The Westhaven Trust Reinforces the Need to Change Reclamation Law J I Ill 141618 United States GAO General Accounting Office Washington, D.C. 20648 Resources, Community, and Economic Development Division B-239883 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 B-239933 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 ManagementIssues 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 landholdings. . 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 charge. . 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 Economic Development Division, Washington, D.C. San Francisco GeorgeR, Senn,Evaluator-in-Charge Regional Office Lisa Lensing, Staff Evaluator - Office of the General Counsel, Washington, - D.C. (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 !k2?.ot~tv1t+b. ‘I’tww is R 25% discoiit~t, on orders for 100 or mort~ copies maild to a si trgle adtlrt~ss. 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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)