Water Subsidies: The Westhaven Trust Reinforces the Need to Change Reclamation Law

Published by the Government Accountability Office on 1990-06-05.

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

The Westhaven Trust
Reinforces the Need to
Change Reclamation

               I Ill
      United States
GAO   General Accounting Office
      Washington, D.C. 20648

      Resources, Community, and
      Economic Development Division

      June 6,199O
      The Honorable GeorgeMiller
      Chairman, Subcommitteeon Water, Power
        and Offshore Energy Resources
      Committee on Interior and Insular Affairs
      Houseof Representatives
      Dear Mr. Chairman:
      Subsequentto our October 1989 report’ to you on the implementation of
      the Reclamation Reform Act of 1982’s 960-acrelimit for subsidized
      water,2 you requested that we determine whether the sale of the J. G.
      Boswell Company’s Boston Ranch to the WesthavenTrust was an
      example of a large farming operation continuing to receive federally
      subsidized water on its entire acreage.The Boston Ranch Company-a
      wholly owned subsidiary of the J. G. Boswell Company and a large farm
      operator located in the Central Valley Project of the Department of the
      Interior’s Bureau of Reclamation-sold 23,238 acresto the Westhaven
      Trust in May 1989. The trust was formed for the benefit of 326 salaried
      employeesof the J. G. Boswell Company.

      As stated in our 1989 report, we believe, on the basis of the act’s legisla-
      tive history, that the Congressexpected to stop the flow of federally r*
      subsidized water to owned and/or leasedland above the 960-acrelimit
      that was operated as one farm. Six of the caseswe examined showed
      that the owners or lesseeshad reorganized large farms into multiple,
      smaller landholdings to be eligible to receive additional federally subsi-
      dized irrigation water from the Bureau. However, the farms continued
      to be operated as large farming operations. Therefore, we concluded
      that (1) the act’s acreagelimit was not being implemented in a manner
      consistent with congressionalexpectations and (2) large farms had been
      reorganized since the act’s passageto receive subsidized water on
      acreagethat would have otherwise exceededthe legislatively mandated
      limit. We recommendedthat if federally subsidized water is to be limited
      to no more than 960 acresof land being operated as one farm or farming
      operation, the act must be amendedto apply the act’s acreagelimit to
      farms and farming operations.
      I Water Subsidies: Basic Changes Needed to Avoid Abuse of the QGO-AcreLimit (GAO/RCEDQOB,
      Oct. 12, 1989).
      ‘Water at rates that exclude any interest on the federal government’s investment in the irrigation
      component of its water resource projects is referred to as “subsidized water” because the lost interest
      is viewed as a subsidy to farmers.

      Page 1                       GAO/RCED-90-198 Westhaven Trust Reinforces Need to Change Law
                   The J. G. Boswell Company’s Boston Ranch is another example of a
Results in Brief   large farm, reorganized by its sale to the WesthavenTrust, to whose
                   beneficiaries are attributed multiple, individual landholdings. Each land-
                   holding is within the act’s 960-acre limit, and each individually qualifies
                   for federally subsidized water under current reclamation law. However,
                   for all practical purposes,the landholdings continue to be operated col-
                   lectively as one large farming operation, much as they were before their
                   sale to the WesthavenTrust.
                   A consequenceof this trust arrangement is that the federal government
                   is not collecting the revenuesto which it would be entitled if the mul-
                   tiple landholdings were consideredcollectively as one large farm or
                   farming operation subject to the act’s 960-acrelimit. Had the Westhaven
                   Trust been subject to the acreagelimitation, the trust would have been
                   required to pay about $2 million more per year for its federal water.
                   Reducedrevenues are likely to continue to occur annually under the
                   existing act unless the Congressamendsthe act, as we recommendedin
                   our October 1989 report.

                   The 1982 act represents a fundamental changein federal reclamation
Background         law, by limiting to 960 the maximum owned or leased acreagethat an
                   individual or legal entity, such as a partnership or corporation, can irri-
                   gate with subsidizedwater. Generally, owned land above the limit
                   cannot be irrigated with federal water, and farmers must pay the full
                   cost for water delivered to leasedland over this limit. However, the act
                   doesnot prohibit multiple landholdings from being operated collectively
                   as one farm while individually qualifying for federally subsidized
                   watern3Somefarmers, therefore, have reorganized their farms into mul-
                   tiple, smaller landholdings to be eligible to receive federally subsidized
                   water from the Bureau using various partnerships, corporations, and/or
                   trust arrangements.As a result, the Bureau has continued to provide
                   federally subsidized water to large farms, someconsisting of thousands
                   of acres of land.

                   “The act defines and uses the term “landholding”-which      is the total irrigable acreage held directly
                   or indirectly by the recipient of federal water -rather than the term “farm” or “farming operation”
                   in establishing the acreage limit.

                   Page 2                        GAO/RCEIMJO-198 Westhaven Trust Reinforces Ned to Change Law

                       The J. G. Boswell Company has taken advantage of section 214 of the
Law Allows             act, which exempts from its 960-acrelimit land held for beneficiaries by
Subsidized Water for   a trustee in a fiduciary capacity, as long as no single beneficiary’s
Westhaven Trust’s      interest exceedsthe law’s ownership limits. The act doesnot preclude
                       multiple landholdings from being operated collectively under a trust as
Entire Acreage         one farm while qualifying individually for federally subsidized water.
                       Accordingly, the J. G. Boswell Company was able to reorganize the
                       Boston Ranch land by selling the 23,238 acresto the WesthavenTrust,
                       with the landholdings attributed to each beneficiary being eligible to
                       receive federally subsidized water.

                       Before the land was sold to the trust, the J. G. Boswell Company oper-
                       ated the acreageas one large farm and paid full cost for the federal
                       irrigation water delivered to the acres for the l&month period ending in
                       May 1989. When the trust bought the land, the entire acreagebecame
                       eligible to receive federally subsidized water.
                       According to the Department of the Interior’s Office of the Solicitor,
                       becausethe landholdings attributed to the 326 trust beneficiaries range
                       from 21 acresto 647 acresper beneficiary, the trust meets the act’s
                       requirement that no individual beneficiary’s interest exceeds960 acres.
                       Although the act does not preclude large farming operations organized
                       as multiple landholdings under a trust from receiving federally subsi-
                       dized water on the entire acreage,this situation is not consistent with
                       what we believe the Congresswas trying to accomplish in establishing
                       the 960-acre limit.

                       In our October 1989 report, we developed 11 indicators, any one or more
GAO Indicators         of which would suggestthat individual small landholdings are, in fact,
SuggestThat            parts of larger farms. Most indicators focus on arrangements between
Westhaven Trust’s      and among owners, lessees,and/or farm operators rather than on the
                       individual landholdings. These indicators are not absolute determinants
Acreage Is One         in themselves,Rather, when applied to the entire farming operation,
Farming Operation      they suggestthat for all practical purposes these landholdings continue
                       to be operated collectively as single large farms. Examples of these
                       indicators include casesin which the sameindividuals make manage-
                       ment decisions for multiple landholdings; a single farm management
                       company operates multiple landholdings; or the farm manager or oper-
                       ator acknowledgesthat the small landholdings are being operated collec-
                       tively as one farm. (Seeapp. I.)

                       Page 3              GAO/RCED-90-198 We&haven Trust Reinforces Need to Change Law
                  We identified the following five indicators that demonstrate to us that,
                  after the Boston Ranch was sold to the WesthavenTrust, the acreage
                  has continued to be operated as one large farming operation.

              . One of the stated purposes of the trust is to operate the entire acreageas
                one farm under a farm managementagreement.Officials from the J. G.
                Boswell Company and the WesthavenTrust acknowledge that the Wes-
                thaven Trust land is generally operated as one farm.
              l The 23,238 acreswere purchased with one loan.
              9 The trustee makes managementdecisionsfor the entire acreage.
              . The annual farming operation is financed with one operating loan.
              . The beneficiaries have an undivided interest in the lands4

                  The WesthavenTrust is another example that clearly demonstrates the
Conclusion        need to changethe Reclamation Reform Act of 1982 if subsidized water
                  is to be limited to no more than 960 acresof leased and/or owned land
                  being operated as one farm or farming operation. The specific language
                  to amend the act, which is included in our October 1989 report, would
                  define a “farm” or “farming operation” to include a landholding or mul-
                  tiple landholdings farmed or operated as a unit by a trust or other
                  arrangement. If amended,the act would prevent arrangements such as
                  the WesthavenTrust from receiving subsidized water on land in excess
                  of the 960-acrelimit.

                  We reviewed the associatedWesthavenTrust documents and records of
Scopeand          the Bureau’s Mid-Pacific Region in Sacramento,California. We met with
Methodology       officials from the Bureau’s Mid-Pacific Region,the Department of the
                  Interior’s Office of the Solicitor, the J. G. Boswell Company, and the
                  WesthavenTrust. We also visited the WesthavenTrust land, accompa-
                  nied by representatives of the J. G. Boswell Company and the Wes-
                  thaven Trust.
                  Our work was conducted from February through May 1990 in accor-
                  dance with generally acceptedgovernment auditing standards.

                  4No Individual beneficiary owns a specific parcel of land. Rather, each beneficiary is allocated a per-
                  centage of the total acreage of the trust. This percentage is based on each beneficiary’s salary from
                  the J. G. Boswell Company relative to the total salaries of all 326 beneficiaries.

                  Page 4                       GAO/RCED-80-198 Westhaven Trust Reinforces Need to Change Law
                  We discussedthe information in this report with Bureau officials at the
Agency Comments   Mid-Pacific Region and representatives of the WesthavenTrust, who
                  generally concurred with our information. They emphasized,however,
                  that the trust’s large farming operation is allowed under existing recla-
                  mation law. As requested, however, we did not obtain official agency
                  comments on a draft of this report.

                  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 copies of this report to
                  the Secretary of the Interior, the Commissionerof the Bureau of Recla-
                  mation, and other interested parties.
                  If you have any additional questions or if we can be of further assis-
                  tance, please contact me at (202) 2757766. Major contributors to this
                  report are listed in appendix II.

                  Sincerely yours,

                  James Duffus III
                  Director, Natural Resources

                  Page 6               GAO/RCED-99-198 We&haven Trurt Reinforcea Need to Change Law
Appendix I

List af Indicatms That Could E3eUsed b
Identify Multiple Landholdings That Are Parts
of a Larger Farm
              .   The individual landholdings or other farm assetsare combined as collat-
                  eral for loans.
              .   The principal owners or lesseesof the individual landholdings agree to
                  cover loan defaults of other principals.
              .   The farm manager or operator bears an economicrisk associatedwith
                  the production and sale of the crops.
              .   The sameindividuals make managementdecisions for multiple
              .   The owners of the farm managementcompany that operates the small
                  landholdings are the sameindividuals who owned or leasedthe land
                  before the reorganization occurred.
              .   The small landholdings are leasedfrom the large farm that existed
                  before the reorganization.
              .   The sameindividuals own or leasethe small landholdings.
              .   A single farm managementcompany operates multiple landholdings.
              .   Crop subsidy records indicate that the landholdings are interrelated.
              .   The small landholdings share equipment or labor, sometimeswithout
              .   The farm manager or operator acknowledgesthat the small landhold-
                  ings are being operated collectively as one farm.

                  Page 6              GAO/RCED-O-198 Westhaven Trust Reinforces Need to Change Law
Appendix II

Major Contributors to This Report

Resources,              Caroline C. Vernet, Staff Evaluator
Community, and
Development Division,
Washington, D.C.

San Francisco           GeorgeR, Senn,Evaluator-in-Charge
Regional Office         Lisa Lensing, Staff Evaluator

Office of the General
Counsel, Washington,

(140861)                Page 7               GAO/RCED4Jl%198 Westhaven Trust Mnforca   Need to Change Law
           --   --__- --._-...- _--__-_
                                              “-_,--.   ~_~-I___-_

in        ---~-
;I ----                       1h~rrcst.s for copit         of (;A() reports   should be sent. to:

                              1J.S. Gt~trc~ral Awtmnthg          Office
                              l’ost OffiCV 130x GO15
                              Gaithrsburg,      Marylard         20877

                              ‘I’t*lt~plrotlt~ 20%275-624 1

                              ‘I’iw first, five copit*s of each report        arc? free. Additional   copies art2

                              ‘I’tww is R 25% discoiit~t, on orders for 100 or mort~ copies maild              to a
                              si trgle adtlrt~ss.

                              Ordt*rs must, be prrpaici by cash or by check or money order madt~
                              oat. to t.tw Supt’rit~t,tlrlcierlt of D0rnment.s.
       C’irst-(kss Mail
    Ik5tage XLFees Paid
       Pertnit No. G 100