Outdated compacts between states and the federal government exist in regards to the needs of upstream and downstream water deliveries to those states through which rivers flow. Most of the requirements on the states were formulated prior to the massive population growths and increased demand for the water resource in Western states. For example, the Colorado River Compact was established in 1922.
The states of Colorado, Utah, Wyoming, New Mexico, Arizona, Nevada and California are states included in the Colorado River Compact. In December 2007, new guidelines were developed by the Secretary of the Interior to address declining water flows in the river due to drought. Senator John McCain, to his credit, advocated the Compact be renegotiated.
Most states have not done so, often for fear of losing allocations. Instead, they have often had to face lawsuits from other states for delivery failures. Such was the case on the Pecos River, when the state of Texas took the state of New Mexico to court for failing to fulfill deliveries and for not establishing effective water management to protect downstream supplies. The result was a lawsuit that resulted ina federal Special Master being brought in to manage the waters of the Pecos in NM and the state paid $70 million to meet the requirements of the Compact. As a result of the law suit, the state of NM established a Strategic Water Reserve to guarantee downstream deliveries.
Regions should not presume allocations from sources outside the region and need to define the amount of surface flows that they can use, define groundwater use in the context of recharge needed for aquifers and balance growth with renewable supplies. California is a downstream user in regards to the Colorado River, but regionally, municipalities and regions within the state have frequently been fed supplies by aqueducts from one region to another. In accounting, the underlying issue is simply maintaining a balanced budget within the water basins of our state.
Countless users with water rights in California have not been adjudicated in regards to their current use of their guaranteed supplies. Unless water rights are adjudicated, there is no public protection in regards to actual beneficial use of the water allocated to them. They can sell their rights, as some are in the Central Valley and make more then they could by farming the land, even if they have not actually been using the actual amount of water to which they have legal rights to. Or municipalities can rob their water supply, such as Los Angeles did from Owens Lake or San Francisco with the Hetch-Hetchy. The peripheral canal proposal in the Delta is yet another example of diversions from one region to another determined by political clout.
The water bubble bursts when the river flows decrease significantly or when municipalities go after more water rights from agriculture but have no more actual water that they can draw on, or when diversions from estuaries impact salinity of freshwater. Like investment banking this is simply shuffling water around on paper without the actual water there to back them up or recognizing that freshwater supplies might actually be reduced due to seawater intrusion. Like the crisis in the financial system, this method of accounting has its own "day of reckoning". And it is coming sooner then most states, especially California, are prepared for.