. Low Interest Loans 177 loans, $37M in 1985 $275M total available Secondary Market 40 loans, $12M Hotline referral, counseling Linked Deposit

Sources: 1) Mark G Popovich, State Emergency Farm Finance, Council of State Planning Agencies,January,1986 and draft update,June 1986; 2) Communicating for Agriculture, Vol. 10, Nos. 1-5, 1986; 3) Survey by the National Governor's of Association Committee on Agriculture, February, 1986; 4) National Association State Departments of Agriculture, State Finance and Counseling Programs in Rai/101136 state to 1985Farm Credit Emergencies, March, 1986; 5) telephone interviews of officials.

Richard L. Gardner Division of Financial Management, Office of Governor John V. Evans, State of Idaho July 1986

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