B-211558 February 13, 1984

B-211558: Feb 13, 1984

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

1983 you requested our opinion on whether the Gila Valley Irrigation District in Arizona or its constituent canal companies are eligible for disaster assistance under the Disaster Relief Act of 1974 (Act) as a result of flood damage occurring in December 1978. We have reviewed FEMA's proposed opinion. Although we think that FEMA's proposed position that the constituent canal companies also do not qualify for assistance is legally supportable. We believe that at least an equally strong argument can be made that the companies are eligible for assistance. Subsection 402(a) provides: "The President is authorized to make contributions to State or local governments to help repair. Or replace public facilities belonging to such State or local governments which were damaged or destroyed by a major disaster.".

B-211558 February 13, 1984

The Honorable James F. McNulty, Jr. House of Representatives

Dear Mr. McNulty:

By letter dated April 18, 1983 you requested our opinion on whether the Gila Valley Irrigation District in Arizona or its constituent canal companies are eligible for disaster assistance under the Disaster Relief Act of 1974 (Act) as a result of flood damage occurring in December 1978. The Federal Emergency Management Agency (FEMA) has preliminarily determined in a draft memorandum prepared by its Office of General Counsel that the District and some of the companies do not qualify for assistance. The Attorney General of the State of Arizona disagrees with the position taken in the memorandum and has stated his reasons in a letter to FEMA. You asked us, pending the agency's final decision, to review the issues surrounding the matter and to advise you and FEMA of our views on FEMA's preliminary conclusions.

A flood damaged irrigation facilities under the District's jurisdiction in December 1978. Immediately following the flood, the District applied to FEMA's predecessor, the Federal Disaster Assistance Administration (FDAA), for funds to repair the damaged facilities. FDAA approved the application and a contractor completed the repairs. The question of the District's eligibility for assistance arose as a result of a Federal audit performed after the contractor finished his work.

We have reviewed FEMA's proposed opinion, the Attorney General's letter, and the authorities cited by both. Based on our review, we agree with FEMA that the Irrigation District does not qualify for assistance. On the other hand, although we think that FEMA's proposed position that the constituent canal companies also do not qualify for assistance is legally supportable, we believe that at least an equally strong argument can be made that the companies are eligible for assistance.

Pertinent Legislation and Scope of GAO Review

Generally, the Disaster Relief Act of 1974 (Public Law 93-288, 88 Stat. 143, 42 U.S.C. Secs. 5121 et. seq. (1976)) authorizes certain emergency services and assistance to help reconstruct and rehabilitate areas devastated by natural disasters. Section 402 of the Act, 42 U.S.C. Sec. 5172 (1976), authorizes two separate avenues for providing disaster assistance for the repair and restoration of the kind of facilities at issue here. Subsection 402(a) provides:

"The President is authorized to make contributions to State or local governments to help repair, restore, reconstruct, or replace public facilities belonging to such State or local governments which were damaged or destroyed by a major disaster."

Subsection (d) includes in its definition of "public facility" for purposes of section 402 any publicly owned irrigation facility.

Subsection (b) provides:

"The President is also authorized to make grants to help repair, restore, reconstruct, or replace private nonprofit educational, utility, emergency, medical, and custodial care facilities * * * which were damaged or destroyed by a major disaster."

The District's eligibility for assistance is determined by applying subsection 402 02(a) and the companies' eligibility is determined by applying subsection:402(b).

It is a well established principle that the interpretation of a statute or regulation by the agency charged with administering it is entitled to considerable weight. Udall v. Tallman 380 U.S. 1, 16 (1965); Power Reactor Development Co. &. Electricians, 367 U.S. 396, 408 (1961). This rule derives from a recognition that the agency which works with a program daily develops an expertise which should be highly regarded. This Off ice has shown great deference to an administering agency's statutory or regulatory interpretation on a number of occasions. See, for example, 49 Comp.Gen., (1970); 48 Comp.Gen. 5 (1968); 42 Comp.Gen. 467 (1963) and A-51604, August 25, 1981. If a statute or regulation is susceptible of different readings, we do not object to the responsible agency's interpretation unless it is clearly wrong. Accordingly, we reviewed the matter from the perspective of whether FEMA's tentative conclusions are legally supportable under the governing statute.

Eligibility Under Subsection 402(a)

The FEMA memorandum (acknowledging that the District is a local governmental unit) takes the position that the District does not qualify for assistance because it did not hold title to the repaired facilities at the time of the flood and therefore did not "own" them for purposes of subsection 402(a). FEMA notes that a number of unincorporated associations constructed the damaged facilities before the District was established. The associations later incorporated as canal companies. The companies' shareholders were the landowners whose property was irrigated by the facilities. The companies' articles of incorporation provide that the companies exist to own, maintain and operate canals, ditches and other irrigation facilities. The Gila Valley Irrigation District was established in 1923 after the enactment of the Arizona statute authorizing the creation of such districts (now A.R.S. 45-1501-1866). The District had not acquired title to the irrigation facilities from the canal companies at the time of the flood although it had the power to do so under A.R.S. 45- 1578. Thus, the FEMA memorandum concludes that the Gila Valley Irrigation District was not the owner of the damaged irrigation facilities.

The Arizona Attorney General argues that determining who holds legal title to the irrigation facilities does not resolve the question of ownership for purposes of the Act. He contends that the facilities should be considered as "belonging to" the District because the District exercised sufficient regulatory control over them by statute so as to constitute ownership for the purposes of determining eligibility under subsection 402(a). He states that under the applicable Arizona statutes, when the constituent landowners created irrigation districts they relinquished control over management of their own canals and all irrigation-related matters within the district's boundaries. The Attorney General believes that such absolute regulatory control is tantamount to ownership for disaster relief assistance eligibility purposes.

We agree with the Attorney General that legal title alone does not necessarily resolve the question of who the damaged facilities "belong to" for subsection 402(a) purposes. However, the Gila Valley Irrigation District does not qualify for disaster relief assistance because its relationship to the damaged facilities is regulatory, not proprietary, as the Act requires. Subsection 402(a) authorizes assistance to State and local governments so that they will not have to bear the financial burden of replacing or restoring their public facilities which are damaged by a major disaster. Thus, if the Irrigation District would have to bear the cost of restoring the damaged facilities if no assistance was available, it could be argued that the Irrigation District is the proper contribution recipient under subsection 402(a).

Although irrigation districts can become financially responsible for facilities repair under Arizona law, the Gila Valley District had not done so and therefore would not be a proper recipient of assistance. In Arizona the legislature authorized the establishment of irrigation districts to create a mechanism to ensure water distribution and to provide a means for irrigation facilities users to raise funds from others through the issuance of bonds. Leshy, Irrigation Districts in a Changing West--An Overview, 1982 Ariz. L.J. 345, 353. The Gila Valley Irrigation District's function is to carry out the Gila Water Commissioner's distribution orders for the diversion of irrigation water throughout the individual canals in the Gila Valley. The Arizona Revised Statutes Title 45, Chapter 6, Article 3 gives irrigation districts broad powers which they may exercise in order to carry out the purposes for which they are created. Included is the power to acquire title to existing irrigation facilities and thereby become responsible for their maintenance and repair. A.R.S. 45-1578.

However the Gila Valley Irrigation District had not acquired title to the irrigation facilities within it from the canal companies and it was not financially responsible for their repair. FEMA indicated to us informally that the canal companies had been paying for the facilities' maintenance long before the 1978 disaster. Further, the canal companies, not the District, would have been responsible for restoring the damaged facilities, presumably by assessing their shareholders, if the FDAA had not provided assistance. Since we believe that an entity must be financially responsible for public facilities (and not merely exercise regulatory control) to be considered their owner for subsection 402(a) purposes, we conclude that the damaged irrigation facilities do not "belong to. the Gila Valley Irrigation District either in the technical sense or when viewed in light of the Act's purpose. Accordingly, we agree with the position FEMA takes in its proposed opinion that the District is not eligible for emergency disaster assistance under subsection 402(a). Eligibility Under Subsection 402(b)

As an alternative position, the Arizona Attorney General contends that the Districts' constituent canal companies are eligible for emergency disaster assistance under subsection 402(b) of the Act (42 U.S.C. Sec. 5172(b)). FEMA disagrees with the Attorney General with respect to some of the companies based upon its interpretation of its regulation implementing subsection 402(b) which was in force at the time the Gila Valley damage occurred. That regulation, 24 C.F.R. Sec. 2 205.54(a)(1) (1978) provided:

"'Private nonprofit organization' means any nongovernmental agency or entity that currently has (i) an effective ruling letter from the U.S. Internal Revenue Service, granting tax exemption under section 501(c), (d), or (e) of the Internal Revenue Code of 1954, or (ii) satisfactory evidence from the State that the non-revenue producing organization or entity is a non-profit one organized or doing business under State law. FEMA does not dispute the eligibility of all of the District's constituent canal companies. Two companies have effective IRS ruling letters and some others have clearly active Arizona non-profit corporate charters. FEMA has determined that these companies meet the eligibility tests set forth in subparagraphs (i) and (ii) respectively and therefore qualify for disaster assistance.

It is the eligibility of the remaining companies which is in dispute. Except for one company which never incorporated, the remaining companies incorporated at various times as nonprofit corporations. At the time of their incorporation Arizona law provided that a corporation could "be formed to endure. for a period of 25 years initially but that it could extend its life for successive 25-year periods if its shareholders adopted a renewal resolution before the original 25 yearn expired or within 5 years afterward. A.R.S. 10-151 (Repealed by Laws 1975, Ch. 69 Sec. 1 effective July 1, 1976). Some companies did not renew their charters after their original 25-year term ended.

The FEMA memorandum concludes that the companies do not qualify for disaster assistance because they ceased to exist as non-profit corporations when they did not renew their corporate charters. FEMA examines pertinent case law and statutes and determines that the companies cannot be considered de facto corporations after their charters expired under Arizona law. FEMA concludes that since the companies did have non- profit corporate status at the time of the 1978 flood they do not meet the eligibility requirements of subparagraph (ii).

An seen from the preceding discussion, the issue of the eligibility of the canal companies hinges on the interpretation of a statute and regulation which FEMA is responsible for administering In brief, FEMA's tentative position is that "satisfactory evidence" of non-profit status for purposes of 24 C.F.R. Sec. 2205.54(a)(1)(ii) does not exist where an entity does not have a current non-profit corporate charter at the time of the disaster for which Federal assistance is sought. Based on our review of the various authorities cited, we could not conclude that FEMA is wrong as a matter of law. FEMA's proposed position, involving as it does the interpretation of its own regulation, is legally supportable and thus within its legal authority. Thus, should FEMA decide to adhere to its tentative conclusion, there would appear to be adequate legal basis to seek recoupment of the funds already paid.

However, we think the argument presented by the Arizona Attorney General is at least equally sound from a legal perspective, and is perhaps even more consonant with the "spirit" of the Disaster Relief Act. He argues that even though the canal companies' non-profit corporate charters have lapsed, they nevertheless are non-profit entities doing business under State law and as such qualify for assistance under subparagraph (ii). In his view, the companies' corporate status is not pertinent to their recognition as non-profit entities and they are doing business under State law by discharging the duties arising by virtue of their participation in the irrigation district. He notes that the companies which did not renew their charters have acted in the same manner since their charters expired as they did before their charters expired. The organization of the companies without effective IRS ruling letters is the same as those with IRS letters. Arizona has granted the companies which remain incorporated non-profit corporate status even though most filed for profit tax returns. For these reasons the Attorney General contends that the companies are essentially non-profit entities which are eligible for disaster assistance.

We believe that the points the Attorney General raises would provide a sufficient basis for FEMA to determine that the companies which did not renew their charters do qualify for assistance. Subsection 402(b) and the applicable regulation (both quoted above) provide that a recipient be a private non-profit entity to be eligible for disaster assistance. A recipient need not be a corporation to qualify, however, in our view. We disagree with the premise upon which the FEMA opinion is based--that because some of the Gila Valley companies allowed their corporate charters to lapse they necessarily lost their non-profit character for purposes of subsection 402(b) as well. The only legal effect of the companies failure to renew their corporate charters is that they ceased to exist in the statutorily recognized corporate form. They do, however, continue to exist as less formal business associations by carrying on their operations after their charters expired. Assuming, as the Attorney General has represented, that the companies continue to conduct their affairs in a manner designed not to produce surplus revenue, we believe that FEMA has a basis upon which to determine that the companies' damaged facilities are "private non-profit * * * utility * * * facilities" eligible for assistance under subsection 402(b) The same would be true of the company which never incorporated if, in fact, it operates on a nonprofit basis. Moreover, the fact that Arizona has granted the companies non-profit status for State tax purposes could be considered to be "satisfactory evidence from the State that the non-revenue producing organization or entity is a non- profit one organized or doing business under State law. as 24 C.F.R. Sec. 2205.54(a)(1)(ii) requires for eligibility assistance.

Conclusions

We agree with FEMA's proposed opinion that the Gila Valley Irrigation District does not qualify for Disaster Relief Assistance under subsection 402(a) of the Disaster Relief Act of 1974 because the District did not have legal title to the damaged facilities at the time of the flood. The determination of the canal companies' eligibility is FEMA's to make, and we believe that its proposed decision that some of the companies are not eligible for assistance is legally supportable. On the other hand, as explained above, we think the better view is that the companies do qualify for assistance under subsection 4 02(b) of the Disaster Relief Act of 1974 because the applicable regulation does not require FEMA to base an eligibility determination on a company's corporate status. We would not object to FEMA's making a case-by-case eligibility determination based upon whether in fact a company is conducting its operations in a non- profit manner. As agreed with your staff, we are sending a copy of this opinion to FEMA.

Milton J. Socolar for Comptroller General of the United States