Accelerated Repayment of Bureau of Reclamation Construction Costs

Accelerated Repayment of Bureau of Reclamation Construction Costs

September 30, 2015
Accelerated Repayment of Bureau of Reclamation
Construction Costs
Title IX of H.R. 2898, the Western Water and American
enforcement issues resulting from the 960-acre limit. It has
Food Security Act of 2015, includes provisions that would
remained, on one hand, an unpopular provision among large
potentially alter construction repayment for Bureau of
landholders who do not want limits on their land,
Reclamation (Reclamation) projects. The potential changes
particularly in the Central Valley, where large industrial
are discussed below.
farms are more common than other areas of the West. On
the other hand, it has been a key rallying point for taxpayer
Background
groups, environmentalists, and others who have opposed
Since the passage of the Reclamation Act of 1902,
using federally subsidized water to irrigate large swaths of
reclamation law has been based on the concept of project
land.
repayment—reimbursement of federal construction costs—
by project water and power users. Agreements between the
Under current law, once a repayment contract is paid out,
federal government (through Reclamation) and water users
contractors continue to receive project benefits but are no
for delivering water are generally governed by one of two
longer subject to the 960-acre limit or to other provisions of
contract types: water service contracts or repayment
RRA (e.g., full-cost pricing for water under certain
contracts. There are 860 such contracts currently in effect in
circumstances). However, under water service contracts, the
the 17 western states.
acreage limitation and other requirements of reclamation
law continue, unless otherwise exempted by law.
The terms of repayment and water service contracts differ.
Repayment contracts are generally made for terms of 40
Summary of Repayment Provisions in
years, with capital costs amortized over the long-term
H.R. 2898
period and repaid in annual installments (without interest
for irrigation investments and with interest for municipal
Contract Conversion, Prepayment
and industrial [M&I] investments). Costs are repaid
Title IX of H.R. 2898, as passed by the House, would allow
annually in fixed amounts to the U.S. Treasury by project
for the conversion of agricultural and municipal water
beneficiaries (contractors), along with costs for project
service contracts to repayment contracts to allow for
operations and maintenance. For water service contracts,
prepayment of allocable construction costs. The bill
contractors pay a combined capital repayment and
specifically would authorize prepayment (also referred to as
operations and maintenance (O&M) rate for each acre-foot
accelerated repayment) of outstanding construction cost
of water actually delivered (i.e., water service). This water
obligations through a lump sum or in installments. It would
service payment is different from repayment contracts in
allow repayment contractors to pay, upon request, their
that under repayment contracts, the annual repayment bill is
remaining construction repayment obligations, either in a
due regardless of how much water is used in a given year.
single lump sum or over three years (i.e., three equal
payments). Under the legislation, contractors would be
Repayment contracts tend to be the norm outside of
required to pay the current value of their remaining contract
California; however, some other projects in these areas
payments, discounted at one-half of the 20-year maturity
have water service contracts. Because the California Central
rate for Treasury securities. The bill reiterates that once
Valley Project (CVP) includes many multipurpose facilities
contractors have satisfied their repayment obligations, they
benefiting different contractors that were built over many
would no longer be subject to the acreage limitations and
decades, most CVP contractors operate under water service
full-cost pricing (as well as other associated requirements)
contracts (and under a law unique to the CVP, water service
of the RRA. The bill would authorize M&I contractors to
contracts terms are 25 years, not 40 years).
similarly convert to repayment contractors and/or repay
their outstanding balances through prepayment.
Another early tenet of reclamation law still in existence is a
limit on how much land one can irrigate with water
Congress has previously authorized similar contract
provided from federal reclamation projects. The idea behind
conversion and repayment provisions for individual
the limitation was to prevent speculation and monopolies in
Reclamation project units. For instance, in the San Joaquin
western land holdings and to promote development and
River Restoration Settlement Act of 2009 (P.L. 111-11;
expansion of the American West through establishment of
Title X), Congress authorized contract conversion and
family farms. Over time, several attempts were made to
prepayment for a subset of CVP contractors in the Friant
increase the acreage limitation. In 1982, pursuant to the
Division, Hidden Unit, and Buchanan Unit. It has
Reclamation Reform Act (RRA; P.L. 97-293), the original
authorized similar accelerated repayment for other
acreage limitation of 160 acres was raised to 960 acres.
individual projects. However, no such authority exists for
Scholars and others have written extensively on
Reclamation projects in general.
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Accelerated Repayment of Bureau of Reclamation Construction Costs
The provisions of H.R. 2898 would apply to all
including nonfederal projects. Eligible projects would
Reclamation contractors; that is, all contractors would be
include both new projects and additions to existing projects.
eligible (either through optional conversion to repayment
CBO estimated that this change would authorize
contracts and subsequent prepayment for water service
approximately $360 million over the FY2016-FY2025
contractors or optional prepayment for existing repayment
period.
contractors) for prepayment of their obligations to the
federal government.
Effect on Future Repayment Obligations
Section 902(c)(2) of H.R. 2898 would also exempt
Figure 1. Repayment Projections: H.R. 2898
contractors from acreage limitations and other RRA
Compared to Current Law
provisions (e.g., full-cost pricing) associated with future
(estimated total payments to the Treasury for water service
repayment obligations that might otherwise be incurred by
contract and repayment contracts)
contractors who repay construction costs under the act.
Under the bill, it appears that future obligations for prepaid
contractors, if any, incurred under new or amended
contracts for the construction of new surface storage
projects would not be subject to the ownership and full-cost
pricing limitations of RRA. (Under current law, these
limitations would apply.) In essence, the provision could
change reclamation law for certain future repayment
obligations once a contractor has repaid the remaining
construction balance on the original project feature.
Support and Opposition
Although many users have supported prepayment as an
option, other groups have opposed the approach embodied
in the current legislation. Supporters have generally argued
that costs being repaid under accelerated repayment
represent those costs that the federal government has
already incurred and that the underlying cost to the
Treasury is negligible. Further, they have noted that the
Source: Congressional Research Service, based on estimates by the
reporting requirements and other limitations associated with
Congressional Budget Office.
the RRA are cumbersome and increase operating costs
without providing tangible benefits. Users have also
Figure 1 provides a comparison of how repayment to the
expressed support for the concept of “recycling” repayment
Treasury might look under H.R. 2898 compared to current
funds embodied in the bill (in the case of the H.R. 2898, in
law. The Congressional Budget Office (CBO) estimated
the form of authorization of appropriations for a new
that the authority for prepayment would increase incoming
Surface Water Storage account).
receipts by a net of about $721 million over the FY2016-
FY2025 period. At the same time, CBO estimated that the
In testimony on similar provisions that were proposed (but
bill would decrease net receipts to the Treasury over the
not enacted) in the 113th Congress, the Obama
long term (because contractors would pay their obligations
Administration noted that although it supported
up front and this amount would be discounted by half the
authorization for prepayment on a case-by-case basis, it had
rate for 20-year Treasury securities on the effective date of
concerns related to a “one-size-fits-all” approach (as is
the contract). CBO estimated that the provisions in Title IX
proposed in H.R. 2898). The Administration noted that such
would result in a net loss in offsetting receipts of $540
an approach may not account for nuances associated with
million over 35 years. The Joint Committee on Taxation has
individual projects, among other things. Others, including
estimated that the bill would reduce federal government tax
taxpayer watchdog groups, have generally argued against
revenues by $89 million over the next 10 years (because
elimination of the acreage limitations and other
contractors are likely to finance some of their lump-sum
requirements of the RRA. They argue that while
repayments through tax-exempt bonds).
prepayment may provide for short-term gains to the
Surface Water Storage Enhancement Account
Treasury, contractors should not be allowed to “buy their
way out” of RRA requirements.
Title IX would also direct that half of the receipts received
by the Treasury for repayment under the bill would be
authorized for appropriation under a new account (the
Charles V. Stern, Specialist in Natural Resources Policy
Surface Water Storage Enhancement Account) intended to
IF10295
fund construction of surface water storage projects,

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Accelerated Repayment of Bureau of Reclamation Construction Costs

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