United States General Accounting Office

GAO Report to the Ranking Minority Member,

Committee on Resources, House of

Representatives

May 1995 CENTRAL ARIZONA

PROJECT

Costs and Benefits of

Acquiring the

Harquahala Water

Entitlement

GAO/RCED-95-102

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-260349 

June 5, 1995

The Honorable George Miller

Ranking Minority Member

Committee on Resources

House of Representatives

Dear Mr. Miller:

The Fort McDowell Indian Community Water Rights Settlement Act of

1990 (Title IV of P.L. 101-628) directed the Secretary of the Interior to

acquire 13,933 acre-feet1

 of water to complete the settlement of the Fort

McDowell Indian Community’s (the Community) water rights claim

against various Arizona parties and the federal government. In accordance

with an option provided in the act, the Department of the Interior acquired

the water from the Harquahala Valley Irrigation District (Harquahala), 1 of

10 irrigation districts that contracted for non-Indian agricultural water

from Interior’s Central Arizona Project (the project). As requested, we are

providing you with information on how Harquahala became a source of

water for the settlement, the federal government’s costs to acquire the

water, and the benefits accrued to the parties involved in the acquisition.

The report also discusses the status of U.S. Department of Agriculture

loans made to Harquahala landowners.

Background The project was authorized under provisions of the Colorado River Basin

Project Act of 1968 (Title III of P.L. 90-537). Interior’s Bureau of

Reclamation (the Bureau) began constructing the project in 1972 and

estimates that it will be completed by 1999. The project’s main

components are a 336-mile aqueduct, water storage reservoirs, a pumping

system, and an electric power generating plant. The project is designed to

pump as much as 2.2 million acre-feet of water annually from the Colorado

River on Arizona’s western border and transport it as far south and east as

Tucson. The project provides water to several cities, the 10 irrigation

districts, and various Indian tribes in Arizona.

The Central Arizona Water Conservation District (the District) is

responsible for operating the project and repaying to the federal

government the reimbursable construction costs allocated to non-Indian

agricultural, municipal and industrial water users, and electrical power

1

An acre-foot is the amount of water needed to cover 1 acre of land to a depth of 1 foot—or about

326,000 gallons.

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generation. The District began operating the project in April 1993. The

District collects revenue through a local tax and through project water and

power sales.

The federal government has financed most of the $3.2 billion spent to

construct the project. Under the Colorado River Basin Project Act, project

construction costs allocated to Indian irrigation water use are

nonreimbursable, that is, they are borne by the federal government. The

reimbursable costs allocated to municipal and industrial water use and

power production are to be repaid with interest while those allocated to

non-Indian agricultural water use are to be repaid without interest. Water

users also pay for the operation and maintenance (O&M) costs incurred by

the District in operating the project. In addition to their water use charges,

the non-Indian agricultural water users are required by contract to pay the

fixed O&M expenses associated with project water allocated to but not

used by the Indian and municipal and industrial users, even if the

non-Indian agricultural users choose not to use the water—the so-called

“take or pay” provision.2

In 1908, the U.S. Supreme Court in Winters v. U.S., 207 U.S. 564, declared

that Indian reservations in the West had federal reserved water rights. The

federal government, as the trustee for the nation’s Indian tribes, is

responsible for ensuring that Indian water rights claims are settled in the

tribes’ best interest. Disputes about the quantity of water covered by these

rights have been resolved by court decrees, legislation, and agreements

among the affected parties. The project has become a major source of

water for settling Indian water rights claims in Arizona. These settlements,

achieved in part through reallocations of the project’s non-Indian

agricultural water to Indian use, decrease the reimbursable costs the

District is required to pay to the federal government. The settlements are

negotiated by Interior and authorized or confirmed by legislation.

Results in Brief During the late 1980s, economic events led to the willingness of

Harquahala landowners to sell their land and associated rights to project

water. At the same time, the United States was interested in obtaining

water to settle the Community’s long-standing water rights claims. The

ensuing legislation and negotiations between the various parties allowed

the Harquahala landowners to receive financial help and the federal

government to acquire the needed water.

2

In early 1995, the District and Interior reached tentative agreement whereby the take or pay provision

will no longer be in effect.

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The water acquisition will cost the federal government $87.6 million in

forgone receipts over the project’s 55-year repayment period. Included in

this cost are Interior’s elimination of Harquahala’s federal water

distribution system debt, payment to Harquahala landowners for the

project water entitlement, and a reduction in construction cost

reimbursements from the District. Furthermore, the cost could increase to

$124 million, depending on water use. The cost estimates presented to the

Congress were significantly understated because a cost element was

omitted and two others developed subsequent to the estimates.

Many parties benefited from the acquisition. The federal government

settled the Community’s outstanding claims and acquired water for other

settlements. The Community resolved its claims and obtained the water.

The District’s repayment obligation for project construction costs

associated with the water was reduced. Harquahala landowners received a

cash payment and debt relief for the sale of a water entitlement for which

they paid nothing. The landowners continue to farm their land using

project water obtained at a substantially lower rate than prior to the sale

and delivered through their debt-free distribution system.

Interior did not adequately protect the federal government’s financial

interests with respect to federal farm loans held by several Harquahala

landowners. Had the proceeds the landowners received from the sale of

their project water entitlement been applied to these loans, a substantial

amount of the delinquencies on these loans could have been made current.

How Harquahala

Became Involved in

the Fort McDowell

Settlement Agreement

During the 1980s, Interior began negotiations to settle the Community’s

water rights claims and provide the Community with a secure source of

water. By 1990, the various parties to the settlement had agreed on the

amount of water due the Community and the contributions each party

would make. Although the amount of water to be contributed by the

federal government had been determined, the source of the water was

uncertain.

Harquahala Valley

Irrigation District—a

Potential Water Source

Harquahala is located about 65 miles west of Phoenix. Harquahala

comprises about 38,000 acres, approximately 33,000 of which are eligible

to receive project water. (See fig. 1.) In 1983, Harquahala signed a contract

with the Bureau and the District agreeing to pay the share of the project

construction costs associated with an entitlement to 7.67 percent of the

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B-260349 

project’s annual non-Indian agricultural water supply.3 In 1984, Harquahala

also contracted with the Bureau for the construction of a $34.5 million

distribution system to transport water from the project aqueduct to the

farmers’ fields. Construction was financed by a $26.1 million

noninterest-bearing loan from the Bureau and $8.4 million in municipal

bonds.

Figure 1: The Project Service Area Showing the Harquahala Valley Irrigation District and Fort McDowell Indian Community

Arizona

Tucson

Phoenix

Aquaduct

Harquahala Valley


Irrigation District &


Distribution System

Fort McDowell


Indian Community

Project


Service


Area

3

Because the repayment period was not scheduled to begin until more than a year after Harquahala

sold its water entitlement to Interior, no payments were made.

Page 4 GAO/RCED-95-102 Central Arizona Project
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Economic circumstances in the late 1980s led Harquahala landowners to

consider selling their land and the accompanying groundwater. Many

landowners were facing bankruptcy because of declining cotton prices,

failing crops due to insect infestation, increasing project water costs, and

debts associated with their land and the distribution system. To compound

their problems, the landowners were faced with having to pay additional

fixed O&M costs when the take or pay provision contained in their project

water service contract took effect in January 1994.

In 1989, the District and several local municipalities were interested in

acquiring land in the Harquahala Valley for use as a water farm—a tract of

land acquired for its future use as a municipal groundwater supply. Aware

that the federal government was interested in obtaining water for settling

Indian water rights claims and recognizing the possibility of reducing its

cost of acquiring the Harquahala land, the District joined with Interior to

acquire Harquahala. In return for financially assisting the District in

completing the acquisition, the federal government would obtain the rights

to Harquahala’s project water entitlement for use in settling Indian water

rights claims. The proposal subsequently became the basis for the

provision in the act designating Harquahala as a potential water source.

The Fort McDowell Indian

Community Water Rights

Settlement Act of 1990

The act confirmed an agreement between the Community, the federal

government, the state of Arizona, and others for settling the Community’s

long-standing water rights claims. The agreement quantified the

Community’s right to an annual supply of 35,223 acre-feet of water in

exchange for its waiver and release of all past, present, and future claims

to water for its reservation lands. The agreement also identified the

contributors and sources of the water supply, including 13,933 acre-feet to

be contributed by the federal government.

The act directed Interior to acquire pursuant to contract the 13,933

acre-feet of project water permanently relinquished by Harquahala and/or

the city of Prescott.4

 The act also provided that if the water could not be

acquired from these sources, Interior could acquire any water available in

Arizona at its disposal.

The act did not appropriate funds to acquire Harquahala’s project water

supply. Instead, in consideration for the fair value of the relinquished

water, the act authorized Interior to eliminate an appropriate share of

4

The city of Prescott option refers to project water available to the city, two water companies, and two

Indian tribes.

Page 5 GAO/RCED-95-102 Central Arizona Project
B-260349 

Harquahala’s distribution system debt and, if the fair value of the

relinquished water was greater than the debt relief, to credit the District’s

annual repayment obligation for the project’s construction costs by that

amount.

The act provided that Harquahala’s non-Indian agricultural priority water

could be converted to Indian priority water at the rate of 1 acre-foot for

each Harquahala acre eligible to receive project water. This provision was

necessary because non-Indian agricultural water deliveries are reduced or

curtailed before municipal and industrial or Indian priority water

deliveries if shortages occur in the project system. Interior officials

believed that the Community would not have agreed to a settlement

without the higher-priority water. The act also specified that any water

acquired in excess of the amount needed to complete the Fort McDowell

settlement could be used only for settling certain Indian water rights

claims in Arizona.

After the act was passed, the District opted not to acquire the Harquahala

Valley land as a water farm; therefore, Interior was unable to acquire

Harquahala’s project water supply as planned. Interior considered

acquiring water from the city of Prescott as authorized in the act but

concluded that due to environmental and financial factors, it would not be

able to obtain the necessary water from this source. Interior then

proposed to acquire Harquahala’s project water entitlement without the

District acquiring the land. Although no longer interested in buying

Harquahala Valley land, the District agreed to provide the funds necessary

to finance the federal acquisition of Harquahala’s project water

entitlement. Interior’s Office of the Solicitor has concluded that the act

provided sufficient authority for the District to advance the necessary

funds to complete the transaction and in exchange to receive a credit

against its annual repayment obligation. In effect, this interpretation

allowed Interior to borrow the necessary funds from the District and to

pay interest on them.

In December 1992, Harquahala agreed to relinquish its entire project water

entitlement to the federal government for $34.9 million. This yielded 13,933

acre-feet of water to complete the Fort McDowell settlement and an

additional 19,318 acre-feet for use in settling other Indian water rights

claims. In January 1993, the Fort McDowell Indian Community Water

Settlement Agreement was signed by the various parties.

Page 6 GAO/RCED-95-102 Central Arizona Project
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Cost of the

Acquisition to the

Federal Government

The Harquahala water acquisition will cost the federal government

$87.6 million in forgone receipts over the projects’s 55-year repayment

period.5

 Interior’s implementation of the act eliminated Harquahala’s

$25.5 million debt for the water distribution system and in effect paid

Harquahala $28.7 million for its project water supply. The District’s

contractual project repayment obligation was reduced by $30.5 million

when the water was reallocated to nonreimbursable Indian use.6

 Interior

also incurred $2.9 million in interest charges when the District financed

the transaction. Furthermore, the cost could rise to $124 million because

Interior has tentatively agreed to incur $36.4 million in fixed O&M costs

associated with the Harquahala water. Table 1 shows the federal costs of

the transaction, including the present value of each aspect of the

transaction.

Table 1: Federal Cost of Acquiring

Harquahala’s Project Water

Entitlement

Dollars in millions

Type of transaction Cost

Present

value

Elimination of Harquahala’s distribution system loan $25.5 $6.7

Payment to Harquahala by the District 28.7 28.7

Reduction in the District’s repayment of project

construction cost 30.5 6.7

Interest charged by the District on $28.7 million payment to

Harquahala 2.9 2.9

Total $87.6 $45.0

Fixed O&M costs 36.4 12.3a

Grand total $124.0 $57.3

aPresent value expressed in 1992 terms except the amount related to fixed O&M costs, which

was calculated to 1995 present-value terms and adjusted for inflation back to 1992.

Distribution System Debt

and Other Financial

Considerations

In December 1992, Interior and Harquahala agreed that Harquahala would

relinquish its entitlement to 33,251 acre-feet of project water for

$34.9 million. As authorized by the act, Interior deducted Harquahala’s

federal distribution system debt from the purchase price to determine how

much additional compensation would be required to complete the

transaction. Interior determined that Harquahala’s $25.5 million

distribution system debt, which was to be repaid without interest over the

succeeding 34 years, had a 1992 present value of $5.8 million. Interior also

5

This amounts to $57.3 million expressed in 1992 present-value terms.

6

The $30.5 million reduction in the District’s repayment obligation is the amount of the

nonreimbursable project construction cost less the increased interest income. (See p. 11.)

Page 7 GAO/RCED-95-102 Central Arizona Project
B-260349 

deducted about $0.5 million for miscellaneous expenses owed the

government, leaving a balance of $28.7 million due to Harquahala.

The District provided $28.7 million to Harquahala to complete the

transaction. A condition of the District’s agreeing to finance the water sale

was that it would not lose money on the transaction. The District charged

Interior $2.9 million to replace forgone investment income resulting from

the payment to Harquahala. Interior credited the District’s 1994 and 1995

project repayment obligations by a total of $31.6 million that the District

incurred for financing the transaction. Figure 2 shows the financing of the

acquisition.

Page 8 GAO/RCED-95-102 Central Arizona Project
B-260349 

Figure 2: The Federal Government’s

Financing and Payments for

Harquahala’s Project Water

Entitlement

Interior Repays $28.7 


Million Plus $2.9 Million in


Interest by Credit to the 


District's Annual Payment

Harquahala Retired a


$3.8 Million Bond Debt


and Incurred $0.2 Million


in Expenses

$24.6 Million is Available


for Distribution to


Harquahala Land Owners

Acquisition Cost


$34.9 Million

Less $5.8 Million for


Distribution System


Debt Elimination

Less $0.5 Million for


Other Debts Owned


the U.S.

The District Pays


$28.7 Million to


Harquahala on


Interior's Behalf

Note: Numbers do not add because of rounding.

Page 9 GAO/RCED-95-102 Central Arizona Project
B-260349 

Inappropriate Discount

Rate

In March 1994, Interior’s Office of Inspector General reported that

Harquahala’s $25.5 million distribution system debt was inappropriately

discounted.7

 The Inspector General determined the discounting to be

inappropriate because (1) the act’s legislative history raised concerns

about the act’s impact on the federal deficit and (2) general federal

Reclamation law and Interior policy does not provide for discounting a

stream of payments included in a repayment contract. The Inspector

General also pointed out that the 8.5-percent discount rate applied to the

distribution system debt was excessive.

We believe that the concept of discounting a debt that is to be repaid over

time is appropriate. The act’s legislative history indicates that discounting

to obtain present value was considered a method that Interior could use.

Deducting the present value of the distribution system debt from the

purchase price would satisfy Interior’s repayment obligation, provided the

proper discount rate was used.

We agree with the Inspector General that the 8.5-percent interest rate used

to discount the distribution system debt was excessive. We determined

that a 7.5-percent rate better reflects the government’s borrowing costs

during the 1992 negotiation of the water entitlement acquisition. On the

basis of this lower interest rate, we calculated that the present value of the

$25.5 million debt was $6.7 million, or $0.9 million more than computed by

Interior. Had the 7.5-percent rate been applied, the cash required to pay

Harquahala would have been less and would have reduced the amount

borrowed from the District by $0.9 million plus interest.

Interior officials told us that they were required to use the 8.5-percent rate

because it was the fiscal year 1992 plan formulation and evaluation rate

used in long-term planning of water projects. Our review showed,

however, that Interior was not required by law or regulation to use this

rate because the transaction in question did not involve the construction

of a water project but rather the calculation of forgoing future streams of

income from the repayment of existing debts. Also, the 8.5-percent rate did

not reflect the long-term borrowing rate in effect at the time of the

negotiations. Therefore, we believe that it would have been more

appropriate to have used the 7.5-percent rate to calculate the present value

of the distribution system loan.

7

Acquisition of the Harquahala Valley Irrigation District’s Water Allocation, Central Arizona Project,

Bureau of Reclamation, Report number 94-I-424, Mar. 1994.

Page 10 GAO/RCED-95-102 Central Arizona Project
B-260349 

Project Repayment

Obligation Reduced

The act authorized Interior to convert Harquahala’s non-Indian agricultural

priority water to Indian priority. Under the project’s authorizing

legislation, construction costs associated with water allocated to Indian

irrigation use are nonreimbursable, that is, they are borne by the federal

government. Bureau officials have calculated that as a result of the

water-use conversion, $67.8 million in construction costs became

nonreimbursable. However, this reduction in reimbursable costs caused

the District’s project interest costs to increase by $37.3 million over the

project repayment period.8

 The net effect of the water-use conversion is a

$30.5 million reduction in the District’s repayment obligation to the federal

government.

Fixed O&M Costs By tentative agreement between Interior and the District, water reserved

by Interior is assessed a fee for its share of the fixed O&M costs incurred by

the District annually to operate the project. Under the tentative agreement,

Interior will reserve 687,000 acre-feet of water. This amounts to 48.6

percent of the fixed O&M costs, or $751.9 million in forgone receipts over

the project repayment period. Currently, the 13,933 acre-feet of

Community water and the 19,318 acre-feet of water Interior has available

for future Indian water rights settlements are reserved. We calculate that

$36.4 million of the $751.9 million represents the fixed O&M costs

associated with the 33,251 acre-feet of water from the Harquahala

acquisition. Should any of the reserved water be used, the water user

would be responsible for paying the fixed O&M costs, and the federal cost

would be reduced accordingly.

Cost of the Acquisition

Was Understated to the

Congress

The Congressional Budget Office’s (CBO) and the Office of Management

and Budget’s (OMB) estimates of the cost of the Harquahala water option in

the proposed legislation presented to the Congress were significantly

understated. One cost was not included in the estimates, and two other

costs did not become known until after the estimates were made. We

calculate that these three costs represent $69.8 million of the total

$124 million in forgone receipts associated with the Harquahala water

acquisition, or $21.9 million of the $57.3 million expressed in 1992

present-value terms.

8

While the conversion reduced the District’s overall repayment obligation, it also reduced its annual

payment and the amount applied to the interest-bearing portion of the repayment obligation. Over the

project repayment period, Bureau officials calculate that this change will generate $37.3 million more

in interest because the interest-bearing portion of the District’s repayment obligation is reduced at a

slower rate.

Page 11 GAO/RCED-95-102 Central Arizona Project
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While including some of the revenue losses associated with the

acquisition, neither agency included the loss of federal receipts resulting

from the conversion of the water from non-Indian agricultural use to

Indian irrigation use. CBO and OMB officials said this cost element was

omitted because Interior officials did not inform them of this cost or the

need to include it in the estimates. The omission amounts to $30.5 million

in forgone receipts over the project’s repayment period, or $6.7 million

expressed in 1992 present-value terms.

Subsequent to their estimates, two other costs arose that added to the cost

of the transaction. First, the District charged Interior $2.9 million in

forgone receipts for interest. This cost was not included in the estimates

because it had not been determined at that time that a finance charge

would be applied to the transaction. Second, the federal government’s

share of the annual fixed O&M expense incurred by the District for the

operation of the project subsequently became an issue. In early 1995, the

District and Interior tentatively agreed that the federal government will be

responsible for 48.6 percent of these expenses. On the basis of discussions

with Interior officials, it is reasonable to attribute a proportional share of

the fixed O&M costs to the acquisition cost of the Harquahala water. We

calculate this cost at $36.4 million in forgone receipts over the project

repayment period, or $12.3 million expressed in 1995 present-value terms

adjusted for inflation back to 1992.

Many Parties

Benefited From the

Harquahala Water

Acquisition

Interior’s acquisition of Harquahala’s project water entitlement provided

the following benefits to various parties involved in the transaction:

• Interior obtained the water necessary to complete the Fort McDowell

settlement, which was carried out on January 15, 1993. As part of the cost

of the Harquahala transaction, Interior also acquired 19,318 acre-feet of

high-priority project water for use in settling certain Indian water rights

claims in Arizona.

• The Community obtained 13,933 acre-feet of project water from the

Harquahala acquisition. When combined with the 21,290 acre-feet of water

from other sources outlined in the settlement agreement, the Community

obtained a firm annual water supply of 35,223 acre-feet, thereby resolving

its long-standing water rights dispute.

• The District’s contractual project repayment obligation was reduced by

$30.5 million as a result of converting Harquahala’s non-Indian agricultural

priority water to Indian priority.

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• Harquahala landowners received multiple benefits for the sale of a water

entitlement for which they paid nothing. After retiring $3.8 million of

municipal bond debt on its distribution system and other expenses

associated with relinquishing its project water entitlement, Harquahala

had $24.6 million available for distribution to its landowners. As of

October 27, 1994, 62 Harquahala landowners had received payments,

ranging from $2,116 to $3,075,436, based on their share of project eligible

acres.9

 In addition, the landowners were relieved of their obligation to pay

the federal distribution system debt and the additional fixed O&M charges

associated with the take or pay provision. The landowners continue to

own their land and the underlying groundwater resources and continue to

use their debt-free distribution system. Due to the District’s restructuring

of its non-Indian agriculture water rates, the landowners now farm with

project water purchased at prices significantly lower than what they paid

prior to relinquishing their project water entitlement.10

Opportunity Missed to

Apply Sale Proceeds

Against Delinquent

Federal Loans

Under the terms of the Harquahala transaction, $24.6 million in sale

proceeds were available for distribution to individual landowners. At the

time of distribution, several landowners were overdue on millions of

dollars of loans made by the U.S. Department of Agriculture’s Farmers

Home Administration (FmHA).11 If applied to these loans, sale proceeds

could have made current a substantial amount of these delinquencies.

However, Interior did not consider the FmHA loans in its negotiations for

the acquisition of the Harquahala water entitlement, and the majority of

the delinquencies remain.

Since 1979, FmHA has made loans to various Harquahala landowners for

rural housing, farm ownership, economic emergency, and natural disaster

emergency purposes. According to FmHA officials, collateral for the loans

generally was the Harquahala land, the value of which was based in part

on the project water entitlement. As of October 28, 1994, 11 borrowers

owed FmHA $9.8 million. Our review of FmHA’s records indicates that

seven borrowers have past due payments totaling $3.9 million on

$9 million in outstanding loans. These seven borrowers were eligible to

9

Payments have been withheld from 10 landowners pending resolution of disputes between

landowners, lienholders, and government agencies as to who is entitled to the proceeds.

10Harquahala landowners have access to other project agricultural water for as little as $28 an

acre-foot, or $24 per acre-foot less than the $52 an acre-foot charge imposed prior to the project water

relinquishment.

11In 1994, the responsibility for administering U.S. Department of Agriculture farm loans was

transferred from FmHA to the newly created Consolidated Farm Service Agency. Because of the

general familiarity with the agency’s earlier name, we refer to FmHA in this report.

Page 13 GAO/RCED-95-102 Central Arizona Project
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receive a total of $4.5 million from the sale proceeds less deductions for

overdue taxes. However, FmHA’s records identify loan payments of only

$27,653 on the borrowers’ various loans since the distribution of

proceeds.12

FmHA officials consider Harquahala’s sale of its project water entitlement

as a disposal of FmHA’s collateral for the $9.8 million in loans. As such,

the officials believe that the sale proceeds should have been applied to the

borrowers’ FmHA loans. The officials told us that had they known the

details and timing of the acquisition, they could have taken actions to

better protect FmHA’s interest. For example, the officials said that they

could have foreclosed on certain loans, thereby making FmHA the

landowner of record at the time of the distribution of proceeds. A second

option could have been for Interior to have required as a condition of the

sale that the proceed checks be made payable to the landowner “and all

lien holders.” The officials said that such a payee stipulation would have

put FmHA in a better position to require delinquent borrowers to bring

their accounts current.

Interior officials told us that they were aware of the FmHA loans but did

not consider them in their negotiations with Harquahala. While Interior

negotiated a clause in the acquisition agreement requiring Harquahala to

retire the municipal bond debt on the distribution system to protect the

federal government’s interest by having the water free and clear of this

debt, no such action was taken to protect FmHA’s interest. The officials

said that in retrospect, they could have protected FmHA’s interest by

alerting FmHA to Interior’s negotiations and by attempting to include a

clause in the acquisition agreement that provided for applying the

proceeds to borrowers’ delinquencies.

Conclusions Interior’s acquisition of Harquahala’s project water entitlement allowed

the federal government to settle the Community’s long-standing Indian

water rights claims. However, the acquisition will cost the federal

government $87.6 million, and could possibly rise to $124 million, in

forgone receipts over the project’s repayment period. This amount is

significantly more than the amount estimated by CBO and OMB because of

two factors. First, Interior did not provide the two agencies with

12In addition to the $27,653, FmHA has also received $1 million for releasing its liens to another

creditor involved in bankruptcy proceedings against Harquahala borrowers. According to an FmHA

official, the bankruptcy assets include some amount of water sale proceeds which would have been

difficult for the federal government to successfully claim. After applying the $1 million to the

borrowers’ $5 million in outstanding loans, FmHA records show the borrowers’ accounts remain

$2.3 million past due.

Page 14 GAO/RCED-95-102 Central Arizona Project
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information on the costs of converting the water from non-Indian

agricultural use to Indian irrigation use for inclusion in their estimates.

Second, two other costs arose subsequent to the estimates. Thus, when the

Congress passed the act, it was not made aware of the total federal cost of

the acquisition. Whether the Congress would have acted differently if the

conversion cost had been presented is unknown, but we believe that this

additional information would have allowed the Congress to make a more

informed decision on the legislation.

Many parties benefited from the Harquahala acquisition. The federal

government settled the Community’s outstanding claims and acquired

water for other settlements. The Community resolved its claims and

obtained the water. The District reduced its project construction

repayment obligation associated with the water. Harquahala landowners

received a cash payment and debt relief for the sale of a water entitlement

for which they paid nothing. Also, the landowners continue to farm their

land using the distribution system and to receive project water at a

substantially lower rate than they paid prior to the sale.

Interior did not adequately protect the federal government’s overall

financial interests with respect to the FmHA loans held by several

Harquahala landowners. The proceeds the landowners in effect received

from Interior for the sale of what effectively was part of the collateral for

their FmHA loans should have been applied to the delinquencies on these

loans. Although Interior officials knew of the loans, they did not consider

them in their negotiations with Harquahala and did not protect FmHA’s

interest as part of the acquisition process. As a result, the federal

government lost an opportunity to make current a substantial amount of

the $3.9 million that was delinquent on the FmHA loans.

Recommendations To ensure complete estimates of federal costs of future Indian water rights

settlements that use Bureau of Reclamation project water, we recommend

that the Secretary of the Interior and the Directors of CBO and OMB develop

methodologies to ensure that all the known costs associated with any

federal contribution of water are included in estimates provided to the

Congress.

Because of the common link between land and water rights in

Harquahala-type acquisitions and the need to ensure that the federal

government’s overall interests are protected in future Indian water rights

settlements, we recommend that the Secretary of the Interior identify

Page 15 GAO/RCED-95-102 Central Arizona Project
B-260349 

other federal agencies’ interests in these settlements and act to protect

these interests in the negotiations.

Agency Comments We provided copies of a draft of this report to the Secretaries of the

Departments of the Interior and Agriculture and the Directors of CBO and

OMB for their comment. The Acting Deputy Administrator of FmHA, the

Associate Director of OMB’s Natural Resources, Energy and Science

Division, the Counselor to the Secretary of the Interior, and a CBO Principal

Analyst concurred in the report’s findings and conclusions. While FmHA,

OMB and Interior agreed with the recommendations, CBO considered the

recommendation on including all costs in estimates provided to the

Congress to be vague. We do not agree that the recommendation is vague.

The recommendation specifies that all known costs, which would include

the costs of converting the water, should be included. The

recommendation also specifies the agencies that should be involved in

implementing the recommendation but provides the agencies the

flexibility of deciding the best means of achieving this. The agencies also

made technical and editorial comments, and we made changes in the

report, as appropriate.

As arranged with your office, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days after the

date of this letter. At that time, we will send copies of the report to the

appropriate congressional committees; interested Members of Congress;

the Secretaries of the Interior and Agriculture; the Administrator, FmHA;

the Directors of CBO and OMB; and other interested parties. We will also

make copies available to others upon request.

Page 16 GAO/RCED-95-102 Central Arizona Project
B-260349 

Please call me at (202) 512-7756 if you have any questions about this

report. Major contributors to this report are listed in appendix II.

Sincerely yours,

James Duffus III

Director, Natural Resources

 Management Issues

Page 17 GAO/RCED-95-102 Central Arizona Project
Appendix I 

Scope and Methodology

We conducted our work at the Department of the Interior’s and

Department of Agriculture’s Washington, D.C., headquarters and at the

Congressional Budget Office (CBO) and the Office of Management and

Budget (OMB). We also conducted our work at the Bureau of Reclamation’s

Lower Colorado Regional Office in Boulder City, Nevada, and its Arizona

Project Office in Phoenix, Arizona; and at the District’s headquarters in

Phoenix, Arizona. At these locations, we interviewed Interior, Bureau,

FmHA, the District, CBO, and OMB officials. We also interviewed members

of the Harquahala Board of Directors and Harquahala’s General Manager.

To determine how Harquahala became a source of water for the

settlement, we examined the relevant legislation and supporting

documents that authorized the acquisition. We then interviewed and

obtained pertinent documents from Interior, Bureau, the District, and

Harquahala officials who participated in the selection process and

negotiation of the water acquisition. We also obtained a written response

from the Solicitor’s Office regarding legal issues raised by the use of

Harquahala’s project water entitlement in the settlement.

To estimate the federal government’s cost of the acquisition, we reviewed

the legislation that authorized the financing of the acquisition and

obtained from CBO and OMB their respective budget estimates of the federal

costs. We also interviewed and obtained documents from Interior, Bureau,

the District, and Harquahala officials to determine each organization’s role

in the acquisition, the price paid for the water entitlement, the charges

associated with the financing, and the post-implementation costs

associated with the acquisition. In general, dollar figures have been

rounded to the nearest hundred thousand.

To outline the benefits accruing to the parties involved in the acquisition,

we talked with Interior, Bureau, the District, and Harquahala officials. We

obtained pertinent documents from these officials to verify the amount of

water Interior received to implement the agreement and future

settlements, the elimination of Harquahala’s distribution system loan, the

amount of water sale proceeds made available to Harquahala landowners,

the reduction in the District’s project construction repayment obligation,

and other benefits received by the various parties associated with the

acquisition.

To determine the status of FmHA loans held by some Harquahala

landowners and the water sale proceeds that could have been applied to

their loan deficiencies, we talked with Interior, Bureau, FmHA, and

Page 18 GAO/RCED-95-102 Central Arizona Project
Appendix I 

Scope and Methodology

Harquahala officials. The FmHA Arizona State Office and the St. Louis

Finance Office provided us with information on Harquahala landowners’

loan obligations and payments. We did not verify the FmHA source data

for this information. We compared the FmHA loan information to sale

proceeds data provided by Harquahala officials to determine the amount

of proceeds that were due these borrowers versus the amount of loan

payments made to FmHA.

We conducted our work between August 1994 and May 1995 in accordance

with generally accepted government auditing standards.

Page 19 GAO/RCED-95-102 Central Arizona Project
Appendix II 

Major Contributors to This Report

Resources,

Community, and

Economic

Development

Division, Washington,

D.C.

Alan Bennett

Leo E. Ganster

Patrick J. Sweeney

Sacramento,

California

Anndrea H. Ewertsen

James E. Hampton

George R. Senn

Kenneth J. Townsend

St. Louis, Missouri Robert C. Sommer

Office of the General

Counsel

Stanley G. Feinstein

(140894) Page 20 GAO/RCED-95-102 Central Arizona Project
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