Key Points:

• Court rules Arizona Department of Water Resources acted illegally in 2023 when it restricted housing development in Phoenix over water supply concerns 

• The state water department’s decision affected thousands of home sites

• ADWR says it will appeal the ruling

The Arizona Department of Water Resources acted illegally when it changed its housing development regulations regarding groundwater and homes built in metro Phoenix in 2023 — a decision which left builders with thousands of lots they could not develop.

The April 21 decision from Maricopa County Superior Court Judge Scott Blaney came via a lawsuit filed on behalf of the Home Builders Association of Central Arizona and lawyers with the Goldwater Institute. They alleged that the Water Resources Department violated state law by changing how it evaluated the availability of groundwater that builders have long relied upon to meet demands of new homes.

Blaney agreed, writing that the department sidestepped the law when it unilaterally adopted a new formula for determining if a builder could pump enough groundwater to support new construction without going through a formal rulemaking process.

The 2023 decision by state water regulators was announced by Gov. Katie Hobbs and led to howls of protest from developers who had been relying on groundwater to meet the requirements of Arizona’s Groundwater Management Act, a 1980 law requiring builders to prove they have an assured water supply that will last for 100 years for each new construction. 

Until the change, the water resources department would review hydrology reports submitted by individual developers to determine if there was enough water below the proposed homes to meet the 100-year supply requirements.

But after a new study, the department determined the entire Phoenix Active Management Area, essentially the bulk of Maricopa County, was nearly 5 million acre feet short of what was needed. And the department then said it would not approve any new developments relying on groundwater because of that basin-wide shortfall. 

An acre foot is generally enough to supply three homes for a year.

The department argued it didn’t formally change its rules on determining the physical availability of water. Blaney wasn’t buying it.

“ADWR appears to argue that it can unilaterally change process and criteria while still claiming adherence to its current rules,” Blaney wrote. “This argument lacks merit and improperly elevates form over substance,” Blaney wrote.

A spokesman for the Department of Water Resources said the agency intends to appeal.

“Although there is no final judgment yet, the Arizona Department of Water Resources intends to challenge the decision once it is final,” said an agency statement.

A Goldwater Institute attorney who worked on the case, Timothy Sandefur, said the department was trying to avoid going through a formal rulemaking process under the state Administrative Procedures Act because they knew it would allow builders and others to flood them with objections.

“The agency wanted to find a way to make sure that the people didn’t have a say, and the way that they did that was by saying, ‘Oh, it turns out, we’ve discovered that the rule was always this way’ when that’s just not true,” Sandefur said. “If they were to go through the APA process, I think it would give the people an opportunity to object and say (that) by making home construction impossible, all you’re doing is raising the cost of housing and making Maricopa County unlivable. 

“So that’s why they tried to avoid going through the proper channels,” he added. “I think that if they did decide to try to go through the proper channels now, then they would have substantial opposition.”

Spencer Kamps, a lobbyist for the Homebuilders Association of Central Arizona, said tens of thousands of home sites owned by developers were affected by the 2023 decision, mainly in the far western part of the Phoenix metro area. Several of those master-planned developments already have neighborhoods that were built before the state put the brakes on issuing new certificates of assured water supplies. 

The water resources department has still been receiving applications for approval for those developments but has not been processing them. 

The agency also came up with two new ways for developers to obtain a certificate – buying up farmland and getting the water credits, called “Ag-to-Urban,” and one that creates a way to obtain assured water from alternate sources.

Kamps said neither helps the vast majority of the developments affected by the 2023 policy change.

Sanfedur said he doubts the state will succeed in an appeal.

“I think the ruling is as clear as it could be, and I have a hard time imagining what sort of legal arguments they would use if they were to try,” Sandefur said.

The 2023 decision led to news stories across the nation about how Phoenix and Arizona were running out of water, something developers, lawmakers and even Hobbs said were not accurate. Still, the finding that there simply wasn’t enough groundwater to support unbridled growth that has driven the Phoenix economy for decades stung.

“The reality is that there is plenty of water in Maricopa County to provide for the needs of development,” Sandefur said. “To have the governor and other people coming out and saying, ‘Well, there’s not enough water in Arizona,’ when, in fact, there is, is bad for the Arizona economy and bad for homeowners.”