Water Subsidies

Farmers have received federally subsidized water from the Interior Department's Central Valley Project for up to 40 years under fixed-rate water service contracts. The fixed rates, however, no longer function as intended; they do not cover Interior's operating costs and have not been enough to repay virtually any of the $1 billion in construction costs owed. Moreover, environmental and water use problems have been linked to the irrigation carried out under these contracts. Studies by agricultural economists suggest that higher water prices would increase irrigation efficiency and conservation, thereby reducing environmental degradation caused by irrigation and freeing up water now used for irrigation for other uses. This report (1) estimates the impact on farm profits of the higher irrigation rates mandated under 1992 legislation and of further rate increases under various scenarios, (2) estimates the financial benefits to the federal government of increasing the irrigation rates, and (3) determines how farmers can mitigate the impact of higher rates.

GAO found that: (1) higher irrigation rates would on average reduce farm profits in one CVP sector by 11 percent to 34 percent and 4.3 percent to 6.9 percent in the other sector under various rate scenarios; (2) farms would remain profitable under any proposed rate increase; (3) the actual impacts of higher irrigation rates depend on farmers' individual circumstances; (4) farmers who lease land would eventually have their higher irrigation rates offset by lower rental expenses while landowners' equity and borrowing capacity would be reduced; (5) higher irrigation rates would not severely affect California's overall farm economy, since interest rates, the export market, and the value of the U.S. dollar have a greater impact on the farm economy than water rates; (6) if irrigation rates are increased beyond mandated requirements, the outstanding CVP debt would be retired more quickly and federal revenues would increase; (7) higher irrigation rates would induce farmers to change their farm management practices and reduce water use through adopting improved and more efficient technologies and changing the types of crops they grow; and (8) if interest is charged on already renewed contracts, irrigators could claim that the United States breached its contracts and seek damages.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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