oversight

Water Resources: Compensation to Water Users Did Not Reflect the Value of Rights and Interests

Published by the Government Accountability Office on 1990-04-18.

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

                      United   States   General   Accounting   Office

GAO               .   Report to the Chairman, Subcommittee
                      on Water and Power, Committee on
                      Energy and Natural Resources, U.S.
                      Senate

April   1990
                      WATER RESOURCES
                      Compensation to
                      Water Users Did Not
                      Reflect the Value of
                      Rights and Interests


                                                                        141372




GAO/RCED-90-116
      United States
GAO   General Accounting Office
      Washington, D.C. 20548

      Resources, Community, and
      Economic Development Division

      B-236731
      April 18,199O

      The Honorable Bill Bradley
      Chairman, Subcommittee on Water
        and Power
      Committee on Energy and Natural Resources
      United States Senate
      Dear Mr. Chairman:
      On September 6, 1989, we provided you with information in responseto
      your July 10, 1989, letter and subsequentdiscussionswith your office
      on the compensation provided to the Strawberry Water Users Associa-
      tion (SWUA) by the Bureau of Reclamation in 1986, and by the Congress
      under Public Law loo-663 in 1988. SWUA was under contract with the
      Department of the Interior’s Bureau of Reclamation to operate the
      Strawberry Valley Project in Utah-part of the Bonneville Unit of the
      Central Utah Project. The irrigation project consists of 66,870 acres of
      land, including a reservoir that is being enlarged.
      Although the United States owns the project land, SWUA had the right to
      revenues from activities on this land, such as grazing, recreation, and
      timber and mineral development. Becauseof the enlargement of the
      Strawberry Valley Project, the Bureau transferred managementof part
      of the project’s land to the U.S. Department of Agriculture’s Forest Ser-
      vice in 1986, and compensatedSWUA for its future revenue losseson this
      land. In addition, in responseto the dissatisfaction of an ad hoc commit-
      tee-composed of SWUA, the Bureau, the Forest Service, a state of Utah
      wildlife resource agency, and a special interest group called the Utah
      Wildlife Leadership Coalition-with the condition of the project land
      under SWUA'S land managementpractices, Public Law 100-663,enacted
      on October 31,1988, transferred the administrative jurisdiction of all
      but 96 acres of the project land from SwuA to the Forest Service and
      compensatedSwuA for its lost contractual surface rights and interests,
      You asked us to determine the legal character and economicvalue of
      SWUA'S rights  and interests, including all properties and improvements,
      to be acquired or transferred under section 4 of the act, as well as the
      land rehabilitation costs.As agreed,in order to meet your needs,the
      September6 letter contained the information that we were able to
      gather through early September 1989. This report incorporates and
      updates the information in that letter. As you requested, we analyzed
      comments in the September 14,1989, CongressionalRecord, printed at


      Page 1                                       GAO/RCED-90-116Water I&sources
                     lb286781




                     the request of Senator Garn of Utah, that, according to SWUA officials,
                     represent swuA’sposition on our letter.


Results in Brief     When the Bureau compensatedSWUA in 1986, it did not have a policy to
                     guide the compensationof organizations managing its projects when the
                     rights and interests of these organizations are terminated. Further, the
                     Bureau did not obtain a formal opinion from the Department of the Inte-
                     rior’s Solicitor’s Office to establish the legal rights and interests of SWUA.
                     In our opinion, when the United States removed SWUA'S right to obtain
                     revenuesfrom the project land, SWUA'S legal entitlement to compensa-
                     tion was limited to the revenuesthat would have been lost had existing
                     contracts not been completed. Becauseall existing contracts were com-
                     pleted when SWUA'S compensation was awarded, SWUA'S rights and inter-
                     ests had no remaining value; therefore, there was no legal obligation to
                     compensateSWUA prior to Public Law 100-663.
                     The compensation provided to SWUA by the Congressin 1988, which
                     resulted from a policy decision, was not basedon complete information
                     becauseno formal opinion establishing the rights and interests of SWUA
                     was available.

                     In essence,the combined $17.9 million paid to SWUA by the Bureau and
                     the Congress,including the non-monetary benefits the act provided-
                     title to potentially valuable land zoned for commercial development,
                     future grazing privileges, retention of its contractual subsurface rights,
                     and being held harmless for the cost of rehabilitating the deteriorated
                     project land-did not reflect the value of SWUA'S rights and interests.
                     Further, included in the $17.9 million is a double payment of $2.9 mil-
                     lion for projected future recreation and grazing revenue losseson part of
                     the project land. In addition, the significant deterioration of the project
                     land, which requires an estimated $3 million in rehabilitation, resulted
                     from SWUA'S past land managementpractices. Although SWUA'S 1940
                     contract with the Department of the Interior established SWUA'S finan-
                     cial liability for these land rehabilitation costs,the 1988 act removed
                     SWUA'S liability.


                     SWUA was organized in   1922 to operate and maintain, under contract
SWUA Had a Limited   with the Bureau of Reclamation, most of the Strawberry Valley Project
Legal Right to       in Utah and to repay outstanding project construction costs. SWUA
Compensation         entered into a contract with the Department of the Interior in 1926-
                     which was modified in 1928 and supercededby another contract in


                     Page2                                           GAO/NJDBO-ll6WaterBeeources
 1940-that provided SWUA the right to generate revenues from the pro-
ject land.
Under SWUA’S current 1940 contract with the Department of the Interior,
the Bureau retained project oversight responsibility. The United States
retained ownership of the project land, including the right to use this
land for purposes that may preclude SWUA’S engagingin income-produc-
ing activities. SWUA, therefore, had no guarantee that it could generate
income in perpetuity from this land. Accordingly, when the United
States removed from SWUA both its administrative jurisdiction over the
project land and its right to obtain revenues from the surface usesof the
land, no legal obligation existed to compensateSWUA in perpetuity for
possible income from future contracts prior to Public Law 100-663.
In our opinion, SWUA was legally entitled to receive compensation when
the United States removed SWUA’S rights and interests to surface usesof
the land. This compensation,however, should have been limited to
actual revenues lost from existing contracts that had not been com-
pleted, and should not have been basedon possible future income.
Becauseall existing annual contracts had been completed before the
compensation was awarded, SWUA’S rights and interests had no remain-
ing value.

When the Bureau compensatedSWUA in 1986, the Bureau had no policy
to guide the compensation of organizations managing its projects when
the rights and interests of these organizations are terminated. Further,
the Department of the Interior’s Solicitor’s Office did not issue a formal
opinion establishing SWUA’S legal rights and interests, in order to have a
basis for compensatingSWUA in 1986. This formal opinion also could
have served as the criterion for the Congresswhen it deliberated SWUA’S
compensation in 1988. The compensation authorized in 1988 repre-
sented a policy decision on the part of the Congress.
The September 14, 1989, CongressionalRecord comments on SWUA’S
legal rights stated that SWUA was entitled in perpetuity to the use, pos-
session,management,and control of the project and was therefore enti-
tled to compensation on the basis of its ownership interest in the project
land. We believe, however, that although SWUA had a restricted right to
generate revenues from the project land owned by the United States, no
legal obligation existed to compensateSWUA in perpetuity for possible
income from future contracts prior to Public Law 100-663.




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                                                            Water Ibmucea
                           B-238731




                           Appendix I provides a detailed discussionof our analysis of the legal
                           character of SWUA’S rights and interests, and our responseto the rele-
                           vant comments appearing in the CongressionalRecord on the legal
                           issues.


                           In 1986, the Bureau paid SWUA $2,883,800-$1,896,900 for relocating
Compensation               grazing and $987,900 for loss of recreation revenueson 26,990 acres of
Provided Was Not           project land. These amounts represented potential revenuesthat SWUA
Based on SWUA’s            could have received from the usesof the project land if it held the land
                           in perpetuity, rather than the actual value of SWUA'S rights and
Rights and Interests       interests.

                           The Congress’decision to compensateSWUA in 1988 resulted from rec-
                           ommendations made by an ad hoc committee formed becauseof growing
                           concernsover the poor condition of the’project land managedby SWUA.
                           The committee concluded in 1987 that SWUA’S remaining contractual sur-
                           face rights on all project land should be bought out, and on October 31,
                           1988, the Congressgenerally incorporated, in Public Law 100663, the
                           ad hoc committee’s agreement.Specifically, the compensationto SWUA
                           under section 4 of the 1988 act included

                       l ownership of 96 acres of project land, together with improvements, in a
                         northwest section of the project land;
                       9 SWUA’S first right of refusal for grazing privileges on certain project
                         land;’
                       l retention of SWUA’S contractual rights to issue oil, gas, coal, and mineral
                         leases,excluding sand and gravel, on project land;
                       l assumption by the Forest Service of the responsibility for project land
                         rehabilitation, with SWUA specifically held harmless for any rehabilita-
                         tion costs; and
                       . authorization for the appropriation of $16 million to SWUA for relin-
                         quishing its contractual surface rights and interests, including sand and
                         gravel, in the 66,776 acres of project land. Public Law 101-101,enacted
                         September 29,1989, appropriated the $16 million.
                           According to SWUA officials, the $ 16million valuation for SWUA’S rights
                           and interests was basedon the fair market value of the project land as if
                           SWUA owned the land, as determined by an independent appraisal.


                           ‘According to the ForestService’sLife and WatershedManagementBranch Chief, SWUAwill be the
                           first entity offered grazingprivileges on Strawberry Valley Projectland if the ForestServicepermits
                           grazingto resume.



                           Page 4                                                        GAO/RCED-ml16 Water Resources
                           B286781




                           Becausethe project land is owned by the United States rather than
                           SWUA, however, this type of appraisal should not have been used as a
                           basis to determine the compensationbecauseit doesnot represent the
                           value of SWUA’S contractual surface rights and interests. Rather, SWUA’S
                           compensation should have been basedon lost revenues from existing
                           annual contracts.


SWUA Compensated           The $16 million appraised value for SWUA’S rights and interests included
Twice on Part of the       the $2.9-million compensation awarded in 1986 for part of the project
                           land, and $11.6 million for SWUA’S remaining surface rights and inter-
Project Land               ests2 Therefore, when SWUA was awarded the $16 million, it received
                           compensation a secondtime for its rights and interests on the 26,990
                           acres.


Public Law 100463          SWUA’S 1940 contract   with the Department of the Interior held SWUA
Removed SWUA’s Liability   responsible for managing the project land in accordancewith the
                           Bureau’s rules and regulations and specifically held the United States
for Land Rehabilitation    harmless for any land rehabilitation costs that might result from SWUA’S
costs                      managementpractices. Although SWUA’S managementpractices gener-
                           ally deteriorated the land, Public Law loo-663 removed SWUA’S liability,
                           and authorized $3 million for the Forest Service to rehabilitate the land.

                           The CongressionalRecord comments stated that the compensation pro-
                           vided to SWUA did not represent the full amount due to SWUA becausethe
                           $16 million was not exempt from federal and state taxes. We believe
                           that SWUA’S rights and interests had no remaining value.
                           Appendix II provides a detailed discussion of our analysis of the com-
                           pensation provided to SWUA, and our responseto the September 14,
                           1989, comments in the CongressionalRecord regarding this issue.




                           ‘The $16 million was calculatedby adding$2.9million (the 1986compensation)plus $11.6million
                           (the appraisedvalue of SWUA’sremainingsurfacerights and interestsin the projectland). According
                           to SWUA’sattorney, the $14.4million total was then roundedup to the nearestwhole million.



                           Page 6                                                    GAO/RCED-90-116Water Resources
                       E286781




                       According to the chiefs of the Bureau’s Land ManagementRecreation
SWUA’s Land            Branch and the Forest Service’sLife and Watershed Management
Management Practices   Branch, the Strawberry Valley Project land needsextensive rehabilita-
Deten’orated the       tion. The deterioration of the project land resulted from SWUA’S past
                       land managementpractices, which, according to the Bureau’s Utah
Project Land           Projects Manager, included overgrazing and herbicide treatments to
                       enhancegrazing. Further, he said that this was done at the expenseof
                       the fishery resourcesand riparian habitat-the thin strips of vegetation
                       bordering the reservoir and streams-that are important habitat for
                       wildlife.

                       To repair the deteriorated condition of the project land, the Forest Ser-
                       vice prepared a preliminary S-year, $2.8-million estimate that was used
                       to support the $3-million land rehabilitation cost in Public Law 100-663.
                       The preliminary plan addressedstream channel and riparian rehabilita-
                       tion, and provided a range development plan. As of February 1990,
                       $600,000 has been appropriated to rehabilitate the land.

                       The Bureau requires land use inspections of Bureau projects every 6
                       years to ensure that the projects are managedin accordancewith its
                       rules and regulations. However, the Bureau’s Salt Lake City Regional
                       Supervisor of Water and Land and the Lands Management and Recrea-
                       tion Branch chief told us that the Bureau is not a land management
                       agency and that becausethe Bureau adopted a “hands-off” policy
                       regarding SWUA’S land managementpractices, it did not conduct the
                       required land use inspections.

                       According to an official in the Bureau’s Washington, D.C., Resources
                       ManagementLiaison Division, the Bureau, which is responsible for mil-
                       lions of acres of land west of the Mississippi River, issued a policy in
                       1989 to require the development of resource managementplans for all
                       Bureau projects. The Bureau is now completing guidelines for drafting
                       these plans. To be developed by both the Bureau and the organizations
                       managing the Bureau projects, the plans will provide guidance on how
                       project purposes such as grazing and recreation should be managedin
                       accordancewith Bureau rules and regulations.

                       The Bureau allocated about $600,000 in fiscal year 1989 and has set
                       aside about $3 million in fiscal year 1990 for plan development; no
                       resource managementplans were completed as of February 1990.
                       SWUA’S land managementpractices and their impact on the project land
                       are further discussedin appendix III.


                       Page 6                                        GAO/lUXD-BO-116Water Resources
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Conclusions       BecauseSWUA’S rights and interests had no remaining value when the
                  compensation was awarded by the Bureau and the Congress,there was
                  no legal obligation to compensateSWUA prior to Public Law 100-663.The
                  decision by the Congressto provide compensationto SWUA for its rights
                  and interests was basedon incomplete information becausethe Depart-
                  ment of the Interior’s Solicitor’s Office had not issued a formal opinion
                  establishing SWUA’s rights and interests. Establishing a Bureau policy to
                  guide the compensation of organizations managing Bureau projects, on
                  the basis of their contractual rights and interests, would provide criteria
                  for any future federal buy-outs.

                  The Bureau’s hands-off policy regarding SWUA’S managementpractices
                  permitted the condition of the Strawberry Valley Project land to deterio-
                  rate. The millions of acres for which the Bureau is responsible make it
                  essential that the Bureau have well-developed plans to manage its
                  projects, and to ensure that these projects are managedin accordance
                  with its rules and regulations. The Bureau’s recent policy requiring the
                  development of resource managementplans for all Bureau projects is a
                  step in the right direction.

                  In the future, the federal government may want to buy out the rights
Recommendations   and interests of organizations managing Bureau projects. To assist the
                  Congresswhen it deliberates on the just compensation for the termina-
                  tion of contractual rights of organizations managing Bureau projects, we
                  recommendthat the Secretary of the Interior direct the Commissioner of
                  the Bureau of Reclamation to provide the Congresswith specific infor-
                  mation on (1) the legal rights and interests of the organization and (2)
                  the remaining economicvalue of these rights and interests for which the
                  organization should be compensated.
                  To ensure that future just compensation is awarded by the Bureau of
                  Reclamation for the termination of contractual rights of organizations
                  managing Bureau projects, we recommendthat the Secretary of the Inte-
                  rior direct the Commissioner of the Bureau of Reclamation to develop a
                  policy to guide the compensation of organizations. Such a policy should
                  be baaedon the Department of the Interior’s contractual obligations
                  with these organizations, which would limit the compensation awarded
                  to the lossesincurred when these rights and interests are terminated.

                  We reviewed the legislative history of the Strawberry Valley Project,
                  and met with Department of the Interior attorneys in Salt Lake City,


                  Page 7                                        GAO/RCED-gO-110
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                      B-286781




                      Utah, and Washington, D.C. In addition, we reviewed records, documen-
                      tation, and reports at the Bureau’s Salt Lake City Regional and Provo,
                      Utah Projects offices, and met with officials from the Bureau, the Forest
                      Service’s Uintah National Forest, and the Strawberry Water Users Asso-
                      ciation. (Seeapp. IV.)


                      As requested, we did not obtain official agency comments on a draft of
Agency Comments       this report. However, we discussedthe factual information in the report
                      with Bureau officials at the Salt Lake City Regional and Utah Projects
                      offices, who told us that the information was accurate. We also met with
                      SWUA representatives to discussthe September6, 1989, correspondence
                      and the comments entered in the September 14,1989, Congressional
                      Record,which SWUA told us represented its views. SWUA did not agree
                      with our positions on various matters, believing that it was entitled to
                      compensation on the basis of the ownership interest in the land, and
                      that the compensation awarded did not represent the full value of its
                      rights and interests. Our analyses of SWUA’S views are included in appen-
                      dixes I and II.

                      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 Secretary of Agriculture, the Commissioner of the
                      Bureau of Reclamation, and other interested parties.

                      This work was conducted under the direction of James Duffus III, Direc-
                      tor, Natural ResourcesManagementIssues,who may be reached at (202)
                      276-7766. Other major contributors are listed in appendix V.
                      Sincerely yours,




                  1’ J.Assistant
                         Dexter Peach
                  J              Comptroller General




                      Page t3                                       GAO/BcED-90410 Water Besources
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        Y




            Page D   GAO/ltCED-go-116Water I&mmcea
Contents


Letter                                                                                          1

Appendix I                                                                                  12
The Legal Character     Background of the Strawberry Valley Project                         12
                        SWUA Formed to Managethe Strawberry Valley Project                  13
and Economic Value of   Administrative Jurisdiction Over the Project Land                   13
SWUA’s Rights and           Transferred to the U.S. Forest Service
                        Basis for SWUA Rights                                               14
Interests               Analysis of the Principal Comments in the Congressional             16
                            Record

Appendix II                                                                                 17
Compensation            Compensation in 1986 Was Based on Potential Future                  17
                            Revenues
Provided to SWUA in     Compensation in Public Laws loo-663 and 101-101 Not                 18
1986 and Under Public       Based on Value of SWUA’s Rights and Interests
Laws loo-563 and        Additional Non-Monetary Compensation to SWUA in                    20
                            Public Law loo-663
101-101
Appendix III                                                                               22
The Deteriorated        SWUA Allowed Land to Deteriorate                                   22
                        Bureau Did Not Conduct Land Use Inspections                        23
Condition of the
Strawberry Valley
Project Land
Appendix IV                                                                                24
Objectives, Scopeand
Methodology
Appendix V                                                                                 26
Major Contributors to
This Report
                        Abbreviation

                        SWUA      Strawberry Water Users Association


                        Page 10                                    GAO/RCEDW116 Water lhoumea
J




    Page 11   GAO/BcEDol16   Water l&so-
Appendix I

The Legal Character and EconomicValue of
SWUA’s Rights and Interests

                    The Strawberry Water Users Association (SWUA) was organized to,
                    among other purposes, operate and maintain the Strawberry Valley Pro-
                    ject. In accordancewith legislation and its 1940 contract with the
                    Department of the Interior, SWUA was authorized to obtain revenues
                    from the use of project land. As a result of the enlargement of the
                    Strawberry Reservoir and dissatisfaction with the condition of project
                    land under SWUA'S management,the Congresstransferred the adminis-
                    trative jurisdiction of the project land from SWUA to the U.S. Forest Ser-
                    vice. When SWUA'S rights and interests to surface usesof the land were
                    removed, SWUA was entitled to compensation for the loss of revenues
                    from existing contracts that had not been completed but not for compen-
                    sation based on possible future income.

                    The Strawberry Valley Project was one of the earliest Bureau projects.
Background of the   Authorized by the Secretary of the Interior on Decemberl&1906, under
Strawberry Valley   the provisions of section 6 of the Reclamation Act of 1902, the Bureau
Project             began construction of the Strawberry Valley Project in 1906 to provide
                    irrigation water. The Strawberry Reservoir was substantially completed
                    by 1916, and the first water was delivered in 1916.

                    On April 4,1910, Public Law 114 authorized that approximately 66,870
                    acres be acquired from the Uintah Indians for the Strawberry Valley
                    Project. The act further provided that the purchase price for this land
                    be included in project construction costs that would be paid by the own-
                    ers of the irrigated land. The 66,870 acres of project land could also be
                    used to generate revenues in the form of rental payments that would be
                    credited on the irrigators’ behalf to the construction costs. Ownership,
                    management, and control of this land was to transfer to the irrigators
                    when they paid 61 percent of the project’s construction costs.
                    The Fact Finder’s Act of 1924 transferred the operation and mainte-
                    nance of a water project to a water users association when two-thirds of
                    the irrigated area was covered by water rights contracts with the
                    Department of the Interior. Net profits derived from the leasing of pro-
                    ject land for grazing and farming, operating power plants, and other
                     activities were to be applied first to project construction costs, then to
                    operation and maintenance, and finally as the water users directed.




                    Page 12                                        GA0/RCED-W116 Water Remmes
                        SWUA was organized in   1922 as a Utah nonprofit corporation to, among
SWUA Formed to          other purposes, contract with the Bureau to operate and maintain the
Manage the              project and repay outstanding construction costs. Pursuant to the Fact
Strawberry Valley       Finder’s Act, SWUA entered into a contract with the Bureau in 1926, with
                        contract modifications in 1928, to manage and operate most of the
Project                 Strawberry Project. The Bureau, however, retained project oversight
                        responsibility. The 1928 contract specifically provided that ownership
                        of the project land would not pass to SWUA. In 1940, SWUA entered into
                        its current contract, which also specified that ownership of project land
                        would remain with the United States. Although SWUA completed repay-
                        ment of the project construction costs in 1974, including the cost of the
                        66,870 acres of project land, the Congressdid not transfer ownership of
                        the land to SWUA.

                        SWUA has obtained revenues principally    through fees received under
                        annual agreementswith its members who graze their cattle and sheep
                        on allocated acreage,from recreational use, and under timber and oil
                        and gas development leases.SWUA members have constructed camping
                        sites, small cabins, and other recreational facilities on land adjacent to
                        the reservoir.

                        The Colorado River Storage Project Act of 1966 authorized the construc-
Administrative          tion of the Central Utah Project-composed of six units-the largest
Jurisdiction Over the   being the Bonneville Unit. The Bonneville Unit’s construction will
Project Land            enlarge the Strawberry Reservoir from 8,400 to 17,120 surface acres
                        and should be completely filled sometime in the 1990s.As part of this
Transferred to the      enlargement, the Bureau transferred the management of 26,990 acres
U.S. Forest Service     from SWUA to the U.S. Department of Agriculture’s Forest Service under
                        an Interim ManagementAgreement dated February 2,1982.
                        The transferred managerial responsibilities included management of
                        both the recreation on the reservoir and the reservoir’s surrounding
                        land. In June 1984, the Forest Service assumedmanagementof the
                        26,990 acres. The Bureau also built for SWUA new grazing and recrea-
                        tional facilities on higher land adjacent to the enlarged reservoir. SWUA
                        believed it should be compensatedfor lost revenues from this acreage,
                        and in 1986 the Bureau paid SWUA $2.9 million for revenue lossesfrom
                        recreation and grazing.
                        As early as the mid-196Os,recreation and fish and wildlife interest
                        groups alleged that SWUA was poorly managing the project land. To



                        Page 18
                 Appendix I
                 The Legal Charclcter and Economic Value of
                 SWUA’sRights and Interesta




                 address growing concernsover the condition of this land, an ad hoc com-
                 mittee was formed in May 1987. The committee consisted of SWUA, the
                 Bureau, the Forest Service, a state of Utah wildlife resource agency, and
                 a special interest group called the Utah Wildlife Leadership Coalition.
                 After a year of deliberating ownership and management issueson the
                 future of the project land, the committee concluded that it would be in
                 the best interest of all to buy out SWUA’S contractual surface rights,
                 excluding 96 acres to which SWUA would acquire title.’ On October 16,
                 1989, the Forest Service assumedadministrative jurisdiction-operation
                 and maintenance control-of all the Strawberry Valley Project land.
                 Public Law 100-663,dated October 31,1988, generally incorporated the
                 ad hoc committee’s agreements.

                 On the basis of documents we reviewed and our discussionswith
Basis for SWUA   Department of the Interior attorneys, we concluded that the United
Rights           States, not SWUA, owned the project land. In the caseof Strawberry
                 Water Users Association v. United States, 611 F. 2d 838 (1979), the
                 Court of Claims held that as a result of its 1928 and 1940 contracts with
                 the Department of the Interior, SWUA conveyed or relinquished to the
                 United States any legal or equitable property interest in project land.
                 Consequently, SWUA was not entitled to compensation under the Fifth
                 Amendment of the United States Constitution for the value of project
                 land taken for the construction of the Central Utah Project’s Bonneville
                 unit.
                 Under the 1940 contract-which implements the 1910 and 1924 acts-
                 SWUA may obtain revenue from the use of project land through leasing
                 and other activities approved by the Department of the Interior. SWUA
                 has received revenues paid under annual contracts for livestock grazing
                 and recreation, and for timber and oil and gas development activities
                 under lease.The United States retained the right, however, to use this
                 land for purposes that may preclude SWUA from income-producing activ-
                 ities. Therefore, becauseSWUA had no guarantee that it could generate
                 income from the project in perpetuity, it was not entitled to compensa-
                 tion for the possible loss of such revenues.

                 When it compensatedSWUA in 1986, the Bureau had no policy to guide
                 the compensation of organizations when the rights and interests of such
                 ‘The original 66,870acresof Strawberry Valley Projectlands acquiredfrom the Uintah Indians
                 included the 96 acresto which SWUAacquiredtitle in 1989,plus the 66,776acresthat the Forest
                 Servicewill manage.These66,776acresare composedof the 26,990acresof recreationlands and the
                 remaining30,786acres.



                 Page 14                                                 GAO/RCED-SO-116
                                                                                       Water Resources
  ,


                            The Legal Character and Economic Value of
                            SWUA’altt&te and Interests




                            organizations managing its projects are terminated. Further, the Bureau
                            did not obtain a formal opinion from the Department of the Interior’s
                            Solicitor’s Office to establish the legal rights and interests of SWUA as the
                            basis for the 1986 compensation. When the United States removed
                            SWUA'S right to generate revenues from the land, the value of SWUA'S
                            rights both in 1986 and in 1988 should have been limited to the actual
                            revenues that SWUA lost becauseexisting contracts were not completed.
                            The 1986 compensation should not have been based on possible future
                            income, and the 1988 and 1989 monetary compensation should not have
                            been based on the value of the project land, which SWUA did not own.
                            Becauseall existing annual contracts were completed when SWUA'S com-
                            pensation was awarded, SWUA'S rights and interests had no remaining
                            value. Therefore, the compensation provided to SWUA by the Bureau in
                            1986 and the Congressin 1988 did not represent the value of SWUA'S
                            rights and interests. The compensation provided by the Congressin
                            1988 and 1989 resulted from a policy decision.


Analysis of the             Commentsthat represent SWUA'S position regarding our September 6,
                            1989, letter, were printed in the CongressionalRecord of September 14,
Principal   Comments   in   1989, at the request of Senator Garn of Utah, to rebut our position
the Congressional           regarding the legal basis for compensation to SWUA. The principal com-
                            ments state that SWUA was entitled in perpetuity to the use, possession,
Record                      management and control of the project land, and that it therefore was
                            entitled compensation, on the basis of the ownership interest in the land,
                            for relinquishing its surface rights and interests in the land. The United
                            States, however, owns the project land, including both the legal title as
                            well as the beneficial interest in the surface and the subsurface of this
                            land. According to its 1940 contract with the United States, SWUA may
                            use the land, provided that the government grants advance approval of
                            SWUA contracts for use of the land. SWUA may retain the proceedsof
                            income-producing activities. However, becausethe government, as
                            owner, retains the right to use the land for purposes that may preclude
                            income-producing activities, there is no guarantee that income would be
                            produced. Accordingly, no legal obligation existed to compensateSWUA
                            in perpetuity for possible income from future contracts prior to Public
                            Law 100-663.

                            Our views are consistent with those expressedby the Department of the
                            Interior’s Associate Solicitor, Division of Energy and Resources,in a
                            1974 letter to the Department of Justice dealing with SWUA'S legal rights.
                            The Associate Solicitor stated, “Nor would there be a right on the part of
                            the Association to be compensatedfor potential revenues from lands not


                            Page 15                                        GAO/RCED-9@116Water Besources
A-1
-w         CbusEter aud Economic Value of
SWUA*oIti@~teandIntereete




covered by approved contracts as of the time the United States
supercededthe Association’s management and control.”
The CongressionalRecord comments also cited section 14(f) of the 1940
contract, the Department of the Interior’s August 8,1972, Solicitor’s
Opinion, and the 1986 Compensation Agreement to rebut our statement
that the value of SWUA'S rights should be limited to lost revenues from
existing contracts. Although section 14(f) provides that SWUA may
obtain contracts to generate revenues from the project, it is our view
that this provision doesnot guarantee that the project land would
always be available for such purposes. Further, the 1972 Solicitor’s
Opinion, while holding that SWUA could continue to receive income from
the project even though it had completed project repayment, did not rec-
ognize SWUA'S right to payment for possible future income not associated
with existing contracts. Moreover, in a 1974 letter to the Department of
Justice, the Department of the Interior Solicitor’s Office, in commenting
upon the 1972 opinion, pointed out that there was no right to compensa-
tion for potential revenues not covered by existing contracts. Finally,
although the 1986 compensation included payment for the loss of future
revenues from grazing and recreation, we do not agree that this was
legally required prior to Public Law 100-663.




Page 16                                      GAO/XtCJDW116 Water ltemmnm
  ,
pppendix II

CompensationProvidedtoSWUAin 1986 and
UnderFkblicLawslOO-563andlOl-101

                       SWUA received compensation when        the United States removed SWUA’S
                       administrative jurisdiction over the Strawberry Valley Project land,
                       thereby removing SWUA’S ability to generate revenues from this land. In
                       1986, SWUA received $2.9 million from the Bureau as compensation for
                       lost revenues on 26,990 acres of the project land. In 1988, the Congress
                       enacted Public Law 100663, which authorized that $16 million be
                       appropriated to SWUA, in addition to significant non-monetary compen-
                       sation, for the loss of its surface rights and interests in all of the project
                       land. The $16 million was appropriated by Public Law 101-101on Sep
                       tember 29,1989. Becauseall existing annual contracts had been com-
                       pleted when the compensation was awarded, SWUA’S rights and interests
                       had no remaining value. The compensation awarded, therefore, did not
                       reflect the value of SWUA’S rights and interests.


Compensation in 1986   In 1986, the Bureau paid SWUA $2,883,800-$1,896,900 for relocating
                       grazing and $987,900 for recreation revenue losseson 26,990 acres of
Was Based on           project land. These amounts represented potential revenues that SWUA
Potential Future       might have received from the land if it had held the land in perpetuity,
                       rather than the actual value of SWUA’S rights and interests in the land.
Revenues
                       In setting the compensation, according to our analysis of Bureau
                       records, the Bureau selectedfactors that resulted in a more favorable
                       compensation package for SWUA. For example, the Bureau used SWUA’S
                       $64 relocation cost per animal unit for the 4.6-month.grazing seasonas
                       the basis for compensation1 The Bureau had also considered (1) $40,
                       which SWUA described as the grazing fair market value, and (2) $17 to
                       $20, which SWUA was charging its members for the 1981 grazing season.2
                       The Bureau’s Utah Projects Manager told us that the $64 figure used to
                       calculate the 1986 compensation was negotiated with SWUA, and that it
                       represented SWUA’S actual cost for leasing private land during the 1982
                       grazing season.SWUA leasedthe land to relocate animals to other grazing
                       areas during a Bureau construction project.
                       The Bureau averaged the historical recreation revenues from the years
                       1977 through 1981 to calculate the compensation for recreation revenue


                       1An animal unit is generally defiied as a 1,OOO-pound
                                                                          cow, a horse,or five sheep.
                       2Accordingto SWUA’spresidentand the vice-presidentof the SWUAGrazingCommittee,the Forest
                       Servicerate of $6.98for the 1986grazingseasonwas consideredbut r&cted becauseit did not
                       include all the additional grazing.wrvicesSWUAprovided, such as feed,water, salt, medicine,herd-
                       ers, and fencemaintenance.



                       Page 17                                                     GAO/RCED@M16 Water l&munmn




                                                      ‘,’
                                                                                                  .
                         Appendisn
                         Compewatlon -toSWUAh19?30and
                         UnderPublicLawaloodsaand1O1-101




                         losses.The Bureau capitalized the grazing and average recreation reve-
                         nues at an internal rate of return computed by SWUA'S accounting firm to
                         arrive at the $2.9~million compensation.

                         The compensation in Public Law 100663, enacted October 31,1988, rep-
Compensation in          resented a policy decision on the part of the Congress,and generally
Public Laws 100463       incorporated the agreementsreached by the ad hoc committee that
and 101-101 Not          reviewed SWUA'S management of the project land. Section 4 of the act
                         authorized the transfer of administrative jurisdiction of 66,776 acres of
Based on Value of        project land to the Forest Service within 16 days of payment of compen-
SWUA’s Rights and        sation to SWUA for its contractual surface rights and interests on this
Interests -              land, including sand and gravel. The compensation under section 4
                         included

                     l ownership of 96 acres,together with improvements, in a northwest sec-
                       tion of the project land (the Bureau deededthis land to SWUA on May 4,
                        1989);
                     . SWUA'S right of first refusal for grazing privileges on 30,786 acres of pro-
                       ject land, and if permitted under a grazing rehabilitation plan, on the
                       remaining 26,990 acres;
                     . retention of SWUA'S contractual rights to issue oil, gas, coal, and mineral
                       leases,excluding sand and gravel, on project land
                     l assumption by the Forest Service of responsibility for project land reha-
                       bilitation. (The act authorized a total appropriation of $3 million, and
                       held SWUA harmless for any costs associatedwith this rehabilitation.);
                       and
                     . authorization for the appropriation of $16 million to SWUA for relin-
                       quishing its contractual surface rights and interests, including sand and
                       gravel, in the 66,776 acres of project land. The $16 million was appro-
                       priated in 1989.
                         SWUA's surface rights and interests were assessedby an independent
                         appraisal as if SWUA owned the project land. Becausethe United States,
                         not SWUA, owns the land, we believe that this type of appraisal should
                         not have been used as a basis to determine the compensation becauseit
                         does not represent the value of SWUA'S surface rights and interests.
                         In August 1989, SWUA'S attorney advised us that the $16 million was
                         derived from a negotiated settlement, and that the funds were neededto
                         retire the outstanding debt of $9.6 million on Bureau bonds used by




                         Page 18
1
                          -n
                          Compsmrrtion
                                 ROVkdk,SWUAin1988md
                          underFnblicL8m     looaM 8ndlOl-101




                          SW~A to rehabilitate project facilities.3 The remaining $6.86 million from
                          the $16 million appropriation would be used to pay the federal and state
                          taxes on the compensation.


SWUA Compensated          The appraisal, which valued SWUA’S rights and interests at $16 million,
Twice on Part of the      included $2.9 million for the compensation SWUA received in 1986 for its
                          rights and interests on 26,990 acres of the project land, and valued
Project Land              SWUA’S remaining rights and interests at $11.6 million.4 BecausePublic
                          Law 101-101 appropriated $16 million, rather than $11.6 million-the
                          balance of SWUA’S remaining rights and interests-the appropriation
                          had the effect of paying SWUA twice for its right to generate revenues
                          from grazing and recreation on the 26,990 acres.
                          According to the September 14,1989, comments in the Congressional
                          Record, the compensation provided to SWUA did not represent the full
                          amount due to SWUA, and did not have the effect of paying SWUA twice
                          for its right to generate revenues on the 26,990~acreparcel. Further, the
                          comments reflected SWUA’S belief that the $16 million compensation
                          should have been exempt from federal and state taxes, and that because
                          the compensation was not tax-exempt, SWUA did not receive all to which
                          it was entitled. Becausewe believe that SW~A’S rights and interests had
                          no remaining value, the tax consideration is not relevant.


Public Law 100-663        According to SWUA’S 1940 contract with the Department of the Interior,
                          SWUA was responsible for managing the land in accordancewith the
RemovesSWUA’s Liability   Bureau’s rules and regulations. The 1940 contract specified that the
for Land Rehabilitation   United States would be held harmless for any costs that might be
costs                     incurred to rehabilitate the land resulting from SWUA’S management
                          practices. Although SWUA’S managementpractices generally deteriorated
                          the project land, Public Law loo-663 removed SWUA’S financial liability
                          regarding the condition of this land, and authorized $3 million for its
                          rehabilitation by the Forest Service.



                          %I June 1988,SWUA,in a statementsubmittedto the Subcommitteeon Waterand Powerof the
                          SeuateCommitteeonEuergyandNaturalResources,statedthatthe$16miUoncompensationwas
                          based on the 1088appraisal.

                          41M $16 million appropriation for P.L. 101-101for SWUAk aurfaoerights and inter&s on the pm
                          ject land was calculatedby adding $2.9million (the 1986a)mpens&ion)plus $11.6million (the
                          appraisedvalue of !3WUA’sremainingsurfacerights and inter&s). Accordingto SWUA’sattorney,
                          the$14.4~totalwasthenroundeduptothe~wholemillion.



                          Pyte 1B                                                  GAO/BCED&@l16 Water -
                         ~~Plwldedtoswu*hl8somd
                         Under Public Lmr lOOM2 and 101401




AdditionalNon-
Monetary
Compensation to
SWUhH'ublicLaw
1004563

Title to 96 Acres        As part of the compensation provided in Public Law 100663, SWUA
                         received title to 96 acres of project land traversing U.S. Highway 40, a
                         direct major route from Salt Lake City. Neither the Bureau nor SWUA
                         appraised the value of the 96 acres.
                         About 80 of the 96 acres, which form one lot situated north of the high-
                         way, are the site of SWUA'S site office and herder facilities, including sev-
                         eral cabins and corrals. The Bureau relocated these facilities in 1986 as
                         part of the enlargement of the Strawberry Reservoir. The remaining 16
                         acres, zoned for commercial development, are located south of the high-
                         way and adjoin the existing Forest Service visitors’ center. The southern
                         parcel is the future site of SWUA'S motel and conveniencestore facility,
                         which has already been approved by Wasatch County. Forest Service
                         and Bureau officials initially told us that once the enlarged Strawberry
                         Reservoir is completely filled, the SWUA 16-acreparcel would be adjacent
                         to the shoreline. However, the Bureau’s Regional Supervisor of Water
                         and Land later clarified this statement by saying that the SWUA land
                         would be about one-half mile away from the reservoir.


First Right of Refusal   Public Law loo-663 entitles SWUA to retain the first right of refusal to
                          grazing privileges on 30,786 acres of project land, and if permitted
                         under a grazing rehabilitation plan to be established by the Forest Ser-
                         vice, on the remaining 26,990 acres. The Uintah Forest Supervisor told
                         us that grazing will be permitted only if it enhancesother values and is
                         consistent with the land use plan. If the Forest Service reopens the pro-
                         ject land to grazing after the land has been rehabilitated, SWUA will be
                          able to resume grazing by exercising its first right of refusal. Conceiva-
                         bly, therefore, all Forest Service grazing leaseson this land could be
                         assignedto SWUA.




                         Page 20                                        GAO/RCED&%11gWater Reoomcm
 f
                    Ap&tendixII
                    cmapeMatlon -toswuAin1986and
                    UnderPublicLawrlOO-E62and1O1-101




Subsurface Rights   SWUA retained   ita contractual rights to issue oil, gas, coal, and mineral
                    leases,excluding sand and gravel, on project land. Neither the SWUA
                    appraisal nor the Bureau has determined the value of the subsurface
                    rights. SWUA has entered into mineral leasesin the past, but Bureau
                    Utah Projects Office officials advised us that no subsurface leasescur-
                    rently exist. SWUA would receive revenues if future contracts for mineral
                    rights were issued.




                    Page21
Appendix III                                                                                 Y)

The Deteriorated Condition of the Strawberry
Valley Project Land

                    SWUA'S management of    the Strawberry i’alley Project land to enhance
                    grazing resulted in the overall deterioration of this land. The Bureau has
                    oversight responsibility for the project, but did not conduct the land use
                    inspections required by its rules and regulations. In order to repair the
                    damageto the land, the Congressauthorized $3 million in Public Law
                    loo-663 for the Forest Service to rehabilitate this land.

                    According to the chiefs of the Bureau’s Land ManagementRecreation
SWUA Allowed Land   Branch and the Forest Service’s Life and Watershed Management
to Deteriorate      Branch, the Strawberry Valley Project land will require extensive reha-
                    bilitation. The condition of the land’s riparian and aquatic resourceswas
                    documented in a July 1984 Forest Service report entitled Aquatic
                    Habitat Management/Rehabilitation on Strawberry Reservoir Tributary
                    Streams by a fisheries biologist for the Uintah National Forest, and in
                    the Bureau’s Utah Projects Office August 1986 draft of the Strawberry
                    Valley Project Land ManagementPlan. The 1986 draft report noted that,
                    historically, SWUA practiced season-long(June through October) grazing
                    of Strawberry Valley pastures, which resulted in the deterioration of the
                    riparian habitat and fishery resource.

                    According to the 1986 draft report, the combination of overgrazing and
                    herbicide treatments had a detrimental impact on riparian areas-the
                    thin strips of vegetation bordering the reservoir and streams-that are
                    important habitat for wildlife. Further, eroding stream banks contrib-
                    uted significantly to the silt load of streams, reducing the water quality,
                    and the increased nutrient loading of the reservoir added to the general
                    degradation of the fishery resource.
                    The 1984 Forest Service report provided an action plan to rehabilitate
                    project streams at a lo-year cost of over $1 million. The plan included
                    the reintroduction of riparian vegetation and bank stabilization. The
                    Forest Service subsequently prepared a preliminary S-year, $2.8million
                    estimate that was used to support the $3 million authorization in Public
                    Law 100-663.This estimate included $2.2 million for stream channel and
                    riparian rehabilitation, and $0.6 million for a range development plan.
                    The Forest Service’s Chief of the Life and Watershed Management
                    Branch told us that a detailed rehabilitation plan with related costs will
                    be developed once funds are appropriated. As of February 1990,
                    $600,000 has been appropriated for land rehabilitation.




                    Page 22                                        GAO/RCEDBO-116Water Resows
                   The Deteriomted Condition of the Strawberry
                   Valley Project Land




                   According to the comments in the September 14,1989, Congressional
Bureau Did Not     Record,the project and surrounding land historically were managed by
Conduct Land Use   SWUA under the Bureau’s supervision, and at no time did the Bureau
Inspections        advise SWUA that the land was being mismanaged.The Bureau’s Utah
                   Projects Manager told us that SWUA managedthe land to enhancegrazing
                   at the expenseof riparian habitat and fishery resources.Although the
                   Bureau requires land use inspections, the Bureau’s Salt Lake City
                   Regional Supervisor of Water and Land and the Lands Management and
                   Recreation Branch Chief told us that the Bureau is not a land manage-
                   ment agency, and that a hands-off policy was adopted regarding SWUA'S
                   land managementpractices. The Bureau’s Utah Projects Office per-
                   formed annual operation and maintenance inspections of the project
                   facilities, but these inspections did not include an assessmentof land use
                   management,nor the condition of the land.

                   The Bureau is responsible for about 8.6 million acres in its network of
                   over 300 dams and dikes, 260 reservoirs and hundreds of miles of
                   canals, pipelines and tunnels. According to an official in the Bureau’s
                   ResourcesManagementWashington, D.C., Liaison Division, the Bureau
                   issued a policy in 1989 to require resource managementplans for
                   Bureau projects. To be developed by both the organizations managing
                   the projects and the Bureau, the plans will provide guidance on how the
                   organizations should managethe specific purposes of the project, such
                   as grazing and recreation, in accordancewith Bureau rules and regula-
                   tions. The Bureau is drafting guidelines on what these plans should
                   address as it develops resource managementplans.
                   The Bureau allocated about $600,000 in fiscal year 1989, and has set
                   aside about $3 million in fiscal year 1990 for plan development; how-
                   ever, no resource managementplans have been completed as of Febru-
                   ary 1990.




                   Page 28                                       GAO/RCED-9l%1l6Water Resources
Appendix IV

Objectives,Scopeand Methodology


              In responseto your July 10,1989, letter and subsequentdiscussions
              with your office, we reviewed the legal character and economicvalue of
              the rights and interests to be acquired or transferred under section 4 of
              Public Law 100-663,including all properties and improvements, as well
              as the costs associatedwith rehabilitation of the Strawberry Valley Pro-
              ject land.

              To determine the legal character of SWUA’S rights and interests, we
              reviewed the legislative history of the Strawberry Valley Project and a
              1979 Court of Claims decision. We also reviewed pertinent Department
              of the Interior legal opinions, and analyzed the contractual obligations
              between the Department of the Interior, the Bureau, and SWUA. We met
              with attorneys at the Department of the Interior in Washington, DC.,
              and the Bureau at the Salt Lake City Regional Office. We also met with
              SWUA’S legal representative.

              To determine the economicvalue of SWUA’S rights and interests, we
              reviewed records, documentation and reports at the Bureau’s Salt Lake
              City Regional Office, and Utah Projects Office in Provo, Utah. We also
              analyzed the documentation used by the Bureau to calculate the com-
              pensation provided to SWUA. We met with officials from the Bureau’s
              Salt Lake City Regional and Utah Projects offices, the Forest Service’s
              Uintah National Forest, SWUA, and the appraiser of the Strawberry Val-
              ley Project land.

              To addressthe condition of the project land and the costs associated
              with its rehabilitation, we reviewed Bureau and Forest Service reports
              regarding the condition of the project land, and the Forest Service’spre-
              liminary estimate on the costs involved to rehabilitate the land. We also
              visited the project with representatives from the Bureau and the Forest
              Service. We also discussedBureau resource managementplans and the
              Bureau’s inspections of project land with a Bureau headquarters
              official.

              To addressthe comments appearing in the September 14,1989, Congres-
              sional Record,we met with Bureau officials in the Salt Lake City
              Regional Office, and with SWUA representatives.
              Our work was conducted from August 1989 to February 1990, in accord-
              ance with generally acceptedgovernment auditing standards.




              Page 24                                      GAO/RCED-90416Water Resources
&pendix V

Major Contributors to This &port


                        Leo E. Ganster, Assistant Director
Resources,              Caroline C. Vernet, Staff Evaluator
Community, and
Economic
Development Division,
Washington, DC.

Denver Regional         Dawn Shorey, Evaluator-In-Charge
Office, Denver,
Colorado
                        Stanley G. Feinstein, Senior Attorney
Office of the General
Counsel, Washington,
DC.




(140847)                Page 25                                 GAO/RCED-9O-110
                                                                              Water l&mucao
-.--