While abundant snow and rain have eased drought conditions in the Southwest, states in the region are continuing to crack down on water use and invest in future water sources to accommodate a growing population. 

In Arizona, which allocated $1 billion last year to protect and expand its water supply, Gov. Katie Hobbs had a reassuring message for residents.

“We are not out of water and we will not be running out of water,” she said at a June 1 press conference.

To ensure that will be the case, her administration put the brakes on new housing construction that relies on groundwater in the Phoenix metropolitan area, citing a projection that over a 100-year period, about 4% of demand for groundwater in the region will not be met without further action. 

“This pause will not affect growth within any of our major cities where robust water portfolios have been proven to cover current and future demands,” Hobbs said.

Long-term drought significantly abated across Arizona after a very wet monsoon season in 2022, followed by a very wet winter into March 2023, according to a report from the Arizona Drought Monitoring Technical Committee. 

Conditions on the Colorado River, which supplies water for 40 million people in seven states, including Arizona, have improved. Lake Powell and the river’s other reservoirs were collectively 42% full as of June 12, compared to 35% last year, the U.S. Bureau of Reclamation reported. 

In May, the seven states agreed to a plan in which Arizona, California and Nevada will conserve 3 million acre-feet of Colorado River water over the next three years to avoid drastic cuts from the federal government. A 2022 compact allocated 7.5 million acre-feet to the three lower basin states annually.

“This agreement is credit positive for the numerous local governments, irrigation districts, water utilities and other entities that rely on the river for water supply,” Moody’s Investors Service said in a recent report. “Previous failure to reach agreement on water cuts risked causing the imposition of federally mandated cuts and an almost certain, drawn-out legal challenge, given the river’s water rights legal hierarchy.”

The rating agency added the river “remains under significant strain from prolonged droughts and increasing demands, creating persistent uncertainty and bringing water management considerations into focus.”

Asset management firm BlackRock said the agreement “is an important stabilizing development for the utilities reliant on this vital water source and supportive for a sector we view favorably due to its essentiality and steady financial performance.” 

In Texas, the drought has decreased for 10 consecutive weeks and impacts the least amount of the state since October 2021, although severe or worse drought continues in some places, according to a state water development board report.

With the Lone Star State’s coffers flush with cash, lawmakers prioritized water this session, placing a constitutional amendment to create a Texas Water Fund on the Nov. 7 ballot.

If approved by voters, enabling legislation signed into law June 9 by Gov. Greg Abbott directs the water development board to use the fund to finance projects that will lead to 7 million acre-feet of new water supply by the end of 2033. Projects can include desalination, aquifer storage and recovery, and infrastructure to transport water.

“They’re going to be large projects, requiring private, local, and state and probably national coordination of funding,” State Sen. Charles Perry, the bill’s author, said at a March committee hearing on the legislation. 

The state would deposit $1 billion into the voter-approved fund, with a minimum of 25% allocated to a new Water Supply for Texas Fund, which has yet to be designed, according to Emma Rogers, a state water board spokeswoman.

“Therefore, while we do anticipate increased capacity in our financial assistance programs, it is premature to predict the impact on existing portfolios and any future debt activity,” she said in an email.

Perry said the state’s population is expected to reach 51.5 million by 2070 “and none of these people are bringing their own water supply.”

Four of the five fastest-growing large U.S. cities between July 1, 2021 and 2022 were in Texas, while Arizona had two cities in the top 15, according to the U.S. Census Bureau.

A 2022 Arizona law earmarked $1 billion over three years to increase its water supply and made the state’s Water Infrastructure Finance Authority (WIFI) a standalone agency with the ability to sell long-term water augmentation bonds, enter into public-private partnerships for water-related facilities, and oversee water-related revolving fund programs.

WIFA has not issued any bonds related to its expanded water augmentation mission and continues to evaluate a proposal for desalinated water, according to spokeswoman Chelsea McGuire. 

The project from Israel-based IDE Technologies envisions an approximate 200-mile pipeline from a yet-to-be-built desalination facility in Puerto Penasco, Mexico, to the state’s major water distributor, the Central Arizona Project.

A draft term sheet has WIFA placing a total of $750 million over three years in an escrow account for the water’s purchase. IDE officials said the account would serve as a credit enhancement for the company’s private financing of the $5 billion project as purchase commitments are sought from water users in the state. 

“In the meantime, our board has directed WIFA staff to gather additional information regarding Arizona’s needs for long-term water augmentation: how much water is needed by whom, and at what cost,” McGuire said in an email. “This will help us refine the target of our long-term water augmentation funds, and thereby help us develop a formal (request for proposals) in order to solicit additional proposals for augmentation projects.”

Utah Gov. Spencer Cox last month issued an executive order requiring water conservation at state facilities.

“While we are thankful for the record-breaking snowpack we received this season, we have to keep up the good work of conserving this precious natural resource,” he said in a statement. “Maintaining and expanding existing water-saving measures will only increase Utah’s ability to grow sustainably.”

As a result of the snow, only 14% of the state is moderately dry and 37% is not experiencing any drought,  according to the Utah Department of Natural Resources. Last year, 99% of the state was in severe drought.

In S&P Global Ratings’ ESG credit indicator report card, released in March 2022, risks due to drought contributed to moderately negative environmental indicators assigned to Arizona, California, Colorado, Nevada and Utah.