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. Page 8 GAO/RCED-gO-116 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 B-%86781 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 Water I&source6 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 J , 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 -.--
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)