FEDERAL AND INTERSTATE WATER RESOURCES
ASSIGNMENT 16
The Federal Reclamation Program:
Subsidies, Abuse, and Reform
“In the West, it is said, water flows uphill toward money. And it literally
does, as it leaps thousands of feet across the Tehachapi Mountains in gigantic
siphons to slake the thirst of Los Angeles, as it is shoved a thousand feet out of
the Colorado River canyons to water Phoenix and Palm Springs and the irrigated
lands around them. It goes 444 miles (the distance from Boston to Washington)
by aqueduct from the Feather River to south of L.A. It goes in man-made rivers,
in siphons, in tunnels. In a hundred years, actually less, God’s riverine handiwork
in the West has been stood on its head. A number of rivers have been nearly dried
up. One now flows backward. Some flow through mountains into other rivers’
beds. There are huge reservoirs where there was once desert; there is desert, or
cropland, where there were once huge shallow swamps and lakes.
“It still isn’t enough.”
Marc Reisner, Cadillac Desert 13 (1986).
Reading:
Peterson v. Department of the Interior
Madera Irrigation District v. Hancock
Notes and Questions:
1.
The history of the 160 acre limitation of the Reclamation Act of 1902, and the Bureau of
Reclamation’s implementation of that limitation are well-described in Peterson v. Department of
the Interior. At issue in Peterson was the constitutionality of the “Hammer Clause” of the
Reclamation Reform Act of 1982. Effective April 12, 1987, the Hammer Clause applied the
"full cost" pricing provisions and the 160 acre aggregate landholding limitation to all recipients
of water from federal reclamation projects who did not previously elect to bring themselves
within the 960 acre and 320 acre limits and O&M cost repayment provisions of the Act. The
Hammer Clause thus had the effect of raising the price of water delivered to these farmers above
the rates set forth in existing CVP contracts.
2.
According to the Ninth Circuit, why was this not a breach of contract? Is the decision in
Peterson fair to the farmers of the Central Valley who have relied on the supply of water at the
rates specified in the existing CVP contracts, many of whom have paid for the value of the
subsidy as capitalized in the purchase price of their land?
1
3.
Is the standard by which the courts analyze whether an act of Congress that alters the
terms of contracts to which the United States is a party violates the due process clause of the
Fifth Amendment, which is set forth in Public Agencies, fair to the individuals or government
agencies that enter into contracts with the federal government? What is the rationale for this
highly deferential standard?
4.
Are you persuaded by the Ninth Circuit's interpretation of Article 21 of the Lower Tule
River Irrigation District water service contract? Does not the purpose of this article appear to be
to vest in the CVP contractors the unilateral authority to determine whether amendments to the
federal reclamation laws should be applicable to their existing contracts?
5.
The decision in Peterson to uphold the constitutionality of the Hammer Clause is based
on two separate legal theories. The first is that the CVP contracts simply do not confer on the
contractors the right asserted in the litigation—viz. the right to exceed the 160 acre limit of the
Reclamation Act of 1902 by aggregating lands held in fee simple with adjoining leased lands.
The second theory essentially holds that, even if the CVP contracts expressly created such a
right, Congress retains its sovereign power to change the statute and to apply the amended law to
the existing contracts.
Why did the Court approach the case in this manner? What does this bifurcation of the
analysis tell you about the Fifth Amendment?
6.
By 1986, the CVP contractors had underpaid the operation and maintenance costs of the
water supply functions of the CVP by an accumulated aggregate deficit of approximately $38
million. In response, Congress enacted a statute, Public Law 99-546, § 106, that requires those
contractors that renew their water service contracts to repay their share of the O&M deficit, plus
interest that has accumulated since October 1, 1985, as part of the rates for water service
provided under the new contracts. The Ninth Circuit rejected breach of contract and
constitutional challenges to this legislation in Madera Irrigation District v. Hancock.
7.
Do you agree with the Court in Madera that the 1939 and 1951 contracts between the
district and the United States created a right to a permanent water supply from the Friant Unit of
the CVP? Do you agree that this permanent right is subject to subsequently enacted
congressional legislation such as section 106? Are there any limits to the United States’
authority to alter the terms of water service when it renews the Madera contract?
8.
Do you agree with the Ninth Circuit that the statutory requirement that the district pay
back the operation and maintenance cost deficits accrued during the term of the old contracts
does not violate the district’s contract rights as long as the obligation is made a condition of
contract renewal?
9.
Does the decision in Madera depend entirely on the special rules that govern the
interpretation of government contracts—viz. that (a) Congress’ power to enact new legislation
that alters the terms of the contracts is an enduring presence that exists unless unmistakably
waived by the contract or by prior legislation and (b) government contracts should be construed
to avoid the conclusion that there has been a waiver of this sovereign power?
2
10.
What is the point of Judge Hall’s concurring opinion? Does she place undue emphasis on
the preamble to the CVP contracts, which states that the contracts are entered into “pursuant to
the Reclamation Act of 1902 and all acts amendatory or supplementary thereto”?
11.
Is there a significant difference in the tone of analysis in Peterson and Madera? Should
government contracts be more secure than the governing law provides?
12.
Until recently, the regulations promulgated by the Department of the Interior to
implement the Reclamation Reform Act allowed for circumvention of the acreage limitations by
permitting the aggregation of land eligible for subsidized project water through the creation of
irrevocable trusts and farm management agreements. Pursuant to these arrangements, large
farming operations continue to receive subsidized project water if there is at least one trust
beneficiary for every 960 acres of land included in the farming operation.
These regulations were successfully challenged in NRDC v. Duvall, Civ. No. 88-0375
LKK (E.D. Cal. filed July 26, 1991) (granting summary judgment to plaintiffs on claim that
promulgation of regulations without an EIS violated NEPA). The United States appealed the
decision to the Ninth Circuit. Pursuant to a joint motion filed by the parties, however, the Court
of Appeals remanded the case to the District Court for implementation of a settlement agreement
that required the Bureau of Reclamation to promulgate new regulations by 1995.
The Bureau published draft rules in December 1996 that did not propose significantly to
change the exemption of irrevocable trusts from the acreage limitation and full-cost pricing
requirements of the Reclamation Reform Act. 61 Fed. Reg. 66,827 (1996). Following protests
by NRDC and other organizations, the Bureau reconsidered. On November 18, 1998, it released
new draft regulations that propose to eliminate the use of trusts to avoid the acreage limits. 63
Fed. Reg. 64,154 (1998). According to the Bureau:
We are proposing this rule to address comments raised in both the rulemaking
concluded on December 18, 1996 (the Acreage Limitation Rules and Regulations) and in
the Advance Notice of Proposed Rulemaking (ANPR) published in the Federal Register
(61 FR 66827, Dec. 18, 1996). Among other things, the comments stated that although
we collect information from landholders to verify compliance with the RRA, we do not
collect this information from farm operators. Commenters pointed out that we,
consequently, may not have adequate information to determine if the provisions of a farm
operating arrangement constitute a “lease” under the acreage limitation provisions and
thus require application of the non-full cost entitlements of the RRA. Other comments
stated that we should analyze all farm operations in excess of 960 acres to determine
compliance with the acreage limitation provisions of Federal reclamation law. Public
comments from the ANPR are addressed below. We believe that this rule balances the
interests in enforcing the law with the interests of limiting paperwork burdens on the
public. By limiting the applicability of the proposed rule as described below, we hope to
target our resources to achieve compliance with the acreage limitation provisions of
Federal reclamation law in an efficient manner. We seek comments on whether this rule
will meet that goal.
The proposed rule would extend RRA certification and reporting forms
requirements to farm operators who: (1) Provide services to more than 960 acres held
3
(directly or indirectly owned or leased) by one trust or legal entity, or (2) Provide services
to the holdings of any combination of trusts and legal entities that exceed 960 acres. In
addition, this part applies to the eligibility of formerly excess land held in trusts or by
legal entities, that is operated by a farm operator who was the landowner of that land
when it was ineligible excess land or land placed under recordable contract. The
provisions of 43 CFR part 426 not specifically addressed in this rule are unchanged.* * *
Farm operators do not now have to submit RRA forms. The new 43 CFR part
428 would extend certification and reporting requirements to farm operators who (1)
provide services to more than 960 acres held by one trust or legal entity, or (2) provide
services to the holdings of any combination of trusts and legal entities that exceed 960
acres. By extending the certification and reporting requirements to these farm operators,
we can get information that we need to determine the following: (1) Who has use or
possession of the land being farmed under a farm operating arrangement; and (2) Who is
responsible for payment of operating expenses, and who is entitled to receive the profits
from the farming operation as indicators of economic risk. We need this information
because the acreage limitation provisions apply to all owned or leased land. Use or
possession of the land and who has all or a portion of the economic risk associated with
the farming enterprises are the factors we use to determine if a farm operating
arrangement is in fact a lease. If we determine that a farm operating arrangement is a
lease, then the farm operator leasing the land will be subject to the acreage limitation
provisions.
Excess Land Provisions Part 426 provides that a seller of excess land may not
receive Reclamation irrigation water if he or she again becomes the landholder of that
land either voluntarily or involuntarily, with certain exceptions. This proposed rule
would apply similar restrictions to farm operators who sold their excess land at an
approved price, and provide services to that land if it is held in trust or by a legal entity.
The only exceptions would be if the formerly excess land became exempt from
application of the acreage limitation provisions or the full-cost rate was paid for
deliveries of Reclamation irrigation water to the formerly excess land. This provision
will not be effective until January 1, 2000, at which time all farm operating arrangements
between farm operators and trusts or legal entities that meet the criteria will be affected.
This includes farm operating arrangements that were in existence prior to January 1,
2000, as well as any farm operating arrangement initiated on or after that date. We
believe this provision is consistent with the intent of the RRA excess land provisions, and
that it parallels excess land provisions that apply to landholders.
The following example illustrates the situation this provision would address:
Landowner A, a qualified recipient, owns 5,000 acres subject to the
acreage limitation provisions, which is 4,040 acres more than his 960acre ownership entitlement. Landowner A sells his excess land at a price
that Reclamation approved to a trust benefitting 10 individuals who are
each subject to the discretionary provisions; none of the beneficiaries'
landholdings exceed their acreage limitation entitlements. The trustee of
the trust then hires Landowner A to operate the land owned by the trust.
Consequently, Landowner A continues to farm the entire 5,000 acres as a
farm operator, and the land continues to receive Reclamation irrigation
water at the non full cost rate.
4
We do not believe the intent of the excess land provisions of Federal reclamation
law has been met in the preceding example. As part of the rulemaking that was
completed on December 18, 1996, we included as Sec. 426.12(g) a provision that
addresses this issue with regard to landholders. It provides that a district may not make
Reclamation irrigation water available at the non-full cost rate to excess land disposed of
by a landholder at a price Reclamation approved, whether or not under recordable
contract, if the landholder later becomes a direct or indirect landholder of that land
through either a voluntary or involuntary action. Section 426.12(g) provides specific
exceptions to this provision. We believe that, starting on January 1, 2000, this same
concept should apply to farm operators who provide services to land held in trusts or by
legal entities or any combination thereof that the farm operator formerly owned as excess
and sold at an approved price. We are seeking comments on the following issues related
to formerly excess land and farm operators:

Should we apply this excess land provision more broadly or should we include other
exceptions to the proposed provision?

Should we not include either of the two exceptions provided in the proposed rule (the
land is no longer subject to the acreage limitation provisions and payment of the full-cost
rate for deliveries of Reclamation irrigation water to the land in question) or should we
otherwise alter them in some manner?

Is the effective date of January 1, 2000, reasonable for this excess land provision or
should we apply some other date?
***
In considering potential abuses of existing rules concerning trusts, we have
focused on trusts that hold more than 960 acres west-wide. In several instances, these
large trusts were created by owners of excess lands who were required by Section 209 of
the RRA to dispose of their interests in excess lands or face the permanent ineligibility of
the lands for receipt of Reclamation irrigation water. By requiring the disposal of excess
lands, the Congress was attempting to assure that the benefits of Federal irrigation water
would be more widely distributed. In some instances owners of excess lands sold or
transferred their excess lands to large trusts. Then, some of these trusts, which are
subject to more liberal acreage limitation provisions, entered into farm operating
agreements with the former owners of such land, creating a situation where substantially
the same enterprise continued to farm the same large acreage. The foregoing practice has
in fact occurred on a limited basis in the Central Valley Project in California, and we are
further concerned that the practice may occur elsewhere in the future as recordable
contracts under which excess lands have been temporarily made eligible to receive
Reclamation irrigation water expire or other excess lands are sold. While the foregoing
arrangements are in literal conformance with existing regulations, we believe that they do
not meet the intent of the law.
To address this issue, we are proposing a change in how Section 209 is
administered to attribute to former owners of excess lands any formerly excess land held
in trusts and operated by the former owner of the excess lands. Essentially, we propose
to treat the contractual relationship between the trust and the former owner of excess
lands as a continuing financial interest in such lands by the former landowner, an interest
5
that we can regulate in our rulemaking power granted by the Congress in Section 224 of
the RRA. This change would eliminate any incentive for former owners of excess lands
to use the large trust vehicle to maintain a continuing farming enterprise and would curb
any abuse of congressional intent inherent in such arrangements. We propose to apply
this concept also to legal entities that hold formerly excess land and hire the former
owner of such land under a farm operating arrangement. We do not believe there are
many instances where legal entities have bought formerly excess land and then arranged
for the former owner to farm the land as a farm operator. However, we are concerned
that application of this concept only to trusts does not cover the full scope of possible
arrangements and may result in a transfer of land ownership to various legal entities that
will continue to arrange to have the land farmed in the same manner as the trust. We
want to preclude such actions.
To ensure a transition and public education period, we will not implement this
provision until January 1, 2000. This provides an opportunity for all trusts and legal
entities that would be affected by the excess land provision (because their landholdings
include formerly excess land and they have hired the former landholder to provide
services to such land as a farm operator) to make other farming arrangements. In doing
so, affected trusts and legal entities can avoid having to pay the full-cost rate for the
delivery of Reclamation irrigation water to the formerly excess land, or even the
ineligibility of such land, if they take action before January 1, 2000. Of course, affected
trusts and legal entities could limit the consequences of the excess land provision at any
time after January 1, 2000, by making alternative arrangements in how the formerly
excess land is farmed. In addition, this proposed change will not affect the underlying
trust itself. Trusts are still subject to the requirements of Section 214 of the RRA, and as
such, the acreage limitation entitlements of the landholder(s) to whom the land held in
trust is attributed will determine if the land is eligible to receive Reclamation irrigation
water in the holdings of the trust.
The Bureau promulgated its final rule on January 26, 2000. 65 Fed. Reg. 4303 (2000). It
provides inter alia:
§ 428.1 -- Purpose of this part.
This part addresses Reclamation Reform Act of 1982 (RRA) forms requirements for certain farm
operators and the eligibility of formerly excess land that is operated by a farm operator who was
the landowner of that land when it was excess.
§ 428.2 -- Applicability of this part.
(a) This part applies to farm operators who provide services to:
(1) More than 960 acres held (directly or indirectly owned or leased) by one trust or legal entity;
or
(2) The holdings of any combination of trusts and legal entities that exceed 960 acres.
(b) This part also applies to farm operators who provide services to formerly excess land held in
trusts or by legal entities if the farm operator previously owned that land when the land was
ineligible excess or under recordable contract.
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(c) This part supplements the regulations in part 426 of this chapter.
§ 428.3 -- Definitions used in this part.
Custom service provider means an individual or legal entity that provides one specialized, farmrelated service that a farm owner, lessee, sublessee, or farm operator employs for agreed-upon
payments. This includes, for example, crop dusters, custom harvesters, grain haulers, and any
other such services.
Farm operator means an individual or legal entity other than the owner, lessee, or sublessee that
performs any portion of the farming operation. This includes farm managers, but does not include
spouses, minor children, employees for whom the employer pays social security taxes, or custom
service providers.
We or us means the Bureau of Reclamation.
You means a farm operator.
§ 428.4. -- Who must submit forms under this part.
(a) You must submit RRA forms to districts annually as specified in § 428.6 if:
(1) You provide services to more than 960 nonexempt acres westwide, held by a single trust or
legal entity or any combination of trusts and legal entities; or
(2) You are the ultimate parent legal entity of a wholly owned subsidiary or of a series of wholly
owned subsidiaries that provide services in total to more than 960 nonexempt acres westwide,
held by a single trust or legal entity or any combination of trusts and legal entities.
43 C.F.R. §§ 428.1-428.4.
14.
The CVP water service contracts, which generally were for 40-year terms, began to come
up for renewal in 1989. In the Central Valley Project Improvement Act of 1992, Pub. L. No.
102-575, 106 Stat. 4706 (1992), Congress imposed a number of significant restrictions on the
contract renewal process. These include a prohibition on contract renewal until the Bureau of
Reclamation’s prepared a programmatic environmental impact statement “analyzing the direct
and indirect impacts and benefits of implementing this title, including all fish, wildlife, and
habitat restoration actions and the potential renewal of all existing Central Valley Project water
contracts.” CVPIA §§ 3404(c)(1) & 3409. The CVPIA also limited the term of renewed
contracts to no more than 25 years. Id. § 3404(c).
In Natural Resources Defense Council v. Houston, 146 F.3d 1118 (9th Cir. 1998), the
Court of Appeals affirmed a district court decision that invalidated and rescinded fourteen water
service contracts in the Friant Unit of the CVP, including ten contracts that were executed before
enactment of the CVPIA. The court held that the renewals of the contracts violated section 7 of
the Endangered Species Act, because the Bureau failed to consult with the National Marine
Fisheries Service regarding the effects of the new 40-year contracts on Sacramento River winterrun chinook salmon and consulted with the United States Fish and Wildlife Service regarding
7
effects on the Delta Smelt only after it had renewed the contracts. The rescission of the fourteen
contracts means that all of the renewed water service contracts will be for 25-year terms and will
be governed by the substantive requirements of the CVPIA.
We will study the CVPIA in detail in Assignment 18.
PETERSON v. DEPARTMENT OF THE INTERIOR
899 F.2d 799 (9th Cir. 1990)
WILLIAM A. NORRIS, Circuit Judge:
In these consolidated cases, we are asked by various public water agencies in California's
Central and Solano Valleys (the "Water Districts") to declare unconstitutional a provision of the
Reclamation Reform Act of 1982 which interferes, they argue, with their contractual right to
receive subsidized water from federal reclamation projects for distribution to agricultural users in
their districts.1 This appeal raises important questions of Congress's ability to reshape federal
water policy and to decide who shall receive federally subsidized water from the government’s
reclamation projects in the western states.
I
Each of the Water Districts entered into a longterm contract in the past 30 years with the
Department of the Interior, Bureau of Reclamation ("the Bureau") to receive water from two vast
systems of federally owned and operated reservoirs, dams and canals: the Central Valley
Reclamation Project and the Solano Project.2 Under these contracts the federal government
agreed to provide water to the Water Districts at a fixed rate for the contract period. Although
each District was charged a different rate for the water it received, all of the contract rates
represent a significant government subsidy. In exchange, the Water Districts agreed to distribute
the water to eligible lands within their jurisdictions. The only express eligibility requirement
contained in the contracts was that no water could be provided to any farm in excess of 160 acres
whether owned by a natural person or a corporation. Because the contracts did not expressly
prohibit the Water Districts from providing water to farms of more than 160 acres if the land was
leased rather than owned, the Water Districts have for many years delivered subsidized water to
farms consisting of thousands of acres of leased land, as well as to small farms complying with
the acreage limitation.
The Reclamation Reform Act of 1982, 43 U.S.C. §§ 373(a); 390aa-390zz1; 422e; 425b;
485h; 502 (1982 & West Supp. 1989) ("the RRA") amended federal reclamation law in three
1
Several landowners who receive reclamation water from the water districts are also named
as plaintiffs in these cases. The landowners do not claim that they have any right to reclamation
water that is not dependent on the water districts' contractual right to the water. Accordingly, we
refer to the plaintiffs collectively as the "Water Districts."
2
Most of the contracts are for 40-year terms and are due to expire in the mid-1990s. Many,
however, do not expire until after the year 2000, and one does not expire until 2026.
8
important ways: (1) it increased the acreage limitation from 160 to 960 acres;3 (2) it closed the
"leasing loophole" by making the acreage limitation expressly applicable to holdings that were
leased as well as owned; see 43 U.S.C. §§ 390dd, 390ee: and (3) it raised the price of
reclamation water to a level that reduced, but did not eliminate, the federal subsidy. See 43
U.S.C. § 390hh.
The provision of the RRA in dispute in this litigation is section 203(b), also known as the
"hammer clause." The hammer clause puts water districts to an election. They are permitted to
amend their contracts to conform to the requirements of the RRA, which means a 960-acre
limitation applicable to all lands, whether owned or leased, and an increased, but still subsidized,
price. If Water Districts choose not to so amend their contracts, they are permitted to deliver
water to leased lands in excess of 160 acres provided they pay the government's "full cost" of
delivering the water. 43 U.S.C. § 390cc(b).4
In these cases, the Water Districts claim that application of section 203(b) to their
existing water contracts violates the due process clause and the taking clause of the fifth
amendment.5 The district court granted the government's motion for summary judgment on both
claims, and the Water Districts now appeal. We affirm the district court's decision that neither
the due process nor the taking clause prevents Congress from limiting the volume of subsidized
water that the Water Districts can deliver to leased lands under their preexisting contracts with
the Bureau of Reclamation.
II
The starting place for understanding the 1982 amendments to the federal water
reclamation law is nearly one hundred years ago when the federal government initially became
involved in developing irrigation systems for the western states. The opening of the West to
farming through the harnessing of its waters provides not only fascinating history but also
necessary background to the constitutional questions raised by these cases.
3
The RRA made one exception to the new 960-acre limitation: Large business entities,
defined as those benefitting more than twenty-five persons, could not receive reclamation water
at subsidized rates for any land owned or leased in excess of 320 acres. 43 U.S.C. § 390ee(a) (2)
& (3).
4
The term "full cost," as used in the Act, means "an annual rate . . . that shall amortize the
expenditures for construction properly allocable to irrigation facilities in service, including all
operation and maintenance deficits funded, less payments, . . . with interest on both accruing
from October 12, 1982." 43 U.S.C. § 390bb(3)(A).
5
The fifth amendment provides: "No person shall ... be deprived of life, liberty, or
property, without due process of law; nor shall private property be taken for public use, without
just compensation." U.S. Const. amend. V. The Water Districts also brought claims against the
United States based on 42 U.S.C. § 1983, the ex post facto clause, the equal protection clause and
the doctrine of equitable estoppel. The Water Districts do not appeal the district court's dismissal
of these claims.
9
The final westward migration of the late 1800s resulted in an enormous demand by the
settlers for irrigation systems.6 The western states, however, lacked the means to finance the
enormous systems of dams, reservoirs, and canals needed to regulate and distribute water from
the western rivers and snow melt. See California v. United States, 438 U.S. 645, 663, 98 S. Ct.
2985, 2995, 57 L.Ed.2d 1018 (1978). Responding to the pressing demand for federal assistance
in funding water reclamation projects, Congress passed the Reclamation Act of 1902, ch. 1093,
32 Stat. 388 (codified as amended at 43 U.S.C. §§ 371-600e (1982)).
With the Reclamation Act of 1902, Congress committed itself to the task of constructing
and operating dams, reservoirs, and canals for the reclamation of the arid lands in 17 western
states. California, 438 U.S. at 650, 98 S. Ct. at 2988.7 The projects were to be built on federal
land and the actual construction and operation were to be in the hands of the Secretary of the
Interior. Id. at 664, 98 S. Ct. at 2995.
The Congress that enacted the Reclamation Act of 1902, however, had far greater
expectations for the program than simply an increase in the West's agricultural production. With
the Reclamation Act, Congress created a blueprint for the orderly development of the West, and
water was the instrument by which that plan would be carried out. See Ivanhoe Irrigation
District v. McCracken, 357 U.S. 275, 292, 78 S. Ct. 1174, 1184, 2 L.Ed.2d 1313 (1958).
Congress was particularly concerned that the reclamation projects not fuel land speculation in the
West or contribute in any way to the monopolization of land in the hands of a few private
individuals.8 The congressmen and senators who sponsored the bill described it as a necessary
6
As early as 1891, settlers in the western states organized annual Irrigation Congresses,
where delegates met to discuss their water needs and to urge Congress to fund federal
reclamation and irrigation projects. See generally Taylor, The Excess Land Law: Execution of a
Public Policy, 64 Yale L.J. 477, 48185 (1955).
7
Of all the federal reclamation projects undertaken, the Central Valley Project is the largest.
In 1958, the Supreme Court described the CVP as follows:
[The Central Valley Project] was born in the minds of farseeing Californians in
their endeavor to bring to that State's parched acres a water supply sufficiently
permanent to transform them into veritable gardens for the benefit of mankind.
Failing in its efforts to finance such a giant undertaking, California almost a
quarter of a century ago petitioned the United States to join in the enterprise. The
Congress approved and adopted the project, pursuant to repeated requests of the
State, and thus far has expended nearly half a billion dollars.
Ivanhoe Irrigation Dist. v. McCracken, 357 U.S. 275, 280, 78 S.Ct. 1174, 1178, 2 L.Ed.2d 1313
(1958).
8
The legislative history of the 1902 Act is replete with references to the antimonopoly and
anti-speculation goals of the bill and to Congress's desire that the federally subsidized water be
used to create landholding patterns consistent with its vision of an agrarian society of family
owned farms. Frank Mondell of Wyoming described the bill as "a step in advance of any
1
0
measure to guard against the rampant land speculation of the late 19th century and to create in its
stead small family farms and homesteads for the rapidly increasing population. Representative
Newlands, the author of the 1902 Act, stated that "the very purpose of this bill is to guard against
land monopoly and to hold this land in small tracts . . . to give to each man only the amount of
land that will be necessary for the support of a family." 35 Cong. Rec. 6734 (1902). Similarly,
Senator Hansbrough of North Dakota, a cosponsor, introduced the reclamation bill into the
Senate by stating: "Mr. President, the purpose of this measure is to assist in providing homes for
the rapidly increasing population of the country." Id. at 1383.
Congress's goals in enacting the Reclamation Act of 1902 have never been in doubt. As
the Supreme Court observed in Ivanhoe, Congress clearly intended the federal reclamation
projects to promote the growth of an agricultural society in the West "by limiting the quantity of
land in a single ownership to which project water might be supplied." 357 U.S. at 292, 78 S. Ct.
at 1184. And as our circuit has said, the Reclamation Act of 1902 was animated by three
primary goals: "to create family-sized farms in areas irrigated by federal projects . . . , to secure
the wide distribution of the substantial subsidy involved in reclamation projects and [to] limit
private speculative gains resulting from the existence of such projects." United States v. Tulare
Lake Canal Co., 535 F.2d 1093, 1119 (9th Cir.1976), cert. denied, 429 U.S. 1121, 97 S. Ct.
1156, 51 L.Ed.2d 571 (1977).
To accomplish these goals, Congress established eligibility requirements for those who
could receive water from any of the federal reclamation projects funded under the Act. First, and
most importantly, Congress provided that "[n]o right to the use of water for land in private
ownership shall be sold for a tract exceeding one hundred and sixty acres to any one landowner."
43 U.S.C. § 431. It so happens that 160 acres was also the limit on the amount of public land
made available to individuals and families under the Homestead Acts,9 reflecting Congress's
view at the time of the appropriate size for a "family farm." See Sax, Federal Reclamation Law
§ 120.1, at 210, in 2 Water & Water Rights (R. Clark ed. 1967).
Second, Congress prohibited the sale of project water to any landowner who was not "an
actual bona fide resident on such land, or occupant thereof residing in the neighborhood of such
land." 43 U.S.C. § 431.
Finally, in a series of significant amendments to the Act, Congress established additional
controls over land speculation by requiring users of reclamation water who owned land in excess
of 160 acres to enter into "recordable contracts" with the Secretary of the Interior, in which they
would agree to sell their excess land within ten years. See, e.g., Omnibus Adjustment Act of
legislation we have ever had in guarding against the possibility of speculative land holdings and
in providing for small farms and homes on the public land, while it will also compel the division
into small holdings of any large areas . . . in private ownership which may be irrigated under its
provisions." 35 Cong. Rec. 66-77 (1902); see also Taylor, supra note 6, at 484-85; Taylor,
National Reclamation in Imperial Valley: Law v. Policy, 11 Ecology L.Q. 125, 12526 (1983).
9
See Homestead Act of 1891, ch. 561, § 5, 26 Stat. 1097 (repealed 1976).
1
1
1926, 43 U.S.C. § 423e.10 The sale price was set by the Secretary and reflected the value of the
land prior to construction of the reclamation projects, thus removing a windfall to those who had
acquired large landholdings before an irrigation project was completed. In exchange, during the
ten years prior to sale, the excess land could receive project water.
These three restrictions are evidence that:
[f]rom the beginning of the federal reclamation program in 1902, the policy as
declared by the Congress has been one requiring that the benefits therefrom be
made available to the largest number of people, consistent, of course, with the
public good. This policy has been accomplished by limiting the quantity of land
in a single ownership to which project water might be supplied. It has been
applied to public land opened up for entry under the reclamation law as well as
privately owned lands, which might receive project water.
Ivanhoe, 357 U.S. at 292, 78 S. Ct. at 1184. There is no question that the Reclamation Act "was
designed to benefit people, not land." Id. at 297, 78 S.Ct. at 1186.
Originally, the Department of the Interior was given responsibility not only for
constructing the reclamation projects, but also for administering the distribution of water to
agricultural users in a project service area. In 1926, however, Congress amended the reclamation
laws to remove from the Department the primary responsibility for distributing water and
monitoring its use. Omnibus Adjustment Act § 46, 43 U.S.C. § 423e. Instead, the Secretary of
the Interior was directed to enter into long-term water service contracts with irrigation districts
organized under state law. It was left to the individual districts to execute subcontracts with the
actual users of water and to deliver the water. Under this arrangement, the water districts, rather
than the United States, had responsibility for ensuring that recipients of project water were
complying with federal reclamation law, including the acreage limitation and excess-land sale
requirement. See Tulare, 535 F.2d at 1094.
Although the Reclamation Act of 1902 had originally intended to recoup the costs of
constructing and operating the projects through the sale of federally owned western lands, see 43
U.S.C. § 391, almost immediately the funds proved inadequate, and Congress had to restructure
the program's financing. In a series of amendments to the Act, Congress provided that a portion
of the capital costs of the projects, as well as a portion of their operating and maintenance costs,
would be charged to the users. See 43 U.S.C. § 492 (enacted in 1914); 43 U.S.C. § 493 (enacted
in 1924); 43 U.S.C. §§ 423e & 423f (enacted in 1926). However, Congress did not expect to
recover all of the construction costs, nor did it expect to recover interest on any of the costs the
federal government had incurred. For example, in the case of the Central Valley Project, it was
recognized from the outset that the irrigation water payments would be insufficient to return
10
The 1926 amendment was preceded by a 1914 amendment which provided: "[T]he
Secretary of the Interior shall require the owners of private lands [receiving water from a
reclamation project] to agree to dispose of all lands in excess of the area which he shall deem
sufficient for support of a family on the land in question. . . ." 43 U.S.C. § 418 (1982) (emphasis
added).
1
2
more than a fraction of the allocated construction costs. See City of Fresno v. California, 372
U.S. 627, 631, 83 S. Ct. 996, 998, 10 L.Ed.2d 28 (1963).
The Department's practice of entering into long-term contracts at fixed rates only
highlighted the fact that the projects were incapable of paying for themselves. By 1982, the
Congressional Budget Office calculated that the United States would in the next five years spend
roughly $3.8 billion on Bureau of Reclamation water projects, but would recoup only $275
million as a result of existing reclamation repayment policies. 128 Cong. Rec. 8318 (daily ed.
July 15, 1982) (statement of Sen. Proxmire).
As the program has been administered by the Department of the Interior over the course
of this century, it has become clear that this vast federal subsidy has been flowing to many
farming operations which in no way resemble the small. family-owned farms envisioned by the
enacting Congress. Although observers were optimistic during the early years of the project
about the program's ability to break up large landholdings and the Department's willingness to
enforce eligibility requirements, see Taylor, Imperial Valley, supra note 8, at 126, by the 1950s
the water districts and the farming interests had found ways to circumvent the 160-acre limitation
and the forced sale provision.
One of the primary means for avoiding these two eligibility requirements of the
reclamation law was the practice of leasing.11 See 128 Cong. Rec. 16,596 (1982) (statement of
Sen. Exon) ("Leasing has historically been one of the principal devices used by large landowners
for avoiding the acreage limitations in the past."). The reclamation laws themselves made no
mention of whether leased lands were or were not entitled to receive reclamation water; the laws
only provided that reclamation water could not go to any lands in common ownership in excess
of 160 acres. The water service contracts that the Bureau entered into with the water districts
tracked the language of the 1902 Act and thus did not include any reference to leased lands.
Because the water service contracts permitted the water districts to purchase as much water as
needed for eligible lands within their districts and allowed the water districts to determine which
lands were eligible, water districts bought far more water than could be used by 160-acre,
family-owned farms in their service areas. The excess water was provided by the water districts
to farms whose lands held in common ownership did not exceed the 160-acre limitation, but
whose operators also controlled leased lands of many thousands of acres. Although the
Department of the Interior was aware that unlimited leasing was being used to circumvent the
160-acre limitation, it took no action to prevent the practice.12 As to the residency requirement,
the Department ignored it altogether after 1926.13
11
Technically ineligible lands also could receive reclamation water by sinking wells into
the underground water supply into which much of the reclamation water ultimately flowed. See
Taylor, Excess Land Law: Calculated Circumvention, 52 Calif. L. Rev. 978, 987-89 (1964).
12
The Bureau did ban leaseback arrangements, the most "flagrant use of leases to
circumvent the excess land provisions of the law." Huffaker & Gardner, The "Hammer" Clause
of the Reclamation Reform Act of 1982, 26 Nat. Resources J. 41, 59 (1986).
13
See also Kelley, Acreage and Residency Limitations in the Imperial Valley: A Case Study
in National Reclamation Policy, 23 S.D. L. Rev. 621, 622 (1978).
1
3
The "leasing loophole" was freely exploited by the water districts and large farming
operations for many decades. By 1981, it was clear that the original blueprint for the
development of the western lands embodied in the reclamation laws had not been met and had, in
fact, become obsolete. The 160-acre family-owned farm was no longer an efficient, or even
viable, means of farming in the West. See S. Rep. No. 973-73, 97th Cong., 2d Sess. 9 (1982),
U.S. Code Cong. & Admin. News 1982, pp. 2570, 2573. Moreover, only a fraction of the farms
actually receiving reclamation water were of that size. By 1981, only 23% of the land receiving
federal reclamation project water was farmed in operations of 160 acres or less. 128 Cong. Rec.
16,599 (1982) (document submitted by Sen. Exon). Three percent of the farming operations
receiving reclamation benefits controlled 30% of all of the irrigated lands in the program. 128
Cong. Rec. 16,421 (1982) (statement of Sen. Proxmire). The largest farms, which comprised
20% of the irrigated acreage in the program, averaged 3,721 irrigable acres. 128 Cong. Rec.
16,599 (1982). The greatest individual beneficiaries of the practice of unlimited leasing were
large corporate farming operations located in California's San Joaquin Valley. 128 Cong. Rec.
8810 (1982) (statement of Rep. Weaver).
The federal subsidy to these large farming operations was enormous. The contract price
of water delivered to the Water Districts ranged from $2.00 to $7.50 per acre foot. In contrast,
the actual cost to the United States of providing this water was between $8.43 and $55.61. The
value of the water subsidy provided to Southern Pacific Land Company alone was estimated at
$6 million per year. 125 Cong. Rec. 24,342 (1979) (statement of Sen. Nelson). In this litigation,
the Department of the Interior has calculated the average present value of the irrigation subsidy
for recipients of water from the Central Valley Project to be $1,850 per acre.
In 1977, in response to a preliminary injunction ordering the Bureau of Reclamation to
promulgate rules to implement the acreage limitation and excess land provisions, see National
Land for People, Inc. v. Bureau of Reclamation, 417 F. Supp. 449 (D.D.C. 1976), the
Department of Interior moved to close the leased land loophole. Its proposed rule stated that
"[n]o person or legal entity shall be entitled to lease more than 160 acres of land served by
federal water provided pursuant to the reclamation laws." 42 Fed. Reg 43,044, 43,047 (1977).
Those regulations never went into effect, however, because they were superseded by Congress's
enactment of the Reclamation Reform Act of 1982.
With the Reclamation Reform Act, Congress redefined completely who could receive
subsidized reclamation water and the price they would pay. The price charged for reclamation
water was increased to keep in line with increased operating and maintenance costs. At the same
time, the 160-acre limitation was discarded as incompatible with modern farming practices. In
its place, Congress authorized the sale of project water at the new, though still subsidized rates to
"qualified recipients" for landholdings up to 960 acres and to "limited recipients" for
landholdings up to 320 acres. 43 U.S.C. § 390ee(a). Qualified recipients include individual
citizens, resident aliens, and "any legal entity established under State or Federal law which
benefits twenty-five natural persons or less." 43 U.S.C. § 390bb(9). Limited recipients are legal
entities that benefit more than 25 natural persons. 43 U.S.C. § 390bb(7). This change results in
a sixfold expansion of the acreage limitation for qualified recipients, and a twofold expansion for
limited recipients.
1
4
As part of the Reclamation Reform Act, Congress closed the "leasing loophole." The
RRA now defines a landholding as the "total irrigable acreage of one or more tracts of land
situated in one or more districts owned or operated under a lease which is served with irrigation
water pursuant to a contract with the Secretary." 43 U.S.C. § 390bb(6). Although the Act does
not bar the Department of Interior from providing water altogether to qualified recipients for use
on leased lands that exceed the 960-acre limitation, the recipients are required to pay the "full
cost" for any such water. 43 U.S.C. § 390ee(a). Finally, the Act eliminates the never enforced
residency requirement. 43 U.S.C. § 390kk.
In these cases, the Water Districts challenge the constitutionality of section 203(b) of the
Act, the so-called "hammer clause." 43 U.S.C. § 390cc(a) and (b).14 Section 203(b) gives the
Water Districts the option of amending preexisting contracts to conform to the RRA's new
provisions, the most important of which are: the increased 960acre limitation and the decreased
subsidy for reclamation water. Those water districts that decline to exercise this option within
the time prescribed may continue to receive water at the original contract price for delivery to
land held in common ownership that does not exceed the 160-acre limit, but must pay "full cost"
for any water delivered to leased landholdings of more than one hundred and sixty acres. All of
the plaintiff Water Districts in this suit declined to amend their contracts and brought suit in
federal court, claiming that the "hammer clause" violated the due process and taking clauses of
the fifth amendment of the Constitution.15
14
Sections 390cc(a) and (b) provide:
New or amended contracts.
(a) Generally. The provisions of this subchapter shall be applicable to any
district which— . . . (3) which amends its contract for the purpose of
conforming to the provisions of this subchapter.
(b) Amendment of existing contracts. Any district which has an existing
contract with the Secretary as of October 12, 1982, which does not enter
into an amendment of such contract as specified in subsection (a) of this
section shall be subject to Federal reclamation law in effect immediately
prior to October 12, 1982, as that law is amended or supplemented by
sections 209 through 230 of this title [43 U.S.C.A. §§ 390ii to 390zz1,
373a, 422e, 425b, 485h]. Within a district that does not enter into an
amendment of its contract with the Secretary within four and one-half
years of October 12, 1982, irrigation water may be delivered to lands
leased in excess of a landholding of one hundred and sixty acres only if
full cost, as defined in section 390bb(3)(A) of this title, is paid for such
water as is assignable to those lands leased in excess of such landholding
of one hundred and sixty acres: Provided, That the interest rate used in
computing full cost under this subsection shall be the same as provided in
section 390ee(a)(3) of this title. (emphasis added).
15
The Water Districts do not make a claim under the contract clause, article I, section 10, of
the Constitution. It is settled law that the contract clause applies only to the several states and
1
5
III
The first step in both due process and taking analyses is to determine whether there is a
property right that is protected by the Constitution. See, e.g., Bowen v. Public Agencies Opposed
to Social Security Entrapment ("Public Agencies"), 477 U.S. 41, 54-55, 106 S. Ct. 2390, 239798, 91 L.Ed.2d 35 (1986); F.H.A. v. The Darlington, Inc., 358 U.S. 84, 91, 79 S. Ct. 141, 146, 3
L.Ed.2d 132 (1958). In Public Agencies, a taking case, the Court held that the contractual right
at issue "did not rise to the level of 'property'" and "[could] not be viewed as conferring any sort
of 'vested right.'" 477 U.S. at 55, 106 S. Ct. at 2398. Without a property right, there could be no
"taking within the meaning of the Fifth Amendment." Id. at 55-56, 106 S. Ct. at 2398.
The Water Districts maintain that as a result of the water contracts they have power to
enter contracts that confer vested rights, and the concomitant duty to honor those rights." Public
Agencies, 477 U.S. at 52, 106 S. Ct. at 2396-97 (citations omitted). Nonetheless, when
interpreting the federal government's contractual agreements, we are guided by three paramount
principles: First, "'sovereign power, even when unexercised, is an enduring presence that
governs all contracts subject to the sovereign's jurisdiction, and will remain intact unless
surrendered in unmistakable terms.'" Id. (quoting Merrion v. Jicarilla Apache Tribe, 455 U.S.
130, 148, 102 S. Ct. 894, 907, 71 L.Ed.2d 21 (1982) (emphasis added)). Thus, "contractual
arrangements, including those to which a sovereign itself is party, 'remain subject to subsequent
legislation' by the sovereign." Id. at 52, 106 S. Ct. at 2397 (citations omitted). Second,
governmental contracts "should be construed, if possible, to avoid foreclosing exercise of
sovereign authority." Id. at 52-53, 106 S. Ct. at 2397. Third, governmental contracts should be
interpreted against the backdrop of the legislative scheme that authorized them, and our
interpretation of ambiguous terms or implied covenants can only be made in light of the policies
underlying the controlling legislation. See Darlington, 358 U.S. at 87-88, 79 S.Ct. at 144.
With these principles in mind, we consider the Water Districts' claim to a vested
contractual right to receive water at the subsidized rate to deliver to leased tracts of more than
160 acres. The Water Districts' argument in support of this right proceeds along two tracks.
First, the Water Districts contend that because Congress did not include in the Act an express
provision reserving to Congress the right to amend the reclamation law's eligibility requirements,
Congress's right to amend the water service contracts is limited. Second, the Water Districts
argue that absent an express reservation of the right to amend the contracts in the controlling
legislation itself, we look only to the language of the contracts themselves. The Water Districts
claim that their contracts must be interpreted (1) as giving them an implied right to deliver
subsidized water to leased tracts of any size, and (2) as including an express waiver by Congress
of its right to amend the contracts without the Water Districts' consent.
A
not to the federal government. Pension Benefit Guar. Corp. v. R.A. Gray & Co., 467 U.S. 717,
732 n.9, 104 S. Ct. 2709, 2719 n.9, 81 L.Ed.2d 601 (1984).
1
6
We consider first the Water Districts' argument that Congress was required to reserve
expressly the right to amend the reclamation law in the body of the statute itself. Although it is
true that there is no express provision in the statutory scheme retaining Congress's ability to
amend, alter or repeal the provisions of the Reclamation Act, this silence cannot be construed as
a waiver of any of Congress's powers. The sovereign's power to enact subsequent legislation
affecting its own contractual arrangements endures, albeit with some limitations, unless
"surrendered in unmistakable terms." Public Agencies, 477 U.S. at 52, 106 S. Ct. at 2397.16
It is true that a line of cases, beginning with the Sinking Fund Cases, 99 U.S. 700, 25 L.
Ed. 496, 504 (1878), upholding legislation altering or repudiating the provisions of a government
contract, has relied on the fact that the original statute included language reserving Congress's
right to repeal, alter, or amend the act at any time. Public Agencies, 477 U.S. at 53 54, 106 S. Ct.
at 2397; National R.R. Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Co., 470 U.S. 451,
46769, 105 S. Ct. 1441, 1452-53, 84 L.Ed.2d 432 (1985); SinkingFund Cases, 99 U.S. at 720.
As the Supreme Court explained in those cases: "Congress not only retains, but has given
special notice of its intention to retain, full and complete power to make such alterations and
amendments . . . as come within the just scope of legislative power." Sinking Fund Cases, 99
U.S. at 720. However, nothing in those cases suggests that it is an absolute requirement that
Congress expressly reserve in the controlling statute the right to amend the statute or
governmental contracts entered under it. Rather, in the SinkingFund line of cases, the express
reservation was simply deemed dispositive of the plaintiffs' claims that Congress could not
amend their contracts. There is no indication that the cases would have been decided differently
had the statutes been silent on this issue. In light of the fundamental principle that Congress
always has the power to amend, repeal or ignore legislation passed by earlier congresses, . . . that
Congress has yielded such power is entirely inconsistent with the requirement that Congress give
notice in regulatory legislation that the regulations are subject to change. Public Agencies, 477
U.S. at 52, 106 S. Ct. at 2397.
B
Nonetheless, we agree with the Water Districts that the absence of any express statement
in the Reclamation Act of 1902 (and its amendments prior to 1982) requires us to examine the
water service contracts to determine whether Congress surrendered in clear and absolute
language its right to impose express limitations on the size of leased tracts that could receive
reclamation water.
16
The exercise of the "reserved power" is not absolute. The Court has recognized that
Congress's power in this respect "'has a limit' in that Congress could not rely on that power to
'take away property already acquired under the operation of the charter, or to deprive the
corporation of the fruits actually reduced to possession of contracts lawfully made.'" Public
Agencies, 477 U.S. at 55, 106 S. Ct. at 2398 (quoting Sinking Fund Cases, 99 U.S. 700, 720, 25
L. Ed. 496, 504 (1878)). Similarly, Congress does not have "the power to repudiate its own
debts, . . . simply in order to save money." Id. at 55, 106 S. Ct. at 2398 (citing Perry v. United
States, 294 U.S. 330, 350-51, 55 S. Ct. 432, 435, 79 L. Ed. 912 (1935); Lynch v. United States,
292 U.S. 571, 576-77, 54 S. Ct. 840, 842, 78 L. Ed. 1434 (1934)).
1
7
We now address the Water Districts' argument that the contract language itself gives the
Water Districts a vested right to deliver subsidized water to leased tracts of any size and contains
an express waiver of Congress's power to amend the reclamation law in any way that interferes
with that right. The specific contractual provisions that form the basis of the Water Districts'
claim vary slightly in each contract. The following portions of the Lower Tule River Irrigation
District water service contract, however, are exemplary of those provisions:
Article 2. This contract shall be effective from the date first herein-above written
and shall remain in effect for a period of forty (40) years. . . .
Article 5(a). The contracting officer will, on or before February 15 of each
calendar year, by written notice, notify the District of the rates of payment to be
made by the District for all water to be delivered to it pursuant to this contract
during the ensuing year, but in no event shall the rates so announced be in excess
of three dollars and fifty cents ($3.50) per acre foot for Class 1 water and one
dollar and fifty cents ($1.50) per acre foot for Class 2 water.
Article 7(f). The right to the beneficial use of water furnished to the District
pursuant to the terms of Article 3 and other applicable provisions of this contract
and any renewal thereof shall not be disturbed so long as the District shall fulfill
all of its obligations under this contract and any renewal thereof.
Article 18(a). No water made available pursuant to this contract shall be
furnished to any excess lands as defined in Article 20 hereof unless the owners
thereof shall have executed valid recordable contracts in form prescribed by the
United States. . . .
Article 20(a). As used herein the term "excess land" means that part of the
irrigable land within the District in excess of one hundred and sixty (160) acres
held in the beneficial ownership of any private individual, whether a natural
person or a corporation.
Article 21. In the event that the Congress of the United States repeals the socalled excess-land provisions of the Federal reclamation laws, Articles 18, 19, and
20 of this contract will no longer be of any force or effect, and, in the event that
the Congress amends the excess-land provisions or other provisions of the Federal
reclamation laws the United States agrees, at the option of the District, to
negotiate amendments of appropriate articles of this contract, all consistently with
the provision of such repeal or amendment.
The Water Districts claim that because Article 18(a) contains only one express restriction
on the type of land that can receive project water, and that restriction applies only to land in
excess of 160 acres held "in common ownership," their contracts with the Bureau give them an
implied right to deliver water to farms of any size, as long as the farms are leased instead of
owned. Thus, while acknowledging that they are expressly forbidden from delivering project
water to forty acres of a 200 acre family-owned farm, the Water Districts contend that Articles
18(a) and 20(a), when read together, give them an implied right to deliver subsidized water to
1
8
lands leased by large corporations that consist of hundreds of thousands of acres. As further
support for their claim to an implied right to the water, the Water Districts point to Article 21's
statement that "the United States agrees, at the option of the District, to negotiate amendments of
appropriate articles of this contract," which the Water Districts construe as an express
relinquishment by the United States of its ability to interfere with this implied right.
We read the contracts differently. The Water Districts concede, as they must, that the
contracts do not expressly authorize the delivery of water to leased tracts. Instead, the Water
Districts proceed on the theory that it is implicit in the terms of their contract that they can
provide reclamation water without limit to leased tracts and that Congress will not interfere with
this implied right. On this basis, they claim to have a vested contractual right to continue to
deliver subsidized water to leaseholds of any size, a right allegedly impaired by section 203(b).
We take a different view. As the Supreme Court has stated when reviewing a similar claim to a
vested right based on an implied contractual provision, the Water Districts' claim "lies in the
periphery where vested rights do not attach." Darlington, 358 U.S. at 90, 79 S. Ct. at 146.
The Supreme Court considered and rejected a similar due process claim to an implied
contractual right against the government in Darlington, and its analysis controls. Darlington
involved another federal subsidy, a mortgage insurance program embodied in the 1942 National
Housing Act, 56 Stat. 303, 12 U.S.C. § 1743, as amended by § 10 of the Veterans' Emergency
Housing Act of 1946, 60 Stat. 207, 214, and the regulations issued thereunder. Congress enacted
the program with the aim of making housing more accessible to veterans and their families. A
corporation, which had entered into a federal contract to obtain mortgage insurance, rented
apartments to transients, a use not expressly prohibited by the contract, controlling statute, or
regulations promulgated thereunder. In fact, the only relevant requirement in force at the time
the mortgage insurance contract was entered into was that the property be "designed principally
for residential use." 358 U.S. at 85, 79 S. Ct. at 143 (quotation omitted). Five years later,
Congress enacted legislation expressly barring the rental of such housing units to transients. The
corporation sued, asserting that the amendment amounted to an unconstitutional infringement of
its contractual rights.
To determine whether a right to rent to transients could fairly be implied in the contracts,
the Court turned to the legislation that had authorized the contracts. Review of the controlling
statute, the National Housing Act, convinced the Court that the "legislation [was] passed to aid
veterans and their families, not . . . to promote the hotel or motel business." Id. at 87, 79 S. Ct. at
144 (footnote omitted). Congress's intention that the mortgaged properties be rented only as
permanent dwellings pervaded the Committee reports and other legislative history, although the
requirement was never made expressly. Because the legislative purpose of the Act was to
provide permanent homes for families, and in particular, for veterans and their families, the
Court declined to hold that the plaintiff had an implicit right to engage in conduct that did not
serve that purpose. The Court rejected the argument advanced by the dissent that Darlington's
contract gave it a vested right to make rentals to any persons and in any manner that was not
expressly prohibited by the statute or contract. Id. at 95, 79 S. Ct. at 147 (Harlan, J., dissenting).
Instead, the Court concluded that "[t]hose who do business in the regulated field cannot object if
the legislative scheme is buttressed by subsequent amendments to achieve the legislative end."
Id. at 91, 79 S. Ct. at 146. By passing legislation barring rentals to transients, Congress was
1
9
simply making explicit the policy underlying the legislation, thus "doing no more than protecting
the regulatory system which it had designed." Id.
The similarities between the Water Districts' claim in this case and the claim rejected in
Darlington are striking. The Water Districts contend that because they were not expressly
prohibited by the Department in their contracts from providing water to leased land, they have a
contractual right to do so which must be considered "vested" or immune from later regulations or
statutory amendments. This argument was squarely rejected in Darlington as insufficient ground
on which to base a claim to a vested right.
As in Darlington, the implied right asserted here clearly violates the spirit, if not the letter
of the reclamation laws which authorized such contracts. The reclamation projects were funded
by the federal government with the express intent that the subsidized water be used to promote
the development of family-owned farms. Prior to the RRA, Congress had always required that
land receiving reclamation water be owned in no larger than 160 acre parcels and that the owners
of the land occupy it or reside in the neighborhood. The fact that the Department of the Interior
ignored the residency requirement and turned a blind eye to the practice of large-scale leasing
does not lessen the importance of these restrictions in the congressional scheme. Nor did the
Department's lax enforcement policy over the years remove the ever-present possibility that
Congress would buttress the reclamation laws "by subsequent amendments to achieve [its
original] legislative end." Darlington, 358 U.S. at 91, 79 S. Ct. at 146.17
In sum, the fact that the reclamation laws had as their end the dismantling of large
landholdings in the West and the redistribution of that land to families, effectively undercuts the
Water Districts' argument that they were given an implied right to deliver the water to farms
regardless of size, as long as the land was not actually owned by the operator of the farm. To
find a vested contract right with these facts, we believe, would seriously impair Congress's
sovereign power to pass laws for the public welfare. Were we to accept the Water Districts'
argument, parties that enter into contracts with the government pursuant to such legislation could
claim vested rights to engage in all conduct not expressly forbidden in the contracts. We do not
believe that Congress must exhaustively proscribe conduct in a regulated field to prevent parties
from claiming an "implied vested right" to engage in conduct found by later Congresses to be
harmful to the public welfare.
Our rejection of the Water Districts' claim to a vested contract right finds further support
in the Supreme Court's decision in Public Agencies. In that case, California and several of its
public agencies brought suit against the United States, alleging a taking in violation of the fifth
amendment as a result of a 1983 amendment to the Social Security Act, repealing a state's right
17
The actions of the Department of the Interior are relevant, if at all, to an equitable
estoppel claim against the United States. Although we express no opinion as to whether
equitable estoppel could be invoked in this case because the Water Districts do not appeal the
district court's dismissal of their estoppel claim, we note that equitable estoppel is infrequently
applied against the government and then only in cases where there is "affirmative misconduct"
by the government. Wagner v. Director, Fed. Emergency Management Agency, 847 F.2d 515,
519 (9th Cir. 1988) (quotation omitted).
2
0
to terminate its participation in the Social Security system. Because California had previously
entered into an agreement with the federal government, which expressly provided that California
could withdraw from the system, California claimed that section 418(g), as amended, amounted
to a repudiation by the government of its contractual obligations.
The Supreme Court rejected this argument, reasoning: The termination provision in the
Agreement exactly tracked the language of the statute, conferring no right on the State beyond
that contained in § 418 itself. The provision constituted neither a debt of the United States, nor
an obligation of the United States to provide benefits under a contract for which the obligee paid
a monetary premium. The termination clause was not unique to this Agreement; nor was it a
term over which the State had any bargaining power or for which the State provided independent
consideration. Rather, the provision simply was part of a regulatory program over which
Congress retained authority to amend in the exercise of its power to provide for the general
welfare. 477 U.S. at 55, 106 S. Ct. at 2398 (citations omitted).
If anything, California had a greater claim to a vested right in Public Agencies than do the
Water Districts in this case because in Public Agencies the federal government had incorporated
in an agreement with the states an express promise that they could withdraw from the social
security system. Nonetheless, the Court held that the contracts created no interests that were
entitled to protection under the taking clause of the fifth amendment.
C
There is still an additional reason for not finding an implied vested right in the Water
Districts' contracts. The contracts contain no language that can be construed as a "surrender[] in
unmistakable terms" of the sovereign's ability to regulate the quantity of subsidized water that
may be provided to leased farm lands. Public Agencies, 477 U.S. at 52, 106 S.Ct. at 2397.
Article 21, which the Water Districts claim is a clear waiver of the federal government's
sovereign power, cannot be so interpreted, especially if we follow the Supreme Court's dictate
that governmental contracts "should be construed, if possible, to avoid foreclosing exercise of
sovereign authority." Id. at 5253, 106 S. Ct. at 2397.
Article 21 has two primary clauses. The first states that if Congress were to repeal the
excess land provisions of the federal reclamation law, then the contracts would be modified
automatically to eliminate related provisions in the contract. The second clause of Article 21
provides that if Congress amends the excess land provisions or any other aspect of the
reclamation law, the contracts will be modified "consistently with the provisions of such . . .
amendment," and "at the option of the District."
The Water Districts argue that these two clauses of Article 21 make the contracts
inviolable, absent a negotiated amendment between the parties. They claim that the two clauses
"expressly deprive the United States of the power to make subsequent amendments of the law
applicable to the contracts." We read Article 21 differently.
In our view, the clause granting the Districts the option of renegotiating their contracts
cannot reasonably be interpreted as a "surrender[] in unmistakable terms" of the sovereign's
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power to make changes in the federal reclamation laws. Id. at 53, 106 S. Ct. at 2397. Such an
interpretation would do violence to the principle that government contracts should be construed,
whenever possible, "to avoid foreclosing exercise of sovereign authority." Public Agencies, 477
U.S. at 53, 106 S. Ct. at 2397. In light of this principle, we believe that a more reasonable
interpretation of Article 21 is that it grants the Water Districts the option of renegotiating the
terms of their contracts to conform to Congress's amendments to the excess land provisions of
the reclamation law. This option does not, however, give the Water Districts the right to
continue to receive reclamation water under the terms of the preexisting contracts if those terms
violate the newly amended law.
As we read Article 21, the Water Districts have a choice between renegotiating their
contracts to bring them into conformity with the new law or withdrawing from the reclamation
program. In other words, the Water Districts have the option of continuing to receive
reclamation water but only under the terms of the new law. Thus, they can continue to receive
and deliver water to holdings up to 160 acres, whether owned or leased, at the low price
specified in their preexisting contracts, but they cannot continue to deliver water at the old price
to holdings in excess of 160 acres.
Although we acknowledge that the language of Article 21 is not entirely clear as to its
intended meaning, we believe that our reading of the ambiguous language is the only one that is
reasonable in light of the Supreme Court's command that we interpret government contracts,
whenever possible, to avoid foreclosing the exercise of sovereign authority. We also believe that
our interpretation is reasonable in light of Article 21's own requirement that in the event of
congressional amendment of the federal reclamation law, the Water Districts' actions must be
"consistent[] with the provision of such repeal or amendment."
D
The Water Districts urge yet another line of reasoning in their effort to establish a vested
property right in the contracts. They argue that they have a "reasonable investment-backed
expectation" to receive water at subsidized rates and that this expectation amounts to a property
interest that is protected by the fifth amendment. They claim that their expectation of subsidized
water was reasonable based upon the statutes then in effect and upon reasonable expectation that
they would continue to receive subsidized water for lands leased in excess of 160 acres.18
The Water Districts offer no authority for the proposition that a constitutionally protected
property interest can be spun out of the yarn of investment-backed expectations. Their reliance
upon Ruckelshaus v. Monsanto Co., 467 U.S. 986, 104 S. Ct. 2862, 81 L.Ed.2d 815 (1984) for
this argument is misplaced. Ruckelshaus is authority for the proposition that once a
constitutionally protected property interest is established, then a reasonable investment-backed
expectation is one of several factors to be taken into account "when determining whether a
governmental action has gone beyond 'regulation' and effects a 'taking.'" 467 U.S. at 1005, 104
S. Ct. at 2874. Whether a "taking" has occurred is the second step of the inquiry. Here, we do
18
Once again, the Water Districts' argument takes on the flavor of an equitable estoppel
claim against the government. See supra note 17.
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not reach that step because the Water Districts have failed to survive the first step, which is
establishing that a property right exists. Thus, the Water Districts' reliance on Ruckelshaus is
misplaced, leaving them with no support for the curious proposition that investment-backed
expectations can give rise to a constitutionally protected property interest.
E
In sum, because the Water Districts have no vested property right to buy reclamation
water for delivery to leased lands, the restrictions imposed by section 203(b) do "not effect a
taking within the meaning of the Fifth Amendment." Public Agencies, 477 U.S. at 56, 106 S.Ct.
at 2398. For the same reason, the Water Districts' due process claim also must fail. See
Darlington, 358 U.S. at 91, 79 S. Ct. at 146 ("The Constitution is concerned with practical,
substantial rights, not with those that are unclear and gain hold by subtle and involved
reasoning."). In the absence of a vested property right, the Water Districts can prevail on their
due process claim only if they establish that section 203(b) is arbitrary and irrational. See
Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 729, 104 S. Ct. 2709, 2717,
81 L.Ed.2d 601 (1984). This they have failed to do.
We agree with the district court that section 203(b) of the Reclamation Reform Act is
rationally related to a legitimate governmental purpose. The provisions of the Act, and its
legislative history,19 clearly demonstrate that Congress's primary concerns were not with the
federal budget,20 but rather, with the promotion of small farming operations, equitable
distribution of water under modern farming conditions, and water conservation.
To these ends, Congress increased the size of farms that could receive reclamation water
to 960 acres (whether leased or owned) and raised the price of reclamation water to reflect more
accurately its true cost to the government. Section 203(b) authorized the Water Districts to
amend their contracts to take advantage of the 960-acre limitation, albeit at a potentially higher,
but still subsidized, rate than that provided in their contracts. The Water Districts were not
required to amend their contracts because any water district that wanted to maintain the 160-acre
limitation and lower contract price was left free to do so. Section 203(b), the so-called hammer
clause, simply provided that those who elected to continue under the original contracts could no
19
See, e.g., 128 Cong. Rec. 8809 (1982) (statement of Rep. Clausen) ("The hope of the
committee is that upward revision of the acreage limitation will enhance the economic viability
and productivity of the modern family farm. . . ."); H.R. Rep. No. 458, 97th Cong., 2d Sess. 34
(1982) (statement of Rep. Miller) (Reforms "will reduce unjustified taxpayer subsidies to large
scale farmers while preserving benefits to the intended beneficiaries of the Reclamation
program—the small farmer.").
20
The due process clause prevents Congress from "repudiat[ing] its own debts . . . simply in
order to save money" and also from modifying an existing contract to which the United States is
a party if the legislation deprives the other party of contract benefits "actually reduced to
possession." Public Agencies, 477 U.S. at 55, 106 S.Ct. at 2398 (quotations omitted). Neither
exception is applicable here.
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longer continue to deliver subsidized water to leased tracts of any size. Section 203(b) requires
the Water Districts to choose between continuing under previous federal water policy, but
without the "leasing loophole" tolerated by the Department of the Interior, or conforming with
the new 960acre limitation of the RRA. In our opinion, section 203(b) is a reasonable way for
Congress to further its federal reclamation policy of promoting small farming operations,
equitable distribution of water, and water conservation.
The summary judgment in favor of the government and the Natural Resources Defense
Council is
AFFIRMED.
MADERA IRRIGATION DISTRICT v. HANCOCK
985 F.2d 1397 (9th Cir. 1993)
KLEINFELD, Circuit Judge:
Madera Irrigation District sued for a declaratory judgment and injunction, to prevent the
United States from changing the terms of its water purchases when Madera renewed its contract.
The district court dismissed for failure to state a claim. We conclude that the government has the
power to impose the particular requirements at issue, and affirm.
I. Facts.
In 1939, Madera Irrigation District sold land and San Joaquin River water rights to the
United States. As part of the consideration, the United States promised to build the Friant Dam
and the Madera Canal and enter into contracts, when the project was completed, to sell Madera a
permanent supply of 270,000 acre feet of water annually. The parties agreed that "it is not
possible at this time to fix a price to be paid by the District for said water, but the United States
agrees that the cost of said water to the District shall not exceed charges made to others than the
District for the same class of water and service from the said Friant Dam and Reservoir."
Contract for Purchase of Property and Water Rights at 13 (May 24, 1939) [hereinafter the "1939
Contract"].
In 1951, when construction was done, Madera and the government entered into a forty
year contract for purchase and sale of water. They agreed upon a "permanent" supply, but a
contract term of forty years. Prices were limited to no more than $3.50 per acre-foot for "class
one water," a dependable supply out of the first 800,000 acre feet from the project, and $1.50 for
"class two water," a residue to be supplied if available but which was not expected to be as
dependable. Under the 1951 contract and "under succeeding contracts the rates to be charged the
District for water service shall not exceed charges made to others than the District for the same
class of water and service from Friant Dam and Reservoir." Contract Between the United States
and the Madera Irrigation District for Water Service and Construction of a Distribution System at
9 (May 14, 1951) [hereinafter the "1951 Contract"]. The 1951 Contract provided that "the
executory portions of the 1939 contract . . . shall remain in full force and effect." Id. at 8.
As the end of the forty year term approached, the parties began negotiation of the
renewals. The irrigation district claims that two provisions in the proposed new contract violate
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its rights under the previous contracts. First, the government insists upon an addition to the rate
in the renewal contract of an amount which would recoup the excess of operation and
maintenance costs under the 1951 contract over the rates charged during that forty year term.
Second, the government insists upon a term in the renewal contract which might require an
environmental impact statement and Endangered Species Act consultation, with possible
subsequent modifications to the contract.
The dates illuminate the issues. When Madera transferred its land and its water rights to
the federal government, federal policy favored reclaiming desert land for agriculture by
subsidizing irrigation water, to settle the West and create a class of independent family farmers.
See Peterson v. U.S. Dep't. Interior, 899 F.2d 799, 802-807 (9th Cir.), cert. denied, 498 U.S.
1003, 111 S. Ct. 567, 112 L. Ed. 2d 574 (1990); Barcellos and Wolfsen, Inc. v. Westlands Water
Dist., 899 F.2d 814 (9th Cir.), cert. denied, 498 U.S. 998, 112 L. Ed. 2d 562, 111 S. Ct. 555
(1990); United States v. Tulare Lake Canal Co., 535 F.2d 1093, 1119 (9th Cir. 1976), cert.
denied, 429 U.S. 1121, 51 L. Ed. 2d 571, 97 S. Ct. 1156 (1977). As the Great Depression
lingered in the late 1930's, Congress and the President may have been more concerned with
expanding economic opportunity than avoiding subsidy. Nothing like the National
Environmental Policy Act or Endangered Species Act were in the law in 1902 when the
Reclamation Act became the law, or 1939 when Madera traded its land and water rights for
government promises.
Congress can change federal policy, but it cannot write on a blank slate. The old policies
deposit a moraine of contracts, conveyances, expectations and investments. Lives, families,
businesses, and towns are built on the basis of the old policies. When Congress changes course,
its flexibility is limited by those interests created under the old policies which enjoy legal
protection. Fairness toward those who relied on continuation of past policies cuts toward
protection. Flexibility, so that government can adapt to changing conditions and changing
majority preferences, cuts against. Expectations reasonably based upon constitutionally
protected property rights are protected against policy changes by the Fifth Amendment. Those
based only on economic and political predictions, not property rights, are not protected. Our task
is to determine whether the renewal provisions insisted upon by the government violated
Madera's Fifth Amendment property rights.
We review de novo dismissal of an action for failure to state a claim, treating the
averments of the complaint as though they were established to test whether, if true, the claim
would entitle the plaintiff to relief. Abbott Bldg. Corp. v. United States, 951 F.2d 191, 195 n.8
(9th Cir. 1991).
II. Operation and Maintenance Costs
The irrigation districts claim that the change in the price term, to recover maintenance
and operation costs which were not charged in the 1951-1991 period, is improperly retroactive.
The government insists upon a provision in the renewal contract which would recover with
interest the subsidy in operations and maintenance costs accumulated during the old forty year
contract. In so doing, the executive branch is carrying out a policy enunciated by Congress.
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Congress passed a statute requiring the recoupment for Central Valley Project irrigation districts
such as Madera:
The Secretary of the Interior shall include in each new or amended contract for the
delivery of water from the Central Valley project provisions ensuring that any annual
deficit (outstanding or hereafter arising) incurred by a Central Valley project water
contractor in the payment of operation and maintenance costs of the Central Valley
project is repaid by such contractor under the terms of such new or amended contract,
together with interest on any such deficit which arises on or after October 1, 1985 . . . .
Water Resource and Small Reclamation Projects Act, Pub. L. No. 99-546, § 106, 100 Stat. 3050,
3052 (1986).
Madera was entitled to buy water for a maximum of $3.50 and $1.50 per acre-foot under
its 1951 contract. The government conditions renewal on payment during the renewal contract
of millions of dollars for operation and maintenance costs incurred during the 1951 contract
term. The effect, as Madera sees it, is that it will be paying more than the $3.50 and $1.50 price
ceilings for its water purchased under the 1951 contract.
Madera argues that the charges cannot be imposed, for two reasons. First, it had and has
a contractual right to pay no more than $3.50 and $1.50 per acre-foot for water under the 1951
contract, and the charges retroactively require it to pay more. Second, it has a contractual right
to pay no more for water than other districts, and the charges would cause its price to be higher
than that charged to other districts. Madera does not dispute that Congress has adopted a policy
which requires recovery of operations and maintenance costs with interest, and does not urge any
construction of the Central Valley Project statute which would exclude Madera's renewal
contract from its operation.
We accept Madera's general proposition that a valid contract right of an irrigation district
against the United States is property protected by the Fifth Amendment. Lynch v. United States,
292 U.S. 571, 579, 78 L. Ed. 1434, 54 S. Ct. 840 (1934); see Ruckelshaus v. Monsanto Co., 467
U.S. 986, 1003, 81 L. Ed. 2d 815, 104 S. Ct. 2862 (1984). Rights against the United States
arising out of a contract are property rights protected from deprivation or impairment by the Fifth
Amendment. Barcellos and Wolfsen, Inc. v. Westlands Water District, 899 F.2d 814, 821 (9th
Cir. 1990). The Due Process Clause limits the exercise of sovereign power which would impair
obligations under government contracts. Alpine Ridge Group v. Kemp, 955 F.2d 1382, 1387 (9th
Cir.), cert. granted, 113 S. Ct. 490, 121 L. Ed. 2d 429 (1992). To demonstrate a wrongful taking
or impairment, Madera must establish that it has cognizable property rights arising out of its
contracts with the government, and that the government has abrogated its contractual rights.
National Railroad Passenger Corp. v. Atchison, Topeka & Santa Fe Ry. Corp., 470 U.S. 451,
472, 84 L. Ed. 2d 432, 105 S. Ct. 1441 (1985); Barcellos and Wolfsen, 899 F.2d at 821.
Two general principles constrain our interpretation. First, we must "construe legislation
in a constitutional manner 'if fairly possible.'" Knapp v. Cardwell, 667 F.2d 1253, 1260 (9th
Cir.) (quoting Crowell v. Benson, 285 U.S. 22, 62, 76 L. Ed. 598, 52 S. Ct. 285 (1932)), cert.
denied, 459 U.S. 1055, 74 L. Ed. 2d 621, 103 S. Ct. 473 (1982). Second, we must construe a
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contract with the government to avoid, if possible, foreclosing the exercise of sovereign
authority. Sovereign power "'will remain intact unless surrendered in unmistakable terms.'"
Bowen v. Public Agencies Opposed to Social Security Entrapment, 477 U.S. 41, 52, 91 L. Ed. 2d
35, 106 S. Ct. 2390 (1986) (quoting Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 148, 71 L.
Ed. 2d 21, 102 S. Ct. 894 (1982)); Peterson v. U.S. Dep't of Interior, 899 F.2d 799, 807 (9th
Cir.), cert. denied, 498 U.S. 1003, 111 S. Ct. 567, 112 L. Ed. 2d 574 (1990). These two
principles compel a construction somewhat more liberal toward the government than might be
appropriate were the contract a purely private transaction. They enable it to change, not just
execute past policies. But too liberal an interpretation of the residual sovereign power of the
government to override its contractual commitments would eviscerate the government's power to
bind itself to contracts. In addition to the moral offensiveness of allowing the government to
break its promises, too liberal a construction would have the paradoxical consequence of
weakening the sovereign power to implement policy. See Perry v. United States, 294 U.S. 330,
351-54, 79 L. Ed. 912, 55 S. Ct. 432 (1935). If the government's commitments need not be
honored, then it can induce responses to policies only by cash or coercion.
A. Right to Renewal.
The government offers a broad justification for the operation and maintenance charges
and all the other changes at issue which we cannot accept. It urges that Madera had no renewal
right under the 1951 contract, so the government was free to offer renewal on any terms. We
cannot reconcile that with the terms of the 1939 and 1951 contracts. Madera did not exchange its
land and its water rights for a forty year supply of water. It exchanged them, as its 1951 contract
recites, for a "permanent" supply of water. Section 4 of the 1951 contract expressly provided for
renewal at the expiration of the forty year term and terms for the "succeeding contracts":
The executory portions of the 1939 contract . . . remain and shall remain in full force and
effect, and the parties, upon the expiration of the term of Part A hereof, shall be entitled
to all of the rights conferred upon them by article 14 of the 1939 contract and shall be
subject to all of the terms and conditions of said article except as the aforesaid 1939
contract may be abrogated or amended by specific reference thereto and mutual
agreement of the parties: . . . . Under this Part A and under succeeding contracts the rates
to be charged the District for water service shall not exceed charges made to others than
the District for the same class of water and service from Friant Dam and Reservoir.
1951 Contract at 8-9. Section 14 of the 1939 contract provided, inter alia, for future purchases
of water:
(e) Whenever the United States shall be prepared to furnish service for irrigation or other
purposes from Friant Reservoir . . ., the United States shall notify the District in writing
relative to the availability and character of such service, and shall define the classes and
quantities of service then and thereafter to be made available and the respective prices
and methods of payment therefor. The District shall have six (6) months from the date of
receipt of said notice within which to contract for the purchase of water on the basis of
the classes and quantities of service so offered to the District; provided, that, having due
regard for the District's procedure required or expedient in negotiating for and securing
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approval of such contract, the Secretary may grant such extensions of time as he deems
desirable. It is mutually understood between the parties hereto that it is not possible at
this time to fix a price to be paid by the District for said water, but the United States
agrees that the cost of said water to the District shall not exceed charges made to others
than the District for the same class of water and service from the said Friant Dam and
Reservoir.
1939 Contract at 13. Section 4 of the 1951 contract amended the 1939 contract, and as amended,
it expressly provides for renewals after the forty year term:
The District shall have six (6) months [after the termination of Part A (of the 1951
contract) and within six (6) months after the termination of each term provided for in
succeeding contracts] within which to contract for the purchase of water on the basis of
the classes and quantities of service so offered to the District; provided, that, having due
regard for the District's procedure required or expedient in negotiating for and securing
approval of such contract, the Secretary may grant such extensions of time as he deems
desirable.
1939 Contract at 13; 1951 Contract at 8-9. This provision guarantees Madera certain rights after
the expiration of the 1951 contract. It has a vested property right to a permanent water supply
based on express provisions of its contracts. Cf. Alpine Ridge Group v. Kemp, 955 F.2d 1382,
1385-86 (9th Cir. 1992) (express provisions of contract supported by independent consideration,
not merely legislative provisions, create vested property rights), cert. granted, 113 S. Ct. 490,
121 L. Ed. 2d 429 (1992). The question is not whether its rights exist, but whether they are
being violated.
B. Retroactivity.
The government and amici argue that Madera's contract and the Reclamation Act always
contemplated that Madera would pay the cost of the water, and the subsidy was accidental, so the
purpose of the contract is served by the recoupment of the operating and maintenance deficits.
We cannot reconcile this argument with the ceiling price in the 1951 contract. When parties
contract for a price not to exceed a certain dollar figure, that necessarily carries the implication
that the seller bears the risk that its costs will exceed that ceiling. A government contract
supported by consideration to pay a subsidy is legitimate and enforceable. Cf. Alpine Ridge
Group v. Kemp, 955 F.2d 1382, 1383 (9th Cir. 1992), (upholding contracts obligating
government to subsidize low income housing rents), cert. granted, 113 S. Ct. 490, 121 L. Ed. 2d
429 (1992). The promise to subsidize if necessary may be an instrument of policy designed to
induce people to do things they otherwise would not do, such as transfer water rights and land to
the United States, settle in the West and start a farm, or invest in an existing farm and equipment.
We will not construe away the unmistakable term establishing a ceiling price in the 1951
contract on the ground that it granted an unintended subsidy.
Nevertheless, we conclude that the recoupment of the operations and maintenance
expense does not violate Madera's rights under the 1951 contract. Madera got its water during
the forty year term, and need pay no more for the old water than the price to which it agreed.
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Were it to buy no more water, it would owe no more money for the operations and maintenance
expense. The recoupment will be a factor in the price of water under the renewal contract. The
price of the new water will be calculated in such a way as to recoup a subsidy previously
granted, as though the subsidy were a debt, but the subsidy is not owed like a debt. Madera has
no obligation to repay it. The means by which the price of new water will be established looks
retroactively at the costs of supplying the old water, but Madera could not be forced to pay the
money in the absence of a renewal contract, so it is a charge for new water calculated on the
basis of the old water, rather than an additional charge for the old water.
The difference between a retroactive means of calculating the price of new water, and a
retroactive charge for the old water, becomes clearer when one thinks about the people to whom
Madera will pass on the charges. Most of the farmers who used the more heavily subsidized
water during the first two decades of the 1951 contract have probably sold out and retired by
now, and some of them have probably died. They are not going to get billed for their share of
the operations and maintenance costs deficit. Instead, many of the people to whom they sold
their farms will pay more than they expected in the future for water. In practical effect, the
recoupment of the operations and maintenance charge is entirely a burden on future rather than
past purchasers of water, and largely on those who expected the subsidy rather than those who
received it. The people who got the subsidy can keep the profits they earned from their crops
based on the cheaper water, and they can also probably keep, unless their contracts provide
otherwise, the money they received from the buyers of their farms attributable to the expected
water subsidy. The burden of what the statute calls recovery of a deficit will fall largely on
people other than the beneficiaries. The practical effect is a sharp policy shift, arguably
disruptive of well-founded expectations, but it is not retroactive.
Since the Central Valley Project is a product of policy rather than the market, there is no
market measure of the value of the water. Price was a matter of policy, when it was a subsidy to
settle the West by turning the deserts green and creating a class of family farmers to populate
them, when it was an element in the attempt to revive the economy during the Great Depression,
and now, when the subsidy may be eliminated or may flow in the opposite direction, as a tax
upon users of the water. For all we know, some supporters of the changes may have felt that
farms should turn back into desert, and the West should be depopulated, and saw a policy of
raising the price of water beyond cost by an increment representing seller's remorse for the old
subsidy as an instrument to achieve this objective. We lack the authority of the political
branches to make these sorts of policy choices. Reasonable expectations arising out of past
policy but without a basis in cognizable property rights may be honored by prudent politicians,
because to do otherwise might be unfair, or because volatility in government policy will reduce
its effectiveness in inducing long term changes in behavior. But violation of such expectations
cannot give rise to a Fifth Amendment claim. Peterson v. U.S. Dep't. of Interior, 899 F.2d 799,
812-13 (9th Cir.), cert. denied, 498 U.S. 1003, 111 S. Ct. 567, 112 L. Ed. 2d 574 (1990).
Although Congress cannot take back a subsidy for which it has bound itself by contract, it may
nevertheless quit subsidizing, and even tax the previously subsidized activity, once its
contractual obligation to subsidize ends. The additional charge for new water does no more than
that.
C. Higher Rates Than Others.
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Madera also pleads that as a result of the government's calculation of the operation and
maintenance deficit, it will be required to pay more for water than other Friant Dam districts.
The practical effect of a higher maintenance and operations charge against Madera will be that
an acre-foot of new water will cost more in the Madera Irrigation District than in some other
Central Valley Project districts.
We find this the most troubling issue in the case. It is distinct from the retroactivity
question. Under the 1939 and 1951 contracts, Madera is entitled to rate equality with other
districts on renewal:
Under this Part A and under succeeding contracts the rates to be charged the District for
water service shall not exceed charges made to others than the District for the same class
of water and service from Friant Dam and Reservoir.
1951 Contract at 9; see 1939 Contract at 13. Our analysis of the retroactivity issue compels the
inference that the recoupment must be treated as part of the price for new water, not part of the
price for old water. Madera purchasers will pay more per acre-foot for new water under the
renewal contract than purchasers in other districts, assuming that Madera's operation and
maintenance cost recoupment is higher.
The two general principles of avoiding unconstitutionality and construing contracts to
preserve sovereign authority nevertheless compel us to reject Madera's argument. The
contractual words, "for the same . . . service" preserve Congressional authority to require a
different charge for different service. Service requiring more expensive operation and
maintenance is different from service requiring less expensive operation and maintenance. The
equality promised applies to "rates," and the 1951 contract puts rates in section 7, and operation
and maintenance cost in a separate section 15, evidently contemplating in section 16 that the
irrigation district would take over operation and maintenance. This suggests that the parties did
not intend that Madera's operation and maintenance cost could not exceed that of other districts.
Congress decided in the plainest terms to change its policy, so that instead of buying
subsidized water, purchasers of the new water will have to pay its full operation and maintenance
costs, plus an increment measured by the subsidy furnished to purchasers of the old water. We
are unable to say that by the words, "shall not exceed charges made to others than the District for
the same class of water and service," the government's sovereign authority to charge more for
water service with a higher operation and maintenance cost was "surrendered in unmistakable
terms." Peterson v. United States Dep't of Interior, 899 F.2d 799, 807 (9th Cir. 1990), cert.
denied, 498 U.S. 1003, 111 S. Ct. 567, 112 L. Ed. 2d 574 (1990).
***
III. The Environmental Requirements.
The United States has also required a term in Article 14 of the new contract that provides:
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(c)(1) The Secretary has undertaken the San Joaquin Basin Resource Management
Initiative, as described in the Federal Register notice of December 29, 1989, 54 Fed.
Reg. 53,763.
(2) The United States and the Contractor [Madera] agree that the Secretary will also
complete a programmatic Environmental Impact Statement (EIS) in accordance with the
National Environmental Policy Act (NEPA) and a consultation in accordance with
Section 7 of the Endangered Species Act (ESA) studying the environmental impacts
associated with the execution and renewal of this and other water service contracts in the
Friant Unit of the Central Valley Project and with the continued diversion and delivery of
water thereunder. The United States and the Contractor further agree that the provisions
of this contract are subject to modification by the United States, after public meetings and
discussions with the Contractor, in accordance with the results of the final EIS and ESA
consultation referenced in the immediately preceding sentence and ESA and NEPA:
Provided, That the Contractor reserves and does not waive any right it may have to
challenge the legality and validity of any such modifications made to this contract
pursuant to this subarticle 14(c). Notwithstanding any other provision of this contract
(including the preceding sentences of this subarticle), the provisions of this contract
covering the right to long-term renewal and quantity of water are non-discretionary and
not subject to change except as required by applicable law.
Madera argues that the language, "that the provisions of this contract are subject to
modification by the United States, after public meetings and discussions with the Contractor,"
makes the contract offered to them a nullity, and so deprives Madera of its right to a renewal
contract. We agree with Madera's legal proposition, that the government cannot reserve to itself
an unlimited right to escape its contractual obligations "without rendering its promises illusory
and the contract void." Torncello v. United States, 231 Ct. Cl. 20, 681 F.2d 756, 760 (Cl. Ct.
1982). Here, though, the reserved power to modify is limited. The modification power is
qualified by the words, "in accordance with the results of the final EIS and ESA consultation
referenced in the immediately preceding sentence and ESA and NEPA: Provided, That the
Contractor reserves and does not waive any right it may have to challenge the legality and
validity of any such modifications made to this contract pursuant to this sub-article 14(c)." The
government, like any contracting party, can enter into a binding agreement subject to a qualified
right of modification or other avoidance of obligations. Cf. Modern Sys. Tech. Corp. v. United
States, 24 Cl. Ct. 699, 701 & n.3 (Cl. Ct. 1992) (upholding government's exercise of "termination
for convenience" clause which permits government to terminate a contract at will), aff'd 980 F.2d
745, (Fed Cir. 1992).
Both of the laws pursuant to which the government reserves rights under the proposed
language are new. The National Environmental Policy Act and the Endangered Species Act
were promulgated after the 1951 contract was executed, and represent policies subsequently
adopted. Madera claims that its renewal rights cannot be burdened with these new policies. That
proposition goes too far. The constitutionally permissible burden will depend on what the
general policies may turn out to mean in application.
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Madera argues that section 203(d) of the Reclamation Reform Act of 1982 prevents the
imposition of these environmental regulations. See 43 U.S.C. § 390cc(d) (1988). This section
provides that—
Amendments to contracts which are not required by the provisions of this subchapter
shall not be made without the consent of the non-Federal party.
Id. Madera cannot take advantage of this provision, because the government seeks a term in a
new contract, not an amendment to an existing contract. The renewal contract provision in the
1951 contract does not say that all the terms in a renewal contract must be identical to the
expired contract. Whether the environmental terms added into the renewal threaten the
proprietary rights preserved in Madera's contract, a permanent right to a certain amount of water
at rates no higher than those charged to other purchasers of the same class of water and service
from Friant Dam and Reservoir, depends on how the environmental provisions are implemented.
The government has not "'surrendered in unmistakable terms'" its power to impose any
environmental laws on the contractual relationship, so the required clause is not necessarily
violative of Madera's contractual rights. Bowen v. Public Agencies Opposed to Social Security
Entrapment, 477 U.S. 41, 52, 91 L. Ed. 2d 35, 106 S. Ct. 2390 (1986) (quoting Merrion v.
Jicarilla Apache Tribe, 455 U.S. 130, 148, 71 L. Ed. 2d 21, 102 S. Ct. 894 (1982)).
We need not and do not reach the question of what environmental requirements are
permissible. As the Department of the Interior has construed it, the new paragraph 14 would not
require the environmental impact statement and endangered species consultation prior to signing
the renewal contract. The government proposes to renew the contract with the new provision
explicitly reserving its authority to impose the requirements of the two environmental acts,
subject to Madera's reservation of rights. This evidently is a construction of the "in accordance
with" language, inferring from these words that to the extent such review is not required by the
statutes, it is not required by the contract. Currently the parties are in litigation in another case,
because the Secretary proposes to renew prior to any such environmental review, and the
environmental advocacy groups which are intervenors and appellees before us claim in that case
that the environmental review must precede renewal. In light of the government's application of
the clause, the question of applicability of the two environmental laws to Madera's renewal
contract is not yet a ripe controversy, in the Article III sense, so we lack jurisdiction. Broughton
Lumber Co. v. Columbia River Gorge Com'n, 975 F.2d 616, 621 (9th Cir. 1992).
AFFIRMED.
HALL, Circuit Judge, Concurring:
I concur in parts I and III of the majority's opinion. As to the issues raised in part II, I
concur in the result, but on the ground very ably set forth by the district court: The Appellants'
right to purchase water from the government is subject to subsequent legislation affecting the
exercise of that right.
"'Sovereign power, even when unexercised, is an enduring presence that governs all
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contracts subject to the sovereign's jurisdiction, and will remain intact unless surrendered in
unmistakable terms.' Therefore, contractual arrangements, including those to which a sovereign
itself is party, 'remain subject to subsequent legislation' by the sovereign." Bowen v. Public
Agencies Opposed to Social Security Entrapment, 477 U.S. 41, 52, 91 L. Ed. 2d 35, 106 S. Ct.
2390 (1986) (quoting Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 148, 147, 71 L. Ed. 2d
21, 102 S. Ct. 894 (1982)). "Contracts should be construed, if possible, to avoid foreclosing
exercise of sovereign authority." Id. at 52-53.
Appellants' asserted property right in the rates set in the 1951 Contract ultimately rests on
the argument that by virtue of the 1939 and 1951 Contracts, Congress has surrendered its right to
exercise its sovereign power to legislate and the executive's obligation to act in conformance
with legislation. Examination of Appellants' contracts fails to disclose the requisite unequivocal
surrender of sovereignty. See Peterson v. United States Dep't of Interior, 899 F.2d 799, 808 (9th
Cir.), cert. denied, 498 U.S. 1003, 111 S. Ct. 567, 112 L. Ed. 2d 574 (1990). Rather, the
language of the contracts appears to reserve Congress' right to exercise its sovereign power.
Both provide that they are executed pursuant to the 1902 Federal Reclamation Act and all acts
amendatory or supplementary thereto. 1939 Contract at 1; 1951 Contract at 1. The 1939
Contract explicitly recognizes that the Appellants' right to purchase water is subject to both
congressional action and implementation by regulation. 1939 Contract at 12, 14.
Appellants point to language in the 1951 Contract providing that the Secretary may set
the water rates annually "but in no event shall the rates so announced be in excess" of $3.50 and
$1.50 per acre-foot for Class One and Class Two water, respectively. 1951 Contract at 13
(emphasis added). This language is insufficient to unmistakably surrender Congress' right to
legislate. It is doubtful that the Secretary of the Interior could, by contract, waive the right of
Congress to pass laws; but in any case, it does not appear that such a waiver was even
contemplated. As stated above, the contracts were made pursuant to the Reclamation Act and
statutes amending or supplementing the Act by their own terms. Furthermore, the initial contract
recognized that the United States would unilaterally determine the price Appellants would pay
for water. 1939 Contract at 12-13. Assuming for the moment that the reference to water rates in
the 1951 Contract is even applicable to the imposition of operation and maintenance costs, in this
context, the words "in no event" may be interpreted to mean "in no event under the current
legislative regime" or "in no event unless Congress legislates otherwise" would the Secretary
adjust cost-sharing arrangements.
The Reclamation Act itself required that Appellants pay an appropriate share of operation
and maintenance costs. See 43 U.S.C. § 485h(e) (1988). Congress amended the Act to require a
cost sharing adjustment. See Water Resource and Small Reclamation Projects Act, Pub. L. No.
99-546, § 106, 100 Stat. 3050, 3052 (1986). Appellants' argument that the rates fixed in a
contract made pursuant to statute preclude the government from collecting operation and
maintenance costs as clearly compelled by statute cannot prevail.
Similarly, to the extent the charges result in a total water cost to Appellants that exceeds
the final cost of water to other users, the contracts allow such a result when brought about by
reclamation legislation. This conclusion is further supported by other contractual provisions
indicating that the parties intended the district to bear its own operation and maintenance costs
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for the distribution network extending from the canal. See 1951 Contract at 25-27. Thus, the
district must have contemplated that its bottom-line water cost would differ in some respects
from the absolute water cost of other users of Friant Dam water. The contract must be
interpreted to require only that the rate per acre-foot of water is the same to each irrigation water
user. Even if the contracts did not explicitly acknowledge that they were subordinate to statute,
the doctrine of reserved sovereign power would compel the same conclusion. The language of
the contracts does not unequivocally surrender congressional power to charge the district for the
actual cost of operating and maintaining the Madera Canal.
Accordingly, the district court's order should be affirmed.
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