oversight

Basic Changes Needed to Avoid Abuse of the 960-Acre Limit

Published by the Government Accountability Office on 1990-07-31.

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

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                        United States General Accounting OlYice    /q/     7 d       ’ * *
                        Testimony
        GAO
                                                                  Hllll
                                                                    IlllIll
                                                                     141921

        For Release      Basic Changes Needed to Avoid
        on Delivery      Abuse of the 960-Acre Limit
        Expected at
        2:00 p.m. EDT
        Tuesday
        July 31, 1990




                         Statement of
                         James Duffus III,    Director
                         Natural   Resources Management Issues
                         Resources,   Community, and Economic
                         Development Division
                         Before the
                         Subcommittee on W a ter and Power
                         Committee on Energy and Natural   Resources
                         United States Senate




                                                                         GAO Form 160 (12/87)
                              .
Dear Mr.     Chairman     and Members of the         Subcommittee:

        We are pleased to be here today to discuss                  our October 1989
report     on the implementation         of the 960-acre       limitation     for
federally     subsidized      water under the Reclamation            Reform Act of
1982, as amended.l           The report    discusses     whether the'act's          acreage
limitation      is being implemented         in a manner consistent          with the
statute     and congressional       expectations.        It also discusses          whether
large farms have been reorganized              since the act was passed to
receive     subsidized     water on acreage that exceeds the legislatively
mandated limit        and, if so, how they have been reorganized.                     We
will    also discuss      our June 1990 report        on the Westhaven trust
arrangement,       which enabled a 23,238-acre           farming operation          to be
irrigated     with subsidized       water.2     Finally,     we will provide          our
views on certain        provisions     of S.2659 recently         introduced      to amend
the 1982 law.

RESULTS IN BRIEF

        In summary, we found that the Reclamation                   Reform Act and the
Bureau of Reclamation's            implementing     regulations        do not preclude
multiple     landholdings,       each of which is within            the act's 'g60-acre
limit,    from continuing        to be operated      collectively         as one large
farm, while individually            qualifying    for federally         subsidized     water.
Some farmers have taken advantage of this loophole                        by using
various     partnerships,      corporations,      and/or trust         arrangements     to
reorganize      their     farms into multiple,       smaller      landholdings      and
became eligible        to receive      additional    federally        subsidized    water
from the Bureau.           For all practical      purposes,       these smaller
landholdings       continue    to be operated      collectively         as single    large
farms, much as they were before being reorganized.                         While these

lWater Subsidies:                    eeded to Avoid                  Abuse of the       960-
Acre T,imit (GA0,RCE~"~~~6~~~~~~s~~,   1989).
2Water S bsidies:          The Westhaven Trust Re'nforces the Need to
Chanae Riclamation         Law (GAO/RCED-90-198, iune 5, 1990).
                                         1
reorganizations       are not precluded    by the act, they are not
consistent      with what we believe    the Congress was trying  to
accomplish      in establishing   the 960-acre   limit.

      A consequence     of these reorganizations     has been a reduction    in
revenues to which the federal        government would have been entitled
if the multiple    landholdings     had been considered   collectively    as
large farms subject      to the act's    960-acre limit.   This reduction    in
revenues  likely   will    continue  to occur annually   under the existing
act.

       We believe       that if federally          subsidized      water is to be limited
to no more than 960 acres of leased and/or owned land being
operated     as one farm or farming operation,                  the act must be amended.
Our October 1989 report             included      proposed legislative        language to
apply the act's         acreage limit        to l'farmslt and "farm operationsI'
which are evidenced            by indicators       of operation,       ownership,
management and other factors.                  S.2659 would address the indicator
of an operator        of a landholding          or parcel     of irrigation       land, but
does not consider           other indicators.           While both revisions         are aimed
at accomplishing          the same purpose,          we believe     that because our
suggested     legislative        language addresses more indicators,                 it would
more effectively          close the loophole          that has allowed multiple
landholdings       to operate together            as one large farm and .receive
subsidized     water on the entire             acreage.

BACKGROUND

       Let me briefly       present     some background      information      on how the
acreage limitation         under reclamation        law has evolved.         From 1902
to 1982, the Department           of the Interior's       Bureau of Reclamation
provided     relatively      inexpensive    federal     water at rates that
excluded     any interest       on the federal      government's      investment    in
the irrigation         component of its water resource           projects.       Water
w


                                             2
delivered     at these rates is referred        to as "subsidized       water"
because the lost interest           is viewed as a subsidy to farmers.
The differences       between subsidized      and full-cost     water rates vary
among water projects          and districts   and are often substantial.           For
example,    in California's       Westlands Water District,         the subsidized
rate is about 2.5 times less than the full-cost                rate.    Thus, a
Westlands     farmer using the average acre-feet            of water annually      to
irrigate    a 960-acre      tract   saves about $66,000 a year by using
subsidized     water.

       Until   1982 federal     reclamation      law allowed water to be
delivered    at subsidized      rates to owned land of up to 160 acres.
The Bureau permitted        married couples who owned a farm to irrigate
up to 320 acres with subsidized            water.    Federal reclamation   law was
silent    on leased acreage,       and the Bureau provided      federally
subsidized     water to large farms, some consisting          of thousands    of
acres of leased land.

       Recognizing       the need to limit           the number of both owned and
leased acres the federal             government        helps a farmer irrigate,        as
well as the need to increase              the size of an economically           viable
farm from the 160 acres designated                   in 1902, the Congress passed the
Reclamation      Reform Act of 1982.              This act was expected to put an
end to the Bureau's           providing     federally        subsidized water to farms
consisting      of thousands        of leased acres by limiting           to 960 the
maximum owned or leased acreage that an individual                      or legal entity,
such as a partnership            or corporation,          can irrigate  with subsidized
water.      Generally,      the act provides           that owned land above the limit
cannot be irrigated           with federal       water,     and farmers must pay the
full   cost for water delivered             to leased land over the limit.              The
act exempts from its 960-acre               limit      land held for beneficiaries        by
a trustee     in a fiduciary         capacity      as long as no single
beneficiary's       interest      exceeds the law's ownership           limits.



                                            3
 THE DI’GWTOMY BETWEm C0NGRESSIQNA.L
                        GUAGE OF THE


       On the basis of the legislative          history    of the Reclamation
Reform Act of 1982, we believe          that the Congress expected to stop
the flow of federally       subsidized     water to owned and/or leased land
over 960 acres being operated          as one farm.       For example,    the
conference    report   that accompanied the act stated that both the
Senate and the House agreed to reduce the subsidy                for "larger
farming operations"       and that the benefits         of the new law should be
available    only if a water district        agreed to amend its contract
with the Bureau to reduce the subsidy for farming operations
exceeding    960 acres.

        However, the act does not specifically                    preclude   multiple
landholdings       from individually         qualifying        for federally     subsidized
water    while being operated          collectively         as one large farm.         This
occurs because the act (1) limits                 the amount of land the government
will help a farmer irrigate              rather     than the size of a farm, (2)
defines    and uses the term lVlandholdingtt                rather    than I@farmtOor
"farming     operation"    in establishing            the acreage limit,       and (3) is
silent    on whether multiple          landholdings         can be operated      together   as
one farm while qualifying            individually         for federally      subsidized
water on up to 960 acres.




       For our October 1989 report,     we selected    eight farms that were
larger    than 960 acres before the 1982 act was fully        implemented     in
order to determine      whether farms have been reorganized        to receive
subsidized    water on more than 960 acres.        The eight farms are not
necessarily    representative    of all large farms throughout        the West:
however, they do provide       examples of how large farms have been
reorganized    through partnerships,    corporations,     and trusts.
ri

                                            4
        We developed       11 indicators,         any one or more of which would
suggest that individual              small landholdings         are, in fact,      parts of
larger     farms.      Most of these indicators           focus on arrangements
between and among owners, lessees,                  and/or farm operators          rather
than on the individual             landholdings.        These indicators        are not
absolute      determinants       in themselves,       but when they are applied           to
entire     farming operations,          they suggest that for all practical
purposes these landholdings               continue    to be operated       collectively      as
single     large farms.        Examples of these indicators             include
situations       in which the same individuals              make management decisions
for multiple        landholdings;       a single     farm management company
operates      multiple     landholdings:        or the farm manager or operator
acknowledges        that the small landholdings             are being operated
collectively        as one farm.        Attachment      I lists     the 11 indicators       we
developed.

        In six of the eight cases we selected,                 the owners or lessees
 had reorganized        large farms into multiple,           smaller     landholdings       to
 be eligible      to receive     additional      federally     subsidized     irrigation
 water from the Bureau.           For example, in one case, a 12,345-acre
 cotton    farm (roughly      20 square miles),         operating     under a single
                                                                                  ,
 partnership,       was reorganized       into an elaborate        network of 15
 separate     landholdings     through      18 partnerships,       24 corporations,
'and 11 trusts.         Five indicators       that the 15 landholdings            continued
 to be operated       as one large farm were:

       --   One partnership      leased all 12,345           acres,  and then
            subleased   portions     of it to other          new partnerships.

       --   The partners      obtained  one operating          loan     secured      by the
            farms' crops      and other assets.

       --   Crop subsidy      records    indicate     that    the     landholdings      are
            interrelated.
       --   Two farm management           companies       operate     all    15 landholdings.

       --   Four individuals     make the management                decisions       for   nine   of
            the 15 landholdings.

Attachment       II   shows graphically         how this      farming       operation     was
reorganized.

       Another vivid          example is the Westhaven Trust arrangement                         that
enables a 23,238-acre             farming operation           to be irrigated          with
subsidized       water.       The J.G. Boswell Company, a large farm operator
located      in the Bureau's         Central      Valley     Project,       has taken
advantage       of the act's provision             that exempts from the 960-acre
limit    land held for beneficiaries                 by a trustee         in a fiduciary
capacity,       as long as no single            beneficiary's         interest      exceeds the
law's ownership          limits.      The act does not preclude                multiple
landholdings        from being operated            collectively         under a trust        as one
farm while qualifying             individually         for federally         subsidized      water.
Accordingly,        the J.G. Boswell Company was able to reorganize                            land
of the Boston Ranch Company, a wholly owned subsidiary                                of the
Boswell Company, by selling                 the 23,238 acres to the Westhaven Trust
in May 1989, with the landholdings                    attributed        to each of 326
salaried       employees.        According      to the Department            of the Interior's
Office     of the Solicitor,          because the landholdings                attributed       to the
326 trust       beneficiaries        range from 21 acres to 547 acres per
beneficiary,        the trust      meets the act's           requirement       that no
individual       beneficiary's         interest      exceeds 960 acres.             Thus each
landholding       was eligible        to receive         federally      subsidized       water.

       Before the land was sold to the trust,     the Boswell Company
operated    the 23,238 acres as one large farm.      Five indicators
suggest that after     the farm was sold the entire     acreage continues
to be operated    as one large farming operation:



                                                6
      --   One of the stated purposes of the trust       is to operate the
           entire  acreage     as one farm under a farm management
           agreement.     Officials   from the Boswell Company and the
           Westhaven Trust acknowledge       that the Westhaven Trust land
           is generally    operated   as one farm.

      --   The 23,238    acres   were purchased       with    one loan.

      --   The trustee    makes management       decisions       for      the    entire
           acreage.

      --   The annual farming      operation     is   financed         with     one
           operating  loan.

      --   The beneficiaries      have an undivided          interest         in the      land.3

Although     the act does not preclude        large farming operations
organized      as multiple     landholdings   under a trust     from receiving
federally      subsidized    water on the entire      acreage,    this situation                   is
not consistent        with what we believe      the Congress was trying        to
accomplish      in establishing      the 960-acre   limit.     A graphic.,
presentation       of this case is shown in attachment          III.

FARM REORGANIZATIONS ARE REDUCING FEDERAI, REVENUES

      A consequence     of these farm reorganizations          and other
arrangements   is that the federal       government     is not collecting       the
revenues to which it would be entitled          if multiple       landholdings
being operated    together    were considered     collectively       as one large
farm or farming operation       subject   to the act's       960-acre    limit.    For
four of the farms discussed        in our October 1989 report,           owners or

3No individual       beneficiary      owns a specific    parcel of land,
Rather,     each beneficiary        is allocated   a percentage  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.
                                             7
lessees paid a total             of about $1.3 million        less in 1987 for federal
water delivered          by the Bureau than they would have paid if their
respective        multiple     landholdings    had been considered         collectively
as large farms subject             to the act's     acreage limit.        Before the
Westhaven Trust,           the Boswell Company had paid full             cost for the
federal      irrigation       water delivered     to the acres for the 18-month
period ending in May 1989.                When the trust     bought the land, the
entire      acreage became eligible          to receive     federally     subsidized
water.       Had the Westhaven Trust been subject                to the acreage
limitation,         the trust     would have been required          to pay about $2
million      more per year for its federal            water.       Reduced revenues will
likely      continue     to occur annually       unless the 1982 act is amended.

GAO'S VIEWS ON S . 2 659

        In May 1990, S.2659 was introduced           to amend the 1982 act.
Some provisions       are directed      at closing   the loophole        that has
allowed multiple       landholdings       to operate collectively          as one large
farm, while individually          qualifying     for federally       subsidized     water,
by addressing       one major indicator       of a farm or farm operation.              The
bill    is directed    at the operator       of a landholding,        which the bill
defines    as an individual       or entity    that performs       the greatest
proportion     of the decisionmaking         or supervision      for an agricultural
enterprise     on a given landholding         or parcel     of irrigation       land at a
given point of time.

         We applied     this definition       of operator    to the farms included
in our October 1989 report             and found that it was sometimes
difficult     to identify       the individual      or legal entity       performing    the
greatest     proportion       of the decisionmaking        or supervision.         For
example, four individuals             made the management decisions            for 9 of
the 15 landholdings           comprising    the 12,345.acre     cotton      farm, and it
would be difficult          to ascertain      which of the four was responsible
for the greatest         proportion      of the decisionmaking.         In another
instance,     a 4,638-acre        farm was operated       by a single     farm
 *
                                              8
management company owned by four members of a family.                         Unless the
company qualified        as a legal entity,        it would be necessary           to
either    (1) develop sufficient         information       about the company to show
that one individual        performs the greatest           proportion     of the
decisionmaking       or (2) divide     the irrigated        acreage equally        among
the four family members.           This latter       alternative      would allow all
4,638 acres (with 2,553 equivalent              acres) to continue          to receive
federally     subsidized    water even though the family              continues      to
operate    the four landholdings         as one farm.

       We agree that it is important               to identify     the operator        of a
farm or farming operation              but believe     that other indicators           also
should be applied            to determine     whether multiple       landholdings
continue      to be operated         as large farms.       These indicators         would
include      ownership,        management, financing,        or other factors
individually        or working together.           Therefore,     we believe      that the
act should be amended to apply the acreage limit                      to farms and
farming      operations        as well as to individual        landholdings.         If our
proposed      legislative        language becomes law, we would envision                 the
Bureau applying           indicators    similar    to the ones we developed            to
arrangements        between and among owners, lessees,               and/or farm:
operators.




        In conclusion,      we recognize        that the Congress could not have
envisioned      all the different        types of reorganizations               and
arrangements       that have developed          in the act's        aftermath.       In our
view, farm reorganizations           and other arrangements               that allow
multiple     landholdings      to continue        to be operated         as parts of large
farms while individually           qualifying         for federally       subsidized    water
are not consistent        with what we believe              the Congress was trying         to
accomplish      in establishing      the 960-acre           limit.     Effectively
closing    this loophole       will require         legislative      language similar       to
that proposed in our October 1989 report.
 i)
                                              9
      Mr. Chairman,   this concludes my statement.  We would be
pleased to respond    to any questions you or the Subcommittee members
may have.




                                  10
    ATTACHHENTI                                                                  ATTACHMENTI
a


                                   LISTOPINDICATORSTBATCOULD
                                    BEUSEDTO IDENTIFYHDLTIPfs:
                                    LANDEOLDINGSTHAT ARE PARTS
                                            OFALARG~FARn


         o   Th8 individual   landholdings           or other     farm assets          are    combined as
             collateral   for loans.
         o   The principal  owners or lessees of the individual                         landholdings
             agree to cover loan defaults   of other principals.
         o   The farm manager or operator bears an economic risk                             associated
             with the production and sale of the crops.
         o   The same individuals         make management decisions              for     multiple
             landholdings.
         o   The owners of the farm management company that operates the
             small landholdings are the same individuals  who owned or leased
             the land before       the reorganization           occurred.
         o   The small landholdings  are leased               from the large           farm that
             existed before the reorganization.            .
         o   The same individuals         own or lease the small            landholdings.
         o   A single     farm management company operates              multiple         landholdings.
         o   Crop subsidy      records    indicate     that     the landholdings             ar'e
             interrelated.
         o   The small     landholdings     share equipment          or labor,         sometimes
             without     charge.
         o   The farm manager or operator             acknowledges      that     the small
             landholdings      are being operated        collectively          as one farm.




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 A’ITA(.MEW    II                                                                                 ATA(Zl+flN 11

                                                                                                                  l




GAO The Panache Farm

                                  I   Panache Farms Partnership
                                            12,345 Acres           I

                                                                             B H W Partnership
                                                        Sublease       )        5.000 Acres
                                                                            Retained 910 Acres
                                                                       \
        Subleases                                        SubleEises

pii&q




                Note: Each of the 15 landholdings received subsidized water.
                Acres shown are actual acreage. Equivalent acreage for each landholding is less than 960 acres.
         ATFA(XiENf   111                                                                        ATlYA(ll+lEW III
                                        I


      GAOr Boswell Farm


                          J-G. Boswell Company




                               Boston Ranch                                        1
I-J
W                                                                                      Farm Management
                                                                                       Agreement
       Trustor%

                      I               Trust
                              W e s thaven Trust
                                23,238 Acres

         Yearlv Profits I                          1 Eventual
                                                     n de Proceeds




                      aLandholdings attiibuted to each beneficiary received subsidized water.


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