Contrary to the catastrophic picture painted by news sources around the country, Arizona is not out of water, construction has not been suspended, and a construction moratorium has not been issued by the Governor. The real picture wouldn’t make the front page news, but it is nevertheless sensational. For many, many decades to the present day, Arizona has actively managed its water supply and often leads the nation in comprehensive water management and conservation. The best-known example, of course, is the 1968 federal law introduced and championed by Senator Carl Hayden and other members of the Arizona delegation authorizing creation of the Central Arizona Project (“CAP”) and related infrastructure to bring Colorado River water to many parts of our state.

At the state level, the most well-known conservation management tool is a product of the 1980 Groundwater Management Act (the “1980 GMA”). Among other things, the 1980 GMA requires (generally) that any person seeking to subdivide land within Active Management Areas (“AMAs”) demonstrate a 100-year assured water supply to obtain a Certificate of Assured Water Supply (“CAWS”) issued by Arizona Department of Water Resources (“ADWR”). In this context, “subdivision” is defined as the creation of six or more lots, parcels, or fractional interests, unless each subdivided parcel is at least thirty-six acres. The CAWS requirement, however, does not apply if a municipal or other water utility with its own designation of assured water supply (“DAWS”) will service the subdivision. Exceptions may also apply to lands that are subject to a mineral extraction and processing permit or a general industrial use permit granted by ADWR.

As a direct result of Arizona’s proactive and diverse approach to solving water questions, until very recently, ADWR typically granted CAWS routinely for subdivided lands within an AMA upon satisfaction of regulatory requirements. On June 1, 2023, however, Arizona Governor Katie Hobbs directed ADWR to “pause approvals of new assured water supply determinations that rely on pumping groundwater” within the Phoenix AMA. Ostensibly, the Governor’s announcement was intended to address the findings of a new groundwater projection model predicting that, over the next 100 years, the Phoenix AMA could face a 4% deficit in groundwater supply based on current conditions. But the announcement did not address that ongoing advancements in technology, conservation, and water augmentation are on a path to more than compensate for a projected 4% deficit that will not occur for 100 years.

It is not yet clear whether the Governor’s pause on issuance of new CAWS relying on groundwater is permanent or temporary during her administration. Nor is it clear how ADWR will administer this new policy. Importantly, Governor Hobbs clarified that existing CAWS will not be rescinded. In practical effect, the policy will primarily impact proposed developments in the outskirts of the Phoenix Metropolitan Area. But many of these areas—Buckeye and Queen Creek, for example—have been a mainstay of the Phoenix growth model.

No matter your position on the recent policy announcement, there is no dispute that Arizona is a leader in water policy and conservation. Beginning more than 100 years ago, our pioneer families, legendary elected officials, and many others committed to implementing then-groundbreaking policies and public works projects, without which Arizona would not have been able to support the growth and diversity of high-wage jobs that it does today. The 1980 GMA is one such example of Arizona’s commitment to protecting and preserving Arizona’s groundwater supply for generations to come. At the time, the 1980 GMA’s creation of the AMA designation (and resulting regulatory approval requirement for new subdivisions to look forward 100 years) set a high bar for conservation.

Policy Considerations and Background

In any AMA, with few exceptions, a developer subdividing land must either obtain a CAWS “prior to presenting the plat for approval to the city, town or county in which the land is located” or obtain a written commitment of water service from a supplier with a DAWS. A.R.S. § 45-576. Under the Governor’s new stated policy, developers will need to obtain an alternative water source (other than groundwater) to serve the proposed development for a CAWS to be issued for a subdivision in the Phoenix AMA. Such an alternative source might not be economically feasible, however, or temporary cutbacks of CAP allocations could create further delays.

Notably, although the CAWS requirement is applied most often to residential uses, the law does not expressly limit this requirement to residential developments. While there are some limited exceptions to the requirement to obtain a CAWS for mining and industrial uses, the CAWS requirement applies to all subdivided lands that fall under the definition of “subdivision” set out in A.R.S. § 32-2101 (irrespective of asset class).

Likely Real-World Implications

Today, there are six AMAs: the Phoenix AMA, the Tucson AMA, the Pinal AMA, the Prescott AMA, the Santa Cruz AMA, and the newly created Douglas AMA. Of the six existing AMAs, the Governor’s new policy applies only to the Phoenix AMA. The other AMAs (and areas outside of an AMA) are unaffected. The Phoenix AMA includes most of Phoenix Metropolitan Area, from Morristown in the northwest, to Queen Creek in the southeast.

Further narrowing the policy’s applicability, large portions of the land within the Phoenix AMA are served by a supplier with a DAWS. For example, the Cities of Avondale, Chandler, El Mirage, Glendale, Goodyear, Mesa, Peoria, Phoenix, Scottsdale, Surprise, Tempe, the Town of Gilbert, and a few private water companies have a DAWS. Subdivisions within these water service areas do not need to obtain a CAWS if the water provider provides a written commitment to supply service.

Finally, the new policy will not affect CAWS already issued for approximately 80,000 lots currently under development within the Phoenix AMA. As a result, a developer buying and/or building out pre-platted residential property with an issued CAWS will not lose its rights to develop the property. However, it is important to note that the developer must not make “material changes” to the existing approved plat. (ADWR defines material changes according to a formula published in the Arizona Administrative Code.) A material plat change may require a new CAWS, which would not be issued under the new policy unless the new CAWS does not rely on groundwater within the Phoenix AMA.

While some may view the Governor’s new policy as having a narrow categorical effect, the current narrative in the popular press (amplified by other states competing with Arizona to attract high value employers) threatens to impede growth. And while the policy largely affects only new developments located on the outskirts of the Phoenix area, the affected municipalities, such as Buckeye and Queen Creek, are fast-developing and no longer entirely rural. Development in these cities is a big reason why large, high-wage employers, including emerging and mature tech and life sciences companies and many other diverse businesses, have invested in Arizona over the last ten years. With any luck, ADWR will administer this new policy in a thoughtful and expedient manner that will allow development in the affected areas while conveying the reality of Arizona’s commitment to water conservation and the positive effects of that decades-long commitment.

Open Questions and Unresolved Issues

There are many outstanding questions that will only be answered as ADWR implements this new policy. Some of these questions include:

• Will the new policy affect assignments of existing CAWS?
• Does the policy constitute a regulatory taking, especially for those developers who have made significant investments in reliance on their ability to obtain a CAWS using groundwater resources?
• Did the Governor’s executive action preemptively denying any new CAWS that will use groundwater infringe on legislative prerogative or violate administrative and rulemaking procedures?
• Will the preemptive denial of new CAWS using groundwater put added pressure on surface water, CAP deliveries, and tribal water resources? Might this added pressure on alternative sources of water have unintended negative consequences for water conservation in Arizona?
• Innovations in technology, conservation and augmentation in the coming years can easily address the 4% projected deficit over the next 100 years. Will the Governor and ADWR provide a measurable goal that if reached would rescind the Governor's direction to “pause approvals of assured water supply determinations that rely on pumping groundwater”?

Historically, the assured water supply program has been an important, but largely ministerial diligence item in most Arizona real estate transactions. Going forward, CAWS and the laws and policies surrounding issuance, will be a more complicated issue to navigate in any Arizona real estate development project.