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Exploring Options for Water Project Financing State and local governments face the same problem the Congress does - too many competing demands for the available tax revenues. An alternative to some financing demands, such as new project development, may be found in increased conservation and management to avoid new construction. 52 The Honorable Bruce Babbitt Governor of Arizona State and local governments face the same problem the Congress does - too many competing demands for available tax revenues. Reductions in available federal- and state -financing necessitate consideration of innovative revenue options as well as more efficient water conseroation and management alternatives. Western water is in transition - uses, values, demands, financing, even our water law and institutions are evolving as we move from an era of unconstrained growth to one which has to focus more on equity, preservation, rehabilitation, conservation and best use of limited resources. Water project financing will be much more difficult in the future, In addition to the decline in federal financing, state and local governments face the same problem the Congress does - too many competing demands for the available tax revenues. Bond markets face growing demands from both the public and private sectors for financing, and even bonds for the most economic water projects may involve large amounts of capital, very long terms and some uncertainty in revenue sources. Borrowing is not a substitute for a revenue source or an appropriation. Financing Options Some of the options for raising revenues for water development include: 1. Increased user fees. Such fees could include full cost pricing, additional beneficiary charges, and depletion charges such as pump taxes. Although theoretical economic efficiency would be enhanced, social equity could be seriously disrupted, and with 90 percent of the water used by agriculture, the impacts on consumer prices, land uses and small communities could be substantial. 2. Increased hydro rates. This option would expand the use of the traditional "cash register" for Western water projects, but it runs immediately into the reality that most Western hydro power is sold, by law, at cost to "preference" customers - rural cooperatives, small municipalities and others who are not well served by private utility markets. 3. Increased private participation. "Privatization" has appeal and will be used to construct more and more projects, The fact remains, however, that most Western water development is beyond the scale of private companies and often involves some subsidization of certain users, Privatization also raises the question of loss of control, coordination and capture of benefits from a public resource. 4. State and local taxes. General revenues often provide basic funding for non- federal Western water needs - small or rural municipal supply, irrigation, rehabilitation and other subsidized or "public good" purposes such as flood control, recreation and environmental protection. Most states, however, do not have the ability to significantly increase appropriations for water development at the same time they are increasing outlays for education, health\:are and other programs for which federal support is also being reduced. 5. Continued federal financing. Periodic authorizations and appropriations will continue to be made, particularly in election years, but most observers doubt that federal financing will ever return to the pattern of the' 50s and' 60s. Other commitments and priorities will claim available federal revenues first. At the same time, ongoing federal responsibilities remain - Indian water development, treaty obligations, multi-state projects, projects serving national purposes, and environmental protection. We need to be sure that the federal government lives up to those responsibilities and does not pass them on to states.