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United States Department of the Inter~

BUREAU OF RECLAMATION

WASHINGTON, D.C. 20240

IN P~PLY

~EEERTO 440/740

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Memorandum

To: Regional Director, PN, ~ UC, LC, SW, Liii, LH

Attention: Code 700 and 400

From: Commissioner (~d)RS~.GlOadb~flt

Subject: Policy for Providing Service to Small Agricultural Tracts and

Suburban Lands

This memorandum supercedes and replaces our April 15, 1982, memorandum.

The section “Repayment Contract Procedures” has been rewritten to clarify

how charges for small tracts are to be handled.

Reclanation law provides for two general types of water supply; irrigation

and municipal and industrial (M&I). The law also provides for divergent

methods of repayment; irrigation must be repaid without interest while M&I

must be repaid with interest. Irrigation repayment also may be assisted

with revenues from project power or M&I, if repayment ability of the irrigation users is insufficient to repay costs in a timely manner. The computation of benefits used in determining economic justification of the project

also differ’ between these two project purposes. M&I benefits are based

on the costs of the most likely alternative and irrigation benefits are

measured by the increase in net farm income resulting from the project. In

addition, the lands to be irrigated must ~beclassified to determine their

capability to support a family and pay water charges under a proper agricultural prograLu.

Because of these differences, it is necessary to identify and ~separate

irrigation and M&I water supplies in project planning and contracting. This

separation normally does not present any problem, but occasionally, when a

project contains small tracts that are used as part—time farms and/or rural

residences, separating irrigation from M&I can be difficult. The water

supply in question is usually, if not always, a seasonal supply used for

irrigation. However, the irrigation often is only of lawns, shrubs, and

home gardens; normal domestic uses. In some cases, the water is used on

agricultural crops) but not of a magnitude that would support a farm family.

Problems arising relative to water service to small tracts within or

bordering on urban or suburban areas impact both the planning and operating

stages of a project, but are most apparent in situations where subdivision

for residential development takes place on an operating project. This has

resulted in project irrigation water service to small tracts that are at

best, part—time, low—income farms, but more often they are suburban residences with no commercial sales of agricultural products. The problem

of ten surfaces when a district submits an application for a loan under the

Rehabilitation and Betterment (R&B) Act or the Small Reclamation Projects

Act (SRPA).
.~, .‘

Regional Director, PN, MI’, UC, LC, SW, UM, 124 2

For repayment contracts written pursuant to the SRPA, a 2—acre minimum limit

for tract size was used to define agricultural use. If service was provided

to tracts of 2 acres or less, it was considered M&I use and provision was

included in the contract to charge interest for such tracts. A “rollover”

provision was included to permit water use to change from the interest—free

agricultural use to the interest—bearing M&I use if the number of tracts of

2—acres or less in size increased during the payback period of the contract.

The Bureau’s. repayment policy has been revised to better define what

constitutes a commercial farm operation. Rather than using solely the

2—acre demarcation, a gross sales criterion has been adopted to distinguish

between water used for commercial agriculture, including the attendant

domestic uses which would be interest free, and that used for “. . . domestic, industrial or municipal purposes,. . .“ which should be interest bearing as set forth in SRPA.

In order to alleviate some of the ‘-oblems associated with small tracts in

writing new and amended repayment contracts, computing benefits, and classifying lands on existing or new projects, the following policy is hereby

adopted:

1. Water provided to tracts of 2 acres or less and to tracts greater

than 2 acres that woula produce less than $5,000 of gross annual sales

of agricultural commodities, shall be treated as 14&T service and

charged appropriately. If it is. not feasible for legal reasons to

make the assignment to the M&1 purpose, it may be a part of the irrigation purpose. The change would be in accordance with instructions

on page 3 of this memorandum, “Repayment Contract Procedures.”

2. Water furnished to tracts larger than 2 acres and capable of

producing at least $5,000 of gross annual sales of agricultural commodities can be considered eligible to obtain irrigation water and

i’-terest—free repayment. In planning new projects, these tracts must

also meet the land classification test of arability. Lands being

reclassified must also meet the arability test to quality for irrigation water.

The gross sales value cited above is ba~ d on a recent publication of the United States Department of The St Agriculture.— udy points out that, “The

diversity in the contemporary farm sector suggests that future policies will

need to be based on more careful identification of problems and targeting of

the subgroups of farms that each policy is to treat.” Four farm groupings

related to gross farm sales were identified.

Gross Sales

Rural residences and hobby farms under $2,500

Rural farm residences $2,500—$5,000

Small farms $5 ,000—$40,000

Primary farms over $40,000

1/ Agricultural—Food Policy Review: Perspective for the 1980ts, USDA,

EES, April 1981.
i...

4

Regional Director, PN, MP, UC, LC, SW, TIM, LM 3

The report indicated that it might be practical to group everything under

$5,000 in gross sales together for the first group since those in this

situation depend heavily on nonfarm incomes. It is also significant to

note that the rural farm residences (under $5,000 gross sales) encompass

44.4 percent of all farms today.

Even in the small farm group ($5,000 to $40,000), most produce too little

to be able to rely fully or primarily on farming for livelihood and must

depend on supplemental nonfarm income. Those in the “primary farm” group

depend primarily upon farming for their living and produce most of the

Nation’s food and fiber.

Repayment Contract Procedures

For application of the small tract policy to repayment contracts, the

following procedures are to be used.

The account charge for a project which has a single—purpose irrigation

function, shall be established as set forth under item 1 of the October 8,

1982, memorandum “Guidelines for Repayment Contracts to Recover Funds

Advanced to the Water Users under the Rehabilitation and Betterment (•R&B)

Act.” Options 2 and 3, as set forth in that memorandum, may be used in lieu

of the account charge but must be fully justified in the report or supporting documents.

When the account charge option is selected for projects that include an

authorized M&I water use function, it will be necessary to establish the

minimum size tract capable of generating $5,000 or more annually in gross

farm sales. For example, if that tract size is 4 acres, then any ownership

less than 4 acres in size is considered to be used for noncommercial agri—

r~ultural purposes and water service to those tracts is for domestic use.

That part of the Federal loan associated with those lands is part of the

service are~i for “. . . domestic, industrial and/or municipal purposes .

and will be interest bearing. Also, the contract will contain a rollover

provision for covering an annual review of the proportion of the loan that

will bear interest. Annual billings to the district will be made accordingly. The $5,000 gross income test and the 4—acre demarcation, however,

will remain fixed for the life of the contract unless it is amended or

supplemented during the time the repayment obligation remains outstanding.

The account charge assessment will be applicable only to the ownerships in

the remaining project area for which water is used primarily for irrigation.

As you know, urban encroachment on the irrigated lands is common to many of

our irrigation projects. This is due to the fact that such lands make good

homesites because of the firm water supply. As a consequence, and over the

term of the repayment contract, many irrigated farms have been subdivided

as urbanization occurs. To the extent that such subdivision is less than
Regional Director, PN, MP, UC, LC, SW, TIM, LM 4

the minimum size tract; i.e., 4 acres in the above example, the “rollover”

policy would apply and would be added to the interest—bearing account. If

such subdivision is larger than the minimum size, the new ownership would

be a new account charge.

The policy to require the district to make an account charge assessment for

each noncontiguous ownership protects the integrity of the irrigated areas

and the farmers’ entitlement to the interest—free loan permitted by Reclamation law. It also ensures that interest, when appropriate, is charged as

required by Reclamation law.

This policy is applicable to all new or aniendatory repayment contracts

written pursuant to the Reclamation Project Act, the R&B Act, the SRPA,

and/or the Distribution System Loans Act, unless documentation in writing

prior to the date of this memorandum exists.

Economic Investigations and Plan Formulation

Benefit determination of small tracts can also be handled by either treating

the water requirement as an M&I function or as a component of irrigation.

The preferred method would be the former if M&I is likely to be a project

purpose even without the small tracts, or if the small tract water requirement is large enough to constitute a reasonable size M&I purpose. If the

small tracts must be treated as a part of the irrigation purpose, benefits

should be. considered, as a minimum, equal to the per—acre or per—acre—foot

benefits from full—time commercial farms. Other alternatives are listed in

Reclamation Instructions, Part 116.2.2.C.(2)(g).

Classification and Reclassification of Small Tracts

In classification and reclassification work, when an individual tract is

2 acres or less, or is likely to produce less than $5,000 in gross annual

sales regardless of acreage, it will not be necessary or desirable to conduct the land classification studies beyond making that determination. The

determination of the expected use and gross crop sales from the small

tracts will normally be accomplished by experienced Bureau land classifiers,

in consultation with Bureau economists, at the time land class specifications are established for classification or reclassification.

Please include this memorandum in section IX and appropriate subsections of

the loose—leaf “Policy Instructions for Repayment, Water Service, and Other

Contracts . . .“ transmitted to you on February 26, 1980. The original

April 15, 1982, memorandum on this subject should be removed.

cc: AS/LW, Associate Solicitor — Energy and Resources

Chiel?, Division of O&M Technical Services, E&R Center

Chief, Division of Planning Technical Services, E&R Center Attn: D—735

W.O. Codes 700, 430