Update: AR Department of Agriculture Waiting for Audit Results of $15M in Out-of-State Account

Update (May 20):
LITTLE ROCK, AR (KARK) — The Arkansas Department of Agriculture is watching and waiting for results from state auditors on $15 million dollars in state funds that were transferred to a nonprofit account out of state. 

Earlier this month we highlighted that the Rice Research and Promotion Board had voted to move the funds to the Rice Foundation for investment and never reported the funds to state financial officials. Agriculture secretary Wes Ward, says he’s heard from many farmers about the issue and discussions have raised the question of if the department should be overseeing those funds instead. 

“If there’s nothing wrong in the programs, it may be okay to stay there. But there are a number of questions that need to be answered, and we look forward to seeing the results of that audit,” Ward says.

The funds are required to be used for rice research funding. Despite the millions not being disclosed to state officials, it appears that for the most part that money has been spent on research. About $10 million is still sitting in that out of state account.

Original Story (May 11):
LITTLE ROCK, AR – A state senator’s inquiry into a fund available to a state board prompted a 2-month long investigation by KARK 4 News. What we found was about $15 million dollars that had been held in an out of state bank account by a private nonprofit that many state officials were unaware even existed. 

John Alter is no stranger to the frustrations of farming, with decades of experience fighting Mother Nature and the commodity markets. 

“My job is to feed my family and sell my product at the best price I can,” Alter said. 

But the frustrations of bureaucracy, he said he came to know during seven years on the Arkansas Rice Research and Promotion Board. 

“I made several attempts to bring about change on the board,” he said. “But I couldn’t get anywhere.” 

In the interest of full disclosure, Alter is a member of the Arkansas Rice Grower’s Association, which has often been at odds with the Arkansas Rice Research and Promotion Board because the association says members of the board often deny funding requests from them for legitimate promotion opportunities, while opting to give millions of dollars tothe promotional arm of the USA Rice Federation.

What is the  Rice Research and Promotion board? 

Alter represented independent rice mills while on the board, though he’s also a farmer in DeWitt, Arkansas. 

By law, the board’s resident agent or administrator can fall under the Arkansas Farm Bureau. ACA 2-20-505 says, “the resident agent of the board shall be the executive vice president, Arkansas Farm Bureau Federation, or his or her designee.” Brandy Carroll, an employee of Arkansas Farm Bureau, serves as the administrator of the board.

“My efforts didn’t seem to coincide with what was going on,” Alter said. 

Alter served from 2006 until he says he asked to not be reappointed in 2013. 

“I believe I could make a motion that the sun comes up in the east and it would die for lack of a second,” he said. And board minutes show that John Alter’s motions veering beyond giving money to the University of Arkansas for research projects often did fail to receive support from the other board members. 

Following the last legislative session, State Senator Garry Stubblefield had some questions about the board, when he proposed a grain dealer regulation bill in the Senate Agriculture, Forestry and Economic Development Committee meeting. 

“I ran a bill that was concerning Turner Grain it would have set up an indemnity fund to protect Arkansas farmers using the check-off funds,” Stubblefield said. 
Turner Grain, a brokering business that went belly up in late 2014, ended up costing many Arkansas farmers tens of thousands of dollars. A number of those farmers produced rice, and according to Stubblefield he had hoped to use check-off money to develop a pool of funds to protect farmers left in the lurch like those caught up in the Turner Grain scandal. 

Check-off funds 

Check-off funds are the annual funding available to the board.  They began as a self-imposed assessment approved by farmers in 1985. But those were written into law later, essentially creating a tax. They are no longer refundable, and a referendum to reconsider the tax would have to be referred to voters by the board that receives the money. 

Farmers pay 1.35 cents per bushel of rice sold, and buyers pay 1.35 cents per bushel bought. That doesn’t sound like a great deal of money, until you consider that Arkansas  often producers around 190 million bushels or more each year. 

The funds are allocated to fund research and promotion of the Arkansas rice industry. The entities that receive the majority of funding, generally without exception, are the University of Arkansas and the USA Rice Council. Minutes show that these two entities were the largest recipients of check-off funds, although occasionally the Arkansas Foundation for Agriculture and Arkansas Farm Bureau have also received funds from the board. 

The USA Rice Council is the promotional arm of the USA Rice Federation. Its research arm is considered The Rice Foundation, according to its website and the foundation’s director.

Stubblefield said in the course of analyzing check-off funds as a source of funding for an indemnity pool for farmers, he learned of something called TRQ funds that were rumored to be well into the millions. Stubblefield, and others at the committee meeting in March, claims when he asked about the TRQ funds, the meeting was instantly shut down. 

“A lot of the rice farmers would like to know just how that money is being spent and where it is kept,” Stubblefield said. ” “One of the questions we asked during the meeting was about TRQ funds, where those funds were and how much money was in the account.”

According to Stubblefield, another state senator called for immediate consideration of Stubblefield’s bill, putting an end to the inquiry and discussion. The bill failed to pass, and Sen. Stubblefield said getting information from the board’s administrator became a challenge. 

“I thought information about state money would be relatively easy to get,” Stubblefield said. “But I made repeated requests for information from the board’s administrator at Farm Bureau. And only recently received a response when I had Senate staff send a formal inquiry,” Stubblefield said the last week of April. 

What are TRQ funds? 

Following the committee meeting in late March, KARK began digging into what TRQ funds were and if they were sitting in an out-of-state bank account as we had been told. After several information requests from multiple sources, here is what we can confirm. 

In 2012, the Arkansas Rice Research and Promotion Board came into a windfall that has resulted in about $15 million dollars to spend. It appears that few people, including many lawmakers, knew of its existence. 

“The TRQ funds from Colombia have been a really amazing opportunity for the rice industry in Arkansas,” said Rice Research and Promotion Chairman Marvin Hare.

Based on a U.S. Trade Agreement with Colombia, rice export tariffs would be reduced to zero percent by 2030. In the meantime, certain amounts of rice could be exported at that rate, through a certificate of trade auction process. Rice companies bid to fill the order, and the highest bidder wins. The money generated from the auctions is then divided between the United States and Colombia. 

Of the 50 percent portion the United States receives, Arkansas typically receives roughly 50 percent of that portion, based on rice production. A nonprofit was established to receive the U.S. funds, called Col-Rice, and then it distributes it to the six rice-producing states that make up its membership. 

Where did the TRQ funds go?

Arkansas received its first payment, designated to go to the Arkansas Rice Research and Promotion Board, in December 2012. But prior to it ever receiving the funds, the board voted  in May 2012 to allow The Rice Foundation to hold the funds for investment purposes on behalf of the board. 

The Rice Foundation is a private, nonprofit. It is not beholden to any state officials. 

“This was already in place. They had a mechanism to invest the funds. We chose to continue doing it that way,” Hare said. 

The Rice Foundation already had a mechanism for handling funds like this because United States rice-producing states had also been the benefactors of a European Union TRQ dating back, Rice Foundation account records show, to at least 1999. Only in that arrangement, the trade agreement made The Rice Foundation the distributing body for those funds to the states, where the Colombian TRQ was slated to go to the states directly after passing through Col-Rice.

“They put it into the Rice Foundation budget as a service to the Rice Research and Promotion Board of Arkansas, they put those dollars in an investment until they need those and decide where they are going to spend those dollars,” said The Rice Foundation director Chuck Wilson. “It’s just a service we provide for them, we don’t get one red penny for doing it. We don’t gain anything. We do it as a service for them.”

The money, Wilson said, is in an account in Virginia that the board always has access to withdraw from. The money, according to board minutes, has been invested in CDs and money market accounts. But further investment strategies didn’t appear to be available based on documents provided by the board’s administrator. 

“It was the way for the board to hold those funds and earn some interest on them,” Hare said.  “Although the returns are small because they’re in very low risk instruments. We’re very prudent in that area – we don’t want to lose any of it.” 

According to Hare, the funds are never really out of the Rice Research and Promotion Board’s control. Although, Wilson confirmed that the board would vote to spend the money as it saw fit and alert The Rice Foundation, which would then arrange for the funds to be distributed.

“The Rice Foundation audits those funds, they provide us regular financial statements on those funds,” Hare said.

State approval? 

Chairman Hare also stated that the state had approved of the whole arrangement. 

“The state of Arkansas has reviewed those. They say there’s nothing wrong with them,” Hare said. “They understand why we were doing that. There’s no wrongdoing and everything is open and above board. All the minutes of the board identify the funds as being there.”

When we followed up with the board administrator, asking who with the state had approved of the process the board had used and if there was any approval in writing, the administrator wrote back,” I believe Mr. Hare was referring to the fact that the Division of Legislative Audit conducts annual audits of the Board’s finances which includes a review of all minutes and financial statements.” 

The only problem is, the Division of Legislative Audit confirmed that it reviews what are known as year-end CAFR closing books from the Department of Finance and Administration (DFA). The closing book for the Rice Research and Promotion Board, which is submitted by Brandy Carroll, haven’t included any references to the outside bank account where those funds were kept, according to administrator of accounting at DFA, Paul Louthian.

These funds have never been included in the board’s annual state audits, despite the first payment being received in December 2012, because there is no mention of the funds being part of its revenue stream.

“There is a section in the questionnaire that asks specifically about commercial bank accounts, because there are state agencies that have those,” Louthian said.
According to Louthian, and documents provided by DFA  in response to an FOI request, for the most recent report of 2013 Carroll marked “no” in regard to outside bank accounts, ignoring the “Morgan Stanley” account the board was reportedly keeping the TRQ funds in, according to documents submitted by Carroll to Col-Rice for IRS filings. According to Louthian, even if the funds were in a Rice Foundation account, the relationship that the board had of distributing the funds from that account would have required it be reported as revenue. 

When we asked Louthian to clarify if the lack of reporting would have left financial officials in the dark on the state level not only about how the funds were used but even their existence, Louthian said, “I think that would be safe to assume.” 

When we asked if individuals who prepared these reports, like Carroll, had access to training for how to properly report revenues, Louthian confirmed that multiple training opportunities are available through DFA and that DFA had dedicated staff members within the office that are available to help answer questions regarding financial reporting from the Rice Research and Promotion Board.

Since December 2012, financial records show that the board has spent about $4.5 million of the $14.5 million it has received in TRQ funds. But the board may not have even had the authority to spend that money. 

According to the division of legislative audit, any money a state agency receives has to have an appropriation from the legislature or a special appropriation from DFA. According to legislative documents and DFA records, the board has received neither in regard to TRQ funds. 

“I think every person who grows rice in this state deserves to know those things, how their money is being spent,” Stubblefield said. 

What comes next?

“When you get a dollar, it’s no different than state tax dollars, people need to know where it’s spent. The percentages and that it’s spent correctly,” State Senator Bryan King, (R) District 5.

Despite all this, it appears the TRQ funds have been spent as intended, funding research projects with the University of Arkansas. But some still wonder how $15 million dollars in state funds were missed. 

“I think it’s high time the whole system be looked at,” John Alter said. 

According to Stubblefield, he and King have requested a full audit of the board, including reviews of financial statements that include TRQ funds. The Division of Legislative Audit has confirmed a review is underway. Stubblefield has also suggested moving the rice check-off funds and the responsibility of the board under the direction of the Arkansas Department of Agriculture. 

According to Louthian at DFA, the business process will be used in regard to this board moving forward. He is not aware of anyone from the board arranging to meet with him or his staff members to work out the details or clarify a plan moving forward, aside from meeting with auditors.

To follow this story and all of Marci Manley’s coverage, click here for Facebook or here for Twitter.

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