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Arizona State Retirement System divests from western Arizona alfalfa farm

The state's largest public pension fund is selling off its interest in a company that owns a 3,000-acre western Arizona farm that grows alfalfa to ship to the Middle East.

The move by the Arizona State Retirement System comes as Attorney General Kris Mayes is calling the idea of investing in a farm that exports alfalfa "as outrageous as it is stupid given the current state of our water crisis in Arizona." She said that it also directly harms the residents of La Paz County.

"And it adds insult to injury when you think about it being perpetrated by a state pension fund," Mayes told Capitol Media Services. "I think even ASRS came to that conclusion, which is why they voluntarily are divesting themselves from this vehicle."

But ASRS Director Paul Matson said the decision has nothing to do with any pressure being exerted by the attorney general.

He said efforts have been underway for years to find a buyer for the property and get the pension fund out. Among the possibilities are marketing the property as a site to generate electricity through solar or wind.

Matson said, though, nothing guarantees that, even after ASRS is out of the picture, a new owner won't keep using the land for agriculture, given there are no real restrictions on the ability of a landowner to pump water from the ground.

"To assume that changing the ownership of the land will change agricultural usage is simply not correct," he said.

Mayes, in an interview with Capitol Media Services, acknowledged that the state exports much of what is grown here, with a 2021 value according to the U.S. Department of Agriculture of $1.5 billion, led by $475 million in vegetables. There also was $154 million in dairy products, $116 million in cotton and $109 million in beef and veal.

That compares with $44 million in feeds including alfalfa.

But the attorney general brushed aside questions about exports of other crops grown with Arizona water — and other landowners and tenants.

"I think that it's very clear that the people of Arizona don't think it's appropriate for us to be allowing companies that are controlled by Middle Eastern or any other foreign country to use our water for free to export alfalfa to their countries, especially when those countries have outlawed the use of water for growing alfalfa," she said.

→  Hobbs cancels lease for Saudi-owned alfalfa farm in Arizona

And where does the attorney general find authority in the Arizona Constitution to enact laws and regulations based on whether the land is owned by domestic or foreign corporations?

"I don't see anything in the Constitution that prevents it, either," Mayes responded. "It goes to the harm that was being done, or is being done, to local residents."

And even if there are legal barriers to such distinctions, she said, that doesn't end the matter.

"For me, at a minimum, farming operations that are owned by a foreign country and are essentially exporting out of country should be closely scrutinized — and aren't appropriate," the attorney general said.

In fact, though, the farm which is the focus of her ire isn't even under foreign ownership.

What is at issue is the decision by the pension fund to invest $175 million in 2012 in International Farming Corp. It, in turn, formed U.S. Farming Realty Trust to purchase about 20 square miles of land in La Paz County, land Matson said was already being actively farmed.

The trust, in turn, then leased some of the land to Al Dahra Farms, based in the United Arab Emirates, which grows the hay that gets shipped to countries in the Middle East and Asia. That firm was interested in the Arizona land because the UAE, with its own water issues, has strict limits on the use of water for local cultivation of animal feed grasses, including alfalfa.

Matson defended the deal.

"The purpose of the investment was to protect against inflation and further diversify the investment portfolio, all while investing in the production of food and feedstock while employing Arizonans," he said. More to the point, Matson said ASRS "did not know that a future tenant would be a non-U.S. entity."

And ASRS needs investments that have a return.

The system provides pension benefits to more than 170,000 retired state and local employees as well as teachers, along with their beneficiaries. That does not include state and local police, who have their own retirement fund, or corrections officers. And some cities have their own pensions.

Fueling that fund are close to 215,000 active members who are currently working.

Workers currently pay more than 12% of their salaries into the system.

But that contribution number can adjust depending on how well the pension's investments performed, something that depends, at least in part, on the economy. It was as low as 2% as recently as 2003.

For the fiscal year, the total fund net rate of return was just 1.1%. That compares with 8.9% over the past decade.

What makes that critical is that the state runs a "defined-benefit plan," where the size of a worker's pension is based on a formula that takes into account salary, years of service and age.

The Arizona Constitution specifically prohibits public retirement benefits from being diminished. And that means the only way to make up the difference when the fund's balance is reduced is by raising the amount collected from employees and employers.

Mayes, however, said she's not ignoring the effect of decisions on the fund's bottom line.

"I don't think that sustainability and good investments are mutually exclusive," Mayes said. And she said an argument could be made that, under either standard, ASRS never should have invested in the property.

"When you really think about it, how sustainable is an operation like a huge alfalfa farm in an area where the state Department of Water Resources has already said there is extreme groundwater table depletion," the attorney general said. "I believe it was a risky investment."

And that, she said, doesn't even factor in how farming in the area — and not just from this operation — affects those already living there, something she said the pension fund should have considered in the first place.

"When you layer on top of that the fact that you're putting Arizona retirees in the position of harming their fellow citizens, it's just a terrible idea," Mayes said.

The fact is, though, that someone would be pumping water out of the area, regardless of whether the pension fund invested in the property and regardless of whether the land was leased to Al Dahra.

Phoenix purchased the original 20 square miles in 1986 in hopes of using the water beneath it — unregulated by the state — as a backup for its own municipal water supply. That never happened, with the city leasing the property to a farmer.

The city sold the land and the water supply in 2012 to International Farming Corp., with ASRS investing $175 million with the firm. IFC created the partnership that became U.S. Farming Realty Trust II.

Matson said the investment is currently in a "wind-down phase," with ASRS having about $69.9 million as of the end of March, and the goal to reduce that to zero over the next year or so.

Mayes said it's irrelevant that Phoenix had bought the land with the purpose of exporting to the city the water beneath it, saying that never happened.

"The only other thing I would say about that is, I guess you could say, that was going to be for Arizona residents, not Emirate residents," she said. "And there is a key difference there."

The issues here are separate from — yet parallel to — a dispute over the leasing of thousands of acres of state-owned land in La Paz County to Fondomonte, a firm owned by Saudi Arabia, which is pumping the water beneath it to grow alfalfa to feed dairy cows in the kingdom. That county bans such farming outright because of its water use.

Mayes campaigned last year on a promise to cancel the lease along with the right to withdraw groundwater. But in a separate interview earlier this year, Gov. Katie Hobbs, who inherited the lease when she took office in January, said that's not legally possible.

The governor pointed out that statutes require state trust lands to be managed to obtain their "highest and best use" and maximize the return to the state and the beneficiaries of the trust, mainly public education. As to canceling the Fondomonte lease, she said the fact remains that Arizona leases out land across the state for various agricultural interests.

"It would be treating one leasehold differently than others," Hobbs said

And there's that question with Fondomonte that also relates to the Al Dahra operation: Can the state refuse to lease land for growing alfalfa for export when it also leases land for other crops, such as vegetables, that are shipped out of Arizona and, sometimes, out of the country?

"That's a really valid question," the Democratic governor told Capitol Media Services. "We can't just unilaterally yank one lease because we don't like that alfalfa's going to Saudi Arabia."

Mayes did get a victory of sorts, getting the state Land Department, under the governor's control, to withdraw its request that the Department of Water Resources allow Fondomonte to drill two new high-capacity wells.

That, however, was based on a technicality that the company's approval to make improvements on state land had expired. None of that bars Fondomonte from continuing to pump water from the wells it already has.

The overall debate did lead to the state House earlier this year approving a measure that would bar the sale or lease of state lands to foreign government and to any company headquartered in China, Cuba, Iran, North Korea, Russia, Saudi Arabia, Syria or Venezuela or any firm where a majority of the shares are held by individuals who are citizens of those countries.

HB 2376 cleared the House on a bipartisan 43-17 vote. But the measure never got a hearing in the Senate.

"The intent of my bill was to start the conversation on what foreign countries are we allowing to use our water in the state of Arizona," the Lake Havasu City Republican told Capitol Media Services. "All across the world, we have countries who would never allow us to do what they are doing to us here in Arizona."

Still, Biasiucci acknowledged his measure would not have affected Al Dahra.

"I'm never going to tell a private landowner what to do with their property," he said, meaning none of this would have affected the land purchased with the ASRS fund. "But when it comes to state land, I believe we need to have more oversight on these type of lease deals."

EDITOR'S NOTE: KJZZ employees are members of the Arizona State Retirement System.