Reforming Interest Provisions in Federal Water Laws Could Save Millions

CED-82-3: Published: Oct 22, 1981. Publicly Released: Oct 22, 1981.

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The cost of financing the construction of federal water projects for irrigation and municipal and industrial consumers has increased substantially since the first projects were built in the early 1900's. Because conditions have changed since repayment policies were established, GAO took a look at the full cost of financing water projects to determine whether expenditures can be reduced.

By law, water project costs, with the exception of interest costs associated with irrigation and future municipal and industrial water supply, are to be repaid by the water users. Although the law has not required interest to be paid by irrigators, it has been required in part for municipal and industrial users. Water users have had difficulties meeting their repayment obligations. As a result, Treasury was required to fund water projects with additional revenue obtained through public borrowing. As a result, taxpayers are subsidizing the users by paying millions of dollars in interest costs related to financing this construction. Today, with high interest rates, the government finds itself borrowing at an interest rate several times as high as the interest rate it charges those it lends money to. The difference is now paid by the taxpayer. The government is not fully recovering its borrowing costs to fund project construction because the Reclamation Act and other federal water laws specifically allow: financing construction costs without interest; using interest rates that do not reflect the Treasury's borrowing costs; using an interest rate in effect at the start of project construction for all subsequent interest charges rather than the interest rates in effect during each year the construction funds were spent; and permitting the use of simple rather than compound interest in negotiating repayment contracts. On four projects reviewed, GAO calculated more than $667 million in taxpayer-provided interest subsidies.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should take a fresh look at the interest-free subsidy in deciding future water project authorizations.

  2. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should amend appropriate federal laws, particularly the Water Supply Act of 1958, as amended, to ensure that municipal and industrial water users fully repay their share of interest costs. In amending the legislation, Congress should require the Secretaries of the Army and Interior to: (1) use interest rates, developed by the Treasury, for computing interest during construction and interest on the unpaid balance that more appropriately reflect the Treasury's cost of borrowing funds; (2) compute interest during construction using the interest rates in effect during each year construction funds are spent; and (3) compute interest during construction on a compound rather than a simple interest basis. Where possible, these provisions should be applied to existing projects; for instance, where binding repayment contracts do not exist, when amending existing contracts, or awarding new contracts for future water sales.

 

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