Reclamation Law: Changes to Excess Land Sales Will Generate Millions in Federal Revenues

Published by the Government Accountability Office on 1990-02-01.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                            United States
G 0                         General Accountiug Office
                            Washington, D.C. 20648
 f                         Resources, Community, and
                           Economic Development Division

                           February 1,199O

                           The Honorable GeorgeMiller
                           Chairman, Subcommittee on Water, Power
                             and Offshore Energy Resources
                           Committee on Interior and Insular Affairs
                           House of Representatives
                           Dear Mr. Chairman:
                           This report responds to your June 13,1989, letter and subsequentdis-
                           cussionswith your office regarding the Bureau of Reclamation’s man-
                           agement of the sale of excessland under recordable contracts1 The
                           report shows that significant revenuesto the federal government are
                           possible if reclamation law is changed.

                           The availability of federal irrigation water to western farmland-due to
Resplts in Brief   f       the government’s construction of water resourcesprojects in the west-
                           increasesthe lands value. When excessland is sold, this added value
                           becomesa profit that is not returned to the federal government. Under
                           existing reclamation law, about 121,000 acres of excessland under
                           recordable contracts will be sold within the next few years, which could
                           generate as much as $100 million in profits. Also, other acres of excess
                           land not under recordable contracts could be sold in future years for
                           additional profits. Becausereclamation law provides the opportunity for
                           profiting from excessland sales,the law needsto be changedso that the
                           federal government obtains the profit created by the construction of the
                           federal water resourcesprojects.

                           In accordancewith the Reclamation Act of 1902, privately-owned land
Baqkground                 in excessof 160 acres-subsequently increasedto 960 acres by the Rec-
                           k-nation Reform Act of 1982 (43 USC. 390aa to zz+-cannot receive
                           federally subsidized waterq2An owner of excessland, however, can
                           obtain the subsidy, as per theOmnibus Adjustment Act of 1926, by plac-
                           ing the excessland under re’iordable contract with the Secretary of the

                           ‘The Reclamation Reform Act of 1982 defines a recordable contract as a written contract between the
                           Secretary of the Interior and a landowner, recordable under state law, that provides for the sale or
                           disposition of land held in excess of the ownership limitations of reclamation law.

                           2However, under section 207 of the Reclamation Reform Act of 1982, the acreage can exceed the Q60-
                           acre limitation for less productive land.

                           Page 1                    GAO/RCED-90400 Changes to Reclamation Law for Excess Land Sales

    Interior.3 The Reclamation Reform Act of 1982 changedthe recordable
    contract period to 6 years (10 years in the Central Arizona Project). Pre-
    viously, landowners who entered into these contracts could irrigate the
    excessland at the subsidized water rate for up to 10 years before having
    to dispose of it.
    Under a recordable contract, the landowner is required to sell the land
    at its dry-land value-a value that does not reflect the value due to the
    availability of project water-plus any value to the land from improve-
    ments such as surface leveling and soil conditioning. The land must be
    sold within the specified period to an eligible buyer-an individual or
    legal entity who after purchasing the land doesnot own more than 960
    acres.Oncesold, the land is no longer classified as excessland.
    Section 209(f)(2) of the Reclamation Reform Act of 1982 specifies that
    the title to excessland contain a covenant which requires that for a
    period of 10 years following the date of its original sale under record-
    able contract, the resale price not exceedits dry-land value, plus
    improvements. After this lo-year period, however, the land can be sold
    at its fair market value, which includes the added value attributable to
    the availability of water from the federal water resourcesprojects.

    According to a March 1981 Department of the Interior study, of the 1.1
    million acres of excessland existing westwide, about 260,000 acres were
    under recordable contracts.4As of January 1990, Bureau records indi-
    cate that about 606,000 acresof excessland remain westwide, with
    about 121,000 acres under recordable contracts that will expire in the
    early 1990s.
    Almost all of the acreageunder recordable contracts is located in the
    Bureau’s Central Valley Project, with about 99,000 acres in the
    Westlands Water District. According to Bureau records on pending sales
    of excessland, as of January 1990, about 90,000 of the 121,000 acres
    under recordable contracts are in the processof being sold.
    The availability of irrigation water resulting from the future completion
    of federal water resourcesprojects may causeadditional acresto

    %ater delivered at rates that exclude any interest on the federal government’s investment in the
    irrigation component of its water resources projects is referred to as subsidized water because the lost
    interest is viewed as a subsidy to farmers.
    4The term westwide refers to the 17 contiguous states west of the Mississippi River that form the
    Bureau’s area of jurisdiction.

    Page 2                     GAO/RCED9l%lOO Changes to Reclamation Law for Excess Land Sales
---I-                   becomeclassified as excessland. Those landowners who will chooseto
                        irrigate their excessland with subsidized water from the federal project
                        also will have to place the land under recordable contracts and sell it to
                        eligible buyers.

                        Reclamation law provides buyers of excessland the opportunity to
      mation Law        obtain significant profits because,while requiring that excessland
      .desBuyers of     under recordable contracts be sold at the dry-land value, it allows buy-
      ssLand With       ers to sell the land at the fair market value after 10 years. For example,
                        in 1989, over 23,000 acres of excessland in the WestlandsWater District
      ts From Federal   were sold into a trust arrangement for about $21 million, contingent
      r Resources       upon Bureau price-approval6 The primary stated purpose of this trust,
Proje(cts               composedof employeesof the trustor, is to hold the land for the
    /                   required period and then sell it at a profit. Becausethis acreagecur-
                        rently has a fair market value of about $49 million, the sale of this land,
                        after 10 years, could result in a profit of about $28 million for the trust
                        beneficiaries if land values do not decline. This significant profit is made
   I                    possible primarily becauseof the federal government’s construction of
                        water resourcesprojects. In our view, this profit properly belongs to the
                        federal government.

                        According to the Bureau’s Mid-Pacific Region Appraisal Branch Chief,
                        land in the WestlandsWater District has a dry-land value plus improve-
                        ments of about $800 to $960 per acre, and a fair market value of about
                        $2,000 to $2,600 per acre. Accordingly, buyers of the remaining 121,000
                        acres of excessland under recordable contracts could purchase the land
                        for about $97 million to about $116 million, and becauseit has a fair
                        market value of about $242 million to about $303 million, could profit
                        by as much as $206 million from its future sale. Becauseabout 90,000
                        acres of the 121,000 acres of excessland under recordable contracts
                        have pending sales actions, however, the revenuesthe federal govern-
                        ment would obtain if the current reclamation law were amendedwould
                        be reduced to the extent that someof this acreageis subject to sales
                        contracts conditioned by Bureau price-approval. As of January 1990,
                        Bureau records indicate that the deedsto about 62,000 acres of the
                        90,000 acres have already been recorded to the buyers. We estimate that

                        “Although the Reclamation Reform Act of 1982 limits to 960 the acreage that can be irrigated with
                        subsidized water, all 23,000 acres can be irrigated at the subsidized rate because the landholdings of
                        each of the trust beneficiaries do not exceed the individual acreage limitations. See our report entitled
                        Water Subsidies: Basic Changes Needed to Avoid Abuse of the 960-Acre Limit, (GAO/RCED-90-6,
                        Oct.. 12, 19891.

                        Page   a                   GAO/RCED-90-100 Changes to Reclamation Law for Excess Land Salea
                     the revenuesto the federal government from the sale of the remaining
                     69,000 acres of land could be as much as $100 million.
                     Owners of about 384,000 acres of excessland not under recordable con-
                     tracts remaining westwide may opt in the future to sell their land.
                     According to the Bureau’s regional Reclamation Reform Act coordina-
                     tors, most of this land has a non-project riparian or groundwater supply,
                     and therefore doesnot depend on the federal water resourcesprojects.
                     As such, the potential future sale of this land would not result in signifi-
                     cant profits to the buyers. However, should any of this land be pur-
                     chasedto obtain federal project water, Bureau rules and regulations
                     specify that the buyers purchase the land at its dry-land value, and
                     allow the buyers to sell it at its fair market value, provided that the land
                     is held for 10 years. The possible future sale of any of the 384,000 acres
                     therefore could generate additional profits that, under current reclama-
                     tion law, would go to the buyers.

                     The sale of excessland generatessignificant profits that are currently
Cjonclusion          not returned to the federal government. Becausethis profit is created by
                     the government’s construction of water resourcesprojects, however,
                     reclamation law should be amended so that the profit can properly
                     accrue to the federal government from the land’s initial sale from excess
                     status. We estimate that as much as $100 million in federal revenues
                     could be generated from the sale of the remaining excessland under
                     recordable contracts. Additional revenues could be obtained if excess
                     land not under recordable contracts is sold in the future.

                     In order for the federal government to obtain the financial benefits from
Recommendation       its construction of water resourcesprojects, we recommend that the
                     Congressamend the Reclamation Reform Act of 1982 to require that
                     excessland under recordable contract and excessland not under record-
                     able contract but purchased to obtain federal project water be sold at a
                     Bureau-approved fair market value, with the seller of the land receiving
                     an amount equal to the dry-land value, plus improvements, and the U.S.
                     Treasury receiving the balance. Specifically, we recommend that the
                 l   Section 209(f)(2) of the Act by substituting:

                     “October 12, 1982 but before the enactment of the Reclamation Reform Act Amend-
                     ments of 1990” for “the date of enactment of this Act,” and

                     Page 4              GAO/RCED-SO-100 Changes to Reclamation Law for Excess Land Sales
                  l   Section 209(f) further by adding the following after (2):
                      “(3) in the caseof disposals of excess lands, including such land not under record-
                      able contracts, made on or after the enactment of the Reclamation Reform Act
                      Amendments of 1990, the disposal of excesslands to non-excessowners shall be for
                      fair market value of the land, which shall be paid to the excessowners except for
                      the fair market value related to the delivery of irrigation water, which shall be
                      deposited in the Treasury of the United States as miscellaneous receipts. Upon such
                      disposal the title to these lands shall be freed of the burden of any limitations on
                      subsequent sale values which might otherwise be imposed by the operation of sec-
                      tion 46 of the Act entitled ‘An Act to adjust water rights charges, to grant certain
                      relief on the federal irrigation projects, and for other purposes,’ approved May 26,
                      1926 (43 USC. 423e).”


                      Becausealmost all of the excessland under recordable contracts is in
Sctjpe and            the Central Valley Project in California, we focused our work on the
M+hodology            Bureau of Reclamation’s Mid-Pacific Region in Sacramento,California.
                      We reviewed legislation and Bureau regulations relating to the excess
                      land sales program. In addition, we obtained Bureau data relating to the
                      excessland held in Bureau projects westwide by contacting the Recla-
                      mation Reform Act coordinators at the Mid-Pacific, Lower Colorado and
                      Great Plains regions.
                      Our work was conducted between October 1989 and January 1990, in
                      accordancewith generally acceptedgovernment auditing standards.

Agency Comments       this report. However, we discussedthe factual information in the report
                      with Bureau officials at the Mid-Pacific Region,who told us that our
                      information was accurate and generally concurred with our analyses of
                      the revenues generated from the sale of excessland under recordable

                      As arranged with your office, unless you publicly announceits contents
                      earlier, we plan no further distribution of this report until 30 days from
                      the date of this letter. At that time, we will send copiesto the Secretary
                      of the Interior, the Commissioner of the Bureau of Reclamation, and
                      other interested parties.

                      Page 6               GAO/RCED-9@100 Changes to Reclamation Law for Excess Land Sales
     This work was performed under the direction of James Duffus III, Direc-
     tor, Natural ResourcesManagement Issues,(202) 2757766. Major con-
     tributors to this report are listed in appendix I.

     Sincerely yours,

     J. Dexter Peach            /
     Assistant Comptroller General

     Page 6             GAO/RCED9iHOO Changea to Reclamation Law for Excess Land sales


    Page 7   GA0/&CZD-90.100 Changes to Reclamation Law for Jkcess Land Salea
AJJJendix I

        ajar Contributors to This Report

                            Leo E. Ganster, Assistant Director
Rebources,                  Caroline C. Vernet, Staff Member
comm unity, and
Development Division,
Washington, D.C.

                            GeorgeR. Senn,Evaluator-in-Charge
                            Mary L. Jankowski, Staff Member

                            Stanley G. Feinstein, Senior Attorney
Office of the General


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