Key Points: 

• Judge rules state agency imposed illegal “tax” on developers

• Developers still need 100-year water supply to build in certain areas

• The ruling may have significant implications for future housing development and affordability

A state agency acted illegally when imposing what developers have dubbed a “tax” to build in areas with scarce sources of water, a judge has concluded.

In a highly-technical ruling, Maricopa County Superior Court Judge Scott Blaney said the Arizona Department of Water Resources does have the rightful power to make the rules deciding when a planned development in one of the state’s Active Management Areas complies with legal requirements to show a 100-year supply of water.

But what the agency does not have, the judge said, is the ability to withhold legally required building permits unless the developer can show it has access to not just the water it needs for the next 100 years, but another 33% on top of that.

Attorney Andrew Gould said this is a victory not just for the Homebuilders Association of Central Arizona, who he represents, but also for those looking for homes.

“At the end of the day it was forcing, ultimately, homebuyers to subsidize groundwater for other uses,” he said. “And it was impacting housing and affordability.”

This is the second recent legal loss for the state Department of Water Resources.

In a separate ruling, Blaney voided the agency’s policy for determining if specific developments have “unmet” water supplies — a conflict that essentially triggered the new rule about the 133% requirement. The judge said the agency did not follow proper procedures for enacting that rule.

The net effect of all that is unclear.

Gould contends this means the rules are back to the way they were before the Department of Water Resources imposed its 2023 moratorium on new development in areas around Buckeye, Queen Creek and parts of Pinal County.

More significantly, he said, it means as long as a developer can show it has sufficient water for its project — from any combination of sources including groundwater, surface water or anything else — the agency cannot refuse to issue building permits.

But it also may be that, in voiding the rule that gave developers the option to find new sources of water — albeit with that 133% requirement — there is no way for them to get around ADWR’s 100-year supply determination in the affected areas. And that could mean they don’t get permits for new housing.

That possibility is causing concern for Gov. Katie Hobbs who pushed DWR to enact the rule that the

judge voided.

“The superior court issued an order that threatens to shut down housing development and increase housing prices, harms our water security, and gets Arizona law wrong,” said gubernatorial press aide Christian Slater. He also said the program is “voluntary” despite the fact that the judge said the moratorium enacted by ADWR in 2023 made the alternate procedure — the one he found is in violation of state statutes — “the only path for developers seeking to obtain an approved subdivision plat.”

Slater said there will be an appeal.

At the heart of the lawsuit is the 1980 Groundwater Management Act.

It created “active management areas” where groundwater supply is a concern. That, in turn, led to the requirement that developers show they have a 100-year supply.

Most developers can obtain that by simply having a contract with a municipal or private water company that has its own certificate of an assured water supply. But that doesn’t work in areas where that is not an option, meaning developers have had to provide their own proof.

In 2023, ADWR released a study showing that, according to its modeling, there are areas where there simply isn’t enough water to provide that assurance. And that resulted in a moratorium on new permits in those areas.

Under pressure from the governor, the agency came up with rules for an “alternative designation of a 100-year water supply.”

That allows developers to meet the legal requirements — and get building permits — if they can identify sufficient sources of water that can include effluent, surface water, allocations from the Central Arizona Project and water transported from elsewhere. More to the point, it does not rely on scarce groundwater.

Several water companies and developers have pursued that option. Most recently, the Arizona Water Company got one of those alternate certificates for Pinal County that will enable it to build 80,000 new homes.

But that still left the issue that to obtain the alternate certificate there had to be enough for not just the needs of a new development — and from only certain sources — but 33% more. And that, he argued, is beyond the authority that state lawmakers gave the Department of Water Resources.

“What they’ve done with the regulation is they’ve rewritten the statute and said you have to have this combination of water supplies and you’re going to have to pay this amount,” Gould said. “And there’s nothing in the statutes that authorizes the executive branch agency to rewrite the statute.”

He said that some people may agree with what the agency was trying to do by providing an alternative to get around the problems of developers having to show an assured supply of water to get the building permits. But Gould said that’s legally irrelevant.

“The fundamental legal issue is: Did ADWR have the authority to write this rule,” he said. “And they didn’t.”

Blaney agreed that the agency, in demanding that developers provide 133% of the water they actually need, broke the law.

“The statute plainly requires that applicants show that water will be continuously available to satisfy the water needs of the proposed use for at least one hundred years,” the judge wrote. The requirement for something above that, he said, conflicts with the plain language of the statute.”