Lawsuit Challenges Water Rules Amid Housing Crisis

By Patrick J. Paul, John Habib, and Sukhmani K. Singh

Arizona’s housing shortage is among the most severe in the nation, with demand far outstripping supply and home prices skyrocketing in recent years. According to a lawsuit filed last week by the Goldwater Institute on behalf of the Home Builders Association of Central Arizona, a newly implemented water policy threatens to worsen the crisis even further.

Under Arizona law, developers in certain parts of Maricopa County must secure a certificate proving a 100-year groundwater supply before starting new construction. Since the passage of the Groundwater Management Act of 1980, homebuilders have adhered to this longstanding policy, which has facilitated Arizona’s growth while maintaining its water usage at levels comparable to 70 years ago, despite a fivefold increase in population.

However, in November 2024, the Arizona Department of Water Resources (ADWR) implemented a new rule based on the concept of “unmet demand,” a term the suit alleges ADWR invented given it does not exist in any statute or validly promulgated rule. This new rule drastically changes how water availability is evaluated, shifting from a site-specific assessment of available groundwater at the proposed development location to a broader, regional approach that considers projected water levels across an entire management area. The new policy requires proof of a 100-year groundwater supply across an entire water management area rather than just at the specific site of the proposed development.

The ADWR’s Phoenix Active Management Area (AMA) Groundwater Model may influence where future development can and cannot occur. According to the lawsuit, this model effectively shuts down home building in some of the fastest growing and most affordable areas within the Phoenix market. The suit further maintains that this shift has already created significant barriers to development in large portions of The Valley, including rapidly growing areas like Buckeye and Queen Creek.

The “unmet demand” model compounds its questionable legality with methodological issues. For instance, the model assumes hypothetical wells remain fixed in place for 100 years, far exceeding the lifespan of most wells. Consequently, if water levels are projected to decline in one part of a management area, the ADWR can prohibit development in entirely separate regions. It is this one-size-fits-all approach that the Goldwater Institute and the Home Builders Association of Central Arizona are challenging, noting it defies logic and disregards regional nuances in water availability.

Furthermore, the application of the “unmet demand” rule unfairly targets homebuilders, who have long adhered to practices that replenish groundwater supplies. For example, home builders often engage in recharge programs that inject water back into aquifers, ensuring that pumped groundwater is replaced and sustainable for future use. The lawsuit alleges that the rule allows other industrial sectors to use groundwater without similar restrictions or replenishment obligations, creating an uneven regulatory landscape. The lawsuit further maintains that the Unmet Demand Rule flips the former method of calculation “on its head.”

The lawsuit also alleges that the new rule was implemented without legislative authorization or formal stakeholder input, violating Arizona’s constitutional principles of democratic governance. Arizona law requires that sweeping regulatory changes must go through a transparent rulemaking process that allows for input from impacted parties. Additionally, state agencies cannot impose new rules without explicit approval from the legislature.

Housing affordability is already a pressing issue in Arizona, with the State ranking among the worst in the nation, where it has the fourth-highest housing cost burden for low-income families, according to a 2023 report by the National Low Income Housing Coalition. By halting development in key areas, the “unmet demand” rule could exacerbate the housing crisis, driving up prices and further limiting supply.

As Arizona continues to face mounting challenges in housing and water management, the outcome of this lawsuit could set a significant precedent for how the state navigates these critical issues.