Bureau of Reclamation: Availability of Information on Repayment of Water Project Construction Costs Could Be Better Promoted
Published: 2014-09-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1902, Reclamation has financed and built water projects to provide water for irrigation and various other uses in 17 western states. The costs to construct the water projects including irrigation as a project purpose—a combined total of more than $20 billion—were primarily financed by the federal government, but irrigation districts and other water users that receive project water are obligated to repay the government for their allocated share of construction costs. Reclamation typically enters into multiyear contracts with irrigation districts that establish water delivery and repayment of their share of construction costs over time.
GAO was asked to provide information on the status of irrigation repayments. This report examines (1) the extent to which Reclamation collects and reports information on construction costs and the status of repayment and (2) the extent to which irrigation districts can repay early and the implications of early repayment. GAO reviewed laws and policies; fiscal year 2012 construction cost repayment and early repayment data; and interviewed Reclamation officials and nonprobability samples of eight irrigation districts and nine individuals knowledgeable about water projects.
section_title: What GAO Found
paragraphs: The Department of the Interior's Bureau of Reclamation collects information on water project construction costs and the status of repayment by irrigation districts—entities that have entered into contracts with the agency to receive project water for irrigation purposes—but has not publicly reported repayment information since the 1980s. Reclamation's data on water project construction cost repayments indicate that, of the $6.4 billion in costs allocated to irrigation as of the end of fiscal year 2012, $1.6 billion remains outstanding. The remaining $4.8 billion has been repaid by irrigation districts or through other revenue sources or will be provided in financial assistance to the districts. Reclamation's policy is to make the statements it prepares annually on repayment available to the public upon request, but the agency does not make it readily known to the public that it prepares these statements or that they are available. GAO interviewed individuals knowledgeable of Reclamation water projects who indicated that this information would be useful for their work, such as in considering funding arrangements for the expansion of water projects; some individuals were not aware that Reclamation prepares repayment statements annually, or that the agency would make them available upon request. By more widely disseminating information to the public that construction cost and repayment data are available, Reclamation may increase interested parties' opportunities to obtain cost and repayment information. This, in turn, could further enable Congress, water users, and the public to assess past funding arrangements and enhance their ability to make informed decisions for funding potential new work, such as to expand water storage capacity.
The authority for irrigation districts—or for landholders who own or lease land for agricultural purposes within those districts—to repay their allocated share of construction costs early is limited to a small number of districts, and its use has various financial and other implications. Early repayment authority allows irrigation districts or landholders to repay their total outstanding repayment obligations in advance of the date specified in the districts' contracts. As of December 2013, 87 irrigation districts—representing about 15 percent of all districts with contracts—had authority for the district or its landholders to repay early. Of those authorized, 69 irrigation districts either repaid early, or had some landholders who repaid early, with those payments totaling more than $238.9 million. GAO found that early repayment's effect on the financial return to the federal government largely depends on whether a discount may be authorized, such as calculating the present value of the outstanding repayment obligation to determine the amount to be repaid early, and the size of that discount. If no discounts are authorized, any early repayments that occur would be worth more to the government because the repayments do not bear interest. In addition, early repayment accelerates the elimination of certain restrictions and requirements for landholders that are in place until their repayment obligation is fulfilled. For example, once landholders have fully repaid their construction cost obligations, they are no longer subject to acreage limits on the amount of land they can own or lease for agricultural purposes and irrigate with project water and may be able to receive project water on additional land.
section_title: What GAO Recommends
paragraphs: GAO recommends that Reclamation better promote to the public that information on water projects' construction costs and repayment status is available. The Department of the Interior concurred with the recommendation.

section_title: Letter
paragraphs: Since 1902, the Department of the Interior’s Bureau of Reclamation has  financed and built more than 180 water projects—comprising dams,  reservoirs, canals, and other features to store and deliver water—to  provide water to various users in 17 western states. Initially, water  projects were intended to make previously arid and semiarid land  productive and were built almost solely for irrigation. Over the years,  water projects grew in size and purpose, often providing water for  irrigation, as well as hydroelectric power generation, municipal and  industrial water supplies, recreation, flood control, and fish and wildlife  enhancement, among other uses. Today, Reclamation’s water projects  vary substantially in size, ranging from a 5,000-acre water project in  southeastern Idaho consisting of a single canal, to the roughly 500-mile  long Central Valley Project in California consisting of 20 dams and  reservoirs, and hundreds of miles of canals. Collectively, Reclamation’s  projects provide water for about 10 million acres of farmland and nearly  31 million people. The costs to construct the water projects including  irrigation as a project purpose—a combined total of more than $20  billion—were primarily financed by the federal government, but irrigation  districts, power users, and municipal and industrial users (collectively  called water users) that receive project water are obligated to repay the  federal government for their allocated share of construction costs. Water  users are also obligated to pay the government for ongoing operation and  maintenance performed by Reclamation.
Reclamation typically enters into multiyear contracts with water users that  are agreements between the federal government and the user on the  delivery of water, the repayment of construction costs, and other terms  and conditions. Repayment requirements vary depending on the type of  water use and contract. For example, irrigation districts with repayment  contracts are generally required to repay their allocated construction  costs over a period of up to 40 years, and they do not pay interest on their  allocated construction costs. In contrast, power and municipal and  industrial users are required to repay their allocated share of construction  costs over a period of up to 40 years as well, but they are also required to  pay interest that accrues on those costs over time.
As congressional authorization for new water projects slowed by the  1970s, Reclamation shifted its focus from constructing to managing water  projects, including providing maintenance, repair, and modernization of  existing infrastructure. Going forward, however, as population, agricultural  production, and development in the West are projected to continue to  increase, Reclamation may be called upon to expand existing capacity for  water storage or delivery or to support additional conservation measures  for fish and wildlife enhancement. For instance, severe drought conditions  in California in 2014 have led some Members of Congress to call for  increasing the water storage capabilities of water projects located in the  state and have highlighted the importance of effective water management  across the West. There has also been congressional interest in broadly  authorizing the early repayment of construction costs—that is, allowing  irrigation districts to pay off their allocated construction costs before the  due date specified in their contracts. Unless expressly authorized in their  contracts or by statute, irrigation districts are not authorized to repay their  construction cost obligations early.
In this context, you asked us to provide information on the status of  irrigation districts’ repayments of their allocated water project construction  costs. This report examines (1) the extent to which Reclamation collects  and reports information on water project construction costs and the status  of repayment by irrigation districts and (2) the extent to which irrigation  districts can repay their allocated water project construction costs early  and the implications of early repayment.
To conduct our work, we reviewed relevant laws, Reclamation policies  and directives, and other Reclamation documents on water project  construction cost allocation, repayment, and early repayment. We also  reviewed our July 1996 report on the status of construction cost  allocations and repayments at that time. To determine the extent to  which Reclamation collects and reports information on water project  construction costs and the status of repayment by irrigation districts, we  reviewed data from Reclamation’s Statements of Project Construction  Cost and Repayment for fiscal year 2012, the most current data available  at the time of our review. To examine the extent to which irrigation  districts can repay water project construction costs early and the  implications of early repayment, we collected data from Reclamation on  irrigation districts that have authority to repay early, districts that have  exercised such authority, and the amounts of early repayments through  December 2013. To assess the reliability of Reclamation repayment and  early repayment data, we took steps such as identifying the sources of  data included in the Statements of Project Construction Cost and  Repayment, which are generally tied to audited accounting records, and  the agency’s review process. We found the data to be sufficiently reliable  for our purposes. In addition, for both objectives, we conducted interviews  with knowledgeable Reclamation officials at the agency’s central office in  Denver, Colorado, and all five regional offices (Great Plains, Lower  Colorado, Mid-Pacific, Pacific Northwest, and Upper Colorado) about  issues related to the status of repayment and early repayment. We also  interviewed officials from a nonprobability sample of eight irrigation  districts and two landholders—who own or lease land for agricultural  purposes—from five water projects located in California, Nebraska,  Oregon, and Wyoming to collect information on the repayment of  construction costs and related issues. We selected these irrigation  districts and landholders using criteria such as the type of contracts the  districts held with Reclamation, the district’s status of repayment, and  whether or not the districts had early repayment authority. We also  interviewed a nonprobability sample of nine individuals knowledgeable  about Reclamation water projects and the status of repayments, early  repayment authority, or both, including staff from the Congressional  Research Service, Congressional Budget Office, and attorneys who have  represented irrigation districts or environmental organizations. Appendix I  presents a more detailed description of our objectives, scope, and  methodology.
We conducted this performance audit from June 2013 to September 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Reclamation has carried out its mission to manage, develop, and protect  water and related resources in 17 western states since 1902. The agency  has led or provided assistance in constructing most of the large dams and  water diversion structures in the West for the purpose of developing water  supplies for irrigation, as well as for other purposes, including  hydroelectric power generation, municipal and industrial water supplies,  recreation, flood control, and fish and wildlife enhancement. Reclamation  is organized into five regions, with technical and policy support provided  by its central office in Denver. Each regional office oversees the water  projects located within its regional boundaries (see fig. 1).
The federal statutes authorizing individual water projects and the statutes  generally applicable to all water projects—known collectively as  reclamation law—govern Reclamation’s water projects. Reclamation law  determines how the costs of constructing water projects are allocated and  how repayment responsibilities are assigned among the projects’ users.  Cost allocation is the process of assigning an equitable share of the total  cost to each use in a multipurpose project. Under reclamation law,  Reclamation allocates a share of the project’s total construction costs to  each of the authorized project purposes based on the proportion of  benefits each purpose receives from the project, and the costs allocated  to each purpose are deemed to be reimbursable or nonreimbursable.  Reimbursable costs are those that are to be repaid by certain water  users, including irrigation districts, power, and municipal and industrial  water suppliers. Nonreimbursable costs are those that are not repaid by  water users and are instead generally borne by the federal government  because certain project purposes are viewed by Congress as being  national in scope, such as costs allocated to flood control and navigation,  fish and wildlife enhancement, and recreation. At the time each water  project is authorized and designed, Reclamation estimates the total  construction costs and allocates these costs among the project uses.  Once project construction is completed, and the actual construction costs  are determined, Reclamation performs a final construction cost allocation.
The cost allocation serves as a basis for the repayment terms in water  users’ contracts. The amount of reimbursable costs that water users are  responsible for repaying is based on the type of project purpose (see fig.  2). Power and municipal and industrial users are responsible for repaying  their allocated share of the construction costs, plus the interest that  accrues on those costs during construction and the repayment period. For  irrigation districts, however, reclamation law does not require the districts  to pay interest on the construction costs allocated to irrigation, resulting in  federally subsidized financing for irrigation districts responsible for  repayment. In addition, irrigation districts may receive the following two  types of financial assistance in repaying their allocated construction costs:  Irrigation assistance. The amount of construction costs allocated to  irrigation that the Secretary of the Interior determines to be above the  irrigation districts’ ability to pay for a given project is repaid from other  revenue sources, where available. These other revenues are primarily  earned from the sale of power generated by the project (or other  related projects), or from the sale of municipal and industrial water,  among other revenue sources. Ability-to-pay determinations are  based on Reclamation’s financial analysis of a given geographic area,  and determinations generally occur before construction begins on a  project.
Credits. Credits can relieve part or all of irrigation districts’ repayment  obligations. Types of credits include congressionally authorized  repayment reductions, or “charge-offs,” and construction expenses  determined to be nonreimbursable. Charge-offs are credits that are  often enacted through legislation in response to special  circumstances, such as a determination that the land is unproductive,  or the settlement of Indian water rights claims.
To establish an agreement between the federal government and irrigation  districts on the delivery of water from a project and to collect payments,  Reclamation generally enters into one of the following two types of  contracts with irrigation districts:
Repayment contracts: Section 9(d) of the Reclamation Project Act of  1939 authorizes permanent contracts for water delivery with  repayment of construction costs allocated to irrigation to be paid in  fixed dollar amounts in annual or other regular increments, over a  period of up to 40 years, by the irrigation district to Reclamation.
Water service contracts: Section 9(e) of the Reclamation Project Act  of 1939 authorizes contracts to furnish water for irrigation purposes for  up to 40-year periods. Reclamation generally enters into water service  contracts with irrigation districts when construction of the water project  has not been completed, final construction costs are uncertain, or the  irrigation district does not want a permanent contract, among other  reasons. By law, Reclamation must charge rates for water delivered  under water service contracts that are at least sufficient to cover an  appropriate share of fixed charges the Secretary of the Interior deems  proper, taking into consideration the construction costs allocated to  irrigation, as well as an appropriate share of annual operation and  maintenance costs. A water service contract can contain a provision  providing for its renewal—through negotiations between Reclamation  and the irrigation district—once the contract’s term ends, or the  contract may contain a provision allowing for its conversion to a  repayment contract.
Depending on the size of the water project, which varies substantially  across projects, Reclamation may have contracts with a number of  irrigation districts within that project’s service area. Irrigation districts  then enter into separate agreements with landholders to provide project  water.geographic area, Reclamation may have only one or two contracts with  irrigation districts for that water project, which provides water to a small  number of landholders. On the other hand, for water projects covering a  larger area, Reclamation may have contracts with multiple irrigation  districts servicing hundreds of landholders within a project.
section_title: Reclamation Collects Information on Water Project Construction Costs and the Status of Repayment by Irrigation Districts but Could Better Promote the Public Availability of This Information
paragraphs: Reclamation collects data on water project construction costs and the  status of repayment by irrigation districts, but it has not publicly reported  this information since the 1980s. Reclamation’s regional offices collect  repayment data annually for each water project with an outstanding  construction cost repayment obligation and then compile them in  Statements of Project Construction Cost and Repayment (repayment  statements). These repayment statements indicate that $1.6 billion of the  $6.4 billion in costs allocated to irrigation was outstanding, as of the end  of fiscal year 2012. It is Reclamation policy to make the repayment  statements available to the public upon request, but it could better  promote to the public that it prepares repayment statements annually and  that these statements are available.
subsections: section_title: Reclamation’s Data Indicate an Outstanding Repayment Obligation of $1.6 Billion Allocated to Irrigation
paragraphs: Reclamation’s data on water project construction cost repayments  indicate that, of the $6.4 billion in costs allocated to irrigation as of the  end of fiscal year 2012, $1.6 billion remains outstanding. Every fiscal  year, Reclamation’s five regional offices collect repayment data and  compile them in repayment statements for each water project that has   These repayment  construction costs with repayments outstanding.statements include data on the total construction costs for the water  project; the construction costs allocated to each project purpose,  including irrigation; repayment information for costs allocated to each  project purpose, including the amount irrigation districts have repaid as of  the end of the fiscal year; and any financial assistance granted to  irrigation districts.
Reclamation prepared repayment statements for 43 of these 54 projects in fiscal year  2012, which indicate that the total construction cost for these projects was more than  $963.3 million, of which at least $350.5 million was allocated to irrigation. Reclamation did  not prepare repayment statements for the other 11 projects or otherwise have construction  cost and repayment information readily available. Per Reclamation policy, it is optional to  prepare repayment statements for water projects where all water users, including irrigation  districts, have repaid their construction cost allocations. that the total construction cost for these projects was more than $19.7  billion, of which $6.4 billion was allocated to irrigation (see fig. 3).
According to Reclamation’s repayment statements, as of the end of fiscal  year 2012, of the $6.4 billion in construction costs allocated to irrigation,  the outstanding repayment obligations totaled $1.6 billion—or 25  percent—after accounting for nearly $4.8 billion in repayments made by  irrigation districts, other repayments received, and financial assistance to  irrigation (see table 1). Outstanding repayment obligations ranged across  Reclamation’s regions, from approximately $91.7 million in the Upper  Colorado region to more than $1.0 billion in the Mid-Pacific region  (accounting for 64 percent of the total outstanding construction costs  allocated to irrigation).
Reclamation’s repayment statements as of the end of fiscal year 2012  further show that, of the $1.6 billion outstanding repayment obligation for  irrigation, irrigation districts are expected to repay approximately $1.1  billion through repayment or water service contracts. Of the remaining  $490.4 million, approximately $287.4 million is expected to be recovered  through other revenue sources, such as the sale of surplus project water  for irrigation, and roughly $203.0 million is being repaid, pursuant to  federal law, a settlement agreement, and stipulated judgment, by a  municipal corporation that operates and maintains the Central Arizona  Project. Irrigation districts have repaid nearly $1.4 billion of their  allocated costs primarily through repayment or water service contracts as  of the end of fiscal year 2012 and, according to Reclamation officials,  irrigation districts are generally current in their repayments.Reclamation officials, across the 76 water projects with outstanding  repayment obligations, Reclamation holds 72 repayment contracts for  irrigation and 304 water service contracts for irrigation. We found that,  across Reclamation’s regions, the number of water projects with  outstanding repayment obligations as of the end of fiscal year 2012 and  the types of contracts vary, as described in table 2.
section_title: Reclamation Could Better Promote That Information on Water Project Construction Costs and Repayments Is Publicly Available
paragraphs: Reclamation has not publicly reported the information it collects on water  project construction costs and repayment since the 1980s, and we found  that Reclamation does not make it readily known to the public that it  prepares repayment statements annually or that they are available.Reclamation officials said that the purpose of the repayment statements  is generally for internal management use, such as when the agency is  preparing for contract negotiations, or to provide information to certain  power users on the amounts of irrigation assistance power may be  responsible for paying. Reclamation officials told us they had considered  publishing the repayment statements on the agency’s website in the mid- 2000s as part of an internal management review, but they decided not to  do so. Instead, in 2007, Reclamation developed an internal policy  document on the preparation of repayment statements that states that  such statements will be provided to any interested party upon request.  This policy document is posted on the section of the agency’s website  that contains program and administrative policies that apply to  Reclamation’s management of its water projects. Information on the  availability of the repayment statements is not otherwise posted online or  made public.
We interviewed staff from legislative branch agencies and several other  individuals knowledgeable about Reclamation water projects who  indicated that public availability to the information contained in the  repayment statements would be helpful. Some individuals we interviewed  were not aware that Reclamation prepares repayment statements  annually, or that the agency would make them available upon request.  Several individuals we interviewed indicated that making the repayment  statements directly accessible on the agency’s website would be helpful  and, in some cases, better inform their work. For example, a staff  member from the Congressional Research Service said that to be able to  respond to congressional committee requests in a timely manner, it would  be helpful to have repayment information on the agency’s website, similar  to information posted online by Reclamation’s Mid-Pacific regional office  on its water rates (which are based in part on construction cost allocation  and repayment information) for the Central Valley Project. In addition,  some individuals noted that, as Reclamation considers modifying or  expanding existing water storage capacity or delivery, Congress and  others may want to assess information on how costs were allocated and  how funding and repayment arrangements were established in the past to  inform potential future funding arrangements. For instance, an  environmental consultant told us that having repayment information  readily accessible for water projects developed in the past would help  inform decisions on future funding arrangements and other policy  considerations for federal, state, and other parties considering the  expansion of a water project in the Pacific Northwest. A senior  Reclamation official we interviewed agreed that increasing public  awareness that cost allocation and repayment information is available  upon request could better position the public to obtain information that  could help inform their decision making on related water project issues. In  addition, the official stated that there may be additional opportunities to  make the public aware of its policy beyond posting the information on the  policy section of its website.
According to the Office of Management and Budget’s open government  directive, the federal government should publish information online about  what the government is doing to promote transparency, accountability,  and informed participation by the public, and federal agencies should  proactively use modern technology to disseminate useful information.  By further disseminating information to the public that cost allocation and  repayment data are available through the repayment statements,  Reclamation would promote transparency and potentially increase  informed participation by the public.
section_title: Early Repayment Authority Is Limited, and Its Use Has Financial and Other Implications
paragraphs: The authority for irrigation districts, or for landholders within those  districts, to repay their allocated construction costs early is limited to a  small number of districts across Reclamation’s water projects. Based on  our analysis, early repayment affects the financial return to the federal  government, and it accelerates the elimination of certain restrictions and  requirements for landholders that are in place until their repayment  obligations are fulfilled, among other things. Reclamation and irrigation  district officials told us that early repayment may not appeal to many  districts or landholders, but some districts or landholders may be  incentivized to seek and exercise the authority to repay early, depending  on their particular circumstances.
subsections: section_title: Early Repayment Authority Is Limited to a Small Number of Irrigation Districts
paragraphs: The authority for irrigation districts, or for landholders within those  districts, to repay their allocated water project construction costs early— that is, repay outstanding repayment obligations, either through lump-sum  or accelerated payments, in advance of the date specified in the districts’  contracts—is limited. Unless expressly authorized in their contracts or by  statute, irrigation districts and landholders are not authorized to repay  their construction cost obligations early. According to Reclamation data,  of the estimated 585 irrigation districts that had repayment or water  service contracts with Reclamation, as of December 2013, 87 districts— or about 15 percent—had authority for the district, or for landholders  within the district, to repay their construction cost obligations early. Of  those 87 irrigation districts, 69 districts exercised their authority and  repaid early, or had some landholders who repaid early, as of December  2013, with early repayments totaling more than $238.9 million, according  to Reclamation data.
Contractual authority for early repayment is limited because only a small  number of contracts that predate the Reclamation Reform Act of 1982— which prohibited new contracts after October 12, 1982, from authorizing  early repayment—contain terms expressly authorizing early repayment.Reclamation data indicate that of the 87 irrigation districts with early  repayment authority, 55 districts had contracts that authorized  landholders to repay their outstanding construction cost obligations early;  these districts are located largely in the Pacific Northwest region. Some or  all landholders within 39 of those 55 irrigation districts exercised this  contractual authority and made early repayments totaling approximately  $18.7 million as of December 2013,app. IV). according to Reclamation data (see  In addition, we identified seven statutes enacted since 2000 that  authorize some irrigation districts—or, in some cases, landholders within  those districts—to repay their construction cost obligations early.  Specifically, we identified 32 irrigation districts that sought and received  statutory authority for early repayment by the district or landholders.analysis of Reclamation data shows that, of those 32 irrigation districts  with statutory authority, 30 districts repaid early or had some landholders  within the district who repaid early, with their early repayments totaling  $220.2 million, as of December 2013 (see app. IV). Twenty-two irrigation  districts that receive water from the Central Valley Project and received  statutory authority in 2009 comprised most of those early repayments,  totaling nearly $200.1 million.
section_title: Early Repayment Affects the Financial Return to the Federal Government and Accelerates the Elimination of Certain Restrictions and Requirements for Landholders
paragraphs: Early repayment affects the financial return to the federal government and  accelerates the elimination of certain restrictions and requirements for  landholders that are in place until their repayment obligations are fulfilled.  While only a limited number of irrigation districts and landholders have  early repayment authority, there has been consideration in Congress of  expanding early repayment authority more broadly, such as to all  irrigation districts. Reclamation documents and officials we interviewed  indicated that the agency has and would likely continue to support  additional authorization for early repayment, so long as the financial  return to the federal government was not negatively affected, but that the  unique aspects of most water projects support authorizing early  repayment on a case-by-case basis.
Reclamation officials and irrigation district officials told us that early  repayment may not appeal to many districts or landholders, given that  their repayments are otherwise due in fixed, interest-free amounts spread  over many years. In addition, some noted, the districts or landholders  may not be in a financial position to repay their outstanding repayment  obligations on a lump-sum or accelerated basis. On the other hand, as  described above, of the 87 irrigation districts that had early repayment  authority, most of the districts, or at least some of the landholders within  those districts, exercised such authority and repaid their obligations early.  Based on our analysis, we found that early repayment more quickly  eliminates certain restrictions and requirements for a landholder, which  may provide an incentive for the landholder or the district to seek and  exercise early repayment authority, depending on their circumstances.  Specifically, we found that early repayment has various implications for  the federal government, irrigation districts, and landholders, as follows.
subsections: section_title: Early Repayment Affects the Financial Return to the Federal Government
paragraphs: Early repayment affects the financial return to the federal government,  largely depending on whether a discount may be authorized, such as  calculating the present value of the outstanding repayment obligation to  determine the amount to be repaid early, and the size of that discount. If  no discounts are authorized, any repayments that occur earlier than the  due date specified in the contract would be worth more to the government  because irrigation districts’ repayments do not bear interest. By receiving  lump-sum or accelerated payments early for the outstanding repayment  obligations, the government avoids the loss in value that would otherwise  occur with repayments made over time. For example, if in 2014 an  irrigation district were to make a lump-sum payment of $100,000 that  would otherwise be due in annual installments through 2030 (e.g., about  $5,882 per year for 17 years), the government would receive that money  sooner. Looked at another way, if the irrigation district were to continue  making annual repayments over time, rather than repay early, the value  to the government of $100,000 paid in full after annual installments  ending in 2030 would be approximately $74,220 in 2014 dollars.  Reclamation officials told us that in most instances where irrigation  districts or landholders exercised their authority to repay early, the early  repayment amounts reflected their outstanding repayment obligations,  and the agency did not apply any discounts.
If early repayment authority provides a discount toward the outstanding  repayment obligation, however, the value of the return to the government  is reduced compared with repayment of the full outstanding amount. In  recent years, a few statutes have granted certain irrigation districts a  discount. For example, legislation enacted in 2009 required certain  Central Valley Project irrigation districts to repay their outstanding  repayment obligations early, at a discount of half the 20-year Treasury  rate. This discount was intended to offset the irrigation districts’ borrowing  costs in obtaining loans to facilitate their early repayments, according to  an attorney who represented the districts. In this example, the discount  may have incentivized the irrigation districts to repay early, but it also  reduced the financial return to the federal government compared with  early repayment without a discount. Specifically, Reclamation data  indicate that, if no discount had been applied, the early return to the  government would have been $236.7 million, rather than the $200.1  million that was repaid based on the discount.such a discount had not been provided, fewer irrigation districts may have  exercised their early repayment authority, and a larger discount would  have resulted in a smaller return to the government.
On the other hand, if  Based on past early repayments, some irrigation districts and landholders  may be motivated to repay early without a discount, but Reclamation  officials told us that they believe some kind of discount would be needed  to incentivize many irrigation districts to consider early repayment, were it  to be authorized. Under certain scenarios, authorizing a discount could  result in early repayment ultimately being worth much less to the federal  government compared with repayment of the full outstanding amount. For  example, in 2012, the Congressional Budget Office analyzed proposed  legislation that would have expanded early repayment authority to all  irrigation districts in the Central Valley Project. according to that analysis, the proposed legislation would have permitted  early repayments at levels approximating the present value, by applying  the 20-year Treasury rate, of the irrigation districts’ outstanding  repayment obligations. The Congressional Budget Office estimated that if  this legislation were enacted and early repayment authority were  exercised by the majority of those irrigation districts, it would result in a  net loss of $176 million to the government over the long-term.
section_title: Early Repayment Eliminates Acreage and Pricing Limitations for Landholders
paragraphs: Congressional Budget Office, “Cost Estimate: H.R. 1837 Sacramento-San Joaquin  Valley Water Reliability Act” (Washington, D.C.: Feb. 27, 2012). ownership limits and are charged full-cost water rates on land irrigated in  excess of the amount subject to the pricing limitations. Full-cost water  rates include interest charges on the landholders’ remaining allocated  portion of construction costs and can be substantially higher than the  subsidized rates charged for acres under the statutory pricing  limitations. For instance, officials in one irrigation district told us their  full-cost water rates were roughly double and, in another district, about 30  times higher than the subsidized rates. Once irrigation districts or  landholders have repaid their construction cost obligations in full— whether early, or as scheduled by the terms of their contract—the  landholders are no longer subject to these acreage and pricing limitations.  As a result, landholders may be able to receive project water, to the  extent it is available, on additional land or at a subsidized rate once they  have fulfilled their repayment obligations.
Reclamation officials told us that any foregone income in future years  from full-cost water rates would reduce the return to the federal  government associated with early repayment. According to Reclamation  officials, the agency collected approximately $146.8 million from January  1988 through December 2013 in full-cost water rates from landholders  who were irrigating land in excess of the amount subject to the statutory  pricing limitations. Thus, if early repayment authority were exercised by  those landholders, then the loss of full-cost water rate revenue in future  years would at least partially offset the return to the government from  early repayments. In addition, Reclamation officials and others we  interviewed stated that early repayment would allow for the possibility of  larger entities receiving project water at subsidized rates on larger  landholdings sooner than intended under reclamation law—one of  Reclamation’s early goals in developing water projects throughout the  western United States was to promote farming opportunities for small,  family-owned operations. Other irrigation district officials told us, however,  that even though their districts had landholders with excess acres who  may be interested in early repayment, the elimination of acreage and  pricing limitations would not likely serve as an incentive for the districts as  a whole to repay early. For example, one official stated that her district  would have to finance a loan to make early repayments on a lump-sum or  accelerated basis, which did not make sense compared with making  annual, interest-free repayments under the terms of the contract.
section_title: Early Repayment Eliminates Reporting Requirements for Landholders
paragraphs: Early repayment also eliminates annual reporting requirements for  landholders earlier than if repayment was made by the due date specified  in the contract. Until their construction cost obligations are repaid,  landholders are subject to annual reporting requirements to ensure  landholders’ compliance with acreage and pricing limitations. According to  irrigation district officials and landholders we interviewed, completing  these reports can be difficult and time-consuming for landholders and for  districts, which must complete a form for Reclamation summarizing the  reports submitted by landholders. For example, one landholder in Oregon  said that it repaid its construction cost obligation early, after receiving  statutory authority to do so in 2005, in part to eliminate the need to submit  the annual reports. On the other hand, some irrigation district officials told  us that while the reporting requirements were burdensome, eliminating  the reporting requirements would not be a sufficient reason for the district  to repay early, if granted the authority, without other incentives.
section_title: Early Repayment Potentially Provides Irrigation Districts with Greater Assurance of Project Water in Perpetuity
paragraphs: Early repayment potentially provides irrigation districts with a greater  assurance of receiving available project water on a permanent basis. The  right to water is generally determined by state law—which varies by state  and can be complex—so repayment and water service contracts do not  provide a right to water under state law. Under federal reclamation law,  however, these contracts give irrigation districts assurance of a specified  amount of water from the project’s available water supply, which becomes  permanent upon completion of repayment of the construction costs   Securing a permanent right to project water in  allocated to the districts.a geographic area where water supply is uncertain was a key motivation  in the Central Valley Project irrigation districts’ desire to convert their  contracts and repay their construction costs early, according to an  attorney who represented those districts in pursuing and receiving such  authority in 2009. In addition, for irrigation districts that receive and  exercise authority to convert their water service contracts to repayment  contracts and repay early, the need for Reclamation and the districts to  renegotiate water service contracts when they expire is eliminated,  according to agency officials. Reclamation officials and the attorney  representing the Central Valley Project irrigation districts told us that  renegotiating the terms of water service contracts can be time-consuming  and unpredictable for landholders and their agricultural businesses and,  therefore, repayment contracts may be preferable over water service  contracts. On the other hand, the agency’s flexibility for responding to  water shortages, drought, and climate change-related issues could be  limited as a result of fixing the amount of water an irrigation district  receives under a repayment contract in perpetuity, according to a  statement made by Reclamation’s Commissioner in 2011.
section_title: Conclusions
paragraphs: With population, agricultural production, and development in the West  projected to continue to increase, Reclamation may be called upon to  modify or expand existing capacity for water storage or delivery. In  considering potential new work and affiliated funding arrangements,  Congress, as well as water users and the public, may benefit from  evaluating information on past water projects. In particular, Congress and  others may want to assess information on how costs were allocated and  how funding and repayment arrangements were established among  various water users in the past. Reclamation compiles such information in  the repayment statements it prepares annually for each water project with  outstanding repayment obligations. However, Reclamation does not make  it readily known to the public that this information is available upon  request. By further disseminating information to the public that  construction cost and repayment data are available, Reclamation may  increase interested parties’ opportunities to obtain cost and repayment  information, and Reclamation would promote transparency and potentially  increase informed participation by the public. This, in turn, could further  enable Congress, water users, and the public to assess past funding  arrangements and enhance their ability to make informed decisions for  funding potential new work, such as to expand water storage capacity.
section_title: Recommendation for Executive Action
paragraphs: Consistent with Reclamation’s policy to make construction cost  repayment statements available to the public upon request, and to  promote transparency and increase informed participation by Congress,  water users, and the public, the Secretary of the Interior should direct  Reclamation to better promote to the public that annual statements of  project construction cost and repayment are available.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of the Interior for  review and comment. On August 13, 2014, the department’s audit liaison  indicated in an e-mail that the department concurred with the  recommendation and did not have any other comments.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the  appropriate congressional committees, the Secretary of the Interior, and  other interested parties. In addition, the report will be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or morriss@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix V.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This appendix provides information on the scope of our work and the  methodology used for the following objectives: examine (1) the extent to  which Reclamation collects and reports information on water project  construction costs and the status of repayment by irrigation districts and  (2) the extent to which irrigation districts can repay their allocated water  project construction costs early and the implications of early repayment.
In conducting our work, we reviewed the Reclamation Act of 1902, the  Reclamation Project Act of 1939, the Reclamation Reform Act of 1982,  and other relevant laws. We reviewed Reclamation policies and directives  and other Reclamation documents on water project construction cost  allocation, repayment, and early repayment of construction costs. We  also reviewed our July 1996 report on the status of construction cost  allocations and repayments. In addition, we conducted interviews with  knowledgeable Reclamation officials at the agency’s central office in  Denver, Colorado, and all five regional offices (Great Plains, Lower  Colorado, Mid-Pacific, Pacific Northwest, and Upper Colorado) about  issues related to the status of repayment and early repayment. For our  interviews with officials from each of the regional offices, we developed a  set list of open-ended questions to obtain information and documentation  on information they maintain on water project construction cost allocation  and repayment information and the use and availability to the public of  this information, as well as the opportunities for and potential implications  of early repayment, among other things.
To determine the extent to which Reclamation collects and reports  information on water project construction costs and the status of  repayment by irrigation districts, we analyzed Reclamation’s Statements  of Project Construction Cost and Repayment (repayment statements) for  fiscal year 2012, the most current data available at the time of our review.  Reclamation provided repayment statements for 76 projects with  outstanding repayment obligations with irrigation districts, and provided  repayment statements for 43 of 54 projects with irrigation that no longer  had outstanding obligations with irrigation districts (Reclamation policy  calls for repayment statements to be prepared annually for all water  projects with construction cost repayments outstanding. This policy does  not apply to water projects where all water users, including irrigation  districts, have repaid their construction cost allocations, and per  Reclamation policy, preparing repayment statements for these projects is  optional). The data contained in repayment statements are generally tied   The repayment statements are prepared  to audited accounting records.annually by the regional offices for each water project that has  construction costs allocated to one or more water users with an  outstanding repayment obligation. The repayment statements contain  information on total costs for the water project, including construction  costs incurred as of the end of the fiscal year; estimated future  construction costs, and other costs that Reclamation includes in its  repayment analysis for construction costs, such as capitalized operation  and maintenance costs; the allocation of construction costs among  project purposes, including irrigation; and the status of repayment for  costs allocated to each project purpose, including repayment realized,  anticipated future repayment, and any financial assistance granted to  irrigation districts, such as credits, which relieve water users from a  portion of their allocated repayment obligations. To analyze and interpret  the data contained in the repayment statements, we relied, in part, on the  relevant financial standards section on repayment statements in the  Reclamation Manual, which provides guidance on the content and format  for repayment statements. When the data in a repayment statement  included estimated future construction costs, we subtracted these  estimated costs from the projects’ total costs because such costs have  not yet been and, in some cases, may never be, incurred. To assess the  reliability of Reclamation repayment data, we took steps such as  reviewing the guidance for developing repayment statements in the  Reclamation Manual; interviewing Reclamation officials from all five  regional offices who were involved in preparing the repayment  statements, as well as officials from Reclamation’s central finance office  in Denver; identifying the sources of data included in the repayment  statements and the agency’s review process; and following up with  Reclamation officials to obtain clarifying information in instances where  we identified discrepancies in the data. On the basis of these steps, we  found the repayment statements to be sufficiently reliable for the  purposes of this report.
We reviewed information from each of the five regional offices on the  number of repayment and water service contracts in their respective  regions where irrigation districts were making repayments on their  allocated construction cost obligations, as of July 2014, for the Lower  Colorado, Mid-Pacific, Pacific Northwest and Upper Colorado regions  and, as of November 2013, for the Great Plains region. To assess the  reliability of the data provided by the regions concerning the number of  contracts of each type, we asked Reclamation officials a standard set of  questions concerning the reliability of the data and reviewed  corresponding documentation, and we found the data sufficiently reliable  for the purposes of our report. We also reviewed Reclamation’s policies  and practices on making cost allocation and repayment information— specifically, its repayment statements—available to the public, as well as  the Office of Management and Budget’s open government directive and  associated documentation related to ensuring the transparency of  government information to the public.
To examine the extent to which irrigation districts can repay their  allocated water project construction costs early, and the implications of  early repayment, we reviewed applicable laws, policies, and other  relevant documents. We also collected data from Reclamation’s regional  offices on irrigation districts that have contractual or statutory authority to  repay early, districts that have exercised such authority, and the dates  and amounts of early repayments through December 2013. To assess the  reliability of the data provided by Reclamation concerning early  repayment, we asked Reclamation officials a standard set of questions  concerning the reliability of the data and reviewed corresponding  documentation, and we found the data sufficiently reliable for the  purposes of our report. In addition, we conducted legal research to  identify statutes that provide irrigation districts with the authority to repay  their construction cost obligations early. To help identify the implications  of early repayment, we reviewed the Reclamation Reform Act of 1982  and other laws and regulations that establish acreage and pricing  limitations and reporting requirements for landholders until their  repayment obligations are fulfilled. We also reviewed testimonies and a  statement for the record by Reclamation on draft legislation that would  have authorized early repayment for additional irrigation districts, and we  reviewed Congressional Budget Office cost estimates of various bills  since 2005 that proposed expanding early repayment authority to certain  irrigation districts.
For both objectives, we conducted interviews with officials from a  nonprobability sample of eight irrigation districts and two landholders from  five water projects located in California, Nebraska, Oregon, and Wyoming  to collect information on the repayment of construction costs and related  issues. We selected these irrigation districts and landholders using  criteria such as the type of contracts the districts held with Reclamation  (repayment or water service contracts), their status of repayment, and  whether or not the districts had early repayment authority. We also  interviewed a nonprobability sample of nine individuals knowledgeable  about Reclamation water projects on the status of repayments, early  repayment authority, or both. Using the “snowball sampling” technique,  we identified these individuals by asking for referrals to others  knowledgeable about Reclamation water projects and their repayment  from others whom we had previously interviewed. Specifically, we  interviewed staff from the Congressional Research Service and  Congressional Budget Office, attorneys who have represented irrigation  districts pursuing enactment of legislation authorizing early repayment, an  attorney who has represented environmental organizations in litigation  concerning Reclamation water projects, an environmental consultant,  former congressional staff, and officials from the Family Farm Alliance  and Taxpayers for Common Sense.
We conducted this performance audit from June 2013 to September 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Cost Allocation and Repayment Information for 54 Projects for Which Irrigation Districts Have Fulfilled Obligations
paragraphs: The following two tables provide information on construction cost  allocations by project purpose (table 3) and repayment status of  construction costs allocated to irrigation (table 4) for 54 Bureau of  Reclamation water projects for which irrigation districts have fulfilled their  repayment obligations, as of the end of fiscal year 2012.
section_title: Appendix III: Cost Allocation and Repayment Information for 76 Projects with Ongoing Repayments by Irrigation Districts
paragraphs: The following two tables provide information on construction cost  allocations by project purpose (table 5) and repayment status of  construction costs allocated to irrigation (table 6) for 76 Bureau of  Reclamation water projects with ongoing repayments by irrigation  districts, as of the end of fiscal year 2012.
section_title: Appendix IV: Irrigation Districts with Contractual or Statutory Authority for Early Repayment of Construction Cost Obligations
paragraphs: The following two tables provide information on irrigation districts with  contractual authority for landholders to repay their outstanding  construction cost obligations early, and early repayments made (table 7)  and irrigation districts with statutory authority for the districts or  landholders to repay their outstanding construction cost obligations early,  and early repayments made (table 8), as of December 2013.
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Alyssa M. Hundrup (Assistant  Director), Josey Ballenger, Marya Link, and Jeanette Soares made key  contributions to this report. Stephen Brown, Cindy Gilbert, Paul Kinney,  and Alison O’Neill also provided assistance.