[Advisory Report on Agricultural Leasing Activities, Pima Agency, Bureau of Indian Affairs]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-I-803

Title: Advisory Report on Agricultural Leasing Activities, Pima
       Agency, Bureau of Indian Affairs

Date: September 28, 1999

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C-IN-BIA-002-97(A)

ADVISORY REPORT

Memorandum

To:  Assistant Secretary for Indian Affairs
Special Trustee for American Indians

From:  Robert J. Williams
Assistant Inspector General for Audits

Subject:  Advisory Report on Agricultural Leasing Activities, Pima Agency, Bureau of Indian
Affairs (No. 99-I-803)

INTRODUCTION

This report presents the results of our review of agricultural leasing activities of the Bureau of
Indian Affairs Pima Agency in Sacaton, Arizona.  The objective of the audit was to determine
whether the Agency adequately managed agricultural leases for the Gila River Indian
Reservation in accordance with regulatory and lease requirements.   In addition, we determined
whether farming revenues in special deposit (suspense) accounts had been distributed to the
landowners.

BACKGROUND

According to the Code of Federal Regulations (25 CFR 162), the Bureau of Indian Affairs is
responsible for approving leases of individually owned land and tribal land held in trust that are
negotiated by the landowners or their representatives.  The Code also states that leases may be
executed either through negotiation or advertising and that annual rents should provide for a fair
annual return. The Code further states that agricultural leases are not to exceed 5 years for dry
farming land and 10 years for irrigable land but may be approved for 25 years when the lessees
are required to make substantial improvements to the land for the production of specialized
crops.

The Pima Agency is responsible for leasing activities on the Gila River Indian Reservation,
which encompasses about 374,000 acres of land in Maricopa and Pinal Counties in Arizona.
Approximately 280,000 acres are tribal lands and 94,000 acres are allotted (individually owned)
lands.  The ownership interests in the allotted lands are severely fractionated. According to the
Bureau, the 94,000 acres of allotted lands included 5,424 separate tracts in which 7,305
individuals had ownership interests.  As of December 31, 1996, the Agency administered 180
agricultural lease units on the Gila River Indian Reservation encompassing about 26,000 acres of
farm land, which had annual rents totaling about $2.1 million.  According to the terms of the
leases, rents are due on January 1 of each year and are delinquent if not paid within 30 days. 
Leases approved by the Agency expire on December 31, but all leases do not expire in the same
year.

The Secretary of the Interior has been designated as the trustee of funds held in trust by the
Government for the benefit of Indian tribes and individual Indians.  On October 26, 1989,
Secretarial Order No. 3137 was issued to establish the Office of Trust Funds Management within
the Bureau of Indian Affairs.  The Office of Trust Funds Management was responsible for
providing oversight of some of the financial trust service functions, which included collecting,
investing, distributing, and accounting for the trust funds.  On February 9, 1996, Secretarial
Order No. 3197 was issued to establish the Office of the Special Trustee for American Indians, as
authorized by the American Indian Trust Fund Management Reform Act of 1994, and to transfer
the Bureau's Office of Trust Funds Management and other financial trust service functions to the
Office of the Special Trustee.

SCOPE OF REVIEW

The review was performed at the Phoenix Area Office and the Pima Agency and focused on lease
activities that occurred in 1996 and 1997 (through March 13).  However, we expanded the scope
of our review to include revenues in special deposit accounts to determine whether agricultural
lease rents and other lease revenues were properly distributed to landowners.

Our audit was conducted in accordance with the "Government Auditing Standards," issued by the
Comptroller General of the United States.  Accordingly, we included such tests of records and
other auditing procedures that were considered necessary under the circumstances. As part of our
review, we assessed the Agency's system of internal controls for administrating its agricultural
leases and found weaknesses related to approving negotiated leases timely, complying with
interest assessment and bonding requirements in lease provisions, pursuing collections of
delinquent rents, distributing rental collections timely, and clearing special deposit accounts.

We also reviewed the Department of the Interior's Accountability Reports for fiscal years 1996
and 1997 to determine whether any reported weaknesses were directly related to the objective
and scope of our audit. The two reports cited long-standing material weaknesses in the Bureau's
(1) management of trust funds, the responsibility for which has now been transferred to the
Office of the Special Trustee for American Indians; (2) debt collection practices; and (3) land
records management. These weaknesses were considered in planning and conducting our review.

PRIOR AUDIT COVERAGE

Neither the Office of Inspector General nor the General Accounting Office has issued an audit
report during the past 5 years on agricultural leases at the Pima Agency.

DISCUSSION

Agricultural leasing activities on the Gila River Indian Reservation were not managed
adequately. Specifically, the Pima Agency did not (1) approve leases timely, resulting in delays
in landowners receiving their rental payments; (2) enforce lease bonding requirements to protect
the landowners' interests; (3) assess and collect interest on late rental payments; and (4)
distribute agricultural lease rents to landowners timely. These conditions occurred because the
Agency did not have sufficient controls and/or procedures to ensure that the realty staff complied
with all leasing and regulatory requirements in a timely manner; the lessee, Tribe, and individual
landowners did not provide necessary leasing-related information to the Agency in a timely
manner; and, according to Bureau officials, inadequate funding and a reduction in staff for
agricultural programs adversely impacted the Agency's realty program.  In addition, we found
that revenues and related interest earnings of approximately $1.4 million from agricultural lease
rents and from other sources that were deposited into special deposit accounts since the 1960s
had not been distributed to landowners.

Expired Leases

We found that the Agency did not always approve negotiated agricultural leases in a timely
manner, which occurred, in part, because lessees and landowners did not always negotiate new
agricultural leases in a timely manner.  Although farming operations continued after the leases
expired, annual rental payments were not made timely and were based on expired rates that
would have been subject to revision under new agreements.  Specifically, we found the
following:

-The Agency had not approved the new negotiated leases as of March 1997 to replace eight
leases that had expired on December 31, 1994, and three leases that had expired on December 31,
1995.  Although farming operations continued on these units by farmers who negotiated the new
leases, annual lease payments totaling about $42,000 due on January 1, 1996, were made 3 1/2
months (eight leases) and 7 1/2 months (three leases) late. Furthermore, distribution of these
payments to the landowners was delayed from 4 to 9 months.

-The Agency did not approve new leases for 34 leases that expired on December 31, 1995, until 2
to 14 months after the expiration date because lessees and landowners did not complete the
negotiation process in a timely manner.  As a result, rents totaling $234,000 for 21 of the new
leases were not paid until 2 to 12 months after the leases expired. 

- The Agency had not approved new leases as of March 1997 to replace 32 leases that had
expired on December 31, 1996, because lessees and landowners did not complete the negotiation
process in a timely manner.

Several factors contributed to these delays, including controls that were inadequate to ensure that
the Agency (1) initiated the renewal process, (2) requested the Phoenix Area Office to conduct
appraisals, and (3) provided ownership information to prospective lessees in a timely manner.  In
addition, Area Office appraisals, tribal resolutions, owner consent forms, and negotiated leases
were not completed and submitted to the Agency in a timely manner.  According to Bureau
personnel, these delays occurred because of insufficient Bureau personnel to perform, conduct,
and/or monitor these activities. Without formal lease documents, the Agency could not
adequately administer the agricultural lease units that lessees continued to farm after the leases
had expired. In addition, without a lease, the Agency could not enforce the payment of rents or
distribute any rental payments that were made voluntarily.  

In response to our reports on agricultural leasing activities at the Fort Peck Agency
(No. 98-I-703) and the Fort Berthold Agency (No. 99-I-102), the Bureau stated that those
agencies would initiate the lease renewal process much earlier in an attempt to complete the lease
approval process before current leases expire.  We believe that the Assistant Secretary for Indian
Affairs should ensure that similar action is taken at the Pima Agency and throughout the Bureau.

Bonding

The Agency had not enforced its bonding requirements.  The Code of Federal Regulations
(25 CFR 162.5(c)) states that "unless otherwise provided by the Secretary," a surety bond is
required to be provided "in an amount that will reasonably assure performance of the contractual
obligations under the lease," including the payment of annual rents.  The bonding requirement
was incorporated by the Agency into the agricultural leases as a standard provision.

Based on our review of the Agency's files for 25 agricultural leases, we determined that all 25
leases contained the standard provision requiring the lessees to post bonds to ensure rental
payment and lease compliance.  However, none of the lessees had posted the required bonds with
the Agency, and none of the lease files contained documentation showing that a determination
had been made to waive the requirement.  Accordingly, we believe that the Assistant Secretary
for Indian Affairs should ensure that the Agency enforces the bonding requirement.

Assessing and Collecting Interest

The Agency did not assess or collect interest on late payments of agricultural lease rents.
Agricultural lease provisions specify that rents are due on January 1 of each year.  According to
the lease provisions, the lessee is required to pay rents without any formal notification from the
Agency and is allowed a 30-day grace period from the date rent is due before interest on late rent
payments is assessed.  The Departmental Manual (344 DM 2.1) requires agencies to take
aggressive actions, including issuing progressively stronger demand letters, to collect delinquent
debts. We found that the Agency generally waited for lessees to pay rents that were past due
rather than initiate collection efforts or assess interest.  Although we found that most lessees
eventually made their rental payments, the Agency did not assess or collect interest of about
$28,700 for the landowners.

Rental Distributions

The Agency did not distribute agricultural lease rents to landowners in a timely manner. Based
on our analysis of collection and distribution data for rents that were collected and deposited into
special deposit accounts during 1995 and 1996, we determined that the Agency took an average
of 116 days, with a range of 8 to 333 days, from collection to distribution of 1996 rents and an
average of 101 days, with a range of 20 to 255 days, from collection to distribution of 1995 rents.

We also found that the Agency did not distribute all revenues and related interest earnings from
agricultural lease rents and from other sources which had been deposited into special deposit
accounts.  The Code of Federal Regulations (25 CFR 114) states that special deposit accounts
are to be used for the temporary deposit of funds which cannot be credited to specific accounts or
readily distributed.  The Code further states that the interest earned on principal in special deposit
accounts is to be distributed with the related principal.  We identified undistributed revenues and
accrued interest of approximately $1.4 million that were in special deposit accounts from 1 to 34
years which had not been distributed.  This amount consisted of $1.2 million of agricultural lease
rents and accrued interest that had accumulated in 58 special deposit accounts from 1963 through
1991, $119,000 of rents and accrued interest from subleases awarded for space at the Gila River
Indian Community Memorial Airfield that had accumulated in nine special deposit accounts
from 1993 through 1996, $60,000 of pipeline right-of-way payments and accrued interest that
had accumulated in a special deposit account since March 1996, and $22,000 of deposits and
accrued interest from a housing grant and other sources that had accumulated in special deposit
accounts from 1963 through 1990.

The Agency's realty staff were responsible for ensuring that funds in the special deposit accounts
were distributed to landowners.  However, the Agency did not have procedures to ensure that
funds in special deposit accounts were analyzed and distributed, and the Agency did not dedicate
sufficient resources to analyze special deposit account balances and land ownership records that
were more than 1 year old to properly distribute these funds.

Corrective Actions

The Bureau has initiated several actions to address deficiencies related to approving leases of
individually owned land and tribal land held in trust and collecting revenues from those leases as
follows:

-The January 1998 Office of Inspector General audit report (No. 98-I-206) on the Office of the
Special Trustee's financial statements for fiscal year 1996 identified significant deficiencies
relating to "reportable conditions" for special deposit accounts.  The report contained four
recommendations to correct special deposit account deficiencies similar to those identified by our
current review.  The recommendations related to performing an analysis of special deposit
accounts; establishing policies and procedures for using special deposit accounts; establishing an
adequate system, policies, and procedures for determining interest earned for Individual Indian
Money account holders; and establishing controls to verify that items are cleared from these
accounts.  Based on the actions outlined in the Office of the Special Trustee's response to the
January 1998 report, we considered these recommendations resolved but not implemented.  We
believe that implementation of these recommendations will correct the deficiencies related to
assessing and collecting interest, rental revenue distributions, and special deposit accounts which
we identified during our current review at the Pima Agency.  In addition, the deficiencies
identified in the January 1998 report have been incorporated into subproject plans of the High
Level Implementation Plan for the Trust Management Improvement Project approved by the
Secretary of the Interior on July 31, 1998.

-The June 1999 General Accounting Office audit report (No. GAO/RCED-99-165) on rent
appraisals of Indian land stated that the Bureau relied primarily on appraisals to ensure that
Indian land was leased for a fair annual rental.  However, the Bureau had not defined fair annual
rental and did not have a clear policy on how that amount should be determined.  The report
recognized the Bureau's ongoing efforts to review and revise its appraisal program.  The report
contained two recommendations to improve the timeliness of appraisals.  The recommendations
related to (1) developing a clear policy on how fair annual rental can be estimated using other
methods in addition to appraisals and (2) establishing consistent standards and guidelines for
applying lease valuation methods.  The Assistant Secretary for Indian Affairs response to the
draft report indicated that actions to correct the deficiencies had been incorporated into the
appraisal subproject plan of the High Level Implementation Plan for the Trust Management
Improvement Project.

Based on the Bureau's and the Office of the Special Trustee's actions, we have not made any
recommendations to address the specific deficiencies (expired leases, bonding, assessing and
collecting interest, and rental distributions) in this report.  However, we will evaluate the actions
taken by the Bureau and the Office to correct these deficiencies, including the bonding issue,
during audits of the Bureau and Office planned for fiscal year 2000.  Since this report does not
contain any recommendations, a response is not required.

Section 5(a) of the Inspector General Act (Public Law 95-452, as amended) requires the Office of
Inspector General to list this report in its semiannual report to the Congress.

We appreciate the assistance of Bureau personnel in the conduct of our review.